FDIC asks “You Actually Read that Footnote?”
August 5, 2014
Authored by: Jerry Blanchard
Revised Guidance on Third Party Payment Processors
The FDIC issued a “clarification” on July 28 to the effect that banks had gone overboard in their reaction to the FDIC’s expressed concerns about third party payment processors. The pressure the banks have been subjected to is related to “Operation Choke Point” where the Justice Department, with the assistance of the federal bank regulators, have attempted to block of the flow of funding to certain businesses such as payday lenders by attacking the ability of third party payment processors who deal with the targeted businesses to maintain deposit accounts with commercial banks. The expressed regulatory reason for this was that banks were exposed to undue reputational risk by assisting such companies to stay in business. While the ability of some of the underlying companies to operate across state lines is currently being litigated by various parties across the US including local cities, the FTC and the New York Attorney General, the businesses for the most part conduct businesses where they are located.
Operation Choke Point has received a great deal of publicity, particularly since it seeks to cut off funding to businesses whose operations are not illegal. The rub being that regardless of what you believe the merits of payday lending to be, once an agency of the federal government decides to put the squeeze on one line of commercial business, what stops them from picking on other lines business. In other words, why do they get to pick and choose who the winners and losers might be and isn’t there some risk that politics can raise its ugly head in the process.
The FDIC and the OCC published Guidance in November of 2013 where they define Reputation Risk as:
Reputation risk is the risk arising from negative public opinion. Deposit advance products are receiving significant levels of negative news coverage and public scrutiny. This increased scrutiny includes reports of high fees and customers taking out multiple advances to cover prior advances and everyday expenses. Engaging in practices that are perceived to be unfair or detrimental to the customer can cause a bank to lose community support and business.