The lawsuit for operation Choke Point comes to an end

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In ending a 2014 lawsuit filed by payday lenders challenging the actions of federal regulators in Operation Choke Point, the Federal Deposit Insurance Corporation (FDIC) announced a resolution to the action.

While a letter to the plaintiffs’ attorney as part of the deal acknowledged that “certain employees acted inconsistently with FDIC policies regarding payday lenders,” the agency also made clear that neither the letter nor a statement issued as part of the agreement represented a change in policy and guidance. However, recognizing the illegal nature of Operation Choke Point, the agency resolutely stated that “[r]Regulatory threats, undue pressure, coercion, and intimidation designed to restrict access to financial services for legal businesses have no place at the FDIC. The exercise of the FDIC’s responsibilities is based on laws and regulations and will not be based on personal beliefs or political motivations. “

What happened

In the 2014 complaint against the FDIC, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency (OCC), a national trade organization, and several payday lenders alleged that federal banking regulators were and were participating. in —Operation Choke Point of the Department of Justice (DOJ), Force banks to terminate business relationships with payday lenders..

According to the plaintiffs, the defendants participated in a two-part campaign: first, enacting regulatory guidance regarding reputational risk, and second, relying on that guidance “as the fulcrum for a backroom regulatory lobbying campaign. which seeks to coerce banks into ending long-standing, mutually beneficial relationships with all payday lenders. “

The plaintiffs requested precautionary and declaratory measures to set aside certain informal guidance documents and other actions by the FDIC, the Board, and the OCC on the grounds that they violated the Administrative Procedure Act and deprived the plaintiffs of liberty interests. without due process of law.

A federal court judge in Washington, DC denied the regulators’ motion to dismiss the lawsuit in September 2015.

The plaintiffs subsequently agreed to fire the Federal Reserve, and the FDIC settled with the plaintiffs. The OCC was also dismissed from the case.

In exchange for the plaintiffs’ dismissal of the lawsuit against the FDIC, the agency agreed to issue a statement summarizing its long-standing policies and guidance regarding the circumstances in which the FDIC recommends that a financial institution terminate the account. deposit of a client, reiterating pre-existing public guidance for financial institutions on the provision of banking services and compliance with the obligations of the Banking Secrecy Law (BSA).

“The agency encourages institutions to take a risk-based approach when evaluating relationships with individual clients rather than refusing to bank entire categories of clients,” explained the FDIC, “as individual clients within broader categories of customers present varying degrees of risk. “

“Financial institutions that properly manage customer relationships and risks are not prohibited or discouraged from providing services to customers that operate in accordance with applicable federal and state laws,” the agency wrote.

If a situation arises in which the FDIC recommends or requires an institution to cancel a deposit account, the agency will not do so through informal suggestions. Rather, any criticism from the examiner on the management of an institution or the mitigation of risk associated with deposit accounts must be made in writing in a Supervisory Examination Report and must be approved in writing by the regional director before being delivered and discussed with the administration of the institution.

In each case, the recommendation must include the supervisory basis for recommending or requiring the account to be terminated, the FDIC added, including specific laws or regulations that the examiner believes are being violated, if applicable.

It is important to note that “[a] The recommendation to an institution to terminate a deposit account relationship cannot be based solely on the institution’s reputational risk, ”the statement concluded.

For more details, the FDIC referred to previously issued guidance, as FIL-41-2014, Clarifying the supervisory approach for institutions that establish account relationships with third-party payment processors.

The agency also issued a cover letter to the plaintiffs’ attorney, accompanied by a letter from November 2018 from FDIC President Jelena McWilliams to Rep. Blaine Luetkemeyer (R-Mo.).

In the cover letter, the agency acknowledged “that certain employees acted inconsistently with FDIC policies regarding payday lenders … and that this conduct created misperceptions about FDIC policies.”

To remedy the situation, the FDIC took steps to clarify and strengthen its policies, including removing the lists of examples of higher risk merchant categories that were previously included in the official FDIC guidance and adopting an internal policy that governs the circumstances in which the agency may recommend that a financial institution cancel a client’s deposit account.

In addition, the agency pledged to conduct additional training of its examining staff on its policies by the end of 2019 “to ensure that its examiners adhere to the highest standards of conduct and respect the rule of law,” according to the letter. by Floyd Robinson. , Deputy General Counsel of the FDIC Litigation and Resolutions Branch.

To read the statement and letter from the FDIC, click here.

For its part, the OCC issued a press release calling for the plaintiffs’ dismissal of the case as confirmation of “what the OCC has long said to the US District Court and Congress: a It is known that the agency was not involved in Operation Choke Point or in any alleged conspiracy to force banks to cancel the bank accounts of the plaintiffs or other payday lenders. ”

To read the OCC statement, click here.

Why does it matter

The resolution of the lawsuit signals what may be the final death sentence for Operation Choke Point and the end of the politicization of bank examinations in order to restrict access to the national banking system of businesses perceived as undesirable but legal.


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