FDIC Grilled on Coercion Against Payday Lenders

     (CN) – A government agency must face claims about the pressure it used to make banks stop working with payday-loan businesses, a federal judge ruled.
     The Community Financial Services Association of America and Advance America, a payday lender that belongs to the organization, brought the lawsuit in question in Washington, D.C.
     They claimed that business took a dive when Federal Deposit Insurance Corporation coerced banks about their supposed “reputation risk.”
     Having lost “beneficial banking relationships,” Advance America for example says it was forced to look for new banking partners on short notice.
     The move has allegedly left the lenders unable to compete for banking resources and has stigmatized them.
     Advance America and the CFSA say the pressure was part of a campaign initiated by the Justice Department known as “Operation Choke Point,” which took aim at banks that worked with financial entities regulators saw as higher risk for fraud and money laundering.
     The payday lenders contend that the operation violated their due-process rights since there was no showing that the lenders actually violated the law.
     A House committee investigated Operation Choke Point and the FDIC’s involvement in 2014.
     Meanwhile U.S. District Judge Gladys Kessler advanced some of the lenders’ civil claims on Friday.
     “Plaintiffs have alleged that the stigma promulgated by defendants has resulted in lost banking relationships, and that the continued loss of banking relationships may preclude them from pursuing their chosen line of business,” the 48-page decision states. “This is sufficient to constitute a ‘tangible change in status’ and implicate a protected liberty interest.”
     The judge found the payday lenders clearly showed that they suffered an injury as a result of Operation Choke Point, and that banks might re-establish their relationship with the lenders absent regulatory intervention.
     There is no explicit FDIC rule regarding the relationships between banks and payday lenders, however, so Kessler said the plaintiffs cannot sue as if the FDIC had issued an enforcement action.
     “An FDIC guidance document does not necessarily reflect the FDIC’s views, nor do any legal consequences flow from the document itself,” the 48-page judgment states.
     Support for the action lies in the 1971 Supreme Court case Wisconsin v. Constantineau, which says, “where a person’s good name, reputation, honor, or integrity is at stake because of what the government is doing to him, notice and an opportunity to be heard are essential.”
     That decision involved a Wisconsin police chief forbidding liquor stores from selling to a certain woman.
     Kessler said the lenders here “have alleged a similar deprivation,” “the previously held right to hold bank accounts.”
     “‘Many people would consider [this] right[] more important than the right to purchase liquor,'” she added. “The loss of a bank account as a result of stigma is sufficient to implicate a right to due process.”

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