Pub. 12 2021 Issue 1

Pub. 12 2021 I Issue 1 Spring 15 West Virginia Banker including firearms retailers and payday lenders, on the FDIC’s “high risk” list. These industries were labeled “high risk” because members were allegedly more likely to engage in money laundering and fraud. The mere suggestion that certain customers were “high risk” and the extra audits and investigations that would come with continuing to do business with those customers resulted in many large banks unilaterally closing these customers’ accounts. Whether Operation Choke Point was an officially sanctioned operation by regulators or the result of rogue bureaucrats’ actions, the result was that most large banks abandoned members of legal but disfavored industries. In response to Operation Choke Point, payday lenders and trade groups sued the FDIC and OCC for violating their due process rights. After considerable litigation, both the FDIC and OCC agreed to settle with the plaintiffs. Although the OCC agreed to settle, it disavowed any responsibility in relation to Operation Choke Point. As a requirement of its settlement, the FDIC was required to issue two statements clarifying its position on banks’ ability to do business with members of legal but disfavored groups. In its first statement needed, the FDIC stated that: • The FDIC 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 without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk. • 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. • If an institution is not properly managing risks associated with deposit accounts, the FDIC may take supervisory ac- tion, including recommending or requiring termination of a deposit account. Such recommendations are not made through informal suggestions, and the FDIC will not criti- cize an institution’s management of deposit accounts, or mitigation of risk, through informal suggestions. Any such examiner criticism must be made in writing in a supervi- sory Report of Examination (ROE). Recommendations or requirements for terminating deposit accounts must be approved in writing by the regional director before being provided to and discussed with an institution. Before including such findings in an ROE or pursuing supervisory action, the recommendations must be thoroughly vetted with the regional office and legal staff. The examiner in charge must include the supervisory basis for an account termination recommendation or requirement, including, if applicable, any specific laws or regulations the examin- er believes are being violated. The FDIC went on to state in its second statement that “certain employees acted in a manner inconsistent with FDIC policies with respect to payday lenders in what has generical- ly been described as ‘Operation Choke Point’ and that this conduct created misperceptions about the FDIC’s policies.” The FDIC also made it clear in its second statement that “regulatory threats, undue pressure, coercion, and intimida- tion designed to restrict access to financial services for lawful businesses have no place at the FDIC.” Having clarified its position, the FDIC ensured banks that engage in fair trade banking would not be subject to increased regulatory scru- tiny. Therefore, with the suspension and the likely future re- scission of the OCC’s Fair Access to Bank Services Rule, small and regional banks can capitalize on the fact that many large banks do not want to work with legal but disfavored groups, and they can seize this opportunity without fear that doing so will increase regulatory action.  Alexander L. Turner is a member attorney at Spilman Thomas & Battle. He actively practices law in West Virginia, Virginia and North Carolina. He regularly represents financial institutions and loan servicers in a variety of consumer finance litigation. He can be reached at aturner@spilmanlaw.com or 336.955.8352. With large banks being placed under increasing pressure to abandon customers who are members of legal but disfavored groups, an opportunity presents itself for small and regional banks to begin a fair trade banking policy and enter this abandoned market. Fairtrade banking is inherently non-discriminatory because business decisions are based on individualized risk assessments of the customer’s financial strength and not broad generalizations associated with the customers’ membership in legal but disfavored groups.