A secretive 2013 Obama administration initiative known as Operation Choke Point, which aims to pressure banks to stop doing business with payday lenders and other businesses it deems to be at high risk of fraud, is the impetus for a lawsuit filed by a leading payday lending trade group, Bloomberg News reports.
The complaint, filed by The Community Financial Services Association of America, accuses federal regulators of "a concerted campaign" to put payday lenders out of business by pressuring banks, via threat of investigation, to cease doing business with them.
Already more than 80 banks have terminated business relationships with payday lenders, according to the suit, after federal regulators informed them that continuing their relationships with payday lenders "will result in harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures."
It's not just payday lenders who are being targeted, according to The Economist
, which profiled a stripper who was informed last month by Chase that the financial institution was closing her account because she was considered a "high risk" customer.
On May 29, according to The Economist, a congressional committee upset over Operation Choke Point's tactics, released a report saying ideologues are trying to "strangle legitimate businesses" — such as payday lenders, firearms, tobacco, coin and fireworks dealers, as well as dating services — by choking them out of "access to banks and payment systems, by prosecuting payment firms that abet suspect transactions."
Just the threat of an investigation is enough to scare financial institutions from keeping these customers, according to The Economist, which notes many banks have already entered into nonprosecution agreements or have been hit with steep fines, meaning "even a minor legal infraction could open up a prior settlement, with dire consequences."
The price tag of an investigation also impacts their decision to dump "risky" customers.
Payday lenders cannot afford to stay afloat without a bank's backing, according to The Washington Post,
which last month published a piece looking at the ability of the government to "choke off" the money supply for industries that are legal.
"IRS officials must already be salivating about ways to apply Operation Choke Point to tea party groups," Post reporter Todd Zywicki wrote. "In principle, of course, the logic of Operation Choke Point could be extended to groups not currently targeted. Notably absent from the FDIC's hit list, for example, are abortion clinics, radical environmental groups, or, well, marijuana shops, for that matter. Something similar was done to cut off credit-card payments to support the operation of WikiLeaks."
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