This sample economics essay explores Obama's efforts to eliminate fraudulent lending and Operation Chokepoint.

Operation Chokepoint: Eliminating fraudulent lending

In the early months of 2014, tremors were sparked by rumors of a government initiative aimed at curbing fraudulent lending practices. Dubbed Operation Choke Point, an initiative of the Obama Administration, the program pressured banks to sever accounts held by lending services and merchants that engage in unlawful business practices. In the minds of some political representatives and commentators, the program has simply been a heinous act of federal government overreach and an assault on free enterprise. But to others, it's merely a fine-tuning of anti-money laundering laws that are geared towards protecting consumers.

As news of the program gained traction, House Republicans cried foul over the intent, alleging that the program was using the issue of consumer protection as a smoke screen for crushing businesses that the Obama Administration opposes from an ideological standpoint, such as the sale of ammunition and firearms. In response, Rep. Blaine Luetkemeyer (R-Mo.) took legislative action, sponsoring a bill that would prevent feds from restricting or stopping business relations between banks and licensed companies, as long as the latter's ethics and legality are vouched by an attorney.

Republicans protest

Many would argue, however, that Luetkemeyer's bill would only serve to enable unethical business practices. After all, one of the first steps in any money laundering operation—from terrorism to organized crime—is to hire an attorney and obtain a license. As the National Consumer Law Center's associate director, Lauren Saunders, has pointed out:

"There are licensed companies that commit fraud all the time, and everybody's got lawyers who will try to justify what they're doing," (Carter).

At the time of the GOP bill's introduction, Operation Choke Point had only made one public choke; a crackdown on Four Oaks Bank of North Carolina, which had been processing payments taken by a range of shady businesses: from federally busted Ponzi schemers and online gambling operations, to fraudulent payday lenders operating out of Central America.

Ignoring the case of Four Oaks, certain members of Congress went on to use the program as an anti-regulatory wedge issue. At a June 2014 House Financial Services Committee hearing, Rep. Patrick McHenry (R-N.C.) referred to the program as an:

"Ideological crusade" that simply scapegoats a "government hit list" of industries under the false pretext of consumer protection. Meanwhile, Rep. Stephen Fincher (R-Tenn.) remarked that Choke Point was "political [in its intent] from day one." Extending the argument even further, Rep. Sean Duffy (R-Wis.) asked whether the program would ultimately amount to "a bureaucratic scheme to shut down legitimate business," (Calder).

The Good: Killing off bad businesses

Of all the industries that criticized Operation Chokepoint, payday lenders have been among the most vocal. In June 2014, representatives of that industry sued the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC). The suit alleged that banks were being coerced by the federal government into severing ties with the lending sector.

A month earlier, Rep. Darrell Issa (R-Calif.), who chairs the House Oversight and Government Reform Committee, authored a report in which he claimed that [i]nternal memoranda on Operation Choke Point" made it clear that the government has specifically targeted short-term lenders, whose services he referred to as "indisputably lawful," (Issa 5).

Operation Chokepoint could be unconstitutional

The representative argues Operation Chokepoint is unconstitutional because the states regulate payday lenders. He's partially right; payday lending is legal in 35 states, several of which still place regulations on the practice: including licensing requirements, interest-rate limits, and caps on the number of loans for which a customer can qualify within a 12-month period. Trouble is, the Internet has enabled lenders to violate state laws and exploit needy applicants with astronomical interest fees.

The association between lenders and fraud has become so commonplace that the industry has begun eating its own. Last year, the industry lobbied the government to put the clamp on bogus lenders who were burying the competition and further soiling the industry's image. In all fairness, some lenders do exist to simply provide financial service options to folks who are down on their luck. According to Advance America spokesman Jamie Fulmer:

The problem boils down to "illegal unregulated lenders." The solution, of course, is to stop lenders that aren't "operating within the parameters of the law," the likes of whom "shouldn't be confused with [any] legitimate business," (Carter).

The Bad: Making things hard for good businesses

Allegedly, the program has also targeted parties that work within the debt-relief sector. One such company is Secure Account Services, LLC., an eight-man operation headed by Steve Stratford of Lake Havasu City, Ariz. By his own words, Stratford's business accounts with Chase Bank and Horizon Community Bank were shuttered in the spring of 2013. The Department of Justice and FDIC requires, as part of Operation Chokepoint, requires that funds for a business such as his be placed in a government-backed banking account; without one, his business is unable to operate. As he investigated the matter, he learned about Operation Choke Point. He asked Chase whether the action against his account had been brought on by the initiative, and a representative for the bank confirmed that it had. The employee went on to reveal that Chase had sent out hundreds of letters—upon orders from several government agencies—to account holders in similar industries.

