U.S. must face payday lenders' Operation Choke Point lawsuit

By Jonathan Stempel

(Reuters) - The main trade group representing payday lenders may pursue a lawsuit accusing U.S. regulators of pressuring banks to stop serving the group's members under an anti-fraud campaign known as "Operation Choke Point," a federal judge ruled on Friday.

U.S. District Judge Gladys Kessler in Washington, D.C. said the Community Financial Services Association of America may press claims that the Federal Reserve, Federal Deposit Insurance Corp and Office of the Comptroller of the Currency violated its members' due process rights.

The group and payday lender Advance America, Cash Advance Centers Inc, which has more than 2,400 offices and is also a plaintiff, claimed that the defendants exerted "back-room pressure" on banks to drive them out of business.

They said more than 80 lenders including Bank of America Corp (NYSE: BAC), Capital One Financial Corp (NYSE: COF) and JP Morgan Chase & Co (NYSE: JPM) have ended relationships with payday lenders as a result of the crackdown.

"Plaintiffs have sufficiently alleged that their liberty interests are implicated by defendants' alleged actions and that the alleged stigma has deprived them of their rights to bank accounts and their chosen line of business, so as to state a

claim for violation of constitutional due process," Kessler wrote.

The judge dismissed claims alleging violations of federal administrative procedure law.

Fed spokesman Eric Kollig, FDIC spokeswoman Barbara Hagenbaugh and OCC spokesman Bryan Hubbard declined to comment.

The trade group had no immediate comment.

Operation Choke Point is a 2013 U.S. Department of Justice initiative meant to block access to payment systems by businesses deemed higher in risk or fraudulent.

Critics have said the program unfairly targets legitimate businesses that the Obama administration dislikes.

Payday loans are typically for $500 or less, and can help tide over cash-strapped borrowers until their next paychecks.

But fees can drive effective interest rates well into three digits, according to the U.S. Consumer Financial Protection Bureau. Critics say borrowers can be trapped in an endless debt cycle by regularly using new payday loans to repay older loans.

In March, President Barack Obama expressed support for a proposed CFPB plan to craft rules to end "payday debt traps," and require lenders to take steps to ensure that borrowers can repay their loans.

The case is Community Financial Services Association of America et al v. Federal Deposit Insurance Corp et al, U.S. District Court, District of Columbia, No. 14-00953.

(Reporting by Jonathan Stempel in New York; Editing by Tom Brown)

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