Why it matters

A D.C. federal court judge issued a mixed ruling in a suit brought on behalf of payday lenders against the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, and the Office of the Comptroller of the Currency (OCC) in a challenge to Operation Choke Point. While the court granted the regulators’ motion to dismiss claims alleging they violated the Administrative Procedure Act (APA), it refused to dismiss several claims accusing the agencies of violating the plaintiffs’ Fifth Amendment procedural due process rights. The lawsuit alleged the regulators undertook a two-part campaign: first promulgating regulatory risk guidance and then relying on “a campaign of backroom regulatory pressure” to end relationships between payday lenders and banks. Finding that the guidance at issue did not constitute “final agency action” for purposes of the APA, the court dismissed those counts. Considering the due process claims, however, the judge found the plaintiffs had sufficiently alleged that “their liberty interests are implicated by Defendants’ alleged actions and that the alleged stigma has deprived them of their rights to bank accounts and their chosen line of business,” allowing the suit to move forward.

Detailed discussion

A national trade organization that represents payday lenders, Community Financial Services Association of America, and a payday lender filed suit in 2014 against the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, and the Office of the Comptroller of the Currency (OCC) in a challenge to Operation Choke Point.

The plaintiffs alleged that the regulators participated—and continue to take part—in the Department of Justice’s (DOJ) operation, forcing banks to terminate their business relationships with payday lenders.

According to the plaintiffs, the defendants engaged in a two-part campaign: first promulgating regulatory guidance regarding reputation risk and later relying on that guidance “as the fulcrum for a campaign of backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders.”

The plaintiffs sought declaratory and injunctive relief to set aside certain informal guidance documents and other actions by the FDIC, the Board, and the OCC on the grounds they violated the Administrative Procedure Act (APA) and deprived the plaintiffs of liberty interests without due process of law.

In their motion to dismiss, the regulators argued the plaintiffs lacked standing to sue and failed to state a claim.

U.S. District Court Judge Gladys Kessler first settled the threshold issue of standing. First, the defendants did not dispute that the plaintiffs suffered an injury in fact. The court held that the plaintiffs’ allegations that they suffered an injury by losing beneficial banking relationships, requiring them to expend resources to locate new banking partners, were sufficient to allege an injury in fact. However, defendants contended that Plaintiffs lack causation because their injuries were the independent decisions of the respective banks to terminate their relationships with the plaintiffs’ members. The court held that the plaintiffs had sufficiently alleged that the defendants’ actions were “a substantial factor” motivating the decisions of the banks, and therefore, plaintiffs sufficiently alleged the causation element.

The plaintiffs referenced several documents issued by the FDIC, OCC, and the DOJ, such as a letter from a FDIC regional director to an unidentified bank stating that “we have generally found that activities related to payday lending are unacceptable for an insured depository institution.” They bolstered their allegations by noting that the Board, the OCC, and the FDIC are the prudential regulators for a total of three, seven, and four banks, respectively, that have already terminated relationships with the plaintiffs.

Defendants also contended that plaintiffs lack standing because their injuries are not redressable by the court. Specifically, defendants argued that even if the court invalidated the documents that allegedly redefined “reputation risk,” banks might not reestablish their relationships with the plaintiffs while the Federal Deposit Insurance Act limited the ability of the court to grant some of the injunctive relief requested by the plaintiffs. Judge Kessler disagreed. Invalidation of the documents “may certainly affect Defendants’ ability to pressure banks in the future,” she noted, and the Act did not preclude her ability to grant any injunctive relief.

The court then addressed the defendants’ motion to dismiss for failure to state a claim. The payday lenders claimed the regulators violated the APA in a number of ways, from exceeding their authority to set standards for safety and soundness to acting arbitrarily and capriciously.

But Judge Kessler never made it to the merits of the APA claim, ruling that the actions at issue were not final agency actions under the statute and therefore not judicially reviewable. Courts apply a two-party test to determine whether an agency action is reviewable as final: first, the action under review must mark the consummation of the decisionmaking process; and second, legal consequences must flow from an action. Looking at the agency documents cited by the plaintiffs, the court held they did not contain obligatory language and that they were not obligatory and meant only to serve as guidance.

“Read in context, it is clear that the language does not create new legal obligations,” the court held. “Instead, the language is used with regard to banks’ overall responsibility to manage risks and third-party risks—obligations that existed prior to the [documents]. In addition, the documents consistently use nonmandatory language such as ‘should,’ rather than ‘shall’ or ‘must.’”

Although the documents “provide guidance on the FDIC and OCC’s views regarding risk management, they do not impose any obligations or prohibitions on banks,” Judge Kessler wrote. “Guidance that ‘does not tell regulated parties what they must do or may not do in order to avoid liability’ is merely a general statement of policy.”

The court dismissed nine of the 12 counts in the plaintiffs’ complaint.

But keeping the suit alive, Judge Kessler then ruled the plaintiffs had sufficiently alleged a violation of their procedural due process rights under the Fifth Amendment by claiming the Board, FDIC, and OCC “stigmatized them, deprived them of their bank accounts, and threatened their ability to engage in their chosen line of business, all without notice and opportunity to be heard.”

The court rejected the defendants’ argument that due process protections were not applicable to the legislative activities of an administrative agency that were generalized in nature and affected a large number of parties. The allegations of the plaintiffs were different, the court held, more akin to an informal adjudication, which requires more individualized process.

Looking at the merits of the due process claim, the court had no problem finding that the plaintiffs sufficiently alleged two of their protected interests were affected by the defendants’ actions. “Plaintiffs have alleged that the stigma promulgated by Defendants has resulted in lost banking relationships, and that the continued loss of banking relationships may preclude them from pursuing their chosen line of business,” Judge Kessler wrote. “This is sufficient to constitute a ‘tangible change in status’ and implicate a protected liberty interest.”

The court denied the motion to dismiss on the plaintiffs’ due process claims.

To read the opinion in Community Financial Services Association of America v. FDIC, click here.