U.S. Rep. Andy Barr, R-Lexington, is being criticized for his opposition to Operation Choke Point, a U.S. Department of Justice crackdown on banks that assist online payday lenders and other businesses with alleged consumer fraud.
"My beef on this issue is with Congressman Barr standing up for the payday lenders and not lower-income families in Kentucky who need access to financial services," Elisabeth Jensen, Barr's Democratic challenger in the Nov. 4 election, said this week.
In April, as part of Operation Choke Point, federal prosecutors announced a $1.2 million civil settlement with Four Oaks Bank & Trust in North Carolina. Prosecutors said the bank ignored evidence of fraud and allowed online payday lenders to process $2.4 billion in unauthorized transactions from depositors' accounts. Two other banks, PNC Financial Services Group and Zions Bancorp, have disclosed in public filings that they are cooperating in similar investigations.
Stuart Delery, assistant attorney general for the Justice Department's civil division, told a House committee in July that Operation Choke Point is focused on "specific conduct, based on evidence that consumers are being defrauded" through unauthorized withdrawals from their bank accounts.
The crackdown has angered payday lenders, who have given at least $22,700 for this election to Barr's campaign. They say banks are being pressured by the government to stop financing them and to cut off their access to borrowers' accounts for repayment of their short-term loans. The industry's trade group sued federal bank regulators this summer to halt Operation Choke Point.
"Operation Choke Point has already claimed casualties," the trade group said in its lawsuit. "Many of these banks have terminated their relationships with law-abiding, responsible payday lenders, and these payday lenders face increasing uncertainty in their remaining banking relationships."
About the same time, Barr agreed to co-sponsor H.R. 4986, the End Operation Choke Point Act of 2014, now pending in the House. The bill would curb the Justice Department's subpoena power under the operation and give banks a legal "safe harbor" if they can show their customers are licensed, registered as financial-services firms or have obtained a legal opinion that says they operate legally.
"There is bipartisan concern about the secrecy of this Department of Justice program," Barr said this week in a statement.
"Many legal businesses across the country have been unnecessarily affected and cut off from the financial system in the process," Barr said. "Despite its stated purpose, we have heard stories of gun stores as well as individuals involved in mining getting targeted by this program. I will continue to support DOJ efforts to prosecute unlawful activity through a transparent and fair process."
Barr, a House Financial Services Committee member, had taken at least $334,666 in campaign donations from the banking, finance and investments industries as of June 30, including payday lenders and major banks that have financed them, such as Wells Fargo and Bank of America. PNC, the bank that in March confirmed getting subpoenaed under Operation Choke Point, has given Barr $9,500.
Two-thirds of the 15 sponsors of H.R. 4986, including Barr, have taken campaign money so far this election cycle from the political action committee of the payday lenders' trade group, the Community Financial Services Association.
At a July 15 House committee hearing on Operation Choke Point, Barr said, "the American people are troubled about ... the prospect of powerful federal agencies working with the Department of Justice to pressure banks to terminate relationships with legitimate businesses."
Barr told the hearing witnesses — including Delery, the assistant attorney general, and several senior banking regulators — that he understood that Operation Choke Point also targeted coal mining as part of President Barack Obama's "war on coal." Barr said "a Kentucky resident" told him that a bank was cutting off financing for surface mining on his leased land because of "pressure from bank regulators."
The witnesses told Barr that Operation Choke Point is unrelated to coal mining. It's focused on consumer fraud, they said.
"Congressman, as I've explained our policy, it would have nothing to do with the situation you're describing," Delery told Barr.
Barr's claim that businesses such as coal operators and gun stores have been swept up in Operation Choke Point is unsupported by facts, the crackdown's supporters say. The only businesses that have been investigated are banks and third-party payment processors that assist with money transfers from depositors' accounts, they say.
"The people who are most upset here are payday lenders, who would like to be able to continue collecting from the bank accounts of their borrowers even when their loans are not legal in the states where the borrowers live," said Jim Lardner, spokesman for Americans for Financial Reform, which opposes the End Operation Choke Point Act.
"But payday lenders also know they are not very sympathetic to the public," Lardner said. "So it's easier for them and for their defenders in Congress to say that a bunch of other industries are being targeted, too. It just doesn't happen to be true."
'Safe, quick, easy!'
The payday lending industry offers small, short-term loans to people with poor credit histories in exchange for big fees. Traditionally, borrowers walked into a store and handed over a post-dated check as collateral. In Kentucky, a $500 loan originally made for two weeks can cost an extra $89 in "finance charges," for an annualized interest rate of 465 percent.
Payday loan chains with names like Cash America, Advance America and First Cash Financial have shared in billions of dollars in financial backing from major banks, including Wells Fargo, Bank of America, JPMorgan Chase, Capital One and Citibank, according to a study last year of the banks' required public disclosures by Reinvestment Partners, a Durham, N.C., group that opposes payday lending.
Recently, payday lending has shifted onto the Internet. "Safe, quick, easy! Receive up to $500 direct to your account in less than 24 hours!" one firm, LendGreen.com, claims on its website. Online revenue tripled from $1.4 billion in 2006 to $4.1 billion in 2013 and now accounts for about one-third of the payday lending market, according to a study released this month by the Pew Charitable Trusts.
