Operation Choke Point Litigation Stirs Up Lawmaker Concern—Again

Financial Services Law

According to a group of payday lenders, the reverberations of Operation Choke Point are still being felt. The public release of documents in their litigation challenging the government’s initiative revives an issue that many thought was dead.

Lawmakers also have reached out to federal banking regulators to ensure that Operation Choke Point is over, once and for all.

What happened

Beginning in 2012, Operation Choke Point involved various federal agencies that put pressure on financial institutions working with companies that raised regulatory or reputational concerns.

In 2014, a coalition of payday lenders and other businesses sued the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC), alleging that the regulators violated the plaintiffs’ rights to due process under the Fifth Amendment of the U.S. Constitution.

After the district court denied the regulators’ motion to dismiss in 2017, the parties began discovery. As part of the process, the FDIC and the OCC (the Federal Reserve was dismissed from the case earlier this year) turned over their internal documents on Operation Choke Point.

In October, the parties filed cross-motions for summary judgment in the case.

The plaintiffs continue their push to hold the OCC and the FDIC liable.

Banks that dropped the payday lenders as customers were concerned about anti-money laundering compliance concerns, according to the FDIC’s motion for summary judgment, in the wake of several investigations against a high-profile payday lender, Scott Tucker.

The ensuing legal actions against Tucker—who is now in prison—and the banks that worked with him likely soured financial institutions on the payday lending industry as a whole, the FDIC suggested.

“There is no FDIC ‘campaign’ against payday lenders,” the agency argued, pointing out that the lead plaintiff currently has “substantially” more banking relationships now than it did before it filed suit and that despite its claims of a bleak future for the company, it recently purchased a $4.5 million corporate jet. The agency also pointed to its 2015 policy, which stated that banks may maintain relationships with law-abiding customers, provided the banks manage the risk of those relationships properly.

Initially sealed, the motions—including the internal agency documents—were recently made public, reviving for lawmakers the controversy over Operation Choke Point.

In a letter from Sen. Mike Crapo (R-Id.), Chair of the Committee on Banking, Housing, and Urban Affairs, joined by a dozen other Republican Senators, the lawmakers asked the agency to “send a clear message that the old culture” is over, with a review of how its policy has been communicated to regulated institutions.

One document revealed that a senior FDIC official said FDIC staff should use “available means, including verbal recommendations” to encourage banks not to do business with a certain disfavored (but legal) industry, the senators wrote. “This reinforces the challenges of ending Operation Choke Point and why it is not appropriate for staff at the FDIC to communicate policy through verbal ‘recommendations,’” they explained.

Businesses should not be targeted simply for operating in an industry that a particular administration might disfavor, the legislators said, regardless of the political party in power.

“To remedy this, we request that the FDIC review all options available to ensure lawful businesses are able to continue to operate without fear of significant financial consequences,” the senators said in the letter, sent to FDIC Chair Jelena McWilliams. “Without such action, banks may believe FDIC staff expects them to continue to deny financial services to legitimate and profitable businesses. In addition, we request the FDIC review how policy is communicated from the FDIC to its regulated institutions more broadly.”

The lawmakers asked the FDIC to respond to four questions: “Is it the official position of the FDIC that lawful businesses should not be targeted by the FDIC for operating in an industry that a particular administration might disfavor? If so, what are you doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”

Pursuant to the Congressional Review Act, agencies are required to submit rules to Congress for review, the letter noted. Were there any communications to Congress with regard to Operation Choke Point?

The lawmakers also wondered about the consistency of policies across the agency, and how they are communicated to regulated institutions. “What are you doing to ensure the staff of the FDIC do not communicate policy in a manner inconsistent with the positions of the FDIC Board of Directors?” the senators asked.

Sen. Crapo’s request for response followed missives from Rep. Blaine Luetkemeyer (R-Mo.) to both the FDIC and the OCC, calling for an investigation into past misconduct by employees at the agencies in connection with Operation Choke Point, based on discovery documents referenced in the litigation. Both agencies already responded with assurances that changes have been made under their leadership.

McWilliams said the FDIC had retained an outside law firm to “better ascertain the effectiveness” of the agency’s response to claims of misconduct, stepped up examiner training and “placed clear limitations on the ability of any FDIC personnel to recommend the termination of account relationships.”

OCC Comptroller Joseph M. Otting emphasized that his agency “was never a part of Operation Choke Point” and that he is committed “to ensuring that it does not have such policy or program in the future.”

To read the OCC’s motion for summary judgment, click here.

To read the FDIC’s motion for summary judgment, click here.

To read the letter from Sen. Crapo, click here.

To read the letters from Rep. Luetkemeyer, click here.

To read the FDIC response to Rep. Luetkemeyer, click here.

To read the OCC’s response to Rep. Luetkemeyer, click here.

Why it matters

After the change in administration, both the DOJ and the OCC formally repudiated Operation Choke Point in 2017, while the FDIC announced guidance to encourage banks to judge customer relationships on a case-by-case basis in lieu of declining to provide banking services to entire categories of customers. However, the documents obtained in discovery allege a continuing impact of Operation Choke Point that ultimately may be decided by a court.