Contrary to the Gov't View, Payday Lending is a Much-Needed Service

Despite the mathematical progress in the country’s Unemployment Rate, one-third of U.S. households earn under $35,000 a year and nearly 20% of U.S. consumers have unpaid medical debts, according to a new report by the Consumer Financial Protection Bureau.

Meanwhile NerdWallet puts U.S. credit card data at $882 billion this year, up nearly 4% year-over-year, or $15,608 per U.S. household. Parsing those statistics another way, despite the climate of the economic recovery, consulting firm McKinsey & Company found that two out of every five Americans (or 40%) are living paycheck to paycheck. For context, that compares to 31% in 2012.

While it may not be popular, the economic reality is that payday lending is a much-needed service particularly since its fees are cheaper than overdraft protection fees for small-denominations, according to the Community Financial Services Association of America.

Was it because its solutions were more economical than those offered by depository institutions that payday lending was targeted as a part of Operation Choke Point?

For those unfamiliar with it, Operation Choke Point is an ongoing initiative of the U.S. Department of Justice (DOJ) that was announced in 2013. They are investigating banks in the country and the business they do with payment processors, payday lenders and other companies believed to be at higher risk for fraud and money laundering. Other businesses included legal ones such as home-based charities and firearms sales blended in with “patently illegal” forms of commerce like pornography. The DOJ partnered with the Federal Deposit Insurance Corporation (FDIC), which originated the list of “high risk” industries included in the DOJ subpoenas with a particular focus on payday lending.

It is no surprise the FDIC would target payday lenders. In fact, Mark Pearce, an FDIC Director of Consumer Protection, is the former president of Consumers for Responsible Lending (CRL), which is one of the most vocal opponents of payday lenders, offering financial products that compete with the payday industry.

New documents uncovered by the House Oversight and Government Reform Committee point to Operation Choke Point being an abuse of government power that in some instances targeted lawful businesses deemed unsavory by the FDIC, DOJ and other regulatory agencies. According to House Oversight and Government Reform Committee Chairman Darrell Issa, “In the most egregious cases, federal bureaucrats injected personal moral judgments into the regulatory process. Such practices are totally inconsistent with basic principles of good government, transparency, and the rule of law.”

In emails, the FDIC’s senior-most bank examiners expressed personal disdain for payday lending and threatened banks with relationships with the industry with further examination. For instance, one senior bank examiner wrote to another FDIC official, “I literally can not (sic) stand pay day (sic) lending,” and they “do not deserve to be in any way associated with banking.”

It is shocking to read these regulators’ own words attacking a legal business used by millions that are looking to make ends meet each and every week in the current economy -- and it's not only short-term lenders that are targeted.  Gun stores, pawnshops and even porn stars were impacted by the callous substitution of the rule of law for the personal opinions of bureaucrats and regulators. Those same words directly resulted in banks indiscriminately terminating relationships with legitimate merchants.

It is encouraging, however, that the Oversight Committee and others in Congress continue to apply appropriate scrutiny to this operation. Just last month, the FDIC and DOJ announced that they will investigate their roles in Operation Choke Point following inquiries from Rep. Blaine Luetkemeyer’s, (R-Mo.), office and more than 30 members of Congress.

Only by holding members of these government institutions accountable will it be possible to accomplish the degree of openness and transparency championed by President Obama rather than let those institutions succumb to cronyism.