Payday Lenders Argue Case for Operation Choke Point Injunction, Claim Regulator Activities Violate Their Rights to Due Process

Courts Payday Lending Consumer Finance Prudential Regulators CFPB DOJ Operation Choke Point

On May 19, a group of payday lenders filed a brief with the Court of Appeals for the District of Columbia claiming a U.S. district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process. (See Advance America v. FDIC, et al, 2017 WL 2212168 (C.A.D.C.).)  As previously discussed in InfoBytes, the lenders claim the DOJ’s “Operation Choke Point” initiative—designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering—is a threat to their survival. The lenders’ brief alleges that federal agencies, including the DOJ and the FDIC, began as early as June 2008 to expand the interpretation of “reputation risk.” According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers, which meant “bank servicing businesses identified as ‘high risk’ would be required to incur significant additional regulatory compliance costs and  face the risk of increased regulatory scrutiny.” This, the lenders assert, became a justification to pressure banks to sever their banking relationships with payday lenders.

Notably, the U.S. district court judge refused to issue a preliminary injunction and was not persuaded that the lenders would be able to prove that these regulatory actions caused banks to deny services the lenders needed to operate.

However, the lenders claim in their brief that they can show a violation of their procedural due process rights under three theories: “stigma-plus,” “reputation-plus,” and “broad preclusion.”

• The lenders describe the “stigma-plus” theory as requiring them to show they were stigmatized in connection with an “alteration of their background legal rights” without any due process protections. They believe they can prove this occurred because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
• The “reputation-plus” theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders claim. The lenders contend this can be proved because the “’stigmatizing charges certainly occurred in the course of the termination of the accounts, which is all that is required for a reputation-plus claim to succeed.” Each lender claims to have lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
• The “broad preclusion” theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them “pursuing their chosen line of business.”

Furthermore, the lenders take issue with the U.S. district court judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.