With personal tax filing season just behind us, it may be more than an interesting footnote to report that once again this year there was a credit product that no banks offered. An astonishing report issued a month before by the Inspector General of the FDIC explains why.

Bankers may look at the Fourth Amendment somewhat differently than do others. Bank supervision places bank premises, persons, papers, and much else routinely under the gaze of bank regulators. Larger banks, in fact, have bank examiners permanently housed within their offices combing through their files. Added to that, for several decades now, every bank is required to have federal deposit insurance. Along with that comes FDIC access to premises, persons, papers, and so forth.

There is no warrant involved, no subpoena. Banks kinda sorta agree to this as part of the arrangement for receiving a bank charter, which every bank has either from the state or federal government. There are limits, though, as the access is to be related to matters of bank supervision, which over time has evolved to mean concern for safety and soundness and compliance with financial consumer statutes.

Other regulators covet these “visitorial powers,” but they do not have them. The Federal Trade Commission does not have them. The Justice Department does not have them (DOJ does have to go through the Fourth Amendment rigors). The Labor Department, in its initial public draft of its controversial “fiduciary rule” (applied to people who provide certain forms of financial information), claimed the authority but backed away upon the recognition that exercising it would violate the National Bank Act (which reserves visitorial powers to bank regulators).

There is good reason why this kind of authority is limited: it is fraught with risk of abuse. This is not theoretical. A blistering report, released on the Ides of March by the Inspector General of the FDIC, outlines in detail how that authority was abused to drive several banks out of a line of business that was legal but out of favor with FDIC policymakers.

The business involved lending people money in anticipation of a tax refund. FDIC regulators did not like the practice, but neither could they find any laws against it. So those officials found ways through bank exams to make life unpleasant for banks that offered it anyway, not that the exams identified any bank violations. As the FDIC’s Inspector General found, “The absence of significant examination-based evidence of harm . . . did not change the FDIC’s supervisory approach.” That is to say, the facts did not seem to matter in the FDIC’s decision to drive banks out of the disfavored business line. Again quoting from the IG:

Yet the decision set in motion a series of interrelated events affecting three institutions that involved aggressive and unprecedented efforts to use the FDIC’s supervisory and enforcement powers, circumvention of certain controls surrounding the exercise of enforcement power, damage to the morale of certain field examination staff, and high costs to the three impacted institutions.

What to do about all that?  On October 16, the Oversight and Investigations Subcommittee of the House Financial Services Committee held a hearing on the IG Report. The IG noted that the FDIC’s efforts “employed what it termed ‘strong moral suasion’ to persuade each of the banks . . .” It worked. As the IG reported, “Ultimately, the FDIC caused all three of” the banks “to exit the business.” 

To his credit, the IG investigation was conducted at the request of current FDIC Chairman Martin Gruenberg, who wanted a fact-finding review of FDIC involvement with Operation Choke Point. It should be noted that much of the actions cited in this particular IG report occurred prior to Chairman Gruenberg’s confirmation by the Senate.

Perhaps that fact, and the attention from the Congress to the abuses, leave the way open to follow up on the key recommendation from the Inspector General: “we believe more needs to be done to subject the use of moral suasion, and its equivalents, to meaningful scrutiny and oversight, and to create equitable remedies for institutions should they be subject to abusive treatment.”