Bloomberg News

Republicans Scold Regulators Over Consumer-Fraud Probe

July 15, 2014

Republican lawmakers scolded the U.S. Justice Department and banking regulators for investigating banks and other firms that process payments for fraudulent merchants, a probe that industry groups say has harmed legitimate businesses.

The Justice Department’s initiative, called Operation Choke Point, is intended to combat fraud by businesses such as payday lenders and online gambling sites by cutting off their access to payment systems. Payday lenders and bankers say the initiative denies lower-income customers access to lending.

The Justice Department said at a hearing of the oversight and investigations subcommittee of the House Financial Services Committee that the operation is stopping fraud. Bank regulators defended their cooperation with the initiative, saying they provided information the investigators requested without directing the probe.

Subcommittee Chairman Patrick McHenry of North Carolina said Operation Choke Point is “inappropriately compelling banks to serve as a moral compass and law enforcement for our market economy.”

Stuart Delery, an assistant attorney general of the Justice Department’s civil division, said the operation is targeting illegal activities.

‘Willfully Ignorant’

“When a bank either knows or is willfully ignorant to the fact that law-breaking merchants are taking money out of consumers’ bank accounts without valid authorization, and the bank continues to allow that to happen, that is not just a concern for regulators,” Delery said. “That is fraud, and it can result in true devastation for consumers.”

Payday lenders advertise small, short-term loans as a means to tide the borrower over until their next paycheck. At a brick-and-mortar lender, the loans typically are secured by a post-dated check. Online borrowers instead furnish a bank account number for direct debits.

More than 80 banks, including JPMorgan Chase & Co. (JPM:US), have severed their relationships with such lenders. Wells Fargo & Co. (WFC:US) remains one of the largest banks doing business with payday lenders.

Due Diligence

“We exercise strict, customized, enhanced due diligence with customers that provide payday loans to consumers to verify that they do business in a responsible way and meet high standards of conduct in all their markets,” Jennifer Dunn, a Wells Fargo spokeswoman, said in an e-mail. “We put our payday lending customers through an ongoing process of monitoring in these regards.”

Republicans said the Justice Department has cut off access to banking services for “legitimate businesses” through Operation Choke Point.

“Our concern is we have a federal government that is out of control and we have bureaucrats that think they can get a swift idea and impose the heavy hand of government on legitimate business that have had no adjudication of fraud,” said Representative Sean Duffy, a Republican from Wisconsin. “You come in here and say fraudulent, fraudulent, fraudulent and you haven’t proved it all.”

Delery said the Justice Department is investigating fraud, not institutions in compliance with law.

Targeting Fraud

“These cases are about fighting evidence of fraud, not conduct of lawful businesses,” Delery said.

Representative Maxine Waters of California, the top Democrat on the full committee, urged the Justice Department and regulators to be “as aggressive as you can be.”

The Federal Deposit Insurance Corp. has helped with Operation Choke Point because the “potential illegal activity” may involve firms it supervises, said Richard J. Osterman Jr., the agency’s acting general counsel, said in testimony prepared for the hearing.

When a bank handles illegitimate transactions, “there is a real risk for the bank, because it can be held legally responsible,” Osterman said, adding that the FDIC insists in its supervision that the banks appreciate and take steps to reduce those risks. Banks that don’t can face enforcement actions, he said.

The FDIC has created a list of “high risk merchants/activities” so institutions it oversees will know where to focus their due diligence, Osterman said.

“If the bank is operating lawfully and the third-party payment processor is acting lawfully there, you have nothing to be concerned about,” he said.

The Community Financial Services Association of America, the main payday lending trade group, sued U.S. banking regulators on June 5, accusing them of applying “backroom pressure” on banks to stop serving the group’s members.

Issa Report

The House Oversight and Government Reform Committee, led by California Republican Darrell Issa, has criticized Operation Choke Point as a veiled attempt by President Barack Obama’s administration to target lawful businesses it doesn’t like.

Issa released a report in May on the Justice Department’s program and obtained department documents that show the FDIC’s involvement in banks terminating relationships with “entirely legitimate and licensed businesses.” On June 9, the congressman sent a letter to FDIC Chairman Martin Gruenberg requesting documents related to the agency’s involvement in the operation.

To contact the reporters on this story: Cheyenne Hopkins in Washington at chopkins19@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo


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