[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL DEPOSIT INSURANCE.
CORPORATION'S ROLE IN.
OPERATION CHOKE POINT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 24, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-11
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
95-055 PDF WASHINGTON : 2015
________________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
ROBERT DOLD, Illinois
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
SEAN P. DUFFY, Wisconsin, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota
ROBERT HURT, Virginia JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
----------
Page
Hearing held on:
March 24, 2015............................................... 1
Appendix:
March 24, 2015............................................... 39
WITNESSES
Tuesday, March 24, 2015
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance
Corporation (FDIC)............................................. 5
APPENDIX
Prepared statements:
Gruenberg, Hon. Martin J..................................... 40
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Written statement of the Electronic Funds Transfer
Association (EFTA)......................................... 53
Written statement of the Electronic Transactions Association
(ETA)...................................................... 55
Gruenberg, Hon. Martin J.:
Written responses to questions submitted by Representative
Luetkemeyer................................................ 68
Written responses to questions submitted by Representative
Mulvaney................................................... 71
THE FEDERAL DEPOSIT INSURANCE.
CORPORATION'S ROLE IN
OPERATION CHOKE POINT
----------
Tuesday, March 24, 2015
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:33 p.m., in
room HVC-210, Capitol Visitor Center, Hon. Sean P. Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Fitzpatrick,
Fincher, Mulvaney, Tipton, Poliquin, Hill; Green, Cleaver,
Ellison, Delaney, Beatty, Heck, Sinema, and Vargas.
Ex officio present: Representative Hensarling.
Chairman Duffy. The Oversight and Investigations
Subcommittee will come to order.
The title of today's subcommittee hearing is, ``The Federal
Deposit Insurance Corporation's Role in Operation Choke
Point.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this subcommittee may
participate in today's hearing for the purpose of making an
opening statement and questioning the witness, FDIC Chairman
Martin Gruenberg.
The Chair now recognizes himself for 3 minutes for an
opening statement.
Thank you for being here, Chairman Gruenberg. I want to
thank you for your willingness and commitment to working with
this subcommittee. Both you and your staff have been very
responsive to our requests, releasing documents to us and
making your staff available for questioning throughout the past
week.
I was, however, very surprised and troubled to learn that
the White House doesn't share the same confidence in our mutual
cooperation. As you know, we asked three members of your staff
to voluntarily meet with both Majority and Minority committee
staff for interviews and they all complied voluntarily.
Before one of the interviews, however, I understand there
was a telephone conversation between the White House and the
FDIC General Counsel in which concerns were raised over the
former Acting General Counsel's voluntary participation in the
oversight process. To his credit, the FDIC former Acting
General Counsel, nonetheless, appeared as scheduled and met
with committee staff. Kudos to him.
I hope that this afternoon you will not be deterred by the
White House's interference, instead continuing to be
forthcoming when answering our questions about how your agency
is working to repair the business relationships that have been
destroyed and damaged since the FDIC's so-called high-risk list
was released several years ago.
As many Members know, this is the subcommittee's second
hearing on the topic of Operation Choke Point, and the second
hearing where representatives from the FDIC have appeared to
discuss their role in it.
Since then, most of the staff that we have spoken to at the
FDIC, including you, Chairman Gruenberg, have contended that
you have not participated with the DOJ in Operation Choke
Point, nor is the FDIC taking part in any way in Operation
Choke Point. I imagine that will also be in your testimony
today.
But Members have heard from too many of our constituents
that even if the FDIC isn't calling it Operation Choke Point,
examiners within the FDIC are making morally-based directives
on what is legal and law-abiding for businesses as they find
banking partners.
Using the term ``reputational risk,'' they are warning
banks that if they do business with gun dealers, short-term
lenders, payday lenders, ammunition manufacturers, smoke shops,
and other legal businesses, they will meet the wrath of the
FDIC. And if you disagree, Mr. Chairman, we have emails and
memos from the FDIC to prove it. Their purpose is to choke off
the business they don't like from the banking system.
I asked you to testify today, Chairman Gruenberg, because I
want to know where you got the target list from several years
ago. And, like the IRS, I fear that activists at the DOJ and
the FDIC are abusing their power and authority and are going
after legal businesses and, in effect, they are weaponizing
government to meet their ideological beliefs. I hope that
today, Chairman Gruenberg, you can convince us that is not the
case.
With that, I now yield to the ranking member of the
subcommittee, Mr. Green from North Carolina, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And, if I may, I will be from Texas today.
Mr. Chairman, if I may just take a moment of my time to
congratulate Jason, who is a part of our team. As you know, our
staff does excellent work. And Jason, who is a part of our
team, is not here today. He is on his way to celebrate his
marriage. And I am honored to say that we will miss him, but we
are proud that he is now taking on a beautiful bride.
Mr. Chairman, I want to thank you, and thank the witness
for appearing as well. Mr. Chairman, for those who are watching
today and unfamiliar with the term ``Operation Choke Point,''
it is generally viewed as a Department of Justice initiative
aimed at protecting consumers by scrutinizing certain financial
institutions and their role in providing access points to the
banking system for industries and businesses with higher risk
of fraud. And that is what we will be talking about today,
Operation Choke Point, for the most part.
Fraudulent transactions in our banking system are a real
issue, not to be taken lightly. In 2012, the Federal Reserve
estimated that there were 31.1 million unauthorized
transactions, worth $6.1 billion, through third-party payment
processors, which are businesses that, for a fee, take payments
from consumers and deposit them in banks for merchants.
In addition, a 2012 Economist article suggests that in the
United States, 42 percent of Americans have experienced some
form of payment card fraud in the preceding 5 years. Given that
the FDIC is a prudential regulator of many financial
institutions that take on consumer deposits, it should come as
little surprise that they, too, are interested in addressing
fraud in our banking system.
However, we should not confuse the FDIC doing its job as a
regulator as evidence that it is doing anything more than
fulfilling its mission. Some have gone to great lengths to rely
on email exchanges and supervisory guidance to connect the FDIC
to this DOJ effort, Operation Choke Point. Reports have been
published and accusations leveled.
However, the truth remains that the FDIC had been
monitoring and regulating fraud at the financial institutions
it oversees long before there was ever a formal Operation Choke
Point.
Some may draw attention to a supervisory letter issued by
the FDIC in 2011 highlighting a list of high-risk industries as
evidence of their involvement in Choke Point by means of
prohibiting banks from doing business with entities on this
list.
In truth, this was an attempt by the FDIC to help financial
institutions be aware of the higher rates of fraud sometimes
associated with certain industries. The list was compiled based
on input from the third-party payment processors who do
business with the industries.
Nonetheless, when notified of concern by banks that their
list was potentially being misconstrued and misapplied during
examinations, the FDIC took definitive action to clarify that
banks could continue doing business, continue their business
relationships with any industry, as long as proper due
diligence was executed to protect consumers. And that is really
what this is about, protecting consumers.
Furthermore, in the interest of eliminating confusion, the
FDIC retracted the list. These actions do not equate to a
Federal regulator overstepping its bounds to put businesses out
of business. In fact, it illustrates a government agency
willing to listen to the concerns of the entities it regulates
and adjust its actions accordingly.
I would, however, like to take a moment to recognize a more
serious issue regarding the off-the-cuff comments made by
employees at the FDIC as it relates to the banking relations of
certain industries. While I do not think excessive credence
should be given to remarks made off-the-cuff, I do expect FDIC
examiners to act responsibly.
I understand that an internal Inspector General (IG)
investigation is under way to determine whether any misconduct
has occurred. Based on the actions already taken by the FDIC to
be responsive to the concerns raised, I fully expect the FDIC
to address these findings, if any, made by the IG.
I will close by expressing my gratitude to the chairman for
his leadership. And I hope that this hearing will clarify the
FDIC's longstanding mandate to combat fraud and protect
depositors.
Thank you, Mr. Chairman.
Chairman Duffy. Thank you.
The Chair now recognizes the vice chairman of the
subcommittee, the gentleman from Pennsylvania, Mr. Fitzpatrick,
for 1 minute.
Mr. Fitzpatrick. Thank you, Chairman Duffy. And thank you
for staying focused on this very important issue.
We are here today because individuals within the Federal
Government decided to create a policy that deliberately
targeted specific businesses that, in their mind, had
questionable business practices or were hurting consumers.
While we can all agree that consumer protection is a noble
and worthy task, the personal preferences of unelected
bureaucrats should not, and must not, be the policy of the
United States. If a company or an individual is breaking the
law, they should be held accountable.
However, extrajudicial punishment meted out arbitrarily
runs counter to the American rule of law and, frankly, the
United States Constitution. These types of actions harm the
economic security of our Nation and destroy the trust that is
critical between private enterprise and the Federal Government.
It is my hope, Mr. Chairman, that we can come together to
understand what the FDIC's involvement was in these practices
and create a bipartisan solution to ensure that this never
happens again.
Chairman Duffy. The Chair now recognizes the vice chairman
of our Monetary Policy and Trade Subcommittee, the gentleman
from South Carolina, Mr. Mulvaney, for an opening statement of
1 minute.
Mr. Mulvaney. Thank you, Mr. Chairman.
Chairman Gruenberg, thank you for being here today.
I will make this very brief. I have been working on this
for about 2 years along with the gentleman from Missouri, Mr.
Luetkemeyer. We were stunned to learn about it in the very
first instance I heard about it, and we have worked diligently
to try and stop this program.
And while we had heard that the program had stopped, I have
had information come to me as recently as last week that not
only is Choke Point not stopped, not only is it just
continuing, but it is expanding. It is broader now than it was
when Mr. Luetkemeyer and I started. I will talk to you
specifically about that during my time.
But I will assure you that there are a lot of folks up here
on this dais and folks who are not here today for whom this is
the biggest thing back home. This is it. You are talking about
Choke Point putting people in my district out of business:
pawnshops; payday lenders; gun dealers.
I am from South Carolina, where that is a big part of what
we do, and it is a big deal for us. And so, if you perceive a
certain passion today in the questions, I hope you understand
that this is not something intellectually removed from reality.
It is not something that is theoretical. It is not something
that is political. This is real. People in my district don't
have jobs today because of Choke Point. And I look forward to
talking to you more about that.
Chairman Duffy. The gentleman yields back.
We now welcome our witness, the Chairman of the Federal
Deposit Insurance Corporation, Chairman Gruenberg. Mr.
Gruenberg was sworn in as the 20th Chairman of the FDIC on
November 15, 2012, for a 5-year term.
Since August 2005, Mr. Gruenberg has served as Vice
Chairman and Member of the FDIC Board of Directors.
Additionally, he served as Acting Chairman twice, once from
November 2005 to June 2006, and again from July 2011 to
November 2012.
Mr. Gruenberg holds a law degree from Case Western Reserve
Law School and an A.B. degree from Princeton University's
Woodrow Wilson School of Public and International Affairs.
The witness will now be recognized for 5 minutes to give an
oral presentation of his testimony. And, without objection, the
witness' written statement will be made a part of the record.
