Banks Overreact to Risk, and Pawnbrokers Pay the Price

As a pawnbroker for over 26 years and a former president of the National Pawnbrokers Association, I am alarmed and dismayed by the recent wave of banks terminating their relationships with pawnbrokers.

The pawn industry is among the most heavily regulated non-depository providers of consumer financial services in the nation, with responsibilities to comply with 14 federal statutes and regulations as well as state and local laws. But since the inception of the Justice Department initiative known as Operation Choke Point, numerous pawnbroker members of the NPA have received discontinuance letters from banks. If banks consider licensed and regularly supervised pawnbrokers with many compliance responsibilities to be too risky, then what Main Street businesses are safe to bank?

The Federal Deposit Insurance Corp. encourages financial institutions to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers. And pawnbrokers were not on the list of high-risk businesses that the Federal Deposit Insurance Corp. included in a 2011 letter to financial institutions. To us, this was confirmation that both federal regulators and commercial banks appreciated our status as licensed non-depository financial services providers.

Apparently, we were wrong.

Soon after the FDIC's guidance, pawnbrokers from Ohio, Illinois, Indiana, Texas, Georgia, and Florida, among others, began receiving notices from some national banks stating they would terminate the pawnbroker's banking privileges in the next 30 days. Since mid-2014, additional NPA members and non-members have lost banking relationships, almost always without explanation or reason. Thank goodness for other banks in our communities that have stepped in and welcomed our business.

In July 2014, the NPA appealed to three federal bank regulators: the Office of the Comptroller of the Currency, the FDIC, and the Federal Reserve Board. We provided specific details about our pawnbroker members, the banks that were terminating their banking privileges, and the lines of commerce that individual pawnbrokers conduct. We provided this same information to key members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services.

In August 2014, the FDIC revised the 2013 guidance that we and many others concluded had caused banks to discontinue relationships with pawnbrokers. We were thankful. In September 2014, both the OCC and FDIC met with NPA representatives. Additional guidance from regulators followed in December and in January 2015, which we believed would resolve the problem.

We were wrong again.

Regulators understand that it makes no sense to terminate relationships with licensed and supervised businesses. But some banks, including SunTrust and JPMorgan Chase, do not. They're still busy cutting off pawnbrokers and no doubt other licensed businesses that have been their customers. While banks say their actions are unrelated to Operation Choke Point, they will not provide specific details about their reasons. The timing of the discontinuance letters has led the NPA to identify Operation Choke Point as a root cause.

[Editor's note: SunTrust said the decision to end relationships with pawnbrokers was motivated by "compliance requirements." JPMorgan said the decision was unrelated to Operation Choke Point and based solely on considerations related to their anti-money laundering and know your customer responsibilities.]

Banks should not be terminating relationships with longstanding, locally-owned customers who provide consumers with a safety net of credit access. That's particularly true as banks do not offer short-term, small-dollar loans that are in line with the national average pawn loan of $150, as reported by the NPA.

Pawnbrokers are stable businesses. Many have operated in the same location for decades. (We cannot move our stores without specific permission from regulators.) Many pawn stores have also been owned and operated by the same families for generations. We know our customers better than most bankers know theirs. We attend the same churches, shop in the same grocery stores, and conduct business with our customers face-to-face. But like any local independent merchant with cash-intensive businesses, we need banking relationships to operate.

Last month, members of the House Financial Services Committee grilled representatives from the FDIC about their agency's involvement with the government initiative known as Operation Choke Point. We thought it would help. But since then, more pawnbrokers received termination letters, including several from SunTrust. 

It's time for Congress and federal bank regulators to ask even more questions about what's going on with these banks. Perhaps some big commercial banks think they cannot afford to do business with Main Street merchants. This makes us wonder if they're not just too big to fail, but too big to care.

Fran Bishop is the government relations liaison with the National Pawnbrokers Association and a past president of the NPA.