The Justice Department program Operation Choke Point set a dangerous precedent by pushing banks to sever relationships with lawful businesses. Now the Federal Deposit Insurance Corp. is taking important steps to undo the damage — but some people apparently haven’t gotten the memo.
The FDIC issued a financial institutions letter in late January encouraging banks to manage their risks on a customer-by-customer basis rather than by grouping entire industries according to “reputational risk.” The effort, spearheaded by FDIC chairman Martin Gruenberg and vice chairman Thomas Hoenig, was accompanied by an internal memo to FDIC supervisory personnel outlining new procedures to be followed if and when examiners direct banks to cut off customer relationships. The directive to the bank must be in writing and receive prior approval from appropriate management personnel at the FDIC. Examiners must also have a sound legal basis other than “reputational risk” for demanding that banks end services to customers.
These actions are good news for thousands of legal lending businesses and the customers who rely on them.
Unfortunately, not everyone is on the same page with the FDIC. Bloomberg reports that Early Warning, a fraud prevention company owned jointly by several large banks, is cutting off some lenders’ access to valuable account data. Until now, the data had been available for both banks and nonbanks to use in their underwriting and fraud detection practices.