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Don't Cut the Lifeline: How New Regulations Limit Options for Financially Vulnerable Americans

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We know most Americans are not saving as much as they need for retirement, but what about a rainy day fund for the unexpected? A recent survey by Princeton Survey Research Associates International reveals that 63 percent of Americans do not have savings to pay for unexpected household and personal emergencies. Moneywatch put it bluntly in its coverage of the survey declaring, "Most Americans are one paycheck away from the street."

Without modest savings, many Americans cannot afford an unexpected car repair or the cost of a medical emergency. They are not necessarily poor, but rather what the Federal Reserve calls "financially fragile." They are also generally limited in their ability to immediately access funds. For example, thirty percent of the financially vulnerable reported they would use credit cards or try to borrow from family and friends. Regrettably, not everyone has this option. Some have maxed out their cards and are not eligible for a new line of credit. Others have stretched their borrowing power with their personal networks. This is the group that turns to alternative financial services products.

One viable solution to a one-time financial emergency is an online, small dollar installment loan to get a person through a financial rough patch. The majority of Americans have a real need for quick access to short-term installment loans when faced with an emergency situation. In fact, this has been the solution for twelve million Americans annually, according to Pew Charitable Trusts.

Why, then, are lawmakers and regulators taking draconian measures to terminate the businesses of legitimate short-term installment lenders? Some claim to be taking such actions in the name of protecting American consumers, suggesting that the American consumer is not intelligent enough to make their own decisions. To the contrary, eliminating these loans won't eliminate the consumer demand. Americans will still have the need for an emergency loan and with fewer or zero options, they will have nowhere legal to get one if the government has its way.

The answer, quite simply, is that certain government officials, regulators and opponents of the short-term lending industry just do not like the short-term lending business. They disparage lenders for risk-centered interest charges, without acknowledging the risk to the lenders who offer these financial products. Some agencies in the federal government have even employed other strategies aimed at closing down legal small dollar lenders and other businesses they do not like - and their methods are frighteningly unconstitutional.

The most prominent example is Operation Choke Point, an initiative employed by the U.S. Department of Justice (DOJ), which used its power, most often through their patsy, the FDIC, with their regulatory sledgehammer, to destroy legal businesses by pressuring banks with threat of federal investigation unless the banks cut off accounts for specific types of businesses. Targeted businesses include short-term lenders; firearms and ammunition dealers; tobacco businesses; some non-profits and charities; and third party payment processors.

The DOJ attempts to justify Operation Choke Point as a program for banks to weed out businesses engaged in fraud or which pose a "reputational risk." This program, however, has only targeted those businesses the current administration does not like.

Operation Choke Point has compromised the ability of legal and licensed lenders, firearms and ammunition dealers, tobacco businesses and third party payment processors to operate. Under federal pressure, banks have severed accounts with merchants in the targeted categories and effectively forced many legal and legitimate businesses to shut down.

The types of businesses currently targeted by Operation Choke Point may not appeal to everyone, and therefore not be of much concern to them. Imagine a conservative federal administration using its vast regulatory and administrative powers to eliminate businesses that go against their conservative beliefs. What outrage would erupt if our government forced the closure of bank accounts and banking services to choke off the business of organizations with liberal values such as Planned Parenthood, Human Rights Campaign and other legal enterprises?

Fortunately, in a vote with rare bipartisan support, the United States House of Representatives passed the "Financial Institution Customer Protection Act of 2016," (H.R. 766) on February 4, 2016. The bill was sponsored by Missouri Congressman Blaine Luetkemeyer. It aims to protect banks and legal businesses from the abuses of Operation Choke Point. It prohibits federal banking regulators from ordering a bank to cut off accounts unless the regulator has a material reason to do so. The legislation specifies that the reason cannot be based solely on reputational risk.

Regardless of political ideology, all Americans should be outraged by the concept and purpose of Operation Choke Point. It goes against our system of government and U.S. Constitution. The federal government cannot cannot legislate or regulate businesses out of existence based on its dislike of that business. The unintended consequences of these actions have real and immediate impact on millions of innocent Americans.

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