Senator Heller’s Choke Point

Heller Amendment Operation Choke Point

One thing in life is almost more certain than death and taxes – if there is legislation that the banking industry wants then Senator Dean Heller (R-NV) will be quite happy to sponsor it, carry water for it, vote for it, and then remind anyone who is still listening how he’s a Man for the Consumers because he once voted against the “bail-out.”   To see Senator Heller’s latest foray into playing the Banker’s Boy one needs to dig a bit, unearthing S.Amdt 4715 to S.Amdt 4685 amending HR 2578, the Commerce, Justice, Science and Related Agencies Appropriations Act of 2016.

Senator Heller has teamed up with Senators Vitter, Crapo, Paul, Lee, and Cruz to insert the following: 

Sec. __.  None of the funds made available in this Act may
    be used to carry out the program known as “Operation Choke
    Point”. [Cong.gov]

What is Operation Choke Point and what was it intended to do?  The Department of Justice was disturbed by reports that fraudulent merchants had found a way around federal banking regulations and once they inserted themselves into the banking system they could team with payment processors to initiate debit transactions against consumer’s accounts and have the amounts transmitted to their own accounts.

Even more disturbing, the Department’s investigations revealed that some third party processors knew that the merchants with whom they were working were frauds but they continued to process their transactions in direct violation of federal law.  [Harris pdf]

So, for example, Quickie Check Instant Lending could get a customer to sign a loan agreement for some outrageous amount of interest, and then hand the item over to a payment processor.  With some cooperation from the bank (usually garnered by providing a handsome fee thereto) the payment processor would have the bank make automatic debits to the person’s account.  Or, say, the Fast Weight Loss Pill Factory got an order from John Q. Public, and the payment processor + bank would insure that John’s bank account was regularly debited for the fraudulent product, or for products not delivered, or whatever scam was being run.

The idea behind Choke Point was to gather information from banks which appeared to be engaged in fraud, or might have evidence of fraudulent conduct by others. Subpoenas were issued, and indeed there were some banks doing some rather obnoxious business.  [See Fair Oaks Bank]  The Fair Oaks Bank had received hundreds of notices from consumers’ banks that the people whose bank accounts were being charged had NOT authorized the payments; had evidence that more than a dozen merchants served by the payment processor had “return rates” over 30% and one had a “return rate” over 70%; and, Fair Oaks had evidence of efforts by merchants to conceal their real identities.

One of the obvious targets are payday lenders who were operating in violation of state regulations regarding the amount of interest that could be charged to a customer.  As the New York Times explained back in January 2014:

“The new, more rigorous oversight could have a chilling effect on Internet payday lenders, which have migrated from storefronts to websites where they offer short-term loans at interest rates that often exceed 500 percent annually. As a growing number of states enact interest rate caps that effectively ban the loans, the lenders increasingly depend on the banks for their survival. With the banks’ help, the lenders that typically work with a third-party payment processor that has an account at the banks are able, authorities say, to automatically deduct payments from customers’ checking accounts even in states where the loans are illegal.”

The object of Choke Point was to cut the insidious relationship between the banks, the processors, and the fraudsters – or choke it off.  If one wanted to promote the interests of the payday lenders, third party processors, and banks willing to turn a blind eye toward the nature of these transactions – there are fewer ways much better than to hamstring the Department of Justice’s investigations into these kinds of transactions.  However, that is precisely what Senator Heller is proposing.

The DoJ’s investigations were also reviled because some of the ammosexuals among us got the idea that if pawn shops couldn’t use the untraditional routes for payment, therefore the whole operation was one giant gun grab. Senators Cruz and Lee bought this horse and have been riding it for some time now.  One quick visit to Politifact will demolish the SunTrust Bank/Brooksville Pawn shop story that made the rounds in 2015.

“SunTrust announced in a Aug. 8, 2014, press release that the bank had “decided to discontinue banking relationships with three types of businesses – specifically payday lenders, pawn shops and dedicated check-cashers – due to compliance requirements.” The bank still works with firearms dealers, according to the release.” [Politifact]

Hence, the policy decision made by SunTrust was no more “anti-gun” than it was anti-jewelry, anti-guitar, anti-CD, anti-work out equipment, or anything else  in a pawn shop.

There are some salient features of this story – once again Senator Heller who delights in his description as a “moderate,” has teamed up with some of the most radical members of the GOP in the U.S. Senate (witness his previous alliances with Senator Jim DeMint (R-SC).  Once again Senator Heller has sided with the payday lenders against any action taken to regulate their relationships with their customers. And, once more Senator Heller has demonstrated his willingness to carry any water in any bucket the American Bankers’ Association wants him to transport to the Senate floor.

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Filed under banking, Economy, financial regulation, fraud, Heller, Nevada politics

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