In a November 2014 post, this blog discussed how the Federal Deposit Insurance Corporation (“FDIC”) warned financial institutions they could be liable for facilitating illegal activities if their customers were involved in money laundering or consumer fraud. As part of an initiative known as Operation Choke Point, the FDIC issued guidance which advised banks to exercise due diligence in evaluating the “reputational risk” of certain types of merchants including credit repair companies, payday lenders, online tobacco retailers, and online gambling sites.
In response, the Community Financial Services Association of America (the trade association for payday lenders) filed a federal lawsuit against the FDIC which alleged that the FDIC’s guidance and “a campaign of backroom regulatory pressure” resulted in several banks terminating their relationships with payday lenders. The U.S. House Committee on Government and Oversight Reform also launched an investigation. Some observers accused the FDIC of targeting legitimate but politically unpopular industries.
To some extent, the controversy over Operation Choke Point receded in early 2015 when the FDIC issued new guidance that financial institutions should “take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers.” Financial institutions must maintain policies and procedures to authenticate the business practices of their customers and to detect potentially illegal financial transactions. However, a bank will not normally draw heightened regulatory attention simply for maintaining longstanding relationships with certain types of industries.
Despite this clarification, the case filed by the Community Financial Services Association of America continues to progress. In a September 25, 2015 decision, the U.S. District Court in Washington, D.C. largely denied the FDIC’s motion to dismiss the lawsuit. While the Court acknowledged that the FDIC’s current guidance encourages banks to take a client-specific approach to risk management, the payday lenders argued that they have been permanently stigmatized by the FDIC and deprived of their ability to conduct a lawful business. The payday lenders may now continue to develop their case in the discovery phase of this litigation.
