Press Releases

Report: ‘Abusive Tactics’ Pressured Banks to Stop Offering Consumer Loan Product


Washington, March 16, 2016 -

WASHINGTON – The FDIC Washington Office used “abusive tactics” and “aggressive and unprecedented efforts” – including pressuring field staff to downgrade examination scores, rejecting underwriting plans and conducting an intrusive examination review – to force banks to stop offering consumers a loan product that is completely legal, according to the FDIC’s Office of Inspector General.

“The FDIC needs to ask how the actions described in our report could unfold as they did, in light of the FDIC’s stated core values of integrity, accountability, and fairness,” Acting Inspector General Fred W. Gibson, Jr. said in his report of inquiry released to the House Financial Services Committee.

The Committee’s Oversight and Investigation Subcommittee, chaired by Rep. Sean Duffy (R-WI), held a hearing on Wednesday to review the report and actions taken by FDIC personnel.

“The Inspector General’s reportreveals a troubling pattern by FDIC officials of targeting legitimate and legal activities through abusive and unfair regulatory practices.I am concerned that the FDIC has repeatedly demonstrated a disregard for the rule of law, for the limitations of its own power and for the financial institutions that it is supposed to serve.This kind of behavior cannot and will not be tolerated by Congress and the American people who expect much more from their government,” said Chairman Duffy.

In its campaign against Refund Anticipation Loans (RALs) – products that “were, and remain, legal activities,” the Office of Inspector General notes – the FDIC’s Washington Office “pressured field staff to assign lower [Safety and Soundness] ratings” for two banks that offered RALs and “required changing related examination report narratives.”

“In one instance a ratings downgrade appeared to be predetermined before the examination began,” the report states. “In another case, the downgrade further limited an institution from pursuing a strategy of acquiring failed institutions. The institution’s desire to do so was then” used as leverage by the FDIC to force the bank to exit its RAL business line.

In another instance, “requests were made, of each of the three banks offering RALs, for underwriting plans that would compensate for the loss of the [Debt Indicator],” a tool providing notification of the IRS’ intention to offset refunds for certain debts. According to the report, the Washington Office rejected each of those plans after an initial review by FDIC examiners revealed each plan would “adequately address” any credit risk.

After failing to convince all three FDIC-supervised institutions to discontinue offering RALs in 2009 and 2010, “the tenor of the FDIC’s supervisory approach became aggressive” in early 2011, according to the report.

Part of the FDIC’s aggressive approach involved an FDIC lawyer repeatedly threatening one bank. The lawyer told bank officials that the FDIC was on the verge of “going to war” and that the bank “would face unprecedented and aggressive regulatory action as early as the next morning,” the Office of Inspector General report states.

That lawyer, who is no longer with the FDIC, also shared non-public information outside the agency about an insured institution whose holding company’s stock was publicly traded – an apparent violation of the nation’s securities laws prohibiting insider trading. The report notes that the Office of Inspector General “has referred this matter to the SEC [Securities and Exchange Commission] and alerted the Department of Justice of this referral.”

Finally, in February 2011, with only one of the three banks remaining in the RAL business, the FDIC “commenced an unannounced visitation” of the bank “to review and analyze its RAL program,” and also “deployed approximately 400 examiners to conduct a 2-day horizontal review” of the bank’s tax providers, the Inspector General reports. “What is certain, is this was an unprecedented use of resources on a horizontal review, affecting a single bank…in a year where 92 other banks failed.”

The FDIC’s strong-arming tactics proved effective and, by April 2012, all three institutions had stopped offering RALs.

The FDIC had a lengthy supervisory relationship with institutions offering RALs dating back to the 1980s. The basis for the FDIC’s about-face on this legal loan product “was not fully transparent because the FDIC chose not to issue formal guidance on RALs” and because the FDIC’s articulated rationale for requiring banks to exit RALs “morphed over time,” the Inspector General reports.

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