New lawsuit by payday lending industry challenges “Operation Choke Point”

by Deepak Gupta

The payday lenders' main trade association, the Community Financial Services Association, brought an unusual lawsuit this week against three federal regulators — the Fed, the FDIC, and the OCC — in an effort to challenge a controversial federal initiative known as "Operation Choke Point." The case was filed in federal district court in Washington, DC.

At the heart of the industry's suit is a grievance that has been surfacing regularly among Republicans on the Hill of late: that the federal bank regulators are, in their view, unfairly using "coercive regulatory pressure" to get banks and other regulated financial institutions to end their relationships with payday lenders.

Here's how the complaint — which you can read here — puts it:

The Defendant agencies, under the guise of protecting the safety and soundness of banks, are waging a covert war against certain legitimate businesses that rely on banking services to function. What started as a set of diffuse sorties has now coalesced into a coordinated campaign, known as “Operation Choke Point,” designed by the Defendant agencies and the DOJ to eliminate certain lawful businesses that they disfavor, by using their regulatory and enforcement authorities to quietly coerce banks to terminate their relationships with the disfavored businesses.

The plaintiffs — CFSA and a leading payday lender known as Advance America — are represented by conservative superlawyer Chuck Cooper of Cooper & Kirk, who is best known for his unsuccessful defense of the California anti-same-sex marriage initiative, Proposition 8.  Legally speaking, the complaint alleges twelve different claims and appears to rely on at least four distinct theories: that the agencies' actions exceed their statutory authority, are arbitrary and capricious, were promulgated without observance of the procedures required by law, and deprive the plaintiffs of liberty interests without due process of law.

In essence, the payday lenders' beef is that banks have been threatened with greater regulatory scrutiny and reputational risk, through supervisory examinations and enforcement investigations, if they continue their relationships with payday lenders.

The payday lenders may have many reasons for bringing this suit — including drawing attention to their plight and getting more traction with their friends on Capitol Hill — but I fail to see how this thing flies in in court. On the facts, it's doubtful the banks will come forward and substantiate any of this. And even if they did, are the payday lenders challenging anything other than non-final, purely discretionary decisions about how these federal agencies deploy their supervisory and investigatory resources against third parties?  That's like suing a prosecutor because you don't like the investigations they're bringing.

Even setting all that aside, the truth is payday lending actually does entail serious risk to consumers that could threaten the banks themselves–a legitimate concern for any responsible regulator. It's interesting that neither the CFPB nor the Justice Department (or their top officials) were named as defendants. I wonder why.

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