Some Ways the Trump Administration can Fight Debanking without Congress (Probably)
An elaboration on the quick-and-dirty list from last week on ways the Trump Administration may be able to fight debanking without relying on Congress
Last week I wrote a quick and dirty list of ways the Trump administration could fight banks or other financial firms refusing to deal with a person for a reason, often a policy reason, not related to creditworthiness or a legal restriction (debanking) without having to rely on Congress. Debanking has emerged as a tool in the culture wars where people who can’t achieve something via the legal process turn to financial firm to impede others’ ability to engage in legal but disfavored conduct.
Trump has campaigned against debanking and both he and his family believe they have been victims of it. Trump has said he will place strong protections to prevent debanking, at least because of political belief, but how can his administration do that, especially since the House is so closely divided and Republicans in the Senate do not have a filibuster proof majority. There are a few avenues available that the Trump administration could (probably) use under existing law. Some of these are aggressive arguments, and may not survive judicial challenge, but others are pretty clearly in the Administrations authority. This is also not an exhaustive list of options, but rather a set of preliminary ideas for consideration.
1. Resurrect and Expand the OCC’s Fair Access rule.
In the last days of the First Trump administration the Office of the Comptroller of the Currency, who charters and regulates national banks, put forward a rule that would require national banks over $100 billion in assets to not refuse to serve customers unless the refusal was based on “quantitative, impartial risk-based standards established in advance” or coordinate with others to deny services.
The rule was controversial and ended up being put on hold before it could take effect by the Biden administration. The Trump administration could bring it back, but with some refinement.
First, the rule should apply to all national banks, rather than just the very largest. The logic of the rule is that part of the role of a national bank, part of why they get charters and all of the power and protection that come with those charters, is that banks are supposed to serve their communities, not play regulator. This logic applies to small banks as well as large banks.
Second, the rule should be more explicit in describing the standard and criteria the banks can use to decide whether to provide services. Banks are not, and should not become, public utilities. We want banks to apply capital to its most profitable use, on a risk adjusted basis. Yes, we want to avoid the risk variable being gamed or manipulated (such as when a regulator or another customer threatens a bank if they do business with a disfavored customer), but we also want banks to make decisions with an eye to profitability and legitimate safety and soundness. Elaborating on what criteria banks can use in their decision making to more clearly reflect this would be beneficial.
2. Apply Fair Access to FDIC-insured State Banks
Of course, national banks are only part of the banking landscape. There are thousands of state-chartered banks in America, almost all of which receive insurance from the Federal Deposit Insurance Corporation.
While deposit insurance is an obvious benefit to bank customers, it is also a valuable subsidy to the banks themselves, who can pay depositors less in interest because the government-provided insurance largely removes the risk of loss. (p. 90-91, 101-103) Because of the subsidy deposit insurance is supposed to go to banks whose actions forward the public policy goals that justify insurance. One of those goals that the FDIC is supposed to consider when evaluating whether a bank’s application for insurance will be granted is whether the bank will serve the convenience and needs of the community. (12 USC 1816(6))
It is hard to say that political debanking serves the convenience and needs of a community. While it would be an aggressive position, and no doubt subject to legal challenge, the FDIC could argue that political debanking runs contrary to the justification of deposit insurance and prohibit insured banks from engaging in it.
Such a rule, if it followed the contours of the OCC rule discussed above, would place national- and state-chartered banks on equal regulatory footing. It would also protect state bank customers from being the victims of banks abusing their privileged positions to play regulator.
3. Remove Reputation Risk, at Least With Regard to Customers, from Bank Supervision
Fair-access rules would help prevent debanking motivated by the desire of a bank, or a private constituency that has influence over a bank, such as the bank’s employees or investors. But what about debanking driven by pressure from regulators? Unfortunately, there is a long and not-so-proud history of bank regulators using reputation risk as a tool to pressure banks to drop legal but disfavored customers.
