Payday lenders asked a federal judge in Washington, D.C., for emergency relief to stop what they called a coordinated effort by U.S. regulators to stop banks from doing business with them, threatening their survival.
In Wednesday night filings, the Community Financial Services Association of America (CFSA) and payday lender Advance America, Cash Advance Centers Inc said a preliminary injunction was needed to end the "back-room campaign" of coercion by the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency.
Advance America said its own situation became dire after five banks decided in the last month to cut ties, including a 14-year relationship with U.S. Bancorp, putting it "on the verge" of being unable even to hold a bank account.
Payday lenders make small short-term loans that can help tide over cash-strapped borrowers.
But critics say fees can drive effective interest rates well into three digits, and trap borrowers into an endless debt cycle in which they use new payday loans to repay older loans.
The CFSA said other payday lenders are also losing banking relationships as a result of "Operation Choke Point," a 2013 Department of Justice initiative meant to block access to payment systems by companies deemed at greater risk of fraud.
"Protecting consumers from credit fraud is, of course, a commendable goal," Charles Cooper, a lawyer for the CFSA, wrote. "But the manner in which the defendant agencies have chosen to pursue that ostensible goal betrays that their true intent has always been to eradicate a disfavored industry."
Spokesmen for the Fed and the FDIC declined to comment. The OCC did not immediately respond to a request for comment.
The preliminary injunction request will be considered by U.S. District Judge Gladys Kessler. She oversees the CFSA's June 2014 lawsuit claiming that regulators violated its members' due process rights.
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 Lisa Shumaker)