Operation Choke Point has strangled its first victim hit its first public target, according to a recent Ballard Spahr client alert. The allegations are serious, because, as the firm notes, all are based upon an underlying allegation of violation of criminal law, in this case, that the bank knowingly participated in a wire fraud scheme. Based upon that alleged "knowing participation," the Department of Justice brought claims under FIRREA and the Anti-Fraud Injunction Act and squeezed a settlement out of a tiny North carolina bank of $1.2 million in penalties and a consent order pursuant to which the bank promised to change its evil ways.
The bank made the mistake of becoming involved with a "Targeted Company," a payday lender (other "Targeted Companies" being credit repair organizations, mortgage assistance relief companies, telemarketers and Internet-based businesses), and allegedly processed ACH payments for the payday lender through a third party payment processor. The following activities by the payday lender were alleged by the DOJ "as fraudulent activity or, at a minimum, warning signs of illegality":
- Some loan agreements included single-payment disclosures under the Truth in Lending Act (TILA) even though they allegedly "hid[ ] in small print and in confusing language" steps required to pay off the loans. The legality of this practice under TILA is the subject of ongoing litigation in a lawsuit brought by the FTC.
- Some loan agreements required consumers to authorize recurring ACH payments, in alleged violation of the Electronic Funds Transfer Act (EFTA). While the CFPB is aware that many lenders require ACH payments on installment loans where the borrower fails to pay by other methods, it has not, at least yet, asserted that these arrangements violate the EFTA.
- Some loan agreements violated the FTC rule limiting wage garnishments.
- Some loan agreements of tribal, offshore and other so-called "choice-of-law" lenders provided for interest at rates prohibited by the law of the states where borrowers resided (but likely permitted by the law of the jurisdiction where the lender was located or licensed).
- In some cases, complaints of unauthorized transactions exceeded thresholds established by NACHA, and in other cases overall return rates were quite high (more than double the 15 percent threshold recently proposed by NACHA).
The bank also agreed to a number of restrictions in its future dealings with third party payment processors, including a ban on dealing with "High Return Originators." Not coincidentally, the threshold for "high return" classification happens to be the same as that contained in a NACHA proposal (0.5 percent for unauthorized debits, 3 percent for data quality returns, and 15 percent for total returns). As the authors of the client alert point out, that's a potentially low threshold in a business (payday lending) where the loans are being made to low credit quality, high default types of borrowers. On the other hand, if the desire is to choke off an entire industry (payday lending) from its access to the banking system, then setting unrealistic low thresholds accomplishes that purpose.
Other onerous requirements for doing business with Targeted Businesses via a payment processor include drilled-down due diligence in connection with money services business licensing under state law (or certification from state licensing authorities that licensing is not required) and with FinCEN; compliance by the third party payment processor with all deceptive trade practice and similar state and federal laws and NACHA rules; and verification that no party associated with the third party payment processor is now or ever has been a member of the Tea Party (perhaps I'm confusing that last requirement with one imposed by the IRS on 503(c) applicants).
The firm concludes with some sober reflections.
Operation Choke Point and the DOJ lawsuit will certainly make it harder for unscrupulous Target Companies to operate. Lawfully operating Target Companies may also be affected, however. If the consent order is read to require banks processing ACH transactions to ensure that their customers comply completely with all applicable law, many banks may discontinue providing ACH services to all Target Companies. Accordingly, we hope that clarification is provided that the duty on banks is to ensure that their ACH customers have a lawful business model, a thorough due diligence investigation discloses no apparent and continuing violations of applicable law, and any grounds for concern are promptly investigated and resolved.
The CFPB lawsuit against CashCall was ground-breaking. The DOJ lawsuit against Four Oaks Bank is earth-shattering.
That "many banks may discontinue providing ACH services to all Target Companies" is not a far-fetched prospect. It's happening, as we speak.
I wonder if, by the time 2017 rolls around, and Eric Holder and his cohorts at the DOJ are forced to find honest work, there will be any payday lenders left.