Under the regulators’ logic, a bank that does business with a legal but unpopular customer risks economic loss through the loss of business from other customers, the departure of staff who oppose the customer, the alienation of investors, the media, and even the regulators themselves. Regulators tend to adopt a “know it when they see it approach” to reputation risk, rather than relying on objective external information, such as stock event studies.
The regulators also take the position (though not all courts agree) that this loss need not be sufficient to threaten the bank’s stability to be actionable. This has allowed regulators to point to reputation risk when they lack an actual legal basis to force a bank to drop a customer the regulator dislikes.
Even if a regulator is truly neutral, the logic of reputation risk would require them to caution a bank from doing business with a customer if another constituency that was potentially worth more money to the bank dislikes the customer. This in effect places the regulator’s thumb on the scale of the calculation the bank must make.
Further, banks who want to cut customers could point to the possibility of reputation risk as a justification for their action, even if that threat is only speculative or pretextual. The vague and arbitrary nature of reputation risk regulation allows it to be whatever the party trying to use it needs it to be.
Nor is reputation risk particularly useful for protecting actual safety and soundness. As Prof. Julie Hill shows, reputation risk is almost always redundant of other, more objective and legally grounded issues. Regulators have ample authority to address legitimate concerns without reputation risk.
Removing reputation risk, at least regarding a bank’s clients, could help prevent regulators encouraging debanking. This is something the bank regulators can largely do themselves.
The use of reputation risk is generally not required by law. Rather, it is a tool the regulators themselves developed to examine banks for safety and soundness. It is usually incorporated as guidance, rather than as a regulation. As such, it can be unincorporated fairly easily, at least in theory.
It would likely be better for bank regulators to explicitly disclaim the use of reputation risk via regulation, rather than simply guidance. This would require the removal of reputation risk from the few regulations where it is mentioned. It would also require the agencies to adopt regulations governing their internal supervisory and examination processes that explicitly prohibit the consideration of reputation risk, at least with regard to customers, by agency staff.
Doing this would not be a cure-all, but it could help start to change the regulatory and supervisory culture within agencies and reduce the risk that bank regulators use the supervisory process to impose their preferences on banks.
4. Provide Meaningful Checks on the Supervisory Process
Speaking of supervision, the agencies with supervisory powers like the OCC, FDIC, Federal Reserve, and CFPB should adopt internal rules to provide meaningful checks and balances on their examination and supervisory process. Supervision is one area where regulators, even relatively low level regulators, can really turn the screws on firms to get them to drop disfavored customers, as we saw with the FDIC’s abuse of the process to target refund anticipation lenders.
Part of why this is effective is that there are not good mechanisms for the supervised firms to contest the findings of the regulator. The FDIC in the first Trump administration tried to change this by creating a far more independent appeals process for material supervisory determinations. Unfortunately, the Biden FDIC largely reversed it almost immediately.
Providing a meaningfully independent review process would help reduce the risk of regulators misusing the supervisory process to target groups they dislike. It would also help encourage banks to push back on such abuses. To be sure, this would not be a silver bullet, but every little bit helps. Plus, since this is an internal agency process the agencies can do it without Congress.
5. Prohibit FinCEN from sharing “typologies” that stigmatize legal organizations and activities.
As revealed in the House Judiciary Committee’s Subcommittee on the Weaponization of Government report (House Report) on the use of financial surveillance after the January 6th riots, FinCEN has distributed material from third-parties that labeled non-violent groups engaged in lawful, constitutionally protected advocacy, as “hate groups” who could indicate a customer doing business with those groups was a violent extremist.
This is clearly problematic. First, it is potentially unconstitutional. As the Supreme Court recently affirmed in the case of NRA v. Vullo a regulator pressuring banks to cut ties with a customer because of that customer's speech can be a First Amendment violation.
FinCEN sharing stigmatizing information about groups with no history of violence gave that information the imprimatur of government support. This in turn likely caused banks to reconsider their perception of those groups, either because they respect FinCEN’s opinion, or because they believed FinCEN would look poorly on the banks not being more hostile to the groups on the list. As George Mocsary, Trent McCotter, and I explained in our amicus brief in NRA v. Vullo, banks have strong incentives to view “suggestions” by regulators as commands.
