A federal judge ruled on Friday that the Community Financial Services Association of America (CFSA) may pursue claims that the FDIC, the OCC, and the Board of Governors of the Federal Reserve have been participating in a campaign initiated by the Department of Justice to force banks to end their business relationships with payday lenders. Called “Operation Choke Point,” the campaign has been the subject of a House Committee Investigation.

insideARM reported on this story when the lawsuit was originally filed, in June 2014.

CFSA alleges that the defendants have laid the groundwork by issuing informal regulatory guidance regarding “reputation risk,” and then later relying on that guidance to support its campaign to pressure banks to terminate their relationships with all payday lenders. Plaintiffs allege that the agencies expanded the definition of “reputation risk” beyond its traditional understanding to include bad publicity due to the actions of third parties, even when actions were unrelated to work done on behalf of the bank. They further allege that the Defendants privately threatened banks with adverse regulatory action if they continued doing business with payday lenders.

An example of the evidence presented by CFSA is an FDIC letter to an unidentified bank, stating “we have generally found that activities relating to payday lending are unacceptable for an insured depository institution.”

CFSA is requesting the following relief from the court:

  1. Declaring various Agency Documents to be unlawful
  2. Declaring that Defendants significantly changed the definition of reputation risk without notice and comment rulemaking
  3. Declaring that Defendants deprived Plaintifss of liberty without due process of law
  4. Enjoining Defendands, “as well as those acting in concert with them,” from implementing the aforementioned Agency Documents, from relying on the revised definition of “reputation risk,” and from applying informal pressure to banks to encourage them to terminate relationships with payday lenders
  5. Enjoining Defendants, “as well as those acting in concert with them,” from harming the reputations of Plaintiffs and from seeking to deprive them of access to financial services
  6. Other such relief as the Court deems just and proper

In their arguments, the Defendants relied on the Plaintiffs’ burden to prove that actions by the Court would indeed redress their injuries. They argued that even if the court granted the requested relief, other reasons unrelated to the challenged documents and actions by the Agencies may affect banks’ individual decisions on whether to reinstate relationships with payday lenders.

The Plaintiffs, in fact, offered evidence of some banks’ expression of remorse after ending the relationships, suggesting they indeed would consider re-establishing a relationship.

In the end, the Court sided with the Plaintiffs, stating that they have alleged facts sufficient to show that there is a “substantial likelihood” that a favorable ruling by the Court would redress their injuries.

This issue has also touched the ARM industry. In April of this year, the Board of Directors of ACA International unanimously voted to support legislation and policy changes that would bring an end to the Department of Justice program known as “Operation Choke Point.”  In a letter issued to members, the Board stated, “This initiative has already been shown to have severe, negative impact on legal and legitimate businesses – including our nation’s legitimate debt collectors. As we have done since this emerged in 2014, we will continue to share examples of members being negatively impacted by Operation Choke Point with legislators and regulators as a key part of our advocacy efforts in Washington.”

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