June 6 (Bloomberg) -- The Community Financial Services Association of America, the main payday lending trade group, sued U.S. banking regulators, accusing them of applying “back room pressure” on banks to stop serving the group’s members.
A federal anti-fraud initiative known as Operation Choke Point unfairly targets online and storefront lenders by claiming they pose a reputational risk to the banks serving them, according to the complaint filed yesterday in federal court in Washington.
Regulators including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are engaged in “a concerted campaign” to drive payday lenders out of business by pressuring “banks and other regulated financial institutions to terminate their relationships” with the lenders, according to the complaint.
Payday lenders offer small, short-term loans originally meant to tide the borrower over until the next paycheck. At a brick-and-mortar lender, the loans typically are secured by a post-dated check. Online borrowers instead furnish a bank account number for direct debits.
Interest rates, measured as an annual percentage rate, can reach 521 percent, according to the Consumer Financial Protection Bureau. Consumer advocates have long argued that the business can trap poorer borrowers in a cycle of debt as they take out new loans to cover old ones.
While regulators have told financial institutions that dealing with payday lenders exposes to them to increased risk, “we have never been told what that increased risk is,” Dennis Shaul, the industry group’s chief executive officer, said in a briefing before the suit was filed. CFSA’s largest member, Advance America Cash Advance Centers Inc., also is a plaintiff in the case.
More than 80 banks have cut off relationships with payday lenders due to “coercive regulatory pressure” including warning them that continuing their relationships with payday lenders “will result in harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures,” according to the suit.
Operation Choke Point is a Justice Department program that aims to combat mass-market consumer fraud, particularly online, by cutting off access to payment systems.
The initiative has raised concerns in the banking industry. Earlier this year, the Independent Community Bankers of America drafted a letter asking the Justice Department to suspend the operation and target businesses breaking the law rather than banks supplying payment services.
A congressional committee last month criticized Operation Choke Point as a veiled attempt by President Barack Obama’s administration to target lawful businesses it doesn’t like.
The suit mirrors that criticism, calling Operation Choke Point a way of going after businesses “that are disfavored” by regulators, such as coin dealers, gun stores, tobacco outlets and dating services, “but it is aimed primarily at the payday loan industry.”
Andrew Gray, a spokesman for the FDIC, declined to comment on the suit. Bryan Hubbard, a spokesman for the OCC, referred a reporter to the Justice Department.
A message left after hours yesterday with a department operator wasn’t immediately returned. Barbara Hagenbaugh, a spokeswoman for the Fed, said in an e-mail that the agency was aware of the filing and would respond to it in court.
The case is Community Financial Services Association v. FDIC, 14-cv-00953, U.S. District Court, District of Columbia (Washington).