The latest nail in the coffin for Operation Choke Point was added on May 22 by the Federal Deposit Insurance Corporation (FDIC) when it issued a press release announcing its resolution of a lawsuit against it by several payday lenders. Plaintiff payday lenders, echoing the generalized complaint regarding Operation Choke Point, had alleged that coordinated efforts by FDIC and US Department of Justice (DOJ) officials forced them out of the financial system by having their banking relationships terminated and, in some cases, having their bank accounts shut down.

Choke Point was a concerted informal effort by DOJ and a number of federal banking agencies, including the FDIC, during the prior administration to create operating difficulties for payday lenders. In particular, the Choke Point campaign included the use of subtle warnings to banks providing clearing services to payday lenders that the banks faced increased risk of regulatory action and scrutiny as the result of their association with the payday lenders. In turn, these sub rosa warnings caused some banks to sever ties with the lenders or increase risk premiums. The breadth of the effort ultimately affected a number of other politically “disfavored” industries, including the firearms and tobacco industries, which had business, legal, or policy relationships to payday lending.

Pursuant to the settlement, the FDIC released a statement (the Policy Statement) that summarizes certain FDIC policies, most notably those related to FDIC recommendations to close a customer’s deposit accounts. Also included along with the Policy Statement is a transmittal letter to plaintiff’s counsel and a republication of President Trump-appointed FDIC Chairman Jelena McWilliams’s November 2018 letter to Congressman Blaine Luetkemeyer, a member of the House Financial Services Committee and Ranking Member of the Financial Institutions and Consumer Credit Subcommittee. The transmittal letter makes clear the FDIC’s concession that “certain employees” acted improperly toward payday lenders under Operation Choke Point:

The FDIC acknowledges that certain employees acted in a manner inconsistent with FDIC policies with respect to payday lenders in what has been generically described as “Operation Choke Point,” and that this conduct created misperceptions about the FDIC’s policies. Regulatory 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.

Though itself a strong statement, the transmittal letter’s tone was slightly more restrained than Chairman McWilliams’s prior comments in her November 2018 letter, which roughly analogized the actions of government employees under Operation Choke Point to the governmental abuses she witnessed while growing up in the former Yugoslavia under communist rule.

In large part, the Policy Statement mirrors the points touched upon in Chairman McWilliams’s November 2018 letter, key among them being:

  • The FDIC has placed “clear limitations” on the ability of any FDIC personnel to recommend the termination of account relationships, stating that any such recommendations must be made in writing, reviewed at a senior level, and reported to the FDIC Board of Directors and Division Directors.
  • The FDIC will conduct additional training of its examinations staff in 2019, including case studies discussing “matters generically referred to as 'Operation Choke Point.’”
  • Financial institutions, and not the FDIC, are the ones properly situated to make risk determinations regarding individual customers. Insured institutions are encouraged "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.”
    • Financial institutions may choose for themselves to whom they provide services so long as those customers are “operating in compliance with applicable federal and state law.”
    • In general, the FDIC’s role in making risk determinations regarding individual customers will be confined to “examin[ing] institutions’ processes and procedures to ensure that they are sufficient and conform to all legal requirements.”
    • Further, FDIC recommendations that an institution terminate a deposit account relationship “cannot be based solely on reputation risk to the institution.”
  • Going forward, the FDIC commits to transparency in communicating critiques of an institution’s management of deposit accounts and associated risks. The FDIC will note any such critiques, recommendations or requirements in a supervisory Report of Examination rather than through “informal suggestions.”
  • Anyone “concerned that FDIC personnel are not following the policies” laid out in the Policy Statement may contact one of several FDIC hotlines, or alternatively, the dedicated email address for the FDIC’s Trust through Transparency initiative, which FDIC Chairman McWilliams launched in 2018 shortly after taking office.
  • Remaining intact is all prior public guidance describing the FDIC’s risk management principles, including the prior walking back by the FDIC of its Operation Choke Point “hit lists” of “higher-risk merchant categories,” e.g., payday lenders, firearms dealers, and sellers of tobacco.

Takeaways

Although this settlement is a clear victory for payday lenders, those operating in the small-dollar consumer loan space should not breathe too deep a sigh of relief. State attorneys general and state and federal political candidates continue to have their sights set clearly on payday lending and arguably similar ventures, e.g., marketplace lending. For example, New York authorities (including the governor) have declared flatly that payday lending is illegal in New York and that they will pursue any effort to collect on a payday debt in the state. With the FDIC on the sidelines (for now), those other governmental actors may view any perceived “win” by the industry as nothing more than a rallying cry for enhanced enforcement and further legislative restrictions.

For others caught up in Operation Choke Point, however, such as firearms dealers and sellers of tobacco, news of this settlement likely provides some comfort that unrestrained yet concealed bureaucratic activism that impacts their ability to maintain banking relationships may, for the time being, be harder to advance. These interests, however, also would be wise to remain vigilant against the possibility of state (and in the future, possible federal) action to hamstring their efforts to establish and maintain business relationships with banking institutions.