With online lending, there is no store or post-dated check. Borrowers give the lenders electronic access to their bank account. The loan sum is deposited into the account. At a given date, that sum, plus one or more fees, is withdrawn.
However, government regulators and other critics say, some online payday lenders take money beyond the agreed sums, or they return for more money so frequently that accounts are closed for lack of funds and customers are punished. Pew found that 46 percent of online borrowers said lenders made withdrawals that overdrew their bank accounts.
The typical online borrower struggles for five months to repay a payday loan, repeatedly rolling the loan over and ultimately spending $520 in interest for $375 in capital, Pew said.
"There is evidence of widespread fraud and abuse in the online lending market," Pew concluded.
Watching for fraud
Kentucky does not authorize online payday lending. It requires that such transactions occur in person at a licensed, physical location, said Charles Vice, commissioner of the state Department of Financial Institutions.
That said, Vice added, it obviously happens here, because the state has received 331 consumer complaints about online payday lending since 2012. State regulators advise borrowers that online payday loans in Kentucky do not have to be repaid, and they also send a cease-and-desist letter to the online lenders if the businesses can be located.
"Absent a cease-and-desist order, we don't really have any tool we can use against them right now," Vice said. "Our statute is sort of limited on that."
In Washington, the Department of Justice also had a hard time regulating online payday lenders. Many appear outside federal jurisdiction because they are registered in other countries or through Native American tribal governments. LendGreen.com, for instance, says it is owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians.
So federal prosecutors focused on banks and third-party payment processors that assist payday lenders and other possible sources of fraud, such as pyramid schemes and online gambling. Cut off the suspects' access to bank accounts and they can't collect, regulators reasoned.
Operation Choke Point was born in November 2012. Subpoenas for banking records started to flow three months later.
Prosecutors and banking regulators say they're particularly watchful for banks with abnormally high "return rates," indicating that a large number of checks are being returned because of insufficient funds or closed accounts.
"When a bank either knows or is willfully ignorant to the fact that law-breaking merchants are taking money out of consumers' bank accounts without valid authorization, and the bank continues to allow that to happen, that is not just a concern for bank regulators. That is fraud, and it can result in true devastation for consumers," Delery, the assistant attorney general, told the House committee that included Barr on July 15.
Operation Choke Point immediately alarmed payday lenders.
According to the lawsuit filed June 5 by the industry's trade group, the Community Financial Services Association, many banks cut ties with payday lenders rather than face heightened scrutiny over account transfers. That imperils the industry's future, according to the suit.
"Payday lenders rely on banking services to operate," the group said in its suit. "As of the filing of this complaint, over 80 banking institutions have terminated their business relationships with CFSA members and other law-abiding payday lenders."
For example, Spartanburg, S.C.-based Advance America, which operates Lexington stores and online lending, was dropped by six banks and a payment-processing firm "as a direct result of the agency actions imposing burdensome requirements and grave uncertainties on banks that do business with payday lenders," the suit said.
Barr and others on the House Financial Services Committee, which oversees banking, quickly moved against Operation Choke Point.
"Your actions to 'choke off' short-term lenders by changing the structure of the financial system are outside your congressional mandate," Barr and 17 other congressmen wrote on Aug. 22, 2013, to Attorney General Eric Holder and Martin Gruenberg, chairman of the Federal Deposit Insurance Commission.
"If the government cuts off underserved consumers' credit options, it will force many Americans who live paycheck to paycheck to turn to unregulated and unsafe alternatives that are much more expensive than currently available short-term credit products," the congressmen wrote. "We are especially troubled by reports that the DOJ and FDIC are intimidating some community banks and third-party payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online lenders."
Jensen, Barr's Democratic challenger on Nov. 4, two weeks ago sent reporters a copy of the 2013 letter. Jensen said it showed that Barr's loyalty lies with "predatory lenders" who give him campaign donations.
"I have news for Andy Barr," Jensen said. "There is nothing legitimate about charging 400 or 650 percent interest. There is nothing legitimate about sucking our Kentucky families into a cycle of debt from which they can hardly recover."
Jensen said she supports a proposal made in February by U.S. Sen. Elizabeth Warren, D-Mass., to have post offices provide basic, affordable banking services — bill-paying, check-cashing, small loans — rather than payday lenders. The British postal system offers similar services.
"It could be a win-win," Jensen said this week. "There already are storefront post offices in a lot of places, like small, rural communities, where there are not banks."
Barr spokeswoman Catherine Gatewood dismissed Jensen's criticism of the congressman.
"As I always tell you, I assume people donate to someone because they agree with their policy positions," Gatewood said about the campaign donations to Barr from payday lenders and banks.
"Bottom line: Of course Andy recognizes that the Department of Justice needs to be able to do its job of prosecuting individuals engaged in criminal behavior, but this program is a poor way to go about it," Gatewood said. "It has unintended consequences that are causing real, collateral damage to legitimate businesses."