Operation Choke Point has also put a pinch on businesses owners in search of bank accounts. For Sandy Perry, finding an account for Cash Express—her auto title and cash loan business—proved futile as Choke took hold of the media; and all despite her A+ rating with the Better Business Bureau. According to Perry, she approached three banks and two credit unions, all of whom stated that her line of business is too risky for banks. Consequently, she had to make frequent, 80-mile commutes from her Las Vegas residence to Mesquite, Ariz. In addition to putting her business in limbo, the hassles brought on by the federal program forced the 72-year-old to postpone retirement.

Specific industries feel the crunch

For some, the choke has been felt on several industry fronts. Take Brian Brookman, a Grand Haven, Mich. resident who opened a pawn shop last year, only to run into problems within weeks of starting. The former gun seller—who left that industry due to increased regulations to control gun sales—opened a business account with Chase Bank, his personal bank for many years. However, the account was nixed within two weeks, an action that the 43-year-old attributed to Operation Choke Point. While Chase would neither deny nor confirm his suspicion, Brookman felt that he was targeted either for having been a former firearm salesman or for running a shop that handles vintage coin sales. Though he ultimately found a local bank that would handle his business, he soon received grim warnings from PayPal about issues it had with his account; all because of recently implemented regulatory practices.

Chase is not the only bank that has put the clamp on certain business accounts. Just ask Mark Cohen, who had a similar experience to Brookman and Stratford; but with TD Bank. Last year, Cohen tried to open a TD credit line for Powderhorn Outfitters—a store that sells firearms, hiking, and hunting equipment—but the bank turned him away, due to his involvement in gun sales. Even though the Hyannis, Mass. resident sported a solid credit rating and had been with TD for more than two decades, he's since spoken out about his experience. As a result, hundreds of Powderhorn shoppers with TD accounts have left the bank in protest. Happily set up with another bank, Cohen has also been a vocal critic of Operation Choke Point. In an Aug. 2014 feature in The Daily Signal, the 65-year-old said that while he "can’t take on [the] Department of Justice and the Federal Deposit Insurance Corporation," he'd certainly "love to," (Harkness).

Investigations into the controversial program

In November 2014, Operation Choke Point was formally investigated by the FDIC, whose inspector general, Fred Gibson, said:

Agency personnel would be subject to conduct reviews, in order to find whether the "actions and policies of the FDIC were consistent with applicable laws, regulations, and policy," (Zibel).

Meanwhile, former FDIC chairman William Isaac came out and formally dismissed Operation Choke Point in a Nov. 21, 2014, op-ed. for the Wall Street Journal. Then, in January, the agency issued a letter that states:

"The Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter today encouraging supervised institutions to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk." (Zywicki)

The Washington Times declared this to be the end of the program in a Jan. 28 piece, which quoted a satisfied Luetkemeyer stating:

"We've gone down that road and have choked off Choke Point," but the "FDIC has acknowledged wrongdoing and put in place measures to stop this activity," (Riddell).

Works Cited

Carter, Zach. "House Republicans Are Trying To Make Money Laundering A Lot Easier."Huff Post Politics. TheHuffingtonPost.com, Inc. 8 Aug. 2014. Web. 2 March 2015.

Calder, Keith. "Operation Choke Point Exposed in a Week of Hearings." American Commitment. n.p. n.d. Web. 2 March 2015.

Issa, Darrell. "The Department of Justice's Operation Choke Point: Illegally Choking Off Legitimate Businesses?" Staff Report, 113th Congress. U.S. House of Representatives. 29 May 2014. Pdf. 2 March 2015.

Harkness, Kelsey. "Meet Four Business Owners Squeezed by Operation Choke Point." The Daily Signal. The Heritage Foundation. 12 Aug. 2014. Web. 2 March 2015.

Zibel, Alan. "U.S. to Probe Abuse-of-Power Claims in Financial Fraud Crackdown."The Wall Street Journal. Dow Jones Company, Inc. 14 Nov. 2014. Web. 2 March 2015.

Zywicki, Todd. "FDIC retreats on Operation Choke Point?" The Washington Post. Nash Holdings, LLC. 29 Jan. 2015. Web. 2 March 2015.

Riddell, Kelly. "FDIC attempts to end Operation Choke Point with letter, action?"The Washington Times. News World Media Development, LLC. 28 Jan. 2015. Web. 2 March 2015.