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The Financial Frontier: Financial Freedom, Payday Lending, & “Operation Choke Point” - YouTube
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Can the government target legitimate businesses simply because it doesn't approve of the industry?
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Payday loans, pornography, surveillance equipment, tobacco sales.
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There are unlawful businesses listed there.
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Operation Choke Point. Operation Choke Point. Operation Choke Point.
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Over the course of Operation Choke Point, we lost 21 banking relationships.
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This label — "Operation Choke Point" — was taken wildly out of context.
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The government was trying to do its job.
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Payday loans are very controversial but what is the borrower's next best option?
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There are worse things than a payday loan
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and the borrower always has the choice to not take a loan.
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Payday loans are very controversial.
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While they are legal in many states and so, by definition, a lawful payday lender is abiding by the law,
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even the lawful loans are controversial because some people believe that
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these loans are inherently harmful to the borrower.
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What has happened is that payday lending has evolved into a derogatory term.
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Unfortunately, what our critics fail to do is to distinguish between
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regulated payday lending and unregulated payday lending.
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Payday lending, which is short-term small-dollar lending, is primarily regulated at the state level.
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There are some federal laws that affect payday lending, as well.
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So, there's a statute called the Truth in Lending Act and this statute requires some
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price disclosures that characterize what the interest rate on the loan is.
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The lender is required to disclose it as an APR or an annual percentage rate.
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I think that the key thing to start with with payday loans is that they are extremely expensive loans.
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The average interest rate on payday loans is around 400%, and
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that price is the critical feature to understand its historical context.
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Payday lending is a small denomination small-dollar form of credit
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that is provided to consumers who have some type of financial shortfall,
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whether it's the washing machine they use to clean their clothes breaks down
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or the car they use to get back and forth to work breaks down
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or they have some type of unexpected childcare expense.
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It's really a form of credit that's designed to meet the varying needs for millions of American consumers.
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These types of loans have an ancient pedigree.
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The very first recorded comprehensive law was the Code of Hammurabi from about 1750 BCE.
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This ancient law had a number of different rules but one thing it had was an interest rate cap:
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22% for loans that were made in silver and a 33% interest rate cap for loans made in grain.
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So, long before we invented money, we figured out that we needed interest rate caps.
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There is a very robust debate about whether or not payday lending does harm consumers
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or is inherently harmful to consumers, and I think a lot of it is going to depend
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on the individual circumstances of the borrower.
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In some states, it's prohibited because there are still interest rate caps —
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New York, for example.
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But it's not just the eastern seaboard liberal states. In the last few elections, ballot measures
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in states like South Dakota, Montana, and maybe a swing state like Colorado,
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the public has voted to reestablish traditional interest rate caps of about 36%.
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When folks on Capitol Hill or regulators are talking about the importance of
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financial regulation, they're talking about complicated products.
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They're talking about higher denomination and rarely do they
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sit down and try to understand the needs of everyday Americans
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and what they have in terms of a need for a daily small-dollar-type product.
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So, Operation Choke Point was nominally to combat fraud.
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It was to combat fraud by denying fraudsters access to banks' services, particularly a payment system.
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Fraudsters would partner with a bank to transfer money.
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When I first learned of Operation Choke Point, I was talking to a reporter from The Wall Street Journal
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who asked about an Operation Choke Point program that was designed to eradicate
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fraud in the banking system and was focusing on certain types of illegal lending activity.
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If you're in a risky business, then it might make sense that a bank will want to
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charge you a higher price for dealing with the problems that are going on in that industry
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and that's not because anybody is being targeted in that business that's operating legally,
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it's just because banks have to take time to distinguish between who the legal operators are
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and who the illegal operators are, and that could be complicated.
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Part of why reputational risk has come up in the context of payday lending is that there
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are people who believe that a bank doing business with a payday lender, not offering the payday loans
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themselves, but just providing payments or depository services to the lender,
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is enabling the payday lender to do an inherently abusive act and,
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therefore, the bank should be stigmatized or punished for engaging in that behavior even if it's legal.
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I think that this label — "Operation Choke Point" — was taken wildly out of context and
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has been used to mischaracterize what the government was actually doing.
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The government was trying to do its job to try and help make sure that banks were doing
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reasonable due diligence to screen out illegal activity from the banking industry.
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What does seem to have occurred, whether intentionally or unintentionally,
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is banks got the message from their regulator that,
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"Hey, it isn't worth it to do business with entities within these industries."
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We, over the course of Operation Choke Point, lost 21 banking relationships.
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And these, again, were simple basic Treasury services relationships:
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allowing our centers to take a bank deposit at night to the nearest branch.
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If you're a grocery store, the bank knows what your business is.
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It's a pretty transparent business and doesn't require the same level of scrutiny as a company
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that might be engaged in potentially problematic activity that is completely illegal in
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some states and illegal in almost every state if you don't have the right license.
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I think reputational risk is used as a weapon against companies like Advance America,
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which are heavily regulated in the marketplace.
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And as regulators were going in to enforce Operation Choke Point,
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using the personal disfavor that they found against the entire industry,
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they were using regulatory risk as a tool to try to force these banks from exiting the relationship.
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The challenge for financial institutions in dealing with payday lending is
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to distinguish between who's doing it appropriately, legally and who's not,
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and that's complicated and it takes some time and effort to make those distinctions.
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If you think payday lending is bad, if you honestly think it's abusive,
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Choke Point looks consumer protective to you because payday lending is bad,
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Choke Point helped curtail payday lending, at least at the margin.
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So, there is a good outcome there.
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Well, the way that I define success for regulating banks is to try and get things to work
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the best that they can for both the bank and the financial institution and also for the consumers.
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We can certainly have a debate about whether or not payday lending is good
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and if we wanted to we could outlaw payday lending,
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but we would have to go through elected officials, there'd have to be votes,
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there'd be a challenge in court, and everything would be overt and out in the open.
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Well, what we hope for the future is that there is an opportunity to continue serving
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the customers who we have served for over 21 years who have a need for access to credit
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and do so in a way that continues to meet to their expectations and their needs.
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Look, the federal government could do better on some things and
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needs to continue to try to reform itself just like any business or any individual does.
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You have to keep on working to get better.
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But, the government is trying to do that and I think by having further dialogue with industry
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and also working to protect consumers, they're going to continue to be in a place that facilitates
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reasonable consumer protections while maintaining a vibrant economy.
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