Internet Payday Lender Group Sues, Regulators Promptly Fight Back

Washington, DCIt’s somewhat poetic that the US Department of Justice, in attempting to protect consumers from the chokingly high interest rates inherent with many online payday lenders, dubbed its effort to rid the industry of illegal operators as “Operation Choke Point.” Still, that hasn’t stopped an industry group representing payday loan lenders from filing a payday loan lawsuit of its own against the feds for allegedly trying to force US banks to drop those lenders as clients.

The feds, for their part, say they are doing nothing of the sort. They have, in fact, extended “guidance” to the banks with regard to illegal payday lenders seeking and issuing loans to consumers in states where lenders are not licensed to do so. Guidance, say regulators, is not the same as enforcement. Nor is it coercion.

To that end, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency filed separate motions to dismiss the payday loan lawsuit filed by Community Financial Services Association of America Ltd. (CFSA) and one of its member institutions in Washington, DC federal court in June.

The feds argue that the case is improper because regulators have not yet issued a final ruling.

Payday loans are a fact of life for low-income individuals who don’t have a relationship with a traditional bank or have poor credit. Interest rates for payday loans are usually higher than rates for traditional loans acquired through banking institutions. However, most states observe strict interest rate caps for both storefront operations and Internet payday lenders who solicit loans in that state and therefore must adhere to state regulations based upon where a loan client resides, regardless of the location from which the lender itself is actually based.

Some states don’t allow payday loans of any kind.

A growing problem, however - and the impetus behind Operation Choke Point - is the rise in illegal Internet payday loan lenders who stand accused of charging predatory interest and other fees for short-term loans. It is for this reason that scores of plaintiffs have sought payday loan legal help. Such operators also make it harder for honest Internet lenders who play by the rules.

The CFSA claims that the crackdown by the feds is an abuse of power that threatens to shut down legitimate operators through a denial of access to the banking system.

That’s hogwash, according to the FDIC. In a memorandum, the regulator noted that “‘scrutiny’ is not the same as ‘pressure’; not even plaintiffs claim that the FDIC is barred from applying ‘scrutiny’ to banks’ third-party relationships when monitoring the safety and soundness of those banks’ operations,” the FDIC said.

The CFSA indicates that its members do not issue Internet payday loans in states where the products are banned. The case is Consumer Financial Services Association of America et al. v. Federal Deposit Insurance Corp. et al., case number 1:14-cv-00953, in the US District Court for the District of Columbia.