Once the witness has finished presenting his testimony,
each member of the subcommittee will have 5 minutes within
which to ask their questions. And without objection and by
previous agreement with the ranking member, the ranking member
and I will each have 15 minutes of questioning at the end of
the first round, as per agreement of the parties.
I want to remind the witness that while you will not be
placed under oath today, your testimony is subject to 18 USC
Section 1001, which makes it a crime to knowingly give false
statements in proceedings such as this one. You are
specifically advised that knowingly providing a false statement
to this subcommittee or knowingly concealing material
information from this subcommittee is a crime.
On your table there are three lights: green means go;
yellow means you are running out of time; and red means stop.
The microphone is sensitive, Chairman Gruenberg, so please make
sure you are speaking directly into it.
And, with that, Mr. Chairman, you are recognized for 5
minutes for your opening statement.
STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Gruenberg. Thank you, Mr. Chairman.
Chairman Duffy, Ranking Member Green, and members of the
subcommittee, I appreciate the opportunity today to testify
about the FDIC's role with the Department of Justice's
Operation Choke Point.
One of the biggest changes in banking over the past decade
has been the rapid growth of electronic commerce. With the
growth in electronic transactions, there has been a
corresponding growth in online illegal activity and consumer
fraud. Much of this online activity requires access to the
banking system often through third-party payment processors,
which has been the focus of supervisory attention.
While the vast majority of electronic transactions are
legal, identifying the illegal transactions hidden among the
billions of annual transactions is a major challenge for banks
and regulators. Banks that help facilitate or ignore warning
signs of illegal activity can find themselves held liable for
this conduct which, in extreme cases, can even threaten the
health of the bank.
As a bank regulator, the FDIC has a responsibility to
inform the banks under our supervision about developing risks
in the financial system. It also is our responsibility to
ensure that banks have policies and procedures in place to
identify and monitor these risks and take reasonable measures
to manage and address them.
As we have stated, the FDIC's policy is that financial
institutions that properly manage relationships and effectively
mitigate risks are neither prohibited nor discouraged from
providing services to customers, regardless of the customer's
business, provided the customers are operating in compliance
with applicable State and Federal law.
The FDIC's interaction with the Justice Department's
Operation Choke Point grew out of the interest in ensuring the
banks under our supervision are not facilitating illegal
activity, especially online.
I first learned about the FDIC's interactions with the
Justice Department on Operation Choke Point in August of 2013,
when I received a letter from Members of Congress expressing
concerns that the Justice Department and the FDIC were
pressuring banks and third-party payment processors to
terminate business relationships with lawful businesses.
Upon inquiring, FDIC staff informed me that in early 2013,
staff at the FDIC became aware that the Justice Department was
conducting an investigation into the use of banks and third-
party payment processors to facilitate illegal and fraudulent
activities. It was understood by the FDIC that the Justice
Department's efforts were aimed at addressing illegal activity
being processed through banks.
The FDIC frequently coordinates with other agencies, both
Federal and State, in its supervision of its regulated
institutions. Staff informed me that FDIC attorneys
communicated and cooperated with Justice Department staff
involved in these investigations based on an interest in any
illegal activity that may involve FDIC-supervised institutions.
Nonetheless, based on the expressed concerns, it became
clear that there was a need to clarify and strengthen the
FDIC's supervisory approach and processes. In an attempt to
address these concerns, we have taken five significant actions.
First, the FDIC issued a public statement clarifying our
policy and supervisory approach. This was intended to ensure
that examiners and financial institutions understand that banks
with properly managed customer relationships will not be
criticized for providing services to customers operating in
compliance with applicable Federal and State law.
Second, the FDIC removed the list of examples from our
outstanding guidance that was intended to provide greater
clarity to the banking industry on how to safely conduct
certain customer relationships. That these examples came to be
viewed as a prohibition on serving certain customers was
clearly, in hindsight, a failure on our part.
Third, the FDIC issued a memorandum to all FDIC supervision
staff establishing new documentation and reporting procedures
where the FDIC directs the financial institution to discontinue
deposit account relationships.
Any such direction by an examiner must be in writing, must
identify the legal and regulatory basis for the action, must be
approved by the relevant Regional Director before taking
effect, and must be reported quarterly to the FDIC Board.
In addition, I met with our six Regional Directors and took
part in a nationwide all-hands call with FDIC examiners to make
clear our policy and the importance of following the
procedures.
Fourth, the FDIC published a toll-free number and email
address for both the FDIC ombudsman and the Inspector General
to encourage institutions concerned that FDIC supervisory staff
are not following FDIC policies on providing banking services
to make confidential reports to the ombudsman or IG.
And finally, the FDIC also issued a public statement on
derisking, encouraging banks to take a risk-based approach in
assessing individual customer relationships rather than
declining to provide banking services to entire categories of
customers without regard to the risks presented by an
individual customer or the financial institution's ability to
manage the risk.
Looking forward, as was noted, the FDIC's Inspector General
is examining allegations concerning the FDIC's role in
Operation Choke Point and allegations that have been made in
regard to FDIC employees. We are cooperating fully with the IG.
When we receive the report, we will review the findings
carefully and take appropriate action to address issues
identified with either our procedures or our employees.
That concludes my statement, Mr. Chairman. I will be glad
to respond to any questions.
[The prepared statement of Chairman Gruenberg can be found
on page 40 of the appendix.]
Chairman Duffy. Thank you, Chairman Gruenberg.
The Chair now recognizes the vice chairman of the
subcommittee, Mr. Fitzpatrick, for 5 minutes.
Mr. Fitzpatrick. I thank the chairman.
Mr. Gruenberg, community banks in my district have felt the
direct and harmful effects of Operation Choke Point and so have
several private employers. The result is more red tape, costly
legal fees, and less capital for lending.
And frankly, just like in Mr. Mulvaney's district,
employees in my district have lost their jobs as a result of an
operation that I believe neither the Department of Justice nor
the FDIC wanted to be public at all.
We have all seen the emails and communications that, at the
very least, suggest that bank examiners' personal opinions of
particular industries have colored their views on what is
considered high risk.
Recently your office issued guidance, though, stating that
banks should look at individual businesses rather than entire
industries. Is that true?
Mr. Gruenberg. Yes, Congressman.
Mr. Fitzpatrick. What procedures have you put in place
internally to ensure that examiners are not pressuring
regulated banks to deny accounts and access to industries of
which they personally disapprove?
Mr. Gruenberg. Congressman, as I just outlined, we have
established written procedures to be followed in implementing
the policy. Any time an examiner believes that a bank should
discontinue a relationship with a customer, that recommendation
has to be put in writing.
The writing has to explain both the legal and regulatory
basis for the action. The recommendation then has to be
reviewed by the Regional Director before it can take effect.
And any actions that actually may be implemented have to be
reported on a quarterly basis to the--
Mr. Fitzpatrick. Is there a mechanism for banks that
believe that they have been impacted to file some sort of a
complaint with the FDIC?
Mr. Gruenberg. Yes. As I also indicated, as part of the
announcement that you referenced, in the statement we provided
a phone number and email address for both our ombudsman and the
FDIC Inspector General.
Mr. Fitzpatrick. What are the sanctions for examiners that
violate? If a complaint is justified, what are the sanctions?
Mr. Gruenberg. It would depend on the action of the
examiner, and it would be subject to review by the agency and,
ultimately, if there is a basis for it, a disciplinary action.
Mr. Fitzpatrick. I know that we are all wondering how
exactly the FDIC would determine that a particular industry was
high risk when it produced the original list of industries.
Mr. Gruenberg. The list that I think is referenced appeared
in a journal that the FDIC publishes called the Supervisory
Insights journal.
There was an article that I believe appeared in June of
2011 that contained this list. The article was by two of our
career employees. And the article was about giving information
to banks about managing their relationships with third-party
payment processors.
And as part of the article, there was a list that provided
identifying categories of merchants that may pose an elevated
risk, that banks have to do appropriate due diligence in regard
to if they are going to provide services to those customers.
Mr. Fitzpatrick. What type of criteria certified a
business, in the eyes of FDIC, to be high risk? What were you
using?
Mr. Gruenberg. The list was drawn, as I understand it--and,
for what it is worth, that article appeared before I became
Chairman--from similar industry lists that had been compiled
identifying merchants that may pose an elevated risk to do
business with, as well as experience that the FDIC had through
its examination activities.
Mr. Fitzpatrick. And what liability do banks face if they
do business with clients that the FDIC determines to be high
risk?
Mr. Gruenberg. As long as the bank has appropriate controls
to manage the risk, and as long as the customer itself is doing
its business in compliance with the law, there should be no
issue.
And frankly, that is why we issued the guidance, to try to
make that as clear as we can, and that is why we have adopted
procedures to try to ensure that the guidance is being
followed.
Mr. Fitzpatrick. Are examiners permitted to tell bank
officials that their banks and/or individual employees of those
banks may face criminal charges for doing business with
particular clients?
Mr. Gruenberg. Only to the extent that a client should be--
if a customer should himself be engaged in illegal conduct,
then that obviously poses a risk and a potential liability for
the institution.
But I think the point of the guidance we have issued to our
examiners is that if they think a bank should not continue a
customer relationship, it has to be provided in writing to the
institution.
And, in addition, the guidance says two things
specifically. One, informal direction should not be provided,
it has to be in writing, and the guidance specifically says the
reputational risk, by itself, is not a basis for such an
action.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, for the hearing, and
Ranking Member Green.
Mr. Chairman, let me ask you a couple of questions. Do you
receive any direction from the White House?
Mr. Gruenberg. No, Congressman.
Mr. Cleaver. Has the FDIC given any kind of direction to
the Department of Justice to investigate financial institutions
particularly selected by the FDIC or by you?
Mr. Gruenberg. As a general matter, no. Depending on the
context, if we develop information, we may refer something to
the Justice Department.
Mr. Cleaver. Was the high-risk list a plan to stop banks
from doing business with those entities that were listed?
Mr. Gruenberg. I don't believe so, Congressman. As I
indicated, the list that was referred to was from a Supervisory
Insights journal article that first appeared back in June of
2011. I think the idea behind the article and the list was to
provide information to banks on managing these client
relationships.
I will say, as I indicated in my statement, that I do think
the list was subsequently 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.
And frankly, the fact that the list was viewed that way,
from our standpoint, was a failure on our part. It was the
reason we ultimately withdrew the list, because we believed it
was being misunderstood and being misapplied, in effect.
Mr. Cleaver. I appreciate that statement. And I had read
your comments on that previous to this hearing.
What I am trying to get clarity on is: Was there some
political motive, people moving through the shadows, meeting
down in basements with no lights, plotting against businesses
that they didn't like and then you and the AG press a button
and say, go and get these bad guys and put them on a list of
nasty companies?
Mr. Gruenberg. Not to my knowledge, Congressman.
Mr. Cleaver. No cigar-smoke-filled rooms with your staff
and others in the basement of the White House--
Mr. Gruenberg. Not to my knowledge.
