In supervising banks that made tax refund anticipation loans, the FDIC made “aggressive and unprecedented” use of its supervisory powers and imposed “high costs” on institutions offering the legal products, according to a review issued today by the FDIC’s inspector general. The review — conducted as part of a broader audit of the FDIC’s involvement in Operation Choke Point — called on the agency to reconsider its leadership practices, processes and procedures, as well as the individual conduct of FDIC staff involved.
The review found that the FDIC began pressuring banks to stop offering refund anticipation loans around 2008 after comments by then-Chairman Sheila Bair. By 2012, the three remaining banks that offered RALs had exited the business. To accomplish this, the IG found, field examiners were in 2010 pressured by FDIC staff in Washington, D.C., to assign lower ratings to two RAL lenders, including changing exam narratives and predetermining the downgrade. The FDIC did not document the examiners’ objections.
The agency also abused “strong moral suasion,” the IG said, including “abusive threat[s]” from FDIC attorneys and deliberate leaks of confidential data. As a result of the IG’s Choke Point audit, the FDIC recently withdrew its guidance on the use of moral suasion.
“The absence of significant examination-based evidence of harm caused by RAL programs could have caused FDIC management to reconsider its initial assessment that these programs posed significant risk to the institutions offering them,” but it did not, the report found. “The FDIC’s actions also ultimately resulted in large insurance assessment increases, reputational damage to the banks, as well as litigation and other costs for the banks that tried to remain in the RAL business.”
