Did Operation Choke Point Hurt The Unbanked?

A former FDIC head has accused the U.S. Justice Department’s Operation Choke Point of being “a serious abuse of government power” that harms the U.S. economy and especially hurts unbanked Americans who use payday loan services, American Banker reported.

William M. Isaac, who served as chairman of the FDIC from 1981 to 1985, said the Choke Point program casts such a wide net in hunting for abusive short-term loan services that “one can only conclude that it is intended to drive all providers of alternative financial services out of business.”

Isaac, who spoke at the annual meeting of the Financial Services Centers of America trade group, pointed to FDIC statistics showing that 34 million U.S. households were unbanked or underbanked, and a 2009 survey that found that two-thirds of unbanked households use alternative financial services for cashing checks, buying money orders and prepaid cards and getting payday and title loans.

While check-cashing services charge $7 or $8 to cash a payroll check, customers who need their money immediately may be willing to pay that instead of waiting several days for a bank to release the funds, Isaac said.

And applying APRs to small, unsecured short-term loans makes little sense, he added. A typical payday loan, which charges a flat $15 fee per $100 two-week loan, has an APR exceeding 350 percent. Calls by critics for short-term lenders to limit the APR to 36 percent would limit the fee to 1.38. “I can’t conceive of any business being willing or able” to make loans like that, he added.

Isaac also cited research from the New York and Kansas City Federal Reserve Banks that found states that eliminate payday loans experience more households filing for bankruptcy when payday loans are no longer available.