Mr. Cleaver. --parked across the street?
Frankly, I am glad that you know the high-risk list. I am
hoping that we can deal with this without there being some
subliminal reason for this being done other than reasons that I
think are fairly clear to us.
One of the roles of this committee is, of course, to try to
find out what is going on. And it is our responsibility. So,
tough questions are supposed to be asked.
My questions were not particularly tough questions, but
they were aimed at trying to hopefully bring some clarity to
this whole issue and its genesis.
So I just wanted to find out whether or not you have been
secretly meeting with the President either on the basketball
court, or on the south lawn of the White House.
Mr. Gruenberg. No, sir.
Mr. Cleaver. How often do you meet with the President?
Mr. Gruenberg. I have had three opportunities during the
course of my service as the President each year has met with
the financial regulators as a group. And I have had the
privilege of participating in those meetings.
Mr. Cleaver. Did he slip you something to the side on a
sheet of paper?
Mr. Gruenberg. No, Congressman.
Mr. Cleaver. Okay. I have no other questions. Thank you.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Tennessee, Mr.
Fincher, for 5 minutes.
Mr. Fincher. Thank you, Mr. Chairman.
I appreciate the questions from the gentleman on the other
side of the aisle, but this is a very serious situation for
States like Tennessee, where we have a lot of folks who
participate and who deliver this product for the consumer.
This is not about one specific business, but this is about
the consumer having a product that they can use to help them
get by in their day-to-day life.
According to the report by the House Committee on Oversight
and Government Reform, a senior FDIC official effectively
ordered a bank to terminate all relationships with payday
lenders.
On February 15, 2013, the Director of the Chicago region
wrote to a bank's board of directors and informed them that the
FDIC had found that activities related to payday lending are
unacceptable for an insured depository institution.
So my question is: Explain the legal basis or authority for
such a sweeping order in the absence of explicit findings or
violations of the law.
Mr. Gruenberg. Thank you, Congressman.
The letter that you refer to was--
Mr. Fincher. And I have the letter, also.
Mr. Gruenberg. I understand.
The quote that you referenced was not consistent with our
policy and, frankly, was a mistake and was one of the things
that prompted us to be concerned about the misunderstanding of
what our policy was and led us in September of 2013 to issue a
financial institution letter to clarify that policy.
And the clarification stated that as long as the bank has
appropriate controls, and as long as the customer is complying
with the law, a bank is neither prohibited nor discouraged from
doing business with that customer. So the letter you reference
was not consistent with our policy.
Mr. Fincher. And following up, there seem to still be quite
a few banks that are intimidated by all of the goings-on from
day one of Operation Choke Point--which you can say it or not.
It was political from day one. Even the term is political--are
still intimidated to allow businesses to do business with them
in regards to maybe a mistake that this letter--or was a
mistake.You referenced that.
So what are you doing proactively to get the word out,
saying, ``It is okay. This is legal. This is okay, to provide
banking for these businesses that have done nothing wrong?''
That is the problem here. Just because you may not like it
doesn't mean it is illegal.
Mr. Gruenberg. Look, I agree with you. And, Congressman,
for what it is worth, we have made multiple efforts now to
clarify that to both bankers and to our examiners.
So we issued the financial institution letter in September
of 2013 clarifying the policy. We issued a financial
institution letter in July of 2014 withdrawing the list and
explicitly saying that it is just a question of having
appropriate controls by the bank and the customer complying
with the law.
Then we issued a statement in January, a public statement,
indicating to banks that risks should be determined on an
individual customer basis, not on the basis of a category of
businesses to which the customer may belong.
We have issued public guidance to our examiners, laying out
the specific procedures for our examiners to follow. And we
have established and made public both phone numbers and email
addresses for our ombudsman and our Inspector General so that
if a banker believes that an FDIC examiner is not complying
with the procedures--
Mr. Fincher. Could you provide us with that information?
Mr. Gruenberg. Yes, sir.
Mr. Fincher. And just wrapping up--I have 45 seconds left--
back to the letter, if it is against your policy to do things
like this, then why was this ever done?
Mr. Gruenberg. I think it was a mistake, frankly, on the
part--
Mr. Fincher. Whose mistake?
Mr. Gruenberg. --of the author of that letter.
Mr. Fincher. So are they still with the FDIC?
Mr. Gruenberg. They are still with the FDIC.
Mr. Fincher. What was the penalty for making this mistake
to go after legal businesses?
Mr. Gruenberg. As you know, the House Oversight Committee
undertook a report. It was one of the items identified in that
report. After receiving the report--
Mr. Fincher. What were the consequences for the actions?
Mr. Gruenberg. We have requested our Inspector General to
review the conduct of the individual there, as well as a number
of others, as well as any others that the Inspector General may
identify. And that review is currently under way.
Mr. Fincher. I yield back.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Washington, Mr.
Heck, for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
I am always hesitant to follow my friend from Tennessee,
but I will endeavor.
Chairman Gruenberg, several months ago your General
Counsel, whose name I think was Osterman--
Mr. Gruenberg. Yes, Congressman.
Mr. Heck. --sat here and said that legitimately constituted
marijuana businesses in those States that have legalized it
either through legislative action or vote of the people who
followed FinCEN guidance wouldn't have anything to worry about
from the FDIC.
Have you formalized that position in writing in any way?
Because I have to tell you, I interact with banks and credit
unions all the time and they are still walking on eggshells.
Mr. Gruenberg. Yes, Congressman. We have put in writing in
a letter that our direction to banks is to follow the FinCEN
guidance.
Mr. Heck. We would deeply appreciate being able to receive
a copy of that.
With respect to marijuana producers and dispensaries, as
you know, the Department of Justice's Cole memorandum requires
conformance with eight Federal priorities to qualify as
legitimate. It is important to note the first two: one, keep it
out of the hands of kids; and two, keep cash out of the hands
of the gangs and cartels.
Both the State entity that regulates them and any bank or
credit union that serves them are required to be checking for
conformance with the same eight Federal priorities.
Now in my State, where the voters did approve it, we have a
State Liquor Control Board which regulates marijuana
businesses. They are working with financial institutions to
allow banks and credit unions to check the Liquor Control
Board's database for red flags before they process any
transaction for a marijuana business.
And, frankly, it seems to me this is just a much more
effective and efficient way--and we are always looking for
efficiencies here--for compliance checks. But, frankly, I worry
that it is being undermined because the FDIC insists that banks
do their own checks, notwithstanding the fact that we have a
regulatory entity that is set up.
It seems to me that you could check how robust and muscular
the Liquor Control Board's effort is and sign off for that to
be the one-stop shopping by banks so that everybody wins. What
is wrong with that idea?
Mr. Gruenberg. If I may, Congressman, let us take a look at
that. And we will be glad to engage with you and your staff in
regard to it.
Mr. Heck. I look forward to your response. And I appreciate
your willingness to follow up.
I have kind of a philosophical question about Suspicious
Activity Reports (SARs). Obviously, it is up to the bank or the
credit union to decide whether or not to close a bank account,
and I think it should be. So don't interpret my question to
mean anything other than that.
But I wonder, frankly, whether or not the mere fact of
generating multiple SARs necessarily leads to the best decision
to close the account. And why do I say that? Well, that is how
we can track them. If we are ever going to want to do anything,
that is our access point. That is the transparency.
And if the reaction is if you hit X number of SARS, you are
gone, the reality is they either: one, figure out a smarter way
to get around indicating reasons to be put on the SARS list; or
two, go all cash, thus not benefiting anybody, frankly, and
being counterproductive from what we are trying to get at. What
is your reaction?
Mr. Gruenberg. That is probably a tricky call on the part
of the institution because, as you know, they are under a legal
obligation, if they identify suspicious activity, to report it.
So, frankly I would have to give that one a little bit of
thought.
Mr. Heck. It is not the reporting. It is the closure that I
wonder about. Because it seems to me you just took the teeth
out of our ability to enforce.
Lastly, quickly, I want to go all the way back to Wachovia
in 2008 and have you just comment briefly on the fraudulent
activity you found and stopped.
And, if you recall, how much money was returned to
consumers on the basis of your enforcement action?
Mr. Gruenberg. As you know, Wachovia was a nationally
chartered bank under the supervision of the OCC, so I believe
it was actually an OCC enforcement action. But we can certainly
get that information for you, Congressman.
Mr. Heck. My recollection is it was a very large number
with lots of zeros.
Mr. Gruenberg. It was substantial.
Mr. Heck. Thank you for your service to community and
Nation, sir.
Mr. Gruenberg. Thank you.
Mr. Heck. I yield back the balance of my time.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Colorado, Mr.
Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman.
I appreciate you, Chairman Gruenberg, for being here today.
I guess I would like to drill down a little bit in terms
of, once you have issued this new guidance and it has gone out
to the banks, what are you doing to be able to repair that
relationship actually with the customers?
Mr. Gruenberg. As you know, Congressman, our relationship
is with the institution.
Mr. Tipton. But it was your actions that separated some
businesses who had relationships with banks.
Mr. Gruenberg. And, frankly, that is the issue we are
trying to address. I don't know that we can--to the extent
there was an impact in the past because of misunderstandings in
regard to what our policy was, that is something we regret, and
frankly, acknowledge the failure, if there was any consequence
of that kind as a result of the list that was issued.
I think our objective now going forward is to ensure that
our policy is well-understood and consistently implemented so
that 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 that there is no prohibition or
discouragement in regard to that.
And two points. If an examiner should ever raise a question
or recommendation, again, as I made clear, we have now
established policies where anything that is directed has to be
in writing, the legal and regulatory basis has to be provided,
and it can't be simply on some reputational concern, and it
cannot be informal.
So we hope there is a sense of accountability here so that
the institution--so that it only occurs in appropriate
circumstances. And I think--
Mr. Tipton. I appreciate that.
Part of your mission, obviously, is the safety and
soundness of our banks. Businesses have pretty much the same
concern for their own safety and soundness. And, arbitrarily,
it sounds like, ``It was just a big mix-up and, gosh, we made a
mistake and we feel bad and now we are going to try and correct
it.''
But there is institutional damage effectively that you put
into place. How are you going to address a bank, if you have a
list that you have now wiped away--that is like going before a
jury after testimony has been given and saying, ``Disregard
that.'' You have already heard it.
Are you going to see a potential problem in terms of those
relationships going forward for fear with, maybe, the threat of
jail and other penalties going on, the banks are simply not
going to handle these businesses as customers?
Mr. Gruenberg. Look, I hope that is not the case. We are
making every effort--I should say, just to be clear, in terms
of communicating to our examiners what the policy and
expectation is, I met personally with all six of our Regional
Directors and, as I indicated, I took part in a nationwide all-
hands call for our examiners around the country to make clear
both what our policy is and what the procedures are we expect
them to follow. We have a very deep commitment to following
through on this.
I understand the concerns you raise. If a business is
engaging in--
Mr. Tipton. Do you feel the policies are being implemented
now?
