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Is Operation Choke Point Strangling Your Bank?

By: Toni Lapp

At first blush “Operation Choke Point,” launched in 2013 by the Justice Department in an effort to target predatory lending, seems straightforward: cut off fraud by cutting fraudsters’ access to the payments system.

Currently, 15 states have banned payday loans or have capped their interest rates at 36 percent. Yet online payday lenders have continued to operate in those states, debiting consumers’ bank accounts via ACH access.

However, as Operation Choke Point unfolds, its tactics have been called into question. Earlier this year, the government sent subpoenas to more than 50 banks and payment processors used by online payday lenders. And now, such high-profile banks as Capital One, Bank of America, Wells Fargo and U.S. Bancorp are closing the accounts of payday lenders. Some in the industry are crying foul, maintaining that many legal payday firms are being cut off from the payments system.

Banking groups are voicing concern. Camden Fine, president and CEO of Independent Community Bankers of America, wrote an April 7 letter to the Department of Justice calling for the tactic to be suspended.

 “Operation Choke Point has an overly broad scope that morphs banks’ traditional fraud and risk-mitigation roles into consumer-protection and law-enforcement roles,” wrote Fine.

The perspective of regulators may also be evolving; William Isaac, former chairman of the FDIC, said recently that Operation Choke Point had been pushed beyond its stated objective and “is having potentially devastating impact on lawful check cashing and small loan businesses. This in turn will cut off tens of millions of people from much-needed access to money to meet emergency needs.”

Jason Oxman, CEO of Electronic Transactions Association, Washington, D.C., says that it’s unfair for banks and payment processors to be the “choke point.” “The concern we have is that DoJ views payday lenders as a disfavored merchant category,” he said. If the government wants to outlaw payday lenders, the tactic should be to pass legislation, he said, noting that his group has created an education program titled Operation Choke Point Boot Camp.

So where does this leave community banks? If large banks with sophisticated compliance departments are refusing to do business with payday lenders, what about smaller banks with fewer resources? Know-your-customer obligations mandate all banks, large and small, look for “red flags” that may indicate a payment is improper or illegal. The cost of being investigated can cripple an institution. Each bank must make its own determination about underwriting and risk management.

Toni Lapp is senior editor of BankNews magazine.

Copyright (c) May 2014. BankNews Media.