Greg Palmer and his partner opened their first Dollar Smart store in Oxnard, California, in 1999, eventually growing into a seven-shop chain that employed 75 people, providing payday lending, auto financing loans, wire transfers and money orders to the unbanked community.
Fifteen years later he says they ended up in the crosshairs of the Obama administration’s Operation Choke Point, with their main bank account closed and no other banks willing to take their business.
The Federal Deposit Insurance Corporation had put the word out that payday lenders, along with gun stores and more than two dozen other industries, were undesirables.
“It’s a tough thing — to work as hard as you can, to get yourself in a position where you’re an equity owner and have all that taken away from you,” Mr. Palmer said. “At the time that happened, I was 61 years old. It’s a pretty tough pill to swallow.”
Running out of options and on a strict deadline, Mr. Palmer said he was forced to license his shops to a larger payday operator, and therefore forgo everything he strived to build.
Operation Choke Point began in 2013 as a Department of Justice program aimed at weeding out fraudulent businesses by cutting off their access to the banking system. But critics argued the program became a dragnet that ensnared legitimate businesses in what the administration deemed to be undesirable industries — like payday lending and gun dealerships — to put them out of business.
Once details of Choke Point started to emerge in 2014, the House of Representatives moved to defund the program, House committees launched investigations and produced reports, and a trade group representing payday lenders sued the FDIC, the Office of the Comptroller of Currency and the Federal Reserve Board, arguing the agencies covertly pressured banks to cut ties with the industry.
On Thursday the House of Representatives is poised to go further, passing a bill that will prohibit any federal banking agency from formally or informally suggesting, requesting or ordering a bank to terminate a customer account or discourage it from entering into certain accounts, unless the agency has material reason to do so and it’s not solely based on reputation risk.
“We don’t want to hurt the ability of DOJ to go after fraud, money launderers or whatever the case may be, but it’s plain to see, out of two reports, government officials had a political bent against certain industries and were on a witch hunt going after entire industries that are not illegal,” said Rep. Blaine Luetkemeyer, a member of the House Financial Services Committee and sponsor of the Choke Point legislation.
“We’re trying to force a bill to keep these government agencies from continuing this practice, which has slowed but has not stopped,” said Mr. Luetkemeyer, a Missouri Republican. “We’re serious about this process; we’re going to keep watching, keep looking until we get this stopped.”
The steady stream of criticism against Operation Choke Point prompted the FDIC to retract its list of more than 30 “high risk” lines of business, such as payday lending and gun dealers, saying they feared bankers had a “misperception” those merchants were discouraged.
And last year, in a letter to banks, FDIC officials urged them to take a “risk-based approach” to “individual customer relationships” rather than rejecting “entire categories of customers.”
Asked for comment on Choke Point, the FDIC referred a reporter to a September inspector general’s report that concluded the agency’s involvement with Operation Choke Point was “inconsequential.”
“The Federal Deposit Insurance Corporation (FDIC) welcomes confirmation from an independent review that the FDIC did not participate in the development, coordination, or execution of the Department of Justice (DOJ) initiative Operation Choke Point; that the FDIC did not use the so-called high-risk list to target financial institutions; and that the FDIC has acted within its supervisory authorities,” Doreen Eberly, the director of the FDIC’s division of risk management supervision, wrote in response to the IG report.
Still, the remnants of Choke Point remain, and some banks remain wary of taking on business from those once deemed “high risk” by the federal government, worried such will draw higher government scrutiny of their own business.
This year, Meetinghouse Bank, a small banker in Dorchester, Massachusetts, decided to stop doing business with all check-cashers because of the risk of running afoul of federal rules.
“Certainly the heightened regulatory scrutiny had something to do with it,” said Anthony Paciulli, the chief executive officer of Meetinghouse Bank, about their decision to exit the check-cashing business. “The tipping point was, in the last year [federal agencies] raised the bar on knowing your customers’ customers, and we can’t do that with the staff we have on hand. Some of these larger banks have 50 or 60 people doing this; we have two.”
Mr. Paciulli said he understands where the FDIC’s pressure is coming from — that many terrorists and money launderers use the check-cashing industry — so he doesn’t disagree with the new regulations. It’s just too much for his small bank to handle. He said the check-cashers were good clients and that he gave them ample time to find new bankers.
It’s these types of decisions, however, that are crushing legitimate payday and check-cashing businesses that run clean shops and adhere to federal and state regulations.
“We have had members across the country continue to report the termination of their bank accounts and, in several instances, they are longstanding banking relationships with little, if any, issues you might equate with Bank Secrecy Act concerns or compliance concerns,” said Ed D’Alessio, the executive director of Financial Service Centers of America, an industry trade group.
“What Operation Choke Point did was make it more acceptable for a bank to terminate all of its accounts of a particular type — in this case, payday lenders,” said Mr. D’Alessio. “In some ways it institutionalized the practice of wholesale or wide-scale termination of an industry’s accounts, whereas previously, banking decisions were made on [an] individualized basis with appropriate risk assessment. Operation Choke Point was completely different than that: If you fall into this category, you can be terminated, even if you have no record of compliance or regulatory issues, but you can be terminated just by virtue of the category you fall into.”
And that translates into real, human loss.
“I had always done the right thing. I followed the rules and was licensed and paid taxes. We passed all federal, state and bank compliance audits and had a good relationship with regulators. I served my country proudly and could not believe that my own government had impacted my life so drastically,” Mr. Palmer said after losing his banker for his payday loan business. “I lost my income, health care and retirement equity that I had built for 15 years in my company. The financial loss was well over $1 million. The mental distress brought on by Operation Choke Point was almost to much to handle.”