Mr. Gruenberg. We announced the clarification of our policy
a year ago. The procedures that I outlined were just announced
in January. And I am hopeful and committed that they are going
to be effectively implemented.
Mr. Tipton. I guess, Chairman, the reason I raise this is
that the FDIC issued a financial institutional letter in
September of 2013, which clarified for employees the
institution's policy and supervisory approach. That was
followed up 10 months later, in July of 2014, with a second
letter restating the policy.
According to the OGR Committee's report during those 8
months, FDIC examiners were discouraging banks from having
relationships with short-term lenders.
What is that telling us in terms of effectiveness of
policy? Are you going to have to keep revisiting this on a
quarterly basis in terms of lining it out to your folks?
Mr. Gruenberg. I hope not, Congressman. As you know, we
received that report from the Oversight Committee, I believe,
in December of last year.
And pursuant to that report, there is now an Inspector
General review going on both identifying the FDIC's conduct of
its policy and whether or not it was consistent with the law
and regulation and there were also specific individuals
identified whose conduct is now under review by the Inspector
General.
So I am hopeful, with these combined efforts, we will be
able to address this issue effectively. But I agree that it is
going to be an ongoing effort.
Mr. Tipton. Off of my colleague from Tennessee's question,
is this going to be a slap on the hand or are these employees
going to be looking at termination?
Mr. Gruenberg. The Inspector General is reviewing the
conduct of these individuals. When that report is submitted, it
is ultimately going to be reviewed by our Board.
And it is a review that will not be done unilaterally by
me, but I will do it in conjunction with our two inside
Directors, Vice Chairman Tom Hoenig and Director Jeremiah
Norton.
So the three of us will have the opportunity to review and
make a judgment on the facts found by the Inspector General and
then, presumably, take action that is appropriate.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from California, Mr.
Vargas, for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman, for the
opportunity to speak.
And Chairman Gruenberg, thank you for being here today.
Listening to my colleagues here, we all have very different
situations. I represent the border area of California and
Mexico. My district literally runs from the ocean all the way
to Arizona, so every inch of the California-Mexico border is
actually in my district. I also have some areas in San Diego
and all of Imperial County.
One of the things that we have done for years is try to get
banking services in underserved areas, in poor areas, and
certainly one of those areas is along the border. The community
of San Ysidro and the community of Calexico in the past had a
really difficult time trying to get bank branches to open
there. But then they were successful through community efforts,
as well, I think, as banks saw an opportunity.
One of the things that you do see along the border, of
course, are a lot of cash businesses. And the banks, I think,
have flourished and done well. And, in fact, I don't think we
have had--we have had some problems, but nothing out of the
ordinary. But you do see a lot of cash transactions.
Recently we have had a lot of banks close their branches
there, in fact, a significant amount. I know I had to go and
speak to a couple of the banks to beg them to keep some of the
branches open. What they are saying is one of the big reasons
is because of this Operation Choke Point, that it has been very
difficult for them because of that.
Could you comment on that, if you have any knowledge of
that, if you could speak to that at all?
Mr. Gruenberg. Congressman, I have not heard that
particular concern raised for institutions in the area that you
described. We would be glad and, frankly, would welcome the
opportunity to meet with you and your staff to discuss that.
Mr. Vargas. I would appreciate that very much.
Because, again, these are merchants that have been long-
time merchants. These are banks that range from literally small
community banks all the way up to very, very large banks with
huge deposits.
So it is not your little tiny banks who have had problems
in the past. It is, frankly, almost all banks that are leaving
the border. And this is the issue that they are pointing at.
So, again, I would like to know what is it that you can do
when we meet because that, to me, is a great concern. Again, we
have tried for years to bring banks into these areas, the bank
people, and we have had an opportunity to do that. And it seems
like they are all going away now.
Mr. Gruenberg. Thank you.
Mr. Vargas. Mr. Chairman, those really were my questions.
And, again, everyone has very different and unique aspects. We
don't have marijuana problems. We don't have other issues. But
this is a really big problem for us. So I really appreciate you
bringing it forward.
Mr. Gruenberg. Thank you.
Chairman Duffy. The gentleman yields back. Thank you, Mr.
Vargas.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney, for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
Chairman Gruenberg, I have a letter in front of me dated
February 15, 2013. It is signed by Anthony Lowe, one of your
Regional Directors at the time. And I am going to read just one
or two sentences from it. It was directed to a board of
directors at a bank:
``It is our view that payday loans are costly and offer
limited utility for consumers as compared to traditional loan
products. Furthermore, the redacted relationship carries a high
degree of risk to the institution, including third-party
reputational compliance and legal risk, which may expose the
bank to individual and class actions by borrowers and local
regulatory authorities. Consequently, we have generally found
that activities related to payday lending are unacceptable for
an insured depository institution.''
Was this the official position of the FDIC in February 2013
when this letter was written?
Mr. Gruenberg. Congressman, as I previously indicated, that
letter was not consistent with our policy and it was really one
of the things that prompted us to issue the guidance clarifying
it in September of 2013.
Mr. Mulvaney. If I were to ask you the same question--if I
took out the words ``payday loans'' and inserted ``pawnshops,''
``tobacco shops,'' ``gun dealers,'' ``ammunition
manufacturers,'' would that also be the case? It was not the
policy of the FDIC in 2013 and it is not the policy today?
Mr. Gruenberg. That is correct.
Mr. Mulvaney. And I see that--I don't have the document for
later in 2013.I do have the one from July of 2014 that you have
referenced here a couple of times today.
In December of 2014, I got a phone call from a pawnshop in
my district that had been denied a loan to expand their
business. They needed a million dollars to expand their
pawnshop.
The woman--it was a single woman who ran it and was hoping
to pass it on to her grown children--needed to borrow a million
dollars and went to the bank that she had a 25-year
relationship with and offered to post $500,000 in collateral
and borrow effectively 50 percent of the cost.
She was told by that institution, which was overseen by the
FDIC, that they could not lend to her because of the nature of
her business. She then went to two other banks in the same
community--it is a very small town where I live--and got the
same answer.
My specific question to you is this: What remedy is
available either to that lady or to that bank for that outcome?
Mr. Gruenberg. I can't speak to the facts of the
circumstance. But if I may try to respond, if indeed that is
what occurred, that would not be consistent with our policy. If
indeed the banker--
Mr. Mulvaney. Let me ask it this way. Let's say that I talk
to the banker and I ask, who is your examiner, and they know
and they will tell me. What should that bank do in order to
straighten out this difficulty?
Mr. Gruenberg. I think a couple of things, if the bank is
willing. One, to report it to the supervisor, the regional
office, to make us aware of it. There is also a dedicated email
address to our ombudsman to report it on a confidential basis,
or there is also a number and email address to report it to our
Inspector General.
Mr. Mulvaney. Now, after you issued the July 2014 advisory
letter, the institution letter, you were still having
difficulties with Choke Point, weren't you? People were still
calling to complain about Choke Point being used to deny them
access to credit.
Mr. Gruenberg. I think it is fair to say we were still
hearing concerns.
Mr. Mulvaney. Sure. And that was at least one motivation
for the January 2015 additional guidance, correct?
Mr. Gruenberg. Yes.
Mr. Mulvaney. And you came in--I think the language here
says that you encourage--this is from the summary, not the
actual text, it is the summary that you provided--insured
depository institutions to service the communities. It goes on
to say that you encourage them to take a risk-based approach in
assessing individual customer relationships rather than
declining to provide banking services to entire categories of
customers without regard to the risks. That is in January of
2015.
Last week, it happened again in my district, to a business
with a decade's long relationship with their bank, at many
different levels, by the way. The company is a diversified
company. One of their businesses happens to be payday lending,
and their bankers came to them unsolicited. They weren't asking
for a new line, weren't asking for any new credit, no new
loans, but the bank came to them and said, look, we really like
the relationship with you and we want to continue it. We just
can't do it anymore for your payday operation. You need to
close your checking and savings accounts for that.
Mr. Gruenberg. Congressman, if the bank is willing, we
would certainly--and I understand the concern about reprisal,
so it is what makes these situations difficult.
Mr. Mulvaney. That is why I am not using the names.
Mr. Gruenberg. I understand. But if the bank is willing, we
would welcome the opportunity to engage with the institution
and understand the facts of the situation.
Mr. Mulvaney. Lastly, and this is the question I referred
to, I think, in my opening statement, I have another example
that I won't go into in great detail where a similar thing
happened in my district with a bank that is not overseen by the
FDIC. It is overseen by the Office of the Comptroller of the
Currency. So, my question to you is this: Are you aware of any
of the other regulatory agencies engaging in similar Operation
Choke Point-like activity?
Mr. Gruenberg. Not to my knowledge.
Mr. Mulvaney. Did you share the directives that you gave in
your July 2014 letter and January 2015 letter with the folks at
the OCC, with the Fed, or with anybody else?
Mr. Gruenberg. Those are public documents, Congressman, so
they would be available to all the agencies.
Mr. Mulvaney. Thank you, sir. Thank you, Mr. Chairman.
Chairman Duffy. The Chair now recognizes the gentleman from
Maine, Mr. Poliquin, for 5 minutes.
Mr. Poliquin. Thank you for being here, Mr. Chairman. This
report from last year concludes that your agency and the people
who work for you had a list of firms, of businesses that were
questionable, disreputable. And you folks instructed your
examiners with a directive listing this group of businesses
that were questionable, disreputable in the opinion of your
examiners or the folks that you work with in the front office,
and instructed banks to put pressure on--or the examiners to
put pressure on those banks so they would not extend loans and
debit transaction processing and so forth and so on to try to
presumably drive these businesses out of business.
Now, what do you say to a three-generation family business
outside of Bangor, Maine, that I represent, that sells firearms
and ammunitions legally, and also sells tobacco, maybe they
sell some fireworks--I'm not done yet. Sorry.
Mr. Gruenberg. I don't--
Mr. Poliquin. Thank you. What gives you the right, or
anybody who works for you the right, or your agency the right,
to tell businesses who are operating legally in this country,
where the owners have sacrificed their savings, their hard
work, grown their businesses, hired their family members and
others--what gives you the right to try to shut them down, sir?
Mr. Gruenberg. We don't have that right or authority,
Congressman.
Mr. Poliquin. You don't, but you did it, didn't you?
Mr. Gruenberg. That is something we have now asked our
inspector--
Mr. Poliquin. But you did it, didn't you, sir?
Mr. Gruenberg. I am trying to--
Mr. Poliquin. Please. I have 3 minutes left.
Mr. Gruenberg. I understand the findings from the House
Oversight Committee report, and as a result of that report, our
Inspector General is conducting a review.
Mr. Poliquin. If I am not mistaken, sir, based on the
timeline that I have, there was a period of time where you
asked for this list to be expanded; is that correct?
Mr. Gruenberg. Not to my knowledge.
Mr. Poliquin. That is not correct. I want to make sure I
hear this correctly.
