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Regulatory Blackmail

Federal Deposit Insurance Corporation (FDIC) building facade
photo by Ron Cogswell

Most of us can think of businesses or industries that we find inherently distasteful, even if they are perfectly legal. But there is no place for such distaste in the conduct of government agencies charged with ensuring fair treatment for all.

Like probably every other financial planner, I have no love for the practice of payday lending – issuing high-interest, high-fee short-term loans (often labeled “advances”) to an individual who typically has no ready access to cash, or even an asset valuable enough to hand over to a pawn shop. There is an extensive body of state and federal law to regulate such business. A number of states, as well as Washington, D.C., ban the practice outright. I don’t object to enforcement of these rules in the interest of consumer protection.

But as in so many other areas – from IRS targeting of Tea Party not-for-profit organizations, to the State Department’s slow walk of the Keystone XL pipeline to a bureaucratic death chamber, to selectively vigorous enforcement of the laws governing the handling of classified information – the Obama administration weaponized the federal bureaucracy to shelter the people and interests it liked, and to wound or destroy those it didn’t. The scope of those activities has gradually seeped into public view over the past two years. While this week’s House triumph by Democrats may alter or slow the flow of such revelations, it won’t stop it.

As the latest example, witness a recent development in the federal lawsuit brought by several payday lenders against the Federal Deposit Insurance Corp.

The FDIC’s main responsibilities include insuring bank deposits and supervising financial institutions to ensure soundness and consumer protection. But newly unsealed documents in the court case indicate that it was among various federal agencies working to freeze businesses the government didn’t like out of the banking system. Payday lenders were among the most prominent targets of “Operation Choke Point,” and they are the plaintiffs in the 2014 lawsuit.

Operation Choke Point’s ostensible goal was to address instances of fraud and money laundering in the financial system. But as more information becomes public, it has become clear that it also acted as a cover story for official conduct that went further.

The Wall Street Journal’s editorial board examined emails connected to this initiative and found that FDIC officials expressed open disdain for payday lenders. Thomas Dujenski, a former regional FDIC director in Atlanta, wrote of the business: “They are abusive, fundamentally wrong, hurt people, and do not deserve to be in any way associated with banking.” Dujenski, however, seemed to overlook the reality that – at least on a federal level – they are also legal. According to a deposition from Anthony Lowe, a former FDIC regional director based in Chicago and now FDIC ombudsman, Dujenski’s attitude reflected the overall position of FDIC leadership.

The government pressured banks to distance themselves by describing payday lenders as “high risk,” using rules about reputation risk that the George W. Bush administration had expanded just prior to leaving office. Under Obama, the FDIC expanded those rules even further, allowing the organization to group payday lenders with other enterprises including ammunition sellers, escort services and Ponzi schemes. While banks were not required to drop these customers outright, they were strongly pressured to do so. The FDIC implied that continuing to serve them could trigger extra audits or closer scrutiny, something no bank wants to deal with. Banks began suddenly closing payday lenders’ accounts or otherwise refusing them service. Doing business without access to the banking system is inefficient and risky – just ask marijuana dispensaries.

Based on their behavior, FDIC officials had no illusions at the time about whether their behavior was acceptable. Dujenski responded to an email notification that a bank would be dropping a prominent payday lender by emphasizing that the bank manager should relay to the lender that it was purely the bank’s decision. In 2014 Mark Pearce, director of the FDIC’s Division of Depositor and Consumer Protection, told The Washington Post outright that his agency was not pressuring banks to drop payday lenders. “If you have relationships with a [payday lending] business operating in compliance with the law and you’re managing those relationships and risks properly, we neither prohibit nor discourage banks providing services to that customer,” Pearce said, in statement that the documents now available flatly contradict.

During the Obama administration, and around the same time payday lenders were suing over their mistreatment, Congress requested the FDIC audit its own role in Operation Choke Point. An FDIC inspector general found that the organization’s involvement was “inconsequential to the overall direction and outcome of the initiative.” The report also noted that while certain FDIC officials acted in accordance with “a widely-held understanding that the highest levels of the FDIC disfavored these types of banking services,” several communications involving those officials were inconsistent with FDIC policy.

Regardless of your personal feelings about payday lenders or your political leanings, this precedent is a dangerous one. As many op-ed writers have observed, the same tactic could be used by an administration to target a wide array of potentially unpopular businesses, from firearm vendors to reproductive health service providers. And when the government pressures banks to steer clear, businesses have no avenue of appeal.

Operation Choke Point officially ended in August 2017, but its repercussions are still becoming clear. Rep. Blaine Luetkemeyer, R-Mo., has spearheaded a years-long legislative effort to ensure this behavior cannot continue, and his bill to that effect passed in the House in late 2017. That legislation would require federal banking agencies to provide written justification of any request that banks terminate or restrict a customer’s account, except in matters of national security.

Regulatory overreach wasn’t the primary reason for Donald Trump’s electoral victory two years ago. But a reaction against its direct impact on people’s lives and livelihoods was probably a supporting factor, especially when you consider Hillary Clinton’s remarks on the campaign trail about putting coal companies out of business.

People expect laws and regulations to be enacted publicly and implemented transparently. That was the prior administration’s practice whenever it could conveniently get what it wanted that way. Otherwise, it was prone to use whatever bureaucratic weapons came to hand, and then to try to wipe away the fingerprints.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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