- - Tuesday, October 6, 2015

Ours is a nation of laws, not men. Our Constitution requires the concurrence of majorities in both houses of Congress and the signature of the president in order to create those laws. The constitutional process, though sometimes frustrating, protects citizens from irrational or punitive polices by ensuring deliberation and compromise.

Some in Washington are taking dangerous shortcuts. A recent report by the FDIC inspector general confirms that FDIC officials have been using their regulatory leverage over banking institutions to coerce banks to close the accounts of law-abiding companies. The IG report establishes beyond question that these FDIC regulators have been covertly pressuring banks to choke off payday lenders’ access to banking services in a deliberate attempt to drive an entire industry out of business.

The investigation uncovered internal FDIC emails showing that regulated payday lenders have been targeted not because they represent a risk to the safety and soundness of the banking system, but solely because these FDIC regulators dislike them and disapprove of their business. One regional director told his staff that he “literally cannot stand payday lending.” He notified high-ranking FDIC officials in Washington that payday lenders “do not deserve to be in any way associated with banking.” And he alerted his staff that “[a]ny banks even remotely involved in payday [lending] should be promptly brought to my attention.”

Another regional director, after learning that a bank in his region was providing services to a payday lender, orchestrated a campaign of regulatory threats and reprisals that, after eight months, resulted in that bank finally agreeing to terminate service to its valued customer. No FDIC officials, staff or attorneys ever objected. Only the bank dared to speak up and express its “disappointment with the FDIC’s supervisory approach, particularly its ability to pressure an institution to terminate a business relationship when there were no safety and soundness considerations other than potential reputation risk.”

Regulators knew that they were acting without legal authority and that their campaign could not be waged in the open; one regulator acknowledged in an email that the FDIC, “because of legal considerations, has never expressly stated publicly that our supervised institutions are not permitted to do business with payday lenders .” “In the end,” what mattered was not the law, but “getting [banks] out of [payday lending] through moral persuasion .”

The fulcrum used to apply this “moral suasion” — the IG’s euphemism for backroom pressure — was an amorphous notion called “reputation risk.” This highly subjective and malleable standard is not established or defined by statute or regulation, and, in practice, it has had nothing to do with the banks, or even their customer’s, actual reputation. Rather, in the words of an FDIC supervisor, the risk is simply that, by providing a lender a bank account — the same service it provides to any other law-abiding customer — “your institution will be linked to an organization providing payday services, [and] your reputation could suffer.” Reputation risk is simply guilt by mental association (in the regulator’s mind) with an industry of which the regulator personally disapproves. And its potential for abuse is unlimited.

This campaign against payday lenders was not merely the work of rogue agency staff. FDIC regional directors often took the lead, sometimes personally pressuring banks to terminate relationships with lenders. Washington officials at the highest levels were kept in the loop; internal documents reveal that regional FDIC officials and staff communicated the campaign’s details to the FDIC chief of staff, the directors of the two divisions charged with risk supervision and consumer protection, and staff and legal counsel in Washington. Indeed, as one regional director wrote to a division chief in Washington after a bank terminated a lender’s bank account: “Now that is something to celebrate on Thanksgiving!” Far from putting a stop to these regulatory abuses, the FDIC’s leadership in Washington condoned them. In fact, half of the FDIC’s regional directors reported that “they had observed a shift in the supervisory tenor among Washington, D.C., executives towards institutions that facilitate payday lending since the fall of 2013.”

Today, federal banking regulators have been caught red-handed using unlawful threats and regulatory coercion to destroy a lawful industry’s access to the banking services necessary to its survival. A Republican administration could be in power in 2017, so what would prevent their FDIC regulators from choking off banking services to Planned Parenthood or large plaintiffs’ law firms using its “moral suasion” to protect banks from “reputation” risks? Nothing but the Constitution. Payday lenders must have the same protection.

This startling IG report poses the question whether Americans will continue to be governed by laws enacted by their elected representatives or will instead be ruled at the mercy of the caprice and animus of unelected bureaucrats. The question is whether ours remains a government of laws, and not of men.

Dennis Shaul is the chief executive of the Community Financial Services Association of America. He previously served as a senior adviser to former Rep. Barney Frank and as a professional staff member of the House Financial Services Committee.

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