Mr. Gruenberg. I am not sure what you are looking--
Mr. Poliquin. You did not ask for this list of questionable
businesses ever to be expanded; is that correct?
Mr. Gruenberg. I think I--if I may note, if I may say what
I think you may be referencing.
Mr. Poliquin. It is a very simple question.
Mr. Gruenberg. No, if I may answer. I will try to.
Mr. Poliquin. Please.
Mr. Gruenberg. The list that you are referencing appeared
in a Supervisory Insights Journal article.
Mr. Poliquin. That is correct, which is a directive to
examiners dealing with banks, correct?
Mr. Gruenberg. That is an article that is not actually
guidance but it is informational to the industry--
Mr. Poliquin. Certainly, they get the message. Did you in
fact--
Mr. Gruenberg. No.
Mr. Poliquin. You did not ask to expand this list to
include firearms dealers?
Mr. Gruenberg. No, sir. There was guidance issued in
January of 2012, following on that Supervisory Insights Journal
article, and there was a--in that guidance, there was a--
identified some examples.
Mr. Poliquin. As I understand your answer, you did not in
any way, at any time, ask to expand this list of industries?
Mr. Gruenberg. To expand--
Mr. Poliquin. That is what I heard.
Mr. Gruenberg. Not to my knowledge.
Mr. Poliquin. Okay. Fine. Thanks. Let's move on. There is a
pattern here, Mr. Director, of government agencies, like the
Internal Revenue Service, intimidating law-abiding citizens
because they don't have the same political views as maybe the
regulating agency, and the Administration wanting to give
amnesty to 5 or 6 million people which is not set in law, and
now all of a sudden you folks come along.
I think you folks, frankly, are a threat to our economy and
our way of life and the employment that we have in this
country. What do you say to the employees who have lost their
jobs because of the overreach of your agency asking examiners
to intimidate banks to shut down credit to businesses that are
trying to survive? What do you say to those families who have
lost those jobs?
Mr. Gruenberg. To extent it has occurred or an issue, it
needs to be addressed, and we have asked the inspector--
Mr. Poliquin. But we just heard that the folks who were
involved in this mess are still working at your agency; is that
correct?
Mr. Gruenberg. Yes.
Mr. Poliquin. That is correct. Okay. So when did you find
out about this?
Mr. Gruenberg. The report that you reference was released
in December.
Mr. Poliquin. When did you find out about it, sir?
Mr. Gruenberg. About the allegations that you are raising,
I believe when we received the report, and pursuant to that, we
requested the Inspector General to review the conduct.
Mr. Poliquin. Okay. So how long have these people who were
involved in this mess, how long have they still been working at
your organization?
Mr. Gruenberg. These are career employees.
Mr. Poliquin. I don't care who they are. How long has it
been, since the report came out, that they are still working
there?
Mr. Gruenberg. The report came out in December and this is
March.
Mr. Poliquin. Okay. Thank you.
Chairman Duffy. The gentleman's time has expired. The Chair
now recognizes the gentleman from Minnesota, Mr. Ellison, for 5
minutes.
Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member
Green. Mr. Gruenberg, I represent a district in Minneapolis,
Minnesota, the 5th District of Minnesota. It is home to
America's largest Somali American population. We are very proud
of our community, and they make tremendous contributions to our
society every day. But one of the problems that they are facing
is that the money that they earn that they try to remit back
home through Somali money service businesses is being reduced
tremendously. Is this phenomena where we see the MSBs having
their options cut part of Operation Choke Point?
Mr. Gruenberg. I don't believe so, Congressman.
Mr. Ellison. Now, when you say you don't believe so, are
you saying that it could be but you just don't know about it,
or just--I am not trying to be difficult.
Mr. Gruenberg. Sure, sure.
Mr. Ellison. It is just like I am like, I would far and
away prefer yes or no, and do you understand what I mean,
because when you say you don't believe so--
Mr. Gruenberg. No, no.
Mr. Ellison. Okay. So no, it is not. I want to say thanks
for the FDIC's statement about serving money service
businesses. What kind of feedback did you get from your
regulated financial institutions about the statements that you
all put out, and did they think that the statements added
clarity or increased understanding?
Mr. Gruenberg. I would say the general response has been
positive because it both clarified the policy, and we hope our
procedures will ensure that it is followed.
Mr. Ellison. Okay. And were the banks more willing to
provide checking accounts and/or wire transfers to money
service businesses serving vulnerable nations because of your
statement, as far as you are aware?
Mr. Gruenberg. I can't speak to that, Congressman.
Mr. Ellison. Okay. And there seems to be a disconnect
between what Treasury and FinCEN say and what examiners tell
banks specifically about know-your-customer requirements. Banks
believe that they must know their customer's customer even
though FinCEN and Treasury say that is not necessary. Do you
want to--do you have any reflections on that?
Mr. Gruenberg. Yes. I agree with what you--in regard to the
FinCEN position that the obligation is to know your customer
and not to know, as you say, the customer of your customer.
Mr. Ellison. Right. So, I have talked to a lot of bankers
about this problem, and what they tell me is that they feel the
need to be infallible even though infallibility is not a
required standard. Do you think there is a disconnect or do you
think that the rules are very clear? Do you think there is some
more clarity that we could be doing?
Mr. Gruenberg. We actually issued guidance trying to
clarify that point that this is not a no-fault or no-mistake
system. We understand that mistakes may be made. The issue is,
do they have an appropriate set of controls and policies? It is
not a mistake-free environment. We understand that. And we
tried to make that clear in our guidance.
Mr. Ellison. Is the FDIC part of any interagency working
group to restore remittances pipeline?
Mr. Gruenberg. I believe there is an interagency effort,
and we have participated in that.
Mr. Ellison. Can you give me some assessment about how well
that interagency group is working?
Mr. Gruenberg. I think it is receiving serious attention.
As you know, it is a challenging issue, so I don't know that we
have a solution yet, but I think it is going to require a high-
level effort among the agencies in conjunction with Treasury
and the State Department as well, I expect. And I know you have
been leading that effort.
Mr. Ellison. Yes. Has the FDIC engaged with the working
group on remittances to East Africa convened by the Federal
Financial Institutions Examination Council (FFIEC)?
Mr. Gruenberg. Yes. I would have to check on that, if I
might, Congressman.
Mr. Ellison. Yes.
Mr. Gruenberg. I don't know.
Mr. Ellison. You could respond to that in writing. Do you
know anything about the FFIEC?
Mr. Gruenberg. Yes. We are a member of the FFIEC.
Mr. Ellison. Okay. Do you think that they can make a
contribution toward restoring humanitarian remittances? Do you
think they are an important player to have involved?
Mr. Gruenberg. Yes, I do. They represent, as you know, the
regulators of the insured depository institutions.
Mr. Ellison. Okay. All right. I think that is pretty much
the end of my time. So, I want to say thank you, and any other
additional questions, we will submit in writing.
Mr. Gruenberg. Thank you, Congressman.
Mr. Ellison. I yield back. Thank you, Mr. Chairman.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the gentleman not from North Carolina but from
Texas, Mr. Green.
Mr. Green. Thank you.
Chairman Duffy. For 10 minutes.
Mr. Green. Thank you, Mr. Chairman. I think it is
appropriate to give some indication as to why it is important
for us to be concerned about activities of the third-party
processors as they relate to the banking industry. For clarity
purposes, these third-party processors, as they are called, are
businesses. And these businesses, for a fee, will accept
payments from consumers, and they accept these payments and
they give these payments, they deposit them in banks for
merchants, and it is a good business. There is nothing illegal,
per se, about third-party processors. There is nothing illegal,
per se, about the businesses that have been mentioned today.
But I do think that we have had some things occur that have
caused us to take a look at this process. And quite frankly, I
think the American people would want us to look into these
things based upon some of the past occurrences.
So, let's take a look at a few of them. On March 12, 2015--
and I am not going to mention the name of the bank, but if
someone wants me to, I will--a bank paid $1.2 million in fines
for knowingly facilitating consumer fraud. Consumer fraud,
meaning people, people from our congressional districts were
defrauded. It happened. It cannot be ignored.
In April 2014, a bank--name not mentioned but available if
need be--paid $1.2 million in fines for fraudulent charges made
by a third-party processor. Another fine paid, $1.2 million.
On March 10, 2015, a bank paid $4.9 million in fines. The
processor was allowed, in this case, to make hundreds of
thousands of withdrawals over a 20-month period on behalf of a
telemarketing company that charged unauthorized payday loan
referral fees. Now, this would give the payday loan industry a
black eye, a bad reputation to allow something like this to
occur and not take action. There is no effort on the part of
the FDIC to eliminate payday lending, but I do think that when
we see these egregious circumstances, we have to do something.
The banks should not just simply be a party to this by seeing
it occur and not do something affirmative to stop it. They are
there, they know that these things are going on, and they
should take affirmative action, and they should have a
compliance process in place. And when they do not, I think that
should be called to the attention of banks, and that is really
what the FDIC appears to be doing.
And here is one. In November 2012, a $15.5 million
settlement--2 million fraudulent charges by a third-party
processor. Two million. These are people who are being hurt. I
do appreciate what my colleagues have said about the
businesses, and businesses who are operating legitimately
should in no way be challenged about what their lawful business
operations are, but there is a reason why we are looking into
things in this area.
And I want to thank you, Chairman Gruenberg, for the way
you have aggressively made an effort to correct mistakes that
were made. I have some of your testimony, and you did not go
into any great detail, but I would like for you to respond. It
appears to me that you participated in a national call with all
FDIC supervision staff. Tell us about that call and what you
were attempting to accomplish with that call, please.
Mr. Gruenberg. Thank you, Congressman. As I indicated
previously, we wanted to be sure that our examiners are
implementing the policy that we have announced and clarified,
which is that banks are neither prohibited nor discouraged from
serving the customer as long as the customer is in compliance
with State and Federal law and the bank has the appropriate
procedures and controls. And we established a set of processes
for examiners to follow in implementing the policy. I don't
want to repeat it all again, but it has to be in writing, it
has to cite the regulation and law, it has to be approved by
the Regional Director, and ultimately, any actions have to be
reviewed by our Board.
I took part in that nationwide all-hands call with all of
our examiners nationwide to emphasize the importance both of
the policy and of the importance of implementing the procedures
to ensure that the policy is faithfully implemented. And I am
very committed to this. I understand the concerns that have
been raised. It is a balance that you have to strike here in
that we want banks that have appropriate controls, and
customers who are abiding by the law to have access to banking
services. At the same time, we want banks to have an
appropriate set of controls to identify any improper activity
that may be going on. So, it is a balance to strike. It is what
we are trying to do.
Mr. Green. You also met with the six Regional Directors.
This is something you did yourself to make clear what the
policy was in the event someone was unclear. Would you kindly
give us some intelligence on this?
Mr. Gruenberg. Consistent with the call to all of our
examiners, I met with our six Regional Directors who oversee
our examiners around the country. Again, to emphasize the
importance of and make clear the policy and the procedures that
we are implementing to ensure that the policy is followed.
