OPERATION CHOKE POINT LAWSUIT SETTLED

After nearly seven years of controversy, federal investigations, legal proceeding, assurances from the Department of Justice that the program had ended, as well as numerous (and still viable) attempts at legislation to prohibit similar initiatives, it seems the chapter on the DOJ’s Operation Choke Point may have finally come to a close with the FDIC’s recent settlement of the lawsuit related to the program. The FDIC has settled with Advance America et al. in a lawsuit that alleged pressured terminations of payday lender bank accounts resulting from FDIC directives to supervised institutions related to Operation Choke Point.

As part of the settlement of the lawsuit, Advance America et al. v. Federal Deposit Insurance Corporation et al. (D.D.C.), and in a bit of irony, the FDIC finds itself following much of the same advice it routinely doles out to financial institutions under its supervision. As part of the settlement, the FDIC was required to issue: (1) a statement summarizing its policies and guidance regarding the circumstances in which the FDIC recommends that a financial institution terminate a customer’s deposit account and reiterating preexisting public guidance to financial institutions about providing banking services and carrying out Bank Secrecy Act obligations; and (2) a cover letter transmitting the statement to the plaintiffs that reiterates prior correspondence from the FDIC Chairman, summarizes applicable FDIC policy, and notes that the FDIC is conducting additional training of its workforce.

The FDIC issued a press release on May 22, 2019 including the statement of policy letter to the plaintiff. The statement of policy encourages institution to take a risk based approach to individual serving customers rather than declining to provide banking services to entire categories and improper management of risk supervisory action may be taken. The letter to the plaintiff states the FDIC has taken steps to: 1) clarify and reinforce its policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable state and federal law, 2) remove the lists of examples of higher-risk merchant categories that were previously included in official FDIC guidance and an informational article, and 3) conduct internal training on these policies by then end of 2019.

The Office of the Comptroller of the Currency issued a press release stating it had been dismissed from the lawsuit which confirms “…that the agency did not participate in “Operation Choke Point” or in any purported conspiracy to force banks to terminate the bank accounts of plaintiffs or of other payday lenders. Furthermore, the OCC has not entered into any settlement agreement or made any other concessions to plaintiffs in exchange for their agreement to dismiss all claims against the agency.”

What was Operation Choke Point?

Operation Choke Point was an initiative by the Department of Justice beginning in 2012 to protect consumers from fraud perpetrated by fraudulent merchants through financial institutions and third-party payment processors. This initiative targeted banks serving entities that could potentially cause reputational risk. The controversial program resulted in criticism of the DOJ (and banking agencies supportive of their efforts) related to their motives, processes, and results of eliminating banking services for categories of businesses and specific businesses operating legally.

A timeline of important events related to Operation Choke Point and the applicable lawsuit:

  • Summer 2011 – FDIC issues Supervisory Insights –Managing Risks in Third-Party Payment Processor Relationships and included information on high risk businesses. (Revised July 2014 to remove specific merchant types).
  • January 2012 – FDIC FIL 3-2012, Guidance concerning institution relationships with payment processors; identified categories of businesses that pose legal, reputational, and compliance risk.
  • November 2012 – Operation Choke Point initiative began
  • August 2013 – Members of Congress concerned FDIC and DOJ were pressuring institutions to eliminate relationships with legal businesses.
  • May 2014 – US House of Representatives Committee on Oversight and Government Reform investigative report issued on The Department of Justice’s “Operation Choke Point”: Illegally Choking Off Legitimate Businesses?
  • June 2014 – Lawsuit filed by Advance America, Cash Advance Centers, Inc. et al against Federal Agencies (FDIC, FRB, OCC)
  • October 2014 – Members of Congress request FDIC investigate participation in Operation Choke Point
  • November 2014 – Financial Institution Consumer Protection Act (bill to end OCP) introduced
  • September 2015 – FDIC Office of Inspector General issues report: “The FDIC’s Role in Operation Choke Point and Supervisory Approach to Institutions that Conducted Business with Merchants Associated with High-Risk Activities”
  • The FDIC report stated they “…found no evidence that the FDIC used the high-risk list to target financial institutions. However, references to specific merchant types in the summer 2011 edition of the FDIC’s Supervisory Insights Journal and in supervisory guidance created a perception among some bank executives that we spoke with that the FDIC discouraged institutions from conducting business with those merchants. This perception was most prevalent with respect to payday lenders.”
  • February 2016 – Financial Institution Consumer Protection Act (bill to end OCP) pass House
  • July 2017 – US District Court for the District of Columbia denied the agencies’ motions to dismiss and/or for summary judgment and permitted the payday lender-plaintiffs’ due process claims to proceed.
  • August 2017 – Operation Choke Point ended by DOJ
  • December 2017 – Financial Institution Consumer Protection Act (bill to end OCP) passed House
  • January 2019 – Financial Institution Consumer Protection Act (bill to end OCP) re-introduced
  • May 23, 2019 – FDIC announced it reached settlement in lawsuit related to Operation Choke Point

What this means for Financial Institutions

In addition to clarifying policies of the FDIC related to termination of accounts, this initiative and process highlights the importance that financial institutions understand they have an avenue to express regulatory concerns. Financial institutions that feel they have been subjected to unwarranted enforcement by a regulator can contact the Office of Ombudsman (OCC, FDIC, FRB, CFPB, NCUA) to resolve regulatory problems.

Additionally, as part of the Statement of Policy the FDIC released related to the above lawsuit, the FDIC states any insured depository institution, or an accountholder or business terminated or declined by any such institution, concerned that FDIC personnel are not following the policies laid out in the Statement, may contact any of the following:

  • The FDIC’s Trust Through Transparency dedicated email address at [email protected]; emails sent to this address are forwarded to the Chairman’s office.

or

  • The FDIC’s Office of Inspector General (“OIG”), which is charged with addressing allegations of waste, fraud, and abuse related to the programs and operations of the FDIC. Individuals or institutions may contact the FDIC OIG through its website at www.fdicoig.gov by using the “Hotline” button, by phone at 1-800-864-3342, or by email at [email protected].

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