FDIC Settles in Operation Choke Point Lawsuit

Earlier this year, the FDIC agreed to a settlement in a lawsuit over the Obama-era initiative, Operation Choke Point. The FDIC initiative pressured banks not to deal with certain types of legal businesses that were categorically identified as “high risk.” As a result of Operation Choke Point, many legal businesses were denied access to the banking system, merely because their industries were disfavored.

So, what kinds businesses did Operation Choke point end up targeting? CIR’s amicus brief pointed to some of the “high risk” businesses that were affected. Brian Brookman lost his business account with J.P. Morgan for his pawn shop and rare coin dealership, because those two activities were deemed “high risk.” Steven Stratford’s accounts with Chase Bank  and Horizon Community Bank were cancelled when it was determined that operating a payment processing company for law firms in the debt relief field was too “high risk.” Sandra Perry had to travel 80 miles to find a bank that would give her an account for her cash loan and car title loan business. Though it had received an A+ rating by the Better Business Bureau, all the local banks and credit unions deemed her business too “high risk.”

Five years after litigation commenced, the parties have reached a settlement agreement. The FDIC agreed to issue a statement to reiterate its official policies, which preclude “regulatory threats, undue pressure, coercion, and intimidation.” The FDIC has already acknowledged that certain employees acted inconsistently with its policies. Further, the FDIC has instituted a new round of employee training. The training program will specifically address Operation Choke Point, and the training materials will be reviewed by the plaintiffs to this case.

CIR filed an amicus curiae brief in Community Financial Services Association of America v. FDIC, a suit brought by a group of payday lenders challenging “Operation Choke Point,” a broad investigation of banks and payment processors that do business with businesses deemed “undesirable” by Obama regulators, such as gun dealers, pawn shops, check cashers, charities, and payday lenders.

Obama officials contend that businesses in these fields have a high incidence of fraudulent business practices. But instead of investigating and prosecuting individual cases of fraud, officials devised “Operation Choke Point,” which forces banks and payment processors to themselves verify the integrity of their customers in these businesses or face regulatory sanctions.

To avoid the risk and expense of such investigations and penalties, most banks and payment processors are instead adopting blanket policies of simply refusing to do business with any business in any of the “undesirable” categories.  As a result, hundreds of small businesses have lost their bank accounts even though they are accused of no wrongdoing and have violated no law.  In one case, a small business owner lost her banking privileges because of Operation Choke Point and is now forced to drive 80 miles to the next nearest bank, despite her “A+” rating from the Better Business Bureau.

CIR represents William M. Isaac, a long time banking industry executive who was appointed by both Presidents Carter and Reagan to serve on the FDIC, including one term as Chairman. Isaac contends that many of the Obama Administration’s “undesirable” businesses provide legitimate services and play a crucial role in the economy.  He notes that payday lenders provide a valuable service for consumers who do not have access to other sources of short-term loans.

The Obama Administration’s extra-legal effort to freeze out businesses it deems undesirable without any showing of illegal or fraudulent activity not only infringes on Congress’s authority to legislate industry wide standards, but represents an abuse of executive branch authority. As the brief notes, the same power the Obama Administration uses “today to choke off payday lending and ammunition dealers from banking services could tomorrow be used against convenience stores selling sugary sodas, restaurants selling high fat foods, or family planning clinics.”

Case Status: Settled on Favorable Terms

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