So much of what financial service providers deal with is not apparent on the surface. And, as it is said, the devil is in the details. Here is an interesting tale of how the forces of government work.
For the last several years the payday lending industry has been under assault from all levels of government, from social justice agencies, consumer advocates, even other financial services providers. There is seldom a legislative session that does not see an introduction of a bill to terminate or restrict payday lending. And, as we have noted often here, the CFPB has entered the fray with its Proposed Small Dollar Lending Rule. The legislative and regulatory processes are certainly the correct venues to address payday lending.
What we find troubling is the extra-legislative and extra-regulatory actions that certain federal agencies of government are employing to achieve their goals. The technique—when applied to the payday industry—even has a name: Operation Choke Point. Those opposed to payday lending, who have not successfully reigned in that product by legislation or regulation, have turned to the banking prudential regulators to choke-off depository banking services to payday lenders, thereby denying them the ability to conduct otherwise lawful business. The regulatory agencies include the FDIC, the OCC and the Federal Reserve Board.
They have been sued for their alleged unconstitutional actions, conspiracy, and abuse of authority.
Many smaller traditional installment lenders and credit sellers who were mischaracterized as payday lenders, were inadvertently swept up in Operation Choke Point. Only after much explanation of business model, were some of these lenders permitted by their banks to retain their depository relationships. And, many banks insisted upon terminating banking services to these creditors anyway, because they did not want to have to explain the business model of their customer to their regulators.
The lawsuit brought by the Community Financial Services Association of America (“CFSA”) and Advance America, Inc.—respectively the nation's largest trade association of payday lenders and the largest payday lender in the nation—was filed in Federal Court in 2014, challenging the practice of the three regulators, specifically their use of “safety and soundness” and “institutional risk” to force their supervised institutions into terminating business relationships with payday lenders. The case has dragged; but now has heated up dramatically.
CFSA and Advance America are seeking a Preliminary Injunction to prevent the Regulatory Agency defendants from:
“(1) harming the reputations of Advance America and other members of CFSA; (2) applying informal pressure to banks to encourage them to terminate business relationships with Advance America and other members of CFSA; (3) seeking to deny Advance America and other members of CFSA of their access to financial services; and (4) seeking to deprive Advance America and other members of CFSA of their ability to pursue their chosen line of lawful business.”
The Motion for Preliminary Injunction was filed last week. It claims irreparable harm to Advance America. US Bank announced to Advance America that US Bank would no longer provide depository banking to Advance America's 1200 branch locations. And, over the course of years, all of Advance America's former nationwide banks have declined to provide such services. So, the timing of the motion clearly is no accident.
While this case involves payday lenders, it has serious implications for all lenders and all businesses for that matter. In the final analysis, this case addresses whether the prudential bank regulators are using their supervisory powers to achieve social justice initiatives and purposes that they find compelling—notwithstanding that the legislatures of the several states do not necessarily agree.
The Motion for Preliminary Injunction makes for very interesting reading especially for those who are fascinated by Constitutional Separation of Powers issues.