Apart from the First Amendment issues, there is no reason to believe that stigmatizing peaceful advocacy groups will prevent crime, which is the justification for the Bank Secrecy Act in the first place. By defining threats too broadly FinCEN risks overburdening itself and banks, excluding innocent people of all stripes from the banking system, and legitimizing the politicization of financial surveillance.
FinCEN should adopt binding internal regulations prohibiting it from distributing information, whether internally or externally created, that stigmatize groups or individuals solely based on their beliefs and lawful conduct. FinCEN should probably not distribute or facilitate the distribution of externally created material generally, unless it has thoroughly reviewed the content and independently decided that the material is accurate, unbiased, and its distribution would not threaten the Constitutional rights of Americans or improperly prejudice access to the financial system.
6. Clarify and Limit the Definition of “Suspicious” in the Bank Secrecy Act to Exclude, or at Least Limit Constitutionally Protected Activity
Another problem the House Report revealed is that banks appear to be filing suspicious activity reports (SAR) on the basis of dramatically overinclusive criteria that specifically focuses on constitutionally protected activity. This included the purchase of religious texts, donations to advocacy groups, mentions of political candidates, and making purchases at retailers that are associated with firearms, even though what was purchased is unknown, and there is nothing per se wrong with purchasing firearms in the first place.
The Bank Secrecy Act system is opaque by design, and it is unknown whether any criminals were interdicted via these reports, but what we do know about the BSA gives strong reason to be skeptical. Over four million suspicious activity reports were submitted in FY 2022, but nobody knows how quickly or effectively law enforcement has been able to use those reports. In fact, Congress has asked for this information and been told by multiple agencies that they lack the systems to answer the question. If anything, it is reasonable to assume that overly broad SAR filings impede the ability of the BSA system to do its job.
FinCEN should use rulemaking to clarify that constitutionally protected activity on its own is not to be considered “suspicious.” This isn’t to say that transactions involving constitutionally protected activity couldn’t be suspicious for other reasons, but those reasons must be clear and compelling on their own.
There is a possibility that such a rule could marginally hamper law enforcement, though given the complete lack of information on how effective the current system is, that should not be assumed, and the burden of proof should be borne by those asserting the argument. Even if it is true however, this type of tradeoff is not new or novel. We often limit law enforcement to protect privacy and liberty. Given the demonstrated abuses and problems of the status quo, such a limitation is appropriate here.
7. Consider Whether Dodd-Frank’s Prohibition on Unfair, Deceptive, and Abusive Acts and Practices Apply to Debanking
This is another somewhat aggressive legal argument, and one that is sure to be unpopular among conservative skeptics of the CFPB, who want to avoid legitimizing the agency, and often with good reason.
Still, the law is the law and under the law financial firms are prohibited from engaging in “Unfair, Deceptive, or Abusive acts and practices” (UDAAP) against consumers. As discussed in more detail here, unfair acts are those that harm or are likely to harm consumers, are not reasonably avoidable by the consumer, and have no countervailing benefit to consumers or competition. Abusive acts are those that “materially interfere with the ability of a consumer to understand a term or condition” of the service or take “unreasonable advantage of” a consumer’s lack of understanding, the inability of a consumer to protect themselves, or the ”reasonable reliance” of the consumer on the firm.
An argument can be made that debanking due to political concerns, general dislike of the customer, aversion to the customer’s otherwise legal activity, etc. could be an unfair or abusive practice, especially if the financial firm’s terms of service are vague and provide the firm with significant discretion, as opposed to laying out concrete and specific criteria that binds the firm’s decision making.
To begin with, debanking can be unfair. It is undeniable that losing a bank or other financial service account (e.g. your PayPal account) harms a consumer. It is disruptive and stigmatizing. Even if the consumer can find a new provider quickly there is no guarantee the provider will be as capable, as economical, or as convenient. Further, the search and transfer costs are a burden in themselves.