I wanted to send that message from me directly both to our
Regional Directors as well as to our examiners.
Mr. Green. You have mentioned it, but I think some things
bear repeating. Toll-free numbers that you have made available,
at least two. Would you reiterate, please?
Mr. Gruenberg. As I indicated, follow-through in
implementation is really what is important here. That is the
reason for the calls and the meetings and establishing the
written policies. And we wanted to give bankers a recourse,
that is, if they think an examiner is not acting appropriately,
not following the policy, not implementing the procedures, we
wanted to give them a confidential way to report that.
So we provided, in our public statement, a phone number and
email address for our ombudsman, as well as a phone number and
an email address for our Inspector General so that any banker
who believes an examiner is not doing what they should be doing
can report it on a confidential basis.
And frankly, I would hope the banker would make the effort
to report it to our regional office so that we can act on it
directly, but I understand the concern and desire of some
bankers for confidentiality, so we wanted to give them an
avenue to report the information on a confidential basis.
Mr. Green. And the notice process to banks has now been not
only formalized but it has been codified, and you have made it
clear that this is to be done in writing. There will be no
informal conversations that will be recognized. We all have
some people who don't adhere to the letter and spirit of
policy, but you have made it clear to people that your
expectations are that policy will be followed to the letter and
in the sincerest spirit with which the policy was promulgated.
Is that a fair statement?
Mr. Gruenberg. Yes, I think so, Congressman.
Mr. Green. Would you want to add anything more to this list
of things that you have done to make sure that mistakes are
properly addressed?
Mr. Gruenberg. Just to be clear, the procedures that you
just described we put in writing, they are public, and our
examiners are expected to follow it, and the procedures make
clear it has to be in writing. It cannot be in informal
communication, and that reputational risk, by itself, is not
the basis for an action. So, we have tried to be responsive to
the concerns that have been raised.
Mr. Green. Thank you, Mr. Chairman. I will reserve my final
5 minutes.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes himself for 15 minutes.
So, Chairman Gruenberg, I want to be clear on your
testimony. The FDIC, by way of its list that came out in
Supervisory Insights, this was not a target list by the FDIC;
that is correct, right?
Mr. Gruenberg. I don't believe that was the intention.
Chairman Duffy. Yes or no? You are the Acting Chairman.
This is not a target list.
Mr. Gruenberg. For what it is worth, that article came out
before I became Acting Chairman.
Chairman Duffy. So, this is not a target list then, for
your testimony?
Mr. Gruenberg. I'm sorry?
Chairman Duffy. This is not a target list?
Mr. Gruenberg. I don't believe it was, no, Mr. Chairman.
Chairman Duffy. Okay. And your testimony is that at no
point during your chairmanship has this list been used to
target these groups that are enumerated on the list, right?
Mr. Gruenberg. It would not have been consistent with our
policy.
Chairman Duffy. Not consistent with your policy. What has
been the practice of the FDIC?
Mr. Gruenberg. I believe the general practice has been
consistent with that policy. There may have been instances, and
that is, frankly--
Chairman Duffy. How prevalent are those instances where the
practice of the FDIC hasn't been followed?
Mr. Gruenberg. We don't know that, frankly. That is what
the inspector is--
Chairman Duffy. You are the chairman, right?
Mr. Gruenberg. Yes, and that is what the--
Chairman Duffy. Have you been looking into this yourself?
Mr. Gruenberg. We have asked the inspector--
Chairman Duffy. That is not my question. Did you look into
it yourself?
Mr. Gruenberg. When the--
Chairman Duffy. Have you looked into the abuses of people
who haven't followed your policy at the FDIC?
Mr. Gruenberg. When the House--
Chairman Duffy. Have you--
Mr. Gruenberg. I am trying, if I may.
Chairman Duffy. Yes or no?
Mr. Gruenberg. The answer, I would say--
Chairman Duffy. Yes. The answer is no, right, you have not
looked into it?
Mr. Gruenberg. I have looked into it, and the
determination--
Chairman Duffy. What have you found?
Mr. Gruenberg. I am trying to answer.
Chairman Duffy. I am trying to get an answer.
Mr. Gruenberg. The determination we made in conjunction
with our inside Directors is this would--we needed to get the
facts, and that is really the basis for the Inspector General
review.
Chairman Duffy. How long have you been looking at the
facts?
Mr. Gruenberg. Well, the report of the House Oversight
Committee--
Chairman Duffy. No, no, no, no, no. You gave information to
the Oversight Committee.
Mr. Gruenberg. Yes.
Chairman Duffy. You had that information. You have known
for 2 years that this was going on. What have you done in the
last 2 years to address Operation Choke Point or the targeting
of these businesses?
Mr. Gruenberg. We issued guidance in September of 2013. We
withdrew the list in July of 2014. We have issued additional
guidance, and we have also asked the Inspector General to--
Chairman Duffy. You have given new guidance, right. So
let's--you were asked from some of my colleagues about a letter
that came out from Anthony Lowe, and in there--this was
February 15, 2013, and I am not going to read the full
egregious paragraph, but just the end it says, ``Consequently,
we have generally found that activities related to payday
lending are unacceptable for an insured depository
institution.'' Now, is Mr. Lowe still employed at the FDIC?
Mr. Gruenberg. Yes, he is.
Chairman Duffy. Yes, he is. And is he still in the same
position, as Regional Director?
Mr. Gruenberg. Yes.
Chairman Duffy. And is it part of your policy now that if
you have an issue with one of your banks, you should go to the
Regional Director Mr. Lowe? Yes?
Mr. Gruenberg. Yes.
Chairman Duffy. Yes. Do you think a bank is going to feel
comfortable having an examiner that is going after them for
payday lending to go to Mr. Lowe who is targeting payday
lending?
Mr. Gruenberg. And the--
Chairman Duffy. That is your big answer to targeting payday
lenders?
Mr. Gruenberg. I think, as you know, the Inspector General
is currently reviewing--
Chairman Duffy. I don't care about--
Mr. Gruenberg. If I may just answer.
Chairman Duffy. Is the Inspector General the Chairman of
the FDIC or is it Martin Gruenberg? The buck stops with you,
Mr. Gruenberg.
Mr. Gruenberg. Yes, and it was important to us to get the
facts in the case before taking any action.
Chairman Duffy. So, you have these facts, this letter, and
you have done nothing, right?
Mr. Gruenberg. We have taken the actions I described, Mr.
Chairman.
Chairman Duffy. So, what you have done is, in the last 2
years you have waited for the Oversight Committee to do a
report, then you asked for an IG investigation. So this is
classic slow walking. He is still in this position. And we will
get to, I think, what the truth is behind what is happening
here.
I want to go through just a few more documents to make sure
we are on the same page and how prevalent this work at the FDIC
is. Thomas Dujenski--I am saying his last name wrong. He no
longer works at the FDIC, right?
Mr. Gruenberg. Yes, sir.
Chairman Duffy. Was he fired or did he leave on his own
accord?
Mr. Gruenberg. He retired, I believe.
Chairman Duffy. He retired, he wasn't fired. Here is an
email from February 7th: ``I am pleased we are getting the
banks out of the payday bad practice,'' et cetera. ``Another
bank is griping, but we are doing good things for them. For
example, the redacted bank, is going the hate DOJ being
involved. We are doing the right thing for sure. One or two
banks may complain next week when the Florida bankers come to
D.C. as a group.''
So we have old Thomas, we see how he feels about payday
lending, but he retired, wasn't penalized at all. Thomas again
says that he literally can't stand payday lending. That was in
an email on November 26th. Let's see, we now have Seth
Rosebrock: ``Jonathan, heard where you are coming from, but
nonetheless, wants to retain a reference to pornography in our
letters and slash talking points. He thinks it is important for
Congress to get a good picture regarding the unsavory nature of
the business at issue. He represented that one is judged by the
friends one keeps, and he seems to feel strongly that including
payday lenders in the same circle as pornographers and online
lenders and gaming businesses will ultimately help get the
message at issue.'' Have you seen this email?
Mr. Gruenberg. Yes, I have.
Chairman Duffy. Would that disturb you?
Mr. Gruenberg. Yes.
Chairman Duffy. Was Seth reprimanded?
Mr. Gruenberg. Well, the--
Chairman Duffy. Is Seth still employed at the FDIC?
Mr. Gruenberg. No, no. Just so I understand, I think that
email was referencing a comment by--
Chairman Duffy. Jonathan.
Mr. Gruenberg. --the individual you mentioned.
Chairman Duffy. Is Jonathan still employed at the FDIC?
Mr. Gruenberg. Yes, and his conduct is under review as
well.
Chairman Duffy. Have you done anything to--has he been
reprimanded by you, the Chairman?
Mr. Gruenberg. Not--
Chairman Duffy. No?
Mr. Gruenberg. --until we get the facts in the case, Mr.
Chairman.
Chairman Duffy. These are pretty--and he is still in the
same position. He hasn't been demoted, right?
Mr. Gruenberg. No. I think the view of myself and the other
inside Directors was we wanted to get the facts in the case
before making a judgment in regard to an employee.
Chairman Duffy. Dana Lesemann, she says that although
payday lending is a particularly ugly practice--and it goes on,
but I am sure Dana is still employed and not been reprimanded.
Here is one. Do you know an individual by the name of Mark
Pearce?
Mr. Gruenberg. Yes.
Chairman Duffy. High ranking at the FDIC?
Mr. Gruenberg. Yes.
Chairman Duffy. Okay. This was from Marguerite, and I
always have a hard time with Marguerite's last name. You know
Marguerite, correct, though?
Mr. Gruenberg. Yes.
Chairman Duffy. Yes. Marguerite says, ``Second, at the
request of Mark Pearce, we are looking into the avenues by
which the FDIC can potentially prevent our banks from
facilitating payday lending.''
Mark Pearce, we are looking into avenues by which the FDIC
can potentially prevent our banks from facilitating payday
lending. Chairman Gruenberg, Mark Pearce is at almost the top
of the pyramid. Is he still employed at the FDIC?
Mr. Gruenberg. Yes, he is, Mr. Chairman.
Chairman Duffy. Has he been reprimanded by you?
Mr. Gruenberg. We are awaiting the results of the--
Chairman Duffy. Waiting for--
Mr. Gruenberg. --IG's review of his conduct.
Chairman Duffy. This was sent in 2013. This was 2 years
ago. I am not going to go through all of the emails, but I
would argue that if I were you, the Chairman, and I actually
agreed with the targeting of payday lending, I would say, you
know what, I am going to slow walk it. I am not going to do
anything, and what I am going to do is I am going to hang my
hat on the fact that an OGR report came out with all my
documents, and then I am going to look for an IG investigation,
and I can slow walk this thing, and all the while payday
lenders across the country that are legal businesses, right,
they are legal? Yes or no, payday lending is legal?
