In the wake of a decision by the Ohio Supreme Court, Ohio Senator Sherrod Brown is calling on the CFPB to ramp up its enforcement on Payday lenders, noting that the CFPB’s robust authority to regulate banks and “bank like” entities give them a clear responsibility to bring additional scrutiny to the market.
“It is clear that the state-based system of regulating alternative financial products contains deficiencies that run counter to the CFPB's mission. Herefore, the CFPB must use its robust consumer protection authority to write rules for small-dollar loans that will fill the gaps left by inadequate state laws,” she wrote in an open letter to CFPB director Richard Cordray.
Brown is not the first, and likely will not be the last, to call upon the government agency specifically tasked with protecting consumers against the perceived excesses of lenders to offer additionally regulatory offer scrutiny to payday and other short-term loan lenders, as they do seem to be a fertile garden for abuse to grown.
What might surprise Senator Brown is the degree to which the CFPB has skipped over regulating payday lenders directly and has instead, in partnership with the FDIC and the DoJ gone right to crushing them out of existence by making it hard for them to use money.
It is called Operation Choke Point, and it launched in early 2013 without much fanfare. Operation Choke Point is easily viewable as a means to offer backdoor regulation to companies that deal in industries deemed morally suspect such as short-term lenders, pornographers, ammunition sellers, escort services and online gambling sites. This is a short summary of a list post by the FCC (and reposted by blogger Tom Blumer) that contains many, many other diverse industries that are under the particular scrutiny of Operation Choke Point.
The point of Operation Choke Point, as summarized by the Washington Post blog among others, is inferable by the program’s name—it seeks to choke off certain industries by cutting off their institutional oxygen - money. The focus is not on the industries themselves directly, but instead on the banks that provide them services and make it possible for them to make payments. Without the ability to work through the banking system to make or to process payments, the businesses cannot survive, especially true for the online vendors.
Born In Lending
Though not much is directly known about Operation Choke Point, though it has been criticized by the likes of Republican Rep. Darrell Issa of California, who chairs the House Oversight Committee. Issa wrote to Attorney General Eric Holder in early 2014, requesting a slew of documents and suggested that the probe was a veiled effort to eliminate even legal online lending.
House and Senate Democrats have been notably more supportive of the operation, especially in its power to persuade banks that it is unpalatable to deal with lenders who charge consumers 250 percent interest on a $200 loan.
The method of enforcement is a modified version of Elliot Spitzer’s attack on mutual funds during his sting as the “Sheriff of Wall Street,” reports the Post blog. Its probes first foremost make life more difficult and unpleasant for reputable financial institutions that deal with industries that pose what the Post referred to as a “reputation risk” to their bank. Banks facing an ongoing and expensive investigation process are thus pressured to settle and swear off their cooperation with the disreputable enterprise.
The first success of Operation Chokehold was against Four Oaks Bank in North Carolina, which was ordered to pay a $1.2 million fine, and to accept tight restrictions on its ability to do business with Internet consumer lenders. The complaint against Four Oaks filed in federal court stated that the company willfully ignored violations of the law in order to preserve a lucrative line of business—the company did not have to admit any fault in the settlement.
Though enforcement under Operation Chokehold so far in court seems to be limited to lenders and lending products, other industries have complained that they are seeing their access to banking services evaporate as financial services institutions determine they would rather close accounts than face the combined wrath of the DoJ, FDIC and CFPB.
The Post blog reports firearms shops are alleging that Operation Choke Point is being used to pressure banks into refusing to providing financial services and porn stars are complaining that they’ve seen their bank accounts terminated for “moral” reasons related to the “reputation risk” of banking individuals in the porn industry.
And the list that governs who is in the investigative hot seat is not open to public review, legislative oversight or all that coherently put together. For example also on the list of suspect industries are fireworks sales, tobacco clubs, telemarketers, makers of racist materials, drug paraphernalia manufacturers and Ponzi schemes. One might argue that the only thing that holds this list together is that they are all things that many people are fairly uncomfortable with – though even in that regard the list is not comprehensive as abortion providers and radical environmental groups are interestingly absent.
It is also becoming a matter of growing concern for legislators
In a letter to Janet Yellen, the chair of the Federal Reserve, last week, House Financial Services Committee Chairman Jeb Hensarling asked why expressed “reputation risk” constituted a cause to attack an other wise legal business. So far.
The federal program has also yielded lawsuits, as one of the porn stars has sued to understand the exact reason their loan was denied.