Documents Show FDIC Encouraged Banks to Cut Ties with Payday Loan Firms

Inside Subprime: Oct 22, 2018

By Lindsay Frankel

Documents released during a lawsuit filed by several payday loan companies show that the Federal Deposit Insurance Corporation (FDIC) put pressure on banks to ditch their payday lending clients during the Obama administration.

The FDIC encouraged banks to cease doing business with payday lenders and other disreputable clients as part of “Operation Choke Point,” which brought select banks under investigation based on their involvement with certain types of customers, including payday loan companies. The initiative, which lasted from 2013-2017, intended to highlight companies that posed a higher risk of money laundering or fraud. During that time, banks that worked with payday lenders faced critical observation from federal regulators.

Charles W. Calomiris, director of the program on financial studies at Columbia University, prepared a report for the court that read: “Regulators retain enormous discretionary power to punish banks as a consequence of perceived increases in ‘reputation risk,’ and it is not practically possible for banks to disprove regulatory judgments about increases in that risk or prevent regulators from punishing them on the basis of those judgments.” He added that banks often chose to drop certain customers rather than take on higher regulatory costs.

Testimony shows some of the highest officials in the FDIC encouraged regional managers to put direct pressure on banks to cut ties with payday loan providers.

For information on predatory payday loans, check out all of our Subprime Reports.

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