Critics Contend Operation Choke Point Has Moved to New Financial Regulator

Has Operation Choke Point spread to the Consumer Financial Protection Bureau?

That’s what critics of this Justice Department initiative to deny financial services to shady businesses think. That’s because the CFPB included payment processors as defendants in a lawsuit against debt collectors accused of using robo-calls to harass consumers into paying debts that they did not owe.

“We are taking action against the many parties that allegedly contributed to this phantom debt collection operation,” said CFPB Director Richard Cordray. “The ringleaders of the scheme, the telemarketing company that broadcast millions of robo-calls, and the companies that processed the payments should all be held accountable for taking advantage of vulnerable consumers.”

The CFPB’s lawsuit contends that payment processors Global Payments, Pathfinder, Frontline and Electronic Merchant Systems “facilitated the debt collectors’ large-scale fraud by enabling the debt collectors to accept payment by consumers’ bank cards when the payment processors knew, or should have known, that the debt collectors were engaged in unlawful conduct.”

The payment processors “gave the debt collectors an air of legitimacy and allowed the debt collectors to efficiently process a high volume of collections,” the suit states.

The message to payment processors is “if you are clearing payments for someone doing something illegal and you have some way of knowing it, then you continue to work with them at your peril,” Chris Willis, a partner at Ballard Spahr law firm, told American Banker.

John Da Grosa Smith, an attorney who represents Pathfinder, told American Banker that CFPB argues that internal polices implemented by payment processors to protect their own credit risks “impose a pseudo regulatory obligation for them to investigate potential violations of the Consumer Financial Protection Act. The CFPB effectively seeks to ‘deputize’ small businesses without notice of lawful authority.”

This means CFPB is executing Operation Choke Point now that the Federal Deposit Insurance Corp. has backed away from the program, said Brian Wise, senior adviser for the U.S. Consumer Coalition. The FDIC removed a list that identified certain industries as “high risk” from its guidance to banks and has told banks that it’s OK to serve customers in any industry as long as their business is legal and the bank has adequate procedures for monitoring their business relationships.

The FDIC took these steps after many legitimate businesses in industries on this “high risk,” such as gun dealers and payday lenders, complained that banks had canceled their accounts because of the list.

“Once the program was made public, and victims began coming forward, the administration had to find a way to protect the program and its ability to prevent lawful industries from operating,” Wise said. “Due to the lack of congressional oversight, and the unique funding and leadership structure of the CFPB, the administration knows that it will make the perfect agency to carry on the legacy of Operation Choke Point. The administration will continue to remove any obstacles in their way.”

Republican leaders of the House Financial Services Committee sent a letter this week to the CFPB and other federal financial regulatory agencies asking them to publicly disavow “their past, present, and future involvement in Operation Choke Point or any similar operation.”

“This situation is far from resolved and we must all continue to work cooperatively to bring Operation Choke Point to a close,” the letter states. “The Financial Services Committee will continue to investigate this matter.”

By Kent Hoover