A U.S. district judge has thrown substantial doubt on the prospects of payday lenders who are attacking Operation Choke Point, ruling that the lenders are not likely to be able to show a deprivation of their due process rights. As a result, the judge denied the lenders’ request for a preliminary injunction against the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (Advance America v. FDIC, Feb. 23, 2017, Kessler, G.).
The payday lenders and others have characterized Operation Choke Point as an effort by the federal government to hamstring what were seen as socially undesirable businesses by depriving them of access to banking services. According to the lenders, the federal banking regulatory agencies adopted guidance on bank reputation risk and then used that guidance to exert "backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders." The federal government has rejected this characterization, claiming that banks can do business with payday lenders as long as the risks are managed properly.
Requirements for injunction. According to the judge, the lenders’ claims are under the due process "stigma-plus rule." This requires the lenders to show that a government action caused harm to their reputations and either deprived them of a benefit to which they have a legal right or prevented them from pursuing their chosen business.
Issuing a preliminary injunction would be appropriate only if the lenders could show they were likely to succeed on the merits of their case and were likely to suffer irreparable harm without the injunction, the judge said. However, if the risk of harm was severe enough, a serious legal question as to the merits of the case might be enough to justify an injunction. Two other factors—the balance of equities and the public interest—were of less significance in this situation, the judge added.
Likelihood of success. The payday lenders could not convince the judge that they were likely to show the harm central to a "stigma-plus" claim. First, the closure of some bank accounts would not be enough to constitute the loss of banking services. Rather, the lenders would need to show that so many banking relationships had been terminated that they had effectively lost access to the banking system. Alternatively, they could show that the loss of banking services had effectively prevented them from offering payday loans.
The evidence failed even to raise a serious legal question on either point, the judge said. While some of the companies had provided information on how many banking relationships have been terminated, none said anything about how many relationships continued. It seemed that virtually all of the payday lenders still have access to banking services, she pointed out.
Nearly all of the lenders still were in operation, so they could not have been blocked from pursuing the business. (The one exception had closed for irrelevant reasons, the judge observed).
The lenders also expressed a concern that allowing Operation Choke Point to continue would result in a loss of banking services in the future. Given that the lenders still were able to find banks to work with, evidence of that possibility was too speculative to support an injunction, the judge decided.
Regulators’ conduct. The payday lenders also needed to show that the regulators made stigmatizing statements about them that caused the banks to deny services. However, they were unlikely to be able to prove the claimed "campaign of backroom strong-arming," which would make them unable to prove the regulators’ statements caused the banks to act.
There was little direct evidence of the stigmatizing statements, the judge said. Instead, the lenders relied on "scattered statements," some of which she characterized as "anonymous double hearsay," to support their claims. The only direct evidence was better seen as "evidence of a targeted enforcement action against a single scofflaw."
The lenders’ efforts to connect banking relationship terminations with agency guidance was unsuccessful due to a lack of evidence about termination rates or numbers before Operation Choke Point began, the judge also said.
Irreparable harm. The lenders were able to convince the judge that they were threatened with irreparable harm, but only due to the narrow scope of the analysis. According to the judge, it was necessary for her to assume, for purposes of the irreparable harm analysis, that the lenders were likely to prove a violation of their due process rights—even though that assumption was contrary to what she already had concluded.
The payday lenders claimed that the regulators had violated their right to due process. Since it was necessary to assume that such a violation could be proved, and the violation of a right to due process is, in and of itself, an irreparable harm, the lenders had satisfied that requirement for a preliminary injunction, according to the judge.
Public interest. The judge also noted that the public interest did not support a preliminary injunction. Interfering with a government agency’s enforcement authority is likely to harm the public interest, particularly in the context of bank supervision. Issuing an injunction against the regulators would involve the court in the oversight of banks all across the nation. In fact, Congress had taken steps to insulate bank supervision from such judicial interference, she said.
The case is No. 14-953 (GK).
Attorneys: David Henry Thompson (Cooper & Kirk, PLLC) for Advance America and Cash Advance Centers, Inc. Charles Justin Cooper (Cooper & Kirk, PLLC) for Check Into Cash, Inc. and NCP Finance Ltd. Partnership. Duncan Norman Stevens for the Federal Deposit Insurance Corporation. Yonatan Gelblum for the Board of Governors of the Federal Reserve System.
Companies: Advance America; Cash Advance Centers, Inc.; Check Into Cash, Inc.; NCP Finance Limited Partnership; NCP Finance Ohio, LLC; Northstate Check Exchange; PH Financial Services, LLC
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