Mr. Gruenberg. Yes. I was--
Chairman Duffy. They follow the law.
Mr. Gruenberg. There are some States, as you know, that
don't permit it, but--
Chairman Duffy. They follow the law, they are legal.
Mr. Gruenberg. Yes.
Chairman Duffy. Are gun dealers, if they follow the law,
legal?
Mr. Gruenberg. Yes.
Chairman Duffy. Are ammunition manufacturers, if they
follow the law, legal?
Mr. Gruenberg. Yes.
Chairman Duffy. So you haven't--the people that I have
mentioned, you haven't fired any of them, right?
Mr. Gruenberg. That is correct.
Chairman Duffy. I want you to look behind you. On the
second row I have a number of people from all across the
country, gun dealers, ammunition manufacturers, payday lenders,
who have been targeted by your people at the FDIC, and guess
what, they are going out of business. Do you want to look at
them?
Mr. Gruenberg. Yes, I did.
Chairman Duffy. Did you see them on the way in?
Mr. Gruenberg. I saw them when I came in, Mr. Chairman.
Chairman Duffy. And what response do you have to them, when
these small business owners, who invested their life savings,
who have worked their hearts out, and all of a sudden they
can't find a bank to bank them because you say, not by way of
the FDIC official policy, but all my top level people, they
have targeted their sectors, they can't find banks, and they
are going out of business, what do you say to them?
Mr. Gruenberg. As far as our conduct, we have made every
effort to make our policies clear, that if the businesses are
conducted in compliance with the law, they should--
Chairman Duffy. Well--
Mr. Gruenberg. If I could just--
Chairman Duffy. Go ahead.
Mr. Gruenberg. They should have access to banking services.
To the extent individuals may have acted inappropriately, that
is currently under review by our Inspector General, and if
there was misconduct, that will be then subject to a review by
myself and the inside Directors at the FDIC.
Chairman Duffy. So, what you say is, yes, I knew 3 years
ago, and I am just going to act now with an IG investigation
after the OGR report. And these people are still going to
collect fat salaries in their cushy positions, but the small
business owners behind you, they are all going to be out of
work, no job for them, and you call that fair.
I don't, Mr. Gruenberg. I think you are the Chairman, and I
think, if I recall in your introduction, did you go to
Princeton?
Mr. Gruenberg. I did, sir.
Chairman Duffy. You are a very intelligent guy. And I am
sure that if you wanted to hold accountable those who were bad
actors in the FDIC, you would. I don't think you want to hold
them accountable.
Let's just talk a little bit further about what the FDIC
has been doing with regard to its policies. From Thomas
Dujenski, August 1, 2013, this is a consent order. So, we talk
about payday lending. By chance, did you ever look through some
of these consent orders that were sent to our committee?
Mr. Gruenberg. I would have to know which ones you are
referring to.
Chairman Duffy. We redacted the bank, but it is a consent
order, and in regard to the consent order, official document,
not an email, the prohibited businesses--and do you know what
the definition of ``prohibited'' is?
Mr. Gruenberg. I don't know the document you are referring
to.
Chairman Duffy. No, the definition of ``to prohibit.''
Mr. Gruenberg. Yes.
Chairman Duffy. What is the definition? Do you know?
Mr. Gruenberg. I don't know the context. I just don't know
the context in which it is being used there, if I may.
Chairman Duffy. Okay. Well, prohibited businesses,
ammunition sales, and firearm sales. This is in a consent order
with a bank. So, this is the official policy of the FDIC?
Mr. Gruenberg. Again, I would have to see the document.
Chairman Duffy. I will send it down if you want, but it
is--you sent it to me.
Mr. Gruenberg. Sure.
Chairman Duffy. So, what do you say about a consent order
for a bank that says you can't do business, it is prohibited
with ammunition manufacturers and gun dealers?
Mr. Gruenberg. You know what, I would need to see the
document, and I would be glad to review it and get back to you,
if that would be helpful.
Chairman Duffy. I will send it down in a moment. I have
another one. I have a commercial lending policy dated March 14,
2012, undesirable loans. Undesirable loans. Guess what is on
that list? Undesirable loans include firearm dealers, and you
wonder and scratch your head, why are firearm dealers around
America going out of business? Because the FDIC is targeting
banks and saying you can't do business with them.
Let's try one more. Anthony Lowe, who is still employed at
the FDIC, right? This is a memorandum of understanding on April
2, 2014. When did you order your directive to stop targeting
folks and make sure everyone at the FDIC was clear that this
was not a target list? When was that sent out?
Mr. Gruenberg. We issued guidance in September of 2013
making clear what the policy was, and then we withdrew the list
in guidance issued in, I believe, in July 2014.
Chairman Duffy. So in September of 2013, you were clear
that you are not supposed to target these whole lines--these
whole businesses, right?
Mr. Gruenberg. I think that was never our policy, and we
wanted to be clear that--
Chairman Duffy. Sure.
Mr. Gruenberg. --that was the case.
Chairman Duffy. And Mr. Lowe did a memorandum of
understanding, and on that list, he has prohibited acts and
services, and on there is payday lenders. How could that be?
That is after you gave the guidance.
Mr. Gruenberg. I would have to look at the documents you
are referring to, Mr. Chairman.
Chairman Duffy. You don't trust me. You gave them to me.
They are your documents.
Mr. Gruenberg. I want to know which one you are--
Chairman Duffy. We have 2 minutes. Do you want me to send
them down to you so you can look at them?
Mr. Gruenberg. What I would suggest, if you are okay with
it, is if we could have an opportunity to review them and then
we will get back to you.
Chairman Duffy. I don't think there is an explanation for
it. I would say you would be hard pressed, even with a
Princeton education, that you have consent orders and memos of
understanding that say you can't do business with ammunition
manufacturers, gun dealers, and payday lenders. These are the
official documents of the FDIC going out to banks.
And I have an email chain showing that you are targeting
payday lenders and ammunition manufacturers. You are abusing
your power. You are going after little guys all over America
because, I would say, Mr. Gruenberg, you are a good liberal.
You say, I don't like these industries and I am going to use,
just like Lois Lerner, the power that I have at the FDIC to
target these industries, and I am going to put them out of
business. And I am not going to have a public debate because
people like the Second Amendment and they like their guns. I am
going to do it behind closed doors under the cover of darkness
and put these folks out of business as a bureaucrat and as an
activist instead of saying, you know what, I am going to come
clean and have a public debate.
The bottom line is you are putting people out of business.
And all the people, in the end, in the FDIC who are
implementing this program, they still work there. They haven't
been fired. They haven't been reprimanded. And you are the
Chairman. And frankly, I will tell you what, if you are not
going to hold them accountable, I think the buck stops with
you. I don't think you should chair the FDIC.
If you can't go after and root out the problems in the
FDIC, if you can't hold accountable those who are targeting
legal businesses, you have no place as the Chairman. That you
have known for 2 years that this is going on. That you wait
until we make public the documents that you gave us, and then
you do an OGR report, or an IG investigation and you say, you
know what, after I get those results, I am going to take
action. All the while, Americans are getting targeted, and
frankly, I think irresponsible, and if you are not going to
handle it, I don't think you should keep your position. Do you
want to respond?
Mr. Gruenberg. Yes. Well, Mr. Chairman, we have tried
consistently, going back to when we received the letter from
the Members of Congress, to respond to the concerns that have
been raised. We have tried to clarify our policies. We have
tried to address the issues raised by the list.
We cooperated with the investigation of the House Oversight
Committee. When we received the results of that investigation
and the report, we then tried to take action pursuant to it,
both to the policies of the FDIC as well as to the individuals
raised.
And in regards to the individuals--and I will say that all
of the actions that we have taken over this period of time are
done in consultation with our Vice Chairman. We have tried to
do it on a basis that involves our Board, and we intend to work
together to review the findings of the Inspector General.
So, we have tried, from my standpoint--I understand the
points you make--to take a balanced approach to address this--
Chairman Duffy. These people have no place in the
government.
Mr. Gruenberg. --in a responsible way.
Chairman Duffy. I am going to yield in a second. These
folks have no place in government. And if you allow them to
stay, you have no place in government. With that, my time has
expired.
With that, I see that the gentleman from Missouri, Mr.
Luetkemeyer, has arrived. We will recognize him for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. I thought I had
12 minutes there for a minute. Okay. Down to 5 minutes.
Mr. Chairman, it is good to see you again.
Mr. Gruenberg. Thank you.
Mr. Luetkemeyer. I just have a couple of follow-up
questions with regards to some of the discussions we have had.
You indicated in your meetings with us, and I think, just for
the record, in your testimony today you indicate that on August
13th you received a letter from Congress and you took some
action. In July of last year, you did something, you took some
action. In January of this year, you took some action. But it
takes us to get you to do anything, and it is very concerning,
because Choke Point is something that I think the chairman has
done a good job of explaining is, to the detriment of all of
our citizens, all of our businesses in this country, which is
a--it is basically your own moral judgments and political
ideology that is being perpetrated as a result of--through the
rulemaking that you--and the enforcement actions that you take.
One of the things that we discussed at our last meeting,
and something that is in your testimony today, is the new
procedures that you said you agreed to. One of them was that
anytime a--you were to request that a bank would terminate a
relationship with one's clients, you would do it in writing and
indicate so with showing the legal reason for that, excluding
reputational risk, and then have a VP, regional VP sign off on
that. How many have you done so far since our meeting in
January when you implemented these changes? Do you know?
Mr. Gruenberg. I don't know that there--at the first so--
and we have also provided that for any actions taken there be a
quarterly report to our Board.
Mr. Luetkemeyer. I understand that. I thought maybe you
might have a monthly report to share with us.
Mr. Gruenberg. No, we will have that first report in April.
We will be glad to share that with you, Congressman.
Mr. Luetkemeyer. Okay. Another question with regards to the
FDIC Board, can you tell us who the Board Members are?
Mr. Gruenberg. Yes. We have 5 Board Members. If you would
like me to name them?
Mr. Luetkemeyer. Sure.
Mr. Gruenberg. Vice Chairman Thomas Hoenig, and Director
Jeremiah Norton, who are our two so-called inside Directors
full-time at the FDIC, and then as a matter of law, the
Comptroller of the Currency, who is now Thomas Curry, and the
Director of the Consumer Financial Protection Bureau, Richard
Cordray, who are also so-called outside Directors and Members
of our Board.
Mr. Luetkemeyer. Have you shared these Choke Point
activities with your Board?
Mr. Gruenberg. Certainly with the two inside Directors,
yes, because these are matters that generally go to the
internal management of the agency and are generally the focus
of the attention of the internal Directors.
Mr. Luetkemeyer. But you have not shared this activity with
the Comptroller of the Currency or the Director of the CFPB,
Director Cordray?
Mr. Gruenberg. I believe they are also aware of it,
Congressman.
Mr. Luetkemeyer. No, there is a big difference here. That
is the reason for my question. Did you inform them of what your
activity is here? This is Operation Choke Point. This is an
operation within your agency that is condoned by you and all
the activities that go on at the agency, and this should be
something that should be at a Board level. You should be
indicating it to your Board Members that this is happening. Did
you do that?
