FDIC Still Facing Heat Despite Efforts to Calm Choke Point Waters

WASHINGTON — The Federal Deposit Insurance Corp. has taken steps to try and erase the perception it is biased against certain banking relationships, but congressional Republicans made clear Tuesday they are not yet satisfied.

Testifying in the House, FDIC Chairman Martin Gruenberg said a 2011 agency list of "high risk" merchants — meant to alert banks to proper risk management practices in processor arrangements — did lead to banks thinking they should end relationships, a result he called an agency "failure." The FDIC has since retracted the list, urged banks "to take a risk-based approach" to those relationships and invited banks to report instances where they thought examiners acted too harshly.

But GOP lawmakers still pummeled Gruenberg over the agency's involvement in "Operation Choke Point", the Department of Justice-led program to block fraudsters from the payments system. They reiterated concerns about views expressed by FDIC officials criticizing payday lending — one of the businesses on the list — and held the agency responsible for problems at business that lost banking ties, saying the program's effects are still being felt.

"We worked diligently to try and stop [Operation Choke Point] and while we had heard the program had stopped, I have had information come to me as recently as last week that not only has Choke Point not stopped, it is expanding," Rep. Mick Mulvaney, R-S.C., said at a hearing before the House Financial Services subcommittee on oversight and investigations. Mulvaney said Choke Point is "putting people out of business in my district."

Gruenberg insisted, however, that neither the FDIC list — which included payday lenders, gun dealers and pornographers — nor the agency's cooperation with DOJ officials stemmed from bias toward those businesses, and said the agency never meant for banks simply to cut ties.

"I do think the list subsequently was misunderstood, there were misimpressions of it, and conclusions were drawn that categories … identified on the list were not eligible [for banks] to do business with and that is really not the case," Gruenberg said. "The fact that the list was viewed that way was a failure on our part which is why we ultimately withdrew the list."

Although some members in both parties applauded the agency's moves in the wake of the Choke Point controversy, the hearing grew heated at times. Rep. Sean Duffy, R-Wisc., who led the aggressive questioning, even suggested Gruenberg should step down as chairman since officials accused of taking an overzealous approach to banks' payday lending ties had not been reprimanded.

"The bottom line is, you are putting people out of business and all the people in the FDIC who implemented this program, they still work there, they haven't been reprimanded … and if you are not going to hold them accountable — the buck stops with you — I don't think you should chair the FDIC," said Duffy, the subcommittee's chairman. He accused FDIC examiners of "making morally based directives on what is legal and law-abiding for business as they find banking partners."

Critics have pointed to a 2013 letter to a bank signed by M. Anthony Lowe, the agency's Chicago regional director, which said "activities related to payday lending are unacceptable for an insured" bank.

Gruenberg said the FDIC is still investigating whether there was wrongdoing by staff, but said such assertions are "not consistent with our policy and was a mistake and was one of the things that prompted us to be concerned about the misunderstanding." He said the agency is awaiting an inspector general report looking into the matter before concluding whether formal action should be taken against any staff.

"Our objective now going forward is to ensure our policy is well understood and consistently implemented so any business that is complying with applicable state and federal law should have access to a banking relationship and that the bank should be clear there is no prohibition or discouragement in regard to that," Gruenberg said.

Some members said the FDIC acted promptly in responding to concerns when it was clear the purpose of the list had been misconstrued.

"These actions do not equate to a federal regulator overstepping its bounds to put businesses out of business," said Rep. Al Green, D-Texas, the subcommittee's ranking member. "It illustrates a government agency willing to listen to the concerns of the entities it regulates and adjust its actions accordingly."

Green said the agency's original steps to urge strong risk management practices were not malicious.

"This was an attempt by the FDIC to help financial institutions to be aware of the higher rates of fraud sometimes associated with certain industries," Green said.