Last week, the Obama administration proposed new regulations for short-term lenders, criticizing the industry for trapping low-income households in debt cycles.
But as part of Operation Choke Point, the government has already quietly regulated the industry for years.
The Consumer Financial Protection Bureau (CFPB) is now trying to curb short-term lenders – who offer what are known as payday loans, cash advances or loans by check – by imposing new strict guidelines “requiring lenders to take steps to ensure consumers can repay their loans.”
“The idea is quite logical: if you lend money, you first need to make sure that the borrower can afford to repay it,” the president said. Obama said of the new proposal last Thursday to a crowd of around 1,800 people at Lawson State Community College in Birmingham, Ala.
Rep. Mick Mulvaney, a Republican congressman from South Carolina who criticized Operation Choke Point, disagrees that the CFPB idea is “common sense.”
He told the Daily Signal in an exclusive interview: “It is absolutely absurd that the government is going into this. “
“Lenders are already doing it,” he said of the obligation on lenders to ensure borrowers can repay their loans. “You don’t lend money to people who can’t pay it back, that’s a sure-fire way to go bankrupt. “
Before final regulations are implemented, the Bureau of Consumer Financial Protection will seek input from a small business review panel and “a wide range of stakeholders.”
Such public debate did not take place when the government implemented Operation Choke Point.
What is Operation Choke Point?
Operation Choke Point was launched by the Department of Justice in 2013 as a way to fight consumer fraud by working with several government agencies to deter banks from doing business with “high risk” industries.
The Department of Justice, under the leadership of Attorney General Eric Holder, executed the program by partnering with federal banking regulators who could pressure banks to do business with customers they saw as ” at high risk ”.
In July 2013, Michael S. Blume, Director of the Consumer Protection Directorate of the Department of Justice, wrote a memo titled “Operation Choke Point: Four-Month Situation Report”.
“[The Justice Department], through the Directorate-General for Consumer Protection, should take the lead in implementing this strategy, ”Blume wrote.
Partner agencies should include [Federal Trade Commission], [Federal Deposit Insurance Corporation], [Office of the Comptroller of Currency], FinCEN (Treasury), Federal Reserve Banks, [National Association of Attorneys General], [Consumer Financial Protection Bureau], FBI and [United States Postal Inspection Service]- who are all members of the Presidential Task Force on Financial Fraud.
Without a bank to deposit checks, sponsor loans, or process payments, businesses are forced to do basic business.
“The effects have been severe and drastic,” said Jamie Fulmer of Advancing America, which operates over 2,500 payday loan companies in 29 different states.
We have seen a number of banking relationships come to an end and it severely limits our ability to operate like any other business.
As part of Operation Choke Point, Republicans allege the Justice Department has not only targeted companies committing illegal consumer fraud, but entire industries as well.
Among them were gun dealers, ammunition makers, coin sellers, and payday lenders.
>>> Read more: No more arms traffickers suffocated by the banking system
The purpose of payday lenders
Payday lenders exist primarily to serve people who cannot get loans from banks. Lenders offer cash advances to people who run out of money between paychecks.
The cost of the loan is typically between $ 10 and $ 30 for every $ 100 borrowed, which equates to an annual percentage rate of almost 400%.
Critics in the industry fear that borrowers will struggle to repay loans, which will result in higher fees for the customer.
In Alabama, when Obama approved his administration’s regulations against payday lenders, he said, “There are four times as many payday loan stores as McDonald’s.
“People turn to payday lenders because they can’t get quality loans from regular financial institutions,” said Mulvaney, who spoke to payday lenders in his state who claim to have been victims of Operation Choke Point, to Daily Signal.
A National survey 2013 by the Federal Deposit Insurance Corporation (FDIC), which is one of the main agencies involved in implementing Operation Choke Point, found that one in 13 U.S. households did not have a bank account.
In the same report, the Federal Deposit Insurance Corporation found that 20% of US households are underbanked, “meaning they had a bank account but also used alternative financial services (AFS) outside the banking system.” .
Mulvaney maintains that the payday loan industry fills a “legitimate need” for unbanked and underbanked Americans.
“If you set the same standards for payday lenders as you do for a regular financial institution, all you’re going to do is just lead these people into the shadows, into loan sharks and out of the banking system,” a- he declared. . “Not everyone likes the salary, I understand, but it fulfills a legitimate need in a legal way.”
Yet Richard Cordray, director of the Consumer Financial Protection Bureau, which proposed the new regulations, believes consumers need protections from payday lenders.
“A consumer facing difficult financial circumstances is offered quick cash without asking questions and in return agrees to provide access to a checking account, paycheck or vehicle title in order to obtain the loan. “Cordray said. said in a March 26 hearing on payday loans. “No attempt is made to determine whether the consumer will be able to pay the ensuing payments, only that the payments are likely to be collected.”
The Consumer Financial Protection Bureau was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers by enforcing federal consumer finance laws.
Despite the skepticism the industry faces, payday lenders insist they operate within the law and do not deserve to be kicked out of business.
Stifle the payday loan industry
As part of the government’s Operation Choke Point, a number of payday loan companies have lost access to their long-term bank accounts and have been forced to downsize or shut down.
Allison Deguisne, owner of Westshore Cash and Loan in California, was one of them.
“My retirement is over,” she said last week ahead of a Congressional hearing on Operation Choke Point. “It took my savings. I am bankrupt in the next few weeks.
Deguisne told reporters that after Wells Fargo cut her line of credit, she couldn’t find another bank that would accept her business.
“If we continue to shut down these industries, they will have nowhere to go to get loans themselves,” she said.
Amy Cantu, communications director of the Community Financial Services Association of America, who represents the payday loan industry, told the Daily Signal by email that she had heard “many cases in our industry of companies being unduly harmed by Operation Choke Point.”
E-mails unearthed by congressional investigators suggest that government officials have been covertly targeting the payday lending industry for years.
“I never told you this (but I’m genuinely passionate about it)… but I literally can’t stand the payday lending industry,” Thomas Dujenski, regional manager of the Federal Deposit Insurance Corporation, wrote to Mark Pearce, Director of the Depositor and Consumer Protection Division, in an email dated November 26, 2012.
In another example, a senior Federal Deposit Insurance Corporation official insisted that the agency always mention pornography when discussing payday lenders among other “high-risk” industries during talking points in the. aim to convey a “good image of the unsavory nature of the companies involved.” . “
“It’s frustrating for us because we try to operate and conduct our business in a way that would give our banks confidence in all federal and state laws, but there is at least one federal agency that de facto establishes rules that limit our access to the baking system without due process, ”said Fulmer of Advance America.
Fulmer said the new rules proposed by the Consumer Financial Protection Bureau “appear to be validation of this concern that we still have,” that the agency has “ignored the facts”, “ignored the research” and is “largely motivated and under pressure from militant groups seeking to end this credit option.
But at the end of the day, Fulmer is thankful for having a chance this time around to influence what the government does to his industry.
“The devil you know is better than the devil you don’t know,” he said.