Report: FDIC Role ‘Inconsequential’ to Operation Choke Point

The FDIC played an “inconsequential” role in the Justice Department’s Operation Choke Point, according to a report today from the agency’s independent inspector general. The report found, however, that some FDIC officials did not always follow the agency’s written policy and guidance in carrying out its supervisory approach to higher-risk business customers, such as payday lenders.

The audit — conducted at the behest of House Financial Services Committee members and FDIC Chairman Martin Gruenberg — found that the extent of FDIC staff involvement in Choke Point was in responding to DOJ inquiries and requests for information. “We concluded that the FDIC’s communications with DOJ employees were based on the FDIC’s responsibility to understand and consider potentially illegal activity involving FDIC-supervised institutions,” the report said.

The report also determined that the FDIC’s approach to supervising banks that served higher-risk businesses was within its legal authority and said that a controversial list of high-risk business categories first circulated in 2011 had no connection to Choke Point. However, to address what the report called “misperceptions” among bankers about the list, it withdrew references to it from guidance and clarified its policy on when and how the agency can direct a bank to end a customer relationship.

Although the report found no consequential involvement in Choke Point, it did find communications from FDIC personnel that “were not consistent with the FDIC’s written policy and guidance.” Correspondence from the agency’s Chicago regional director discouraged a bank from providing ACH services to a payday lender, and communications from a former Atlanta regional director “reflected strongly-held, negative views about payday lenders” that “reflected poor judgment as they had the propensity to influence staff behavior and lead to communications with financial institutions that are inconsistent with written FDIC policy and guidance,” the report found. While FDIC officials believed they were acting appropriately to use “moral suasion” in advising banks not to provide services to payday lenders, the report recommended the FDIC institute a clear written policy on the use of moral suasion.

ABA has been a vocal critic of Operation Choke Point, aggressively urging the FDIC to distance itself from the initiative and to modify its supervisory approach accordingly.