Mr. Gruenberg. I would have to check on--I believe they are
aware. Certainly all the documents we have issued relating to
guidance are public documents that are available, and we
certainly made an effort to ensure Board accountability for
these actions, so let me--let me get--if I may get back to you
on that.
Mr. Luetkemeyer. Okay. I am concerned because I think they
all need to be aware of it, and we had testimony of one these
gentlemen. They didn't hear of it, didn't know of it, weren't
aware of it.
Mr. Gruenberg. I certainly agree with that, Congressman.
Mr. Luetkemeyer. It would seem to me that is where we
certainly need to go with some of this stuff.
I guess just a follow-up on the chairman's last comments
with regards to--and we have had this discussion, Mr.
Chairman--the culture that you have allowed to happen in the
FDIC. How do you propose to solve the problem at this point?
Mr. Gruenberg. Through the efforts that we have made and I
have described at the hearing and we have talked about in our
conversations as well. We have made every effort to make our
policy clear. We have--clearly, there was a misunderstanding in
regard to the list, which we acknowledge was a mistake on our
part and we have withdrawn the list. As you indicated, we have
established a set of procedures, written procedures for
examiners to follow and to provide in writing any explanation
of any actions in regard to a bank, and we have issued a
statement in regard to derisking, that any actions by a bank
should be based on the individual customer, not in regard to
any category of business. And I have engaged in extensive
outreach with our--both Regional Directors and our examiners
around the country to try to make the policy and procedures
clear.
Mr. Luetkemeyer. But so far nobody has been fired, nobody
has been demoted. The OGR report that shows there are people
making statements like, we need to audit you, or threaten banks
that, we will audit you if you don't comply with what is going
on here, or these--certain industries don't have a moral right
to exist, those people are still employed?
Mr. Gruenberg. They are, but their conduct is also
currently subject to review by the Inspector General.
Mr. Luetkemeyer. Okay. If the chairman will indulge me with
one more question. In your changes that you made, operational
changes you have made, you also indicated that there would be a
Web site and a hotline number for the IG.
Mr. Gruenberg. Yes.
Mr. Luetkemeyer. To be able to report activities. Have any
activities been reported to this point?
Mr. Gruenberg. We established numbers and email addresses
for both the IG and our ombudsman. Any reports to the IG are to
the IG and are not available to us.
Our ombudsman has shared the--some of the results which--
that the ombudsman has received, and I believe since the number
and address--email address were made public, we have had 12
emails and 3 calls.
Chairman Duffy. The gentleman's time has expired.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Chairman Duffy. The Chair now recognizes the gentleman from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Mr. Chairman, if I may, I would like to have
just a quick word with you.
[Discussion off the record.]
Chairman Duffy. I appreciate the ranking member's
reasonableness. Thank you. The Chair now recognizes Mr. Hill
for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman, and thank you, Ranking
Member Green, for holding this hearing.
Mr. Chairman, I am glad to have you before us. I spent a
better part of my career in institutions that had you as a
primary regulator, so I appreciate all the hard work and
efforts on behalf of the FDIC, which really prompted more shock
when I read this package, knowing for 3 decades the work of the
FDIC and its staff.
I have a customer in Little Rock who sent me a note, and I
just wanted you to be on the record on this question that he
had. What would you say to a legally licensed and State and
Federally regulated business, like a pawnbroker, who does not
use money service businesses, handles all their transactions
face to face, doesn't use third-party payment processors, and
doesn't use the ACH system and yet still have fallen victim and
had their banking relationships cut off because of Operation
Choke Point, how would you--what am I supposed to say to that
business in my hometown of Little Rock?
Mr. Gruenberg. I would encourage them to--if they were to
approach an FDIC-supervised bank, we would make every effort
to--assuming they are complying with the law as you indicate,
that they have access to banking services.
Mr. Hill. Thank you, Mr. Chairman. On looking at the FIL-
43-2013 and knowing the banking business and our responsibility
to put people on a CTR list or file a suspicious activity
report (SAR) if necessary, my question is, in looking at your
documentation, did that go through FFIEC Act, did that
particular financial institution newsletter go through the
FFIEC clearance process for interagency review or was it unique
to the FDIC?
Mr. Gruenberg. The 2013 guidance was FDIC guidance. There
has been a guidance relating to third-party processors that has
been issued by the FFIEC as well.
Mr. Hill. But that predated the FDIC's, FIL? Was that
older, that general guidance?
Mr. Gruenberg. There was guidance prior to that, and I
believe there has been guidance and an update to that as well
afterward also.
Mr. Hill. And in those other agencies, did they name these
same listed businesses in the same methodology that the FDIC
did in your 2013 release?
Mr. Gruenberg. The previous guidance issued by the FFIEC
did also cite examples
Mr. Hill. But was it as inclusive and comprehensive a list
as yours?
Mr. Gruenberg. Just to be clear, in the financial
institution letter issued in September of 2013, you could look
at FFIEC guidance from September--from 2010 that was roughly
comparable. The Supervisory Insights Journal article list was
lengthier than a guidance that had been otherwise issued.
Mr. Hill. And this issue of reputational risk, which is
something that examiners talk to their banks about as a part of
the normal CAMELS process, maybe as a part of the management
rating in the CAMELS review, really, aren't banks responsible
for their reputation, and therefore, they ought to do business
with any legally organized business in their market that needs
depository services, setting aside even the credit issue for a
moment?
Mr. Gruenberg. And we have made clear in the guidance we
have issued, and that guidance is public, that reputation alone
is not the basis for a bank discontinuing a relationship with a
customer.
Mr. Hill. But yet that is what so many of these stories
that have percolated back through Congress, and I am just--I
find it as a former community banker and now a Member of
Congress and a former Treasury official who oversaw the
regulatory process during the Bush 41 Administration, I find it
stunning that that can go through a financial institution's
exam council review and survive that list of businesses.
I just don't see how it happened, and I agree, Mr.
Chairman, that someone who is responsible for that really needs
to stand up and take that responsibility. I appreciate you
being here and responding to the committee's inquiries.
Can you think of an example in the FDIC, switching topics,
where the FDIC engages in price regulation or the Comptroller
of the Currency, any Federal bank regulation where they
actively engage in price regulation of consumer financial
transactions between banks and their customers?
Mr. Gruenberg. Offhand, I don't believe we have authority
to do that, Congressman.
Mr. Hill. So if two people have exact same credit
backgrounds, exact same ages, races, borrowing backgrounds, and
they live in two different cities in a State, and one has many,
many job opportunities and one doesn't, do you think they
deserve the same price for credit?
Mr. Gruenberg. One would think so, assuming they have the
same credit profile.
Mr. Hill. My time has expired.
Chairman Duffy. The gentleman's time has expired. The Chair
now recognizes for the last 5 minutes, the gentleman from
Texas, Mr. Green, and I appreciate his cooperation and help in
navigating Members as they come in.
Mr. Green. Thank you, Mr. Chairman. Chairman Gruenberg, you
now understand that no mistake will go unnoticed and no good
deed will go unpunished. Let's talk about this for just a
moment, in these last 5 minutes.
You have requested an IG investigation. Is that abnormal?
Is that something that you would do when you find that there is
something that is questionable, to get an independent third
party to come in and give a report?
Mr. Gruenberg. No, that is not routine, Congressman.
Mr. Green. And you did this for a reason. Why did you do
it?
Mr. Gruenberg. We thought the allegations made were very
serious, and both myself and the other internal Members of our
Board felt it was important to get the facts, before making a
judgment, in regard to conduct by an employee of potentially
this consequence, that we wanted an independent review and the
facts gathered by our Inspector General before reaching a
judgment.
Mr. Green. You are not especially trained in this area of
investigation, I assume. You are a fine public servant, but you
don't perform investigations yourself. You would use the
expertise of those who do this, and quite frankly, that the
Federal Government has charged with the responsibility of
accomplishing these ends. Is that a fair statement?
Mr. Gruenberg. Yes, Congressman, and I would note that the
initial request for the IG investigation was made by Members of
Congress, and then when we received the report of the House
Oversight Committee, we--I supplemented that request by asking
the IG to look specifically at individuals identified in the
report.
Mr. Green. And when you receive this report, is it your
intention to take corrective action?
Mr. Gruenberg. Based on the facts that are presented.
Mr. Green. I understand. And you have done many things in
the interim to make sure that people understand what the policy
was and is. The policy has not changed. You have had some
people who may not have followed it to the letter, but the
policy hasn't changed; is that a fair statement?
Mr. Gruenberg. Yes, the policy has been consistent.
Mr. Green. And you had some--
Mr. Gruenberg. And I will say, I believe the policy has
been consistent, and that is one of the things the Inspector
General will be reviewing as well
Mr. Green. You had some people who have not adhered to the
policy, the spirit and letter of the policy, but do you
consider this a culture across the entire FDIC, or is this
something that you are addressing as it relates to individuals?
Mr. Gruenberg. I don't believe it is what you have
described. I think one of the things the Inspector General
review will try to determine is the conduct of the agency over
time and was the application of the policy generally
consistent.
Mr. Green. In your years at the FDIC, have you always
encouraged and required that the policies be followed?
Mr. Gruenberg. Yes, Congressman.
Mr. Green. And is this consistent with what you are doing
now?
Mr. Gruenberg. I believe so.
Mr. Green. And, do you believe that the FDIC should be
charged with having produced Operation Choke Point? Is this
something that the DOJ initiated, that was brought to the FDIC?
I just want to make it clear that this is not something you
initiated, the Operation Choke Point. You are concerned about
fraud, and you are concerned about third-party processes, but
this whole operation is not something that you produced?
Mr. Gruenberg. No. It was a Justice Department program.
Mr. Green. And the Justice Department, in my opinion, has
good reason to look into fraud as is the case with the FDIC,
but mistakes have been made. You have done what you can to
correct them immediately. You are allowing a certain amount of
due process before taking your final actions. This is not
unusual in our circles to be thorough, investigate totally,
completely, and then make decisions. Is there any final thing
that you would like to say in terms of what you are hoping to
accomplish?
Mr. Gruenberg. No. I agree with the points you have made,
Congressman. We have tried to take a deliberate and balanced
approach to this to address the issues in an effective way, and
we are very committed to following through.
I think the basic premise that businesses that are
complying with the law should have access to banking services
is a sound premise and an important one. We are committed to
ensuring that we conduct our supervisory activities to achieve
that outcome.
Mr. Green. Thank you, Chairman Gruenberg, and thank you
also, Chairman Duffy. I yield back.
Chairman Duffy. Thank you. The ranking member yields back.
I would like to thank our witness again for testifying today in
front of our subcommittee.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
And without objection, this hearing is now adjourned.
[Whereupon, at 4:25 p.m., the hearing was adjourned.]
A P P E N D I X
March 24, 2015
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]