Consumer Finance Insights
December 5, 2016

Payday Lenders Claim Regulators Are Choking Their Livelihoods in Motion for Preliminary Injunction

On November 23, 2016, Advance America, Inc., a payday lender, and Community Financial Services Association of America, Ltd., a trade organization which represents the interests of payday lenders (Plaintiffs), filed a Motion for Preliminary Injunction (Motion) against the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (Regulators) to try to stop the Regulators from pressuring national banks into cutting off payday lenders’ access to the financial services banks offer.  The Motion states that the payday lenders that have managed to survive the Regulators’ attempt to shut them down are now facing catastrophic consequences, with increasing numbers of banks moving to terminate their relationships with payday lenders and close payday lenders’ accounts.  These account closures leave payday lenders without access to ACH networks, which allow them to collect on past-due loans, and without cost-effective treasury services, which they need in order to accept non-cash payments and to pay their employees.  The Regulators have denied that they are trying to categorically deny payday lenders access to these financial services.

The Motion is the latest development in a lawsuit the Plaintiffs filed in 2014 against the Regulators for participating in the Department of Justice’s (DOJ) Operation Choke Point, a program the Plaintiffs allege violates payday lenders’ constitutional rights.  In their complaint, the Plaintiffs allege that, since the DOJ launched Operation Choke Point in 2011, the Regulators have worked together to essentially shut down the payday-lending industry, which is viewed by some as immoral.  The Plaintiffs argue that the Regulators have coerced banks into closing payday lenders’ accounts by suggesting that continuing to do business with payday lenders carries “reputational risk” – an amorphous term which is difficult to quantify in any meaningful way.

The Plaintiffs’ most recent Motion builds on this argument and alleges, for example, that the FDIC included payday lending in its list of “high-risk” industries, which included gun sales, Ponzi schemes and pornography.  The Motion asserts that, by comparing payday lending to illegal or controversial activities, the government was sending a message that the industry itself was problematic.  The Motion goes on to argue that, although payday lending is legal, and there is no statute or regulation prohibiting its existence, the Regulators have threatened banks with severe consequences if they keep payday lenders as clients.  As an example, the Plaintiffs point to Business Bank of Texas, which they say explicitly ended its relationship with payday lender Power Finance Texas because of pressure from the OCC.  The Motion cites a declaration from the bank’s CEO, who stated that absent regulatory pressure, the bank would restore banking services to Power Finance Texas.  Even more pressing for Plaintiffs, Advance America reports that U.S. Bank terminated its relationship with Advance America and a number of other payday lenders because of regulatory pressure just this past month.  Prior to the termination, U.S. Bank had provided financial services to over 1,200 Advance America locations.

The Plaintiffs’ constitutional claims have already survived a motion to dismiss, and the Plaintiffs have arguably provided evidence in their Motion regarding the imminent harm they will suffer from their accounts closing, but it is unclear that a preliminary injunction can issue here.  The Motion asks that the Regulators be ordered to cease “putting pressure” on banks to terminate relationships with payday lenders, but it’s unclear what that would mean in practice or how the court would be able to avoid intruding on the Regulators’ enforcement authority.