Operation Choke Point Lawsuit Comes to an End

Financial Services Law

Putting an end to 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’ counsel as part of the deal acknowledged that “certain employees acted in a manner inconsistent with FDIC policies with respect to 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. Nonetheless, in acknowledging the unlawful nature of Operation Choke Point, the agency resolutely stated that “[r]egulatory threats, undue pressure, coercion, and intimidation designed to restrict access to financial services for lawful businesses have no place at the FDIC. The exercise of FDIC responsibilities rests on laws and regulations and will not be based on personal beliefs or political motivations.”

What happened

In the 2014 complaint against the FDIC, 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 the federal banking regulators participated in—and were continuing to take part in—the Department of Justice’s (DOJ) Operation Choke Point, forcing banks to terminate their business relationships with payday lenders.

According to the plaintiffs, the defendants engaged in a two-part campaign: first, promulgating regulatory guidance regarding reputation risk, and second, relying on that guidance “as the fulcrum for a campaign of backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders.”

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

A Washington, D.C., federal court judge denied the regulators’ motion to dismiss the suit in September 2015.

The plaintiffs later agreed to dismiss the Federal Reserve, and the FDIC then reached a deal with the plaintiffs. The OCC was also dismissed from the case.

In exchange for the plaintiffs’ dismissal of the suit 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 a customer’s deposit account, reiterating pre-existing public guidance to financial institutions about providing banking services and carrying out Bank Secrecy Act (BSA) obligations.

“The agency encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers”, the FDIC explained, “as individual customers within broader customer categories present varying degrees of risk.”

“Financial institutions that properly manage customer relationships and risks are neither prohibited nor discouraged from providing services to customers operating in compliance with applicable federal and state law,” the agency wrote.

If a situation arises where the FDIC recommends or requires an institution to terminate a deposit account, the agency will not make them through informal suggestions. Rather, any examiner criticisms of an institution’s management or mitigation of risk associated with deposit accounts must be made in writing in a supervisory Report of Examination and approved in writing by the regional director before being provided to and discussed with institution management.

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

Importantly, “[a] recommendation to an institution to terminate a deposit account relationship cannot be based solely on reputation risk to the institution,” the statement concluded.

For further details, the FDIC referred to previously issued guidance such as FIL-41-2014, Clarifying Supervisory Approach to Institutions Establishing Account Relationships With Third-Party Payment Processors.

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

In the cover letter, the agency acknowledged “that certain employees acted in a manner inconsistent with FDIC policies with respect to payday lenders … and that this conduct created misperceptions about the FDIC’s policies.”

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

In addition, the agency pledged to conduct additional training of its examination workforce 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 from Floyd Robinson, deputy general counsel of the Litigation and Resolutions Branch of the FDIC.

To read the FDIC’s statement and letter, click here.

For its part, the OCC issued a press release calling the plaintiffs’ dismissal of the case confirmation of “what the OCC has long told the U.S. District Court and the Congress: namely, that the agency did not participate in Operation Choke Point or in any purported conspiracy to force banks to terminate the bank accounts of plaintiffs or of other payday lenders.” 

To read the OCC’s statement, click here.

Why it matters

The resolution of the lawsuit signals what may be the final death knell for Operation Choke Point and an end to politicizing bank examinations for the purpose of restricting perceived undesirable but lawful business from accessing the national banking system.