Choke Point

Choke Point: Not Dead Yet

I’m not the only one who’s skeptical about the effect of the FDIC’s recent letter that appears to end that agency’s participation in Operation Choke Point. Former FDIC Chairman Bill Isaac claims (paid subscription required) that if that program is dying, it’s not going to be a quick death. His example is an “early warning” that some folks may not be getting the message the FDIC claims it intended to send.

Bloomberg reports that Early Warning, a fraud prevention company owned jointly by several large banks, is cutting off some lenders’ access to valuable account data. Until now, the data had been available for both banks and nonbanks to use in their underwriting and fraud detection practices.

We don’t have all the facts yet, but Early Warning is reportedly telling its customers that it is cutting off lenders that charge high interest rates. The change “reflects both the wishes of our data contributors as well as various regulators,” a company spokesman told Bloomberg. Early Warning’s primary metric for denying the service under its new guidelines is a rule that limits its lending customers to those that offer products with an APR at or below 36%.

Bill claims that none of his contacts at federal banking agencies admit to having any sympathy for the position of Early Warning. They claim that it does not embody regulatory policy.

In fact, Bill asserts, it flies in the face of regulatory policy.

Regulators want lenders to do more to determine the ability of subprime customers to repay their loans. Cutting lenders off from Early Warning’s data undermines subprime lenders’ power to properly underwrite loans.

We can all agree that abuses in short-term lending need to be curtailed. The rub here is that access to Early Warning has made short-term lending more responsible, not less.

When lenders can verify that the identity of the customer matches his or her bank account, they are able to quickly weed out first-party fraud — that is, loan applications by individuals or groups that have no intent to repay. That means lenders are able to improve fraud scoring, which in turn leads to lower default rates and ultimately means better pricing for borrowers. Having access to this valuable data is especially important for the more innovative players in the space, which are using advanced analytics and modeling to determine pricing.

In addition, Early Warning can give lenders the opportunity to stop automated clearing house withdrawals for borrowers whose accounts do not have enough funds. That is an important protective measure for customers who face expensive insufficient funds fees, bounced check fees or overdraft charges if the lender makes a payment attempt on the account.

As I’ve said repeatedly, you can’t make this stuff up.

Perhaps a more encouraging sign (dimly lit as it is) is the apparent receptiveness of Attorney General nominee Loretta Lynch to “listen to reason” on the issue of Operation Choke Point. At least, she seemed to indicate that she is open to a serious consideration of the concerns of her opponents during her confirmation hearings. That’s a slim reed, so we won’t grasp it firmly. She also has a brief banking background, which indicates that her grasp of the issues might be based on something other than pure ideology (as compared to, say, those of the Massachusetts Mohican). At any rate, can she be worse than Eric Holder? Don’t answer that question. It’s too early to tell.

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