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FDIC Withdraws Alleged 'Hit List' of High-Risk Merchants

WASHINGTON The Federal Deposit Insurance Corp. said Monday that it has withdrawn a list of merchant categories, including payday lenders, debt consolidation firms, pornography businesses and others, that it said warranted heightened attention by banks processing their transactions.

In a letter to financial institutions, the agency said the list, which was first published three years ago, had been misinterpreted, resulting in banks' severing ties with legitimate businesses.

"The lists of examples of merchant categories have led to misunderstandings regarding the FDIC's supervisory approach to institutions' relationships with [third-party payment processors], resulting in the misperception that the listed examples of merchant categories were prohibited or discouraged," the FDIC wrote. "In fact, it is the FDIC's policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to customers operating in compliance with applicable federal and state law."

The move is another dramatic turn in the battle over efforts by state and federal authorities to cut off certain business' access to the payment system.

The Justice Department has sent subpoenas to more than 50 banks and payment processing firms as part of "Operation Choke Point," its program to aimed at preventing fraudulent merchants from using the payment system. The FDIC has separately encouraged banks to scrutinize account relationships with third-party payment processors.

In a bulletin issued in 2011, the FDIC described potential risks banks could face by facilitating payment transactions with certain merchants, including a list of categories that included payday lenders and others. The list was later used by the Justice Department in subpoenas to banks.

Industry critics and Republican lawmakers have accused the FDIC of creating a "hit list" of targeted firms, saying it has harmed legitimate businesses. At a hearing two weeks ago, Rep. Patrick McHenry, R-N.C., grilled an FDIC official over the list.

"You've put out this list and it says, 'Don't do business,'" McHenry said. "That's what the banks have heard."

Richard Osterman, the agency's acting general, acknowledged that the list had been "misinterpreted" by financial institutions.

The move on Monday appears to be the FDIC's attempt to take itself off of the front lines of the battle over Operation Choke Point. The letter said that banks must still assess their risk from third-party payment processors, but the list of merchant categories has been removed.


(6) Comments



Comments (6)
From the start, FDIC Vice Chairman Hoenig denied any official, DC headquarters-driven effort to coerce or strong arm banks from doing business with the online and/or payday lending industry, yet according to numerous bankers his field minions continued to do the political bidding by threatening to lower the CAMEL ratings of banks who did. Even post-FIL on the topic in September, 2013, banks who invested in increased credentialing and risk management scrutiny of state-licensed short term lenders were informed by their FDIC field examiners that while their risk management processes were exceptional if they did business with such firms they would experience merciless, constant examination which would produce overpowering evidence to support their CAMEL ratings dropping to levels which would eventually force the bank out of business.

An FIL, and even this clarification, is one thing. Whether the FDIC's field actions live up to it's statements to Congress is fully another. Me thinks these are two different realities.
Posted by AllThingsUnderbanked | Saturday, August 02 2014 at 9:19PM ET
This is truly an intelligent and highly appreciable decision by the FDIC! Why I say so is because there are lots of legal and fairly operating merchants that have been mistreated due to their banks wrongfully putting them into the Match List.

It's an equally wise step by the Justice Department to continually keep an eye on fraudulent merchants and prevent them from misusing the payment system. I hope FDIC's attempt to support banks to inspect account relationships with any third-party processors will also be fruitful!
Posted by JasonSimms | Thursday, July 31 2014 at 7:24PM ET
Long overdue reversal of a deplorable abuse of authority by the FDIC to attack businesses based on the personal biases of agency management rather than regulatory violations, a practice emulating the OCC's ill-advised list of non-bank businesses supposedly presenting a high risk for money laundering.
Posted by jim_wells | Tuesday, July 29 2014 at 7:55AM ET
Maybe so. But the first step in correcting a problem is admitting you have one. Good on FDIC for owning up to the fact that legitimate businesses are being harmed by their nonsense "high risk" designation.
Posted by Brian L | Monday, July 28 2014 at 5:28PM ET
Well it's nice to see that the FDIC did something right and important. People have unfairly been blackballed by many banks and put into the "Match List" which is run by Mastercard. Basically, if for some reason they feel a merchant is a high risk or have been accused of something that is not true, or perceive something that sets off a red flag in their computers, it's extremely difficult to get a merchant account. There are NO checks and balances.

Essentially, the information they receive is considered chiseled in stone and it's hurt a lot of legitimiate retailers. The only way to get off of that "Match List" is to deal with the original bank that blacklisted the retailer in the first place. Beg, plead etc... It's just horrible. A colleague of mine had to get a high risk merchant account from this place: http://HighRiskMerchantingService.com because of that list from the FDIC that was given to the banks. However, it did work and they serve a lot of these "high risk businesses" successfully. Just a tip if anyone has the issue.
Posted by Jon Roberts | Monday, July 28 2014 at 4:27PM ET
What a bunch of crap. Those industries are no longer on an 'official' list but you can bet they are still in A list. This statement is simply SPIN. Meaningless.
Posted by steveholt | Monday, July 28 2014 at 12:19PM ET
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