[NILA Supplementary Comment: Operation Choke Point 1.17.19 The irony of recent comments, notably, on the Economic Equality blog, that non-bank lenders pose some kind of systemic risk because they lack banks’ “liquidity facilities” and “capital backstops” is not lost on NILA, given that the focus of Operation Choke Point was direct government interference in the ability of non-bank lenders to partner with and build lending relationships with, depository institutions which do have these features.]
The now notorious Justice Department initiative known as Operation Choke Point, began in 2013, reportedly after a long and involved meeting at the White House. It is seen by many as an attempt by activists within government to use legal and regulatory pressure to, as described in an article in National Review, ““choke off” the financial oxygen for businesses that were, in the opinion of those same government activists, “exploiting consumers”. This included businesses involved in firearms and ammunition sales, online gambling, pharmaceutical sales, pornography, payday lending and more. As is often the case, where payday lenders are targeted, safe and affordable installment loans suffer collateral damage.
The operation was a joint effort by various regulatory entities—the Department of Justice (DOJ), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC)— which used regulatory powers to provide heightened supervision of banks that conduct business with the third-party payment processors that, in turn, provide payment services to the targeted industries.
This involved issuing subpoenas to banks along with a guidance document from the Federal Deposit Insurance Corporation (FDIC), warning them to consider “reputational risk” in their banking relations. Banks responded predictably. Dealing with existing oversight was already causing small and mid-size banks around the country to merge to handle compliance costs. These banks could not afford the extra supervision that came with a Choke Point subpoena. Thus, they had no choice but to cut off relationships with targeted businesses, even ones with whom they had long and trouble-free histories.
This had what has been described as “a chilling effect” on commerce. For most, the unfairness of it was evident from the beginning and sparked an immediate backlash. The sheer brazenness of government, targeting legal businesses in such a cynical yet highly effective manner, was seen by many as a shocking abuse of power. Even among supporters of the administration and its policies, there was concern that the precedent set by this kind of action could be used by the other side, at a time when they controlled the executive branch, to target industries and concerns considered politically unpalatable, in the same way.
NILA’s own membership felt the sting of the broad and dangerous approach the DOJ was taking. We saw banks pressured to end relationships with legitimate businesses that offer traditional installment loans – the safest, most responsible, affordable and time-tested form of small-dollar credit available to Americans. This generated real world effects for ordinary people. Former FDIC chair William Isaac, writing in the Wall Street Journal, described it thus:
“Many of those cut off from the banking system by Operation Choke Point are companies that offer much needed alternative financial services (short-term lending, check cashing, title loans, etc.) to the unbanked and under-banked….”
He went on to describe precisely who this would harm:
“….A 2013 survey by the Federal Deposit Insurance Corp. estimates that 51 million adults, or more than one quarter of the U.S. population, have limited or no participation in the banking system, which includes over half of African-American households, close to half of Hispanic and American Indian/Alaskan households, and more than 70% of lower-income households. Operation Choke Point only cuts off a lifeline these people have to financial services.”
This kind of criticism was compounded by the publication in May, 2014, of a damning staff report out to the U.S. House of Representatives Committee on Oversight and Government Reform which concluded:
“Forceful prosecution of those who defraud American consumers is both responsible and admirable. However, Department of Justice initiatives to combat mass-market consumer fraud must be legitimate exercises of the Department’s legal authorities, and must be executed in a manner that does not unfairly harm legitimate merchants and individuals.
Operation Choke Point fails both these requirements. The Department’s radical reinterpretation of what constitutes an actionable violation under § 951 of FIRREA fundamentally distorts Congress’ intent in enacting the law, and inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world. In light of the Department’s obligation to act within the bounds of the law, and its avowed commitment not to “discourage or inhibit” the lawful conduct of honest merchants, it is necessary to disavow and dismantle Operation Choke Point.”
The outcry that accompanied this report led the FDIC to withdrew its guidanceon reputational risk that had accompanied its subpoenas. Nevertheless, Choke Point-targeted businesses continued to report trouble in continuing or establishing banking relationships.
Finally, in August 2017, in a letter to GOP members of Congress, Assistant Attorney General Stephen Boyd announced that the program had ended, calling it “misguided” and going on to say,
“We reiterate that the Department will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms- related activities.”
NILA believes that banks should be persuaded by this that they will not come under pressure from the Justice Department for establishing banking relationships with non-politically correct industries. NILA considers Operation Choke Point a shameful episode in the history of US government oversight of business and a warning against government political activism and the law of unintended consequences.
After all, if Operation Choke Point had its intended effect, credit sources for our customers would have dried up altogether. You have to wonder whether the minds behind Operation Choke Point had considered the social and economic consequences of this – and whether they even cared.