The payday lending industry claims that recent regulatory efforts to rein in short-term, high-interest loans have severely restricted their access to traditional banks. Now a trade organization representing the controversial lenders has asked for a federal court to intervene.
Community Financial Services Association of America – a trade association representing the payday loan industry – along with lenders Advance America and Cash Advance Centers Inc., filed a motion for preliminary relief [PDF] in federal court in Washington, D.C. last week to end what it believes is a “back-room campaign” by regulators to prevent banks from doing business with payday lenders.
According to the motion — tied to a two-year old lawsuit [PDF] against the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency — alleges that efforts by the agencies have hurt the reputation of payday lenders, leading banks to drop their relationships with these small-dollar loan operations.
Specifically, the injunction asks the court to order the agencies to cease and desist from harming the reputations of Advance America and other CFSA members; from applying pressure on banks, encouraging them to terminate relationships with the banks and other CFSA members; denying CFSA members access to financial services; and from depriving members ability to pursue business.
CFSA says that payday lenders are losing banking relationships as a result of “Operation Choice Point,” a 2013 initiative meant to block lenders deemed to be at greater risk of fraud from accessing certain payment systems.
“Protecting consumers from credit fraud is, of course, a commendable goal,” Charles Cooper, a lawyer for the CFSA, wrote [PDF] in supporting documents. “But the manner in which the defendant agencies have chosen to pursue that ostensible goal betrays that their true intent has always been to eradicate a disfavored industry.”
Instead of eliminating the “bad apples” of the payday industry, Cooper says the agencies have “set about to choke off the life-sustaining financial oxygen that the entire industry, and millions of under-banked individuals, depend on.”
Dennis Shaul, CEO for CFSA, wrote in the declaration [PDF] that members say that the consequences of Operation Choke Point for the industry has been “dire.”
For example, Shaul says that U.S. Bank has dropped its affiliation with several members, including Advance America, allegedly putting the company “on the verge” of being unable to hold a bank account.
In another case, the group claims that smaller payday lender DollarSmart Money Centers was forced to close when it lost banking services entirely.
While CFSA contends that the agencies actions have hurt business and prevent its members from providing consumers with needed, quick infusions of cash, payday loans have been found to contribute to a devastating cycle of debt.
Nearly one in four consumers continue to turn to high-cost, short-term financial products like payday loans, auto-title loans and other pricey alternatives when struggling to make ends meet.
This occurs despite research that has found these expensive lines of credit often leave consumers worse off than when they began. Typical payday loans — and other similar products — come with triple-digit interest rates that make it difficult for consumers to repay their debts in the allotted time frame — generally two weeks.
In 2014, a report from the CFPB found that only 15% of borrowers were able to repay their debt when it was due without re-borrowing. By renewing or rolling over loans the average monthly borrower is likely to stay in debt for 11 months or longer.
A recent rule proposal from the CFPB aims to end these costly debt traps, offering four protections to end debt traps: a test that companies must perform before extending credit; restrictions on rollovers; a payoff option for some products; and offering less-risky lending options.