It is also reasonable to argue that a consumer would find it hard to avoid being debanked if the reason they are debanked is not a direct violation of a clear, objectively defined term of service. If the firm gets to define what violates its terms of service ex post, we can’t assume customers will be able to read the firm’s mind. (Of course, some cases may be more obvious than others. For example, a prohibition against “racism” would obviously apply to the KKK but would not obviously apply to a group that opposes racial preferences in college admissions, even if some people consider that group racist.)
It is also hard to argue that debanking consumers helps consumers or competition. Clearly, the debanked consumer is not helped, but consumers collectively aren’t helped either. One consumer is not meaningfully economically benefitted by the debanking of another and cutting consumers off from the banking system would if anything reduce competition.
Moving on to whether debanking can be abusive – abusiveness deals with preventing a firm from exploiting a consumer’s inability to understand a term or condition of the service, because the firm has obscured the term’s meaning, is taking undue advantage of the consumer’s lack of understanding or is using the consumer’s belief that the firm is acting in the consumer’s interest against the consumer.
Abusiveness claims may be easier to make if the firm gains a clear benefit from debanking the customer. For example, before their terms were reformed, PayPal could assert a liquidated damages claim of $2500 against certain customers who violated their terms of service. These terms of service were vague, subjective, and gave PayPal broad discretion to determine what was or was not a violation. The liquidated damages provision also applied regardless of whether it was an accurate reflection of the damage to PayPal that was caused by the customer’s violation. (Which is how liquidated damages provisions work.)
Given the broadness, vagueness, and potential arbitrariness of PayPal’s terms, and the potential to recoup damages in excess of the actual harm caused, this arrangement could potentially have qualified as an abusive act or practice. To the extent there are similar arrangements where firms can benefit in some way from exploiting a consumer’s ignorance or misunderstanding of the terms there may be a claim for abusiveness possible.
Of course, the prohibition on UDAAP in Dodd-Frank only applies to consumers, who are individuals, rather than businesses. However, as discussed here, some firms will allow individuals to transact for business purposes in their personal accounts, and at least one district court has held that a product or service can be a “consumer financial product or service,” and therefore covered by the UDAAP provision, if it is offered to consumers, even if businesses also use it.
Having the CFPB police debanking is clearly not without risks. It remains to be seen who President-elect Trump will appoint to head the CFPB, but the rank and file have a reputation for being highly progressive, so they may not have much sympathy for victims of political debanking who are coded as conservative.
CFPB skeptics may also be reasonably concerned that using the CFPB and allowing it to take arguably aggressive positions on the law will legitimize it, making reform or even dissolution of the controversial and polarized agency harder if not impossible in the future.
On the other hand, if the laws on the books prohibit certain types of debanking those laws should be enforced. Giving the CFPB a cause that currently will likely disproportionately benefit consumers who code right (though nothing says it will always be that way) could help attract more ideologically diverse staffers and help moderate the agency. Further, it appears highly unlikely that the CFPB will be dissolved at any point soon, so using it to enforce current law may not be costing anything on that front. Wishing the agency would just go away has not worked. It may be more productive to engage with it and domesticate it to serve a more balanced agenda.
Using this tool may not outright prohibit debanking, since absent an affirmative duty or prohibition financial firms are allowed to choose their customers. However, it could prohibit debanking on the basis of vague or opaque terms and reduce the selectiveness and arbitrariness that often accompany debanking. Forcing firms to be more explicit about the standards they will apply could help discourage them from playing politics, or at least give customers sufficient notice that they know who to trust with their finances.
Conclusion
President-elect Trump has much on his plate, but if he is serious about debanking and wants to act without having to rely on Congress (probably) he could consider some or all of these options. None are perfect, all will have challenges, and some may even run aground in the courts. Still, this is an important issue that deserves the new administration’s attention. Hopefully there will be efforts, featuring these or other means to protect Americans’ access to financial services and ability to meaningfully enjoy their core rights.