Banks Face Tough Questions on Politicized Debanking

Big banks are facing heat from President Donald Trump’s administration over potential instances of unlawful debanking, but that doesn’t mean community banks should sit still, industry lawyers say.

Instead, they advise that banks review past closures of customer accounts for reasons that could be perceived as political — even if they took action over legitimate reasons such as money laundering risks.

Lawyers don’t expect community banks to find many problematic cases. If anything, they say the bigger challenge may be gaps in record-keeping for any decisions they made.

But banks should undertake the “typical corporate hygiene process” that occurs whenever controversies pop up, says Stephen Gannon, a partner at the law firm Davis Wright Tremaine. That includes clarifying policies for future account closures, keeping adequate records going forward and preparing for potential questions from regulators. 

“That way, you get ahead of the curve. That’s even if you believe that you’re not within a country mile of any debanking issues,” Gannon says. “Just make sure that you’re consistent with what the regulators are looking for now.”

It’s a focus that thus far is mostly directed at larger banks — and contrasts with regulators’ overall approach to lessen supervisory burdens. The Office of the Comptroller of the Currency said in September it was gathering information from the nine biggest banks it regulates, which include JPMorgan Chase & Co. and Bank of America Corp.

The scrutiny follows an executive order in August from Trump, who has said his family and business were debanked after the Jan. 6 attack on the Capitol. It’s an issue that has drawn some bipartisan concern. At a hearing this year, Sen. Elizabeth Warren, D-Massachusetts, flagged debanking complaints from nonprofits, Muslim Americans and customers with criminal histories.

Even if smaller banks aren’t a main focus, the debanking issue “has all the hallmarks of something that the agencies will be actively looking for” in their examinations, says Chris Willis, a partner at the law firm Troutman Pepper Locke. 

SBA Kick-off
For many banks, the process kicked off not with their primary regulators, but with the Small Business Administration. 

In August, the SBA sent letters to more than 5,000 lenders directing them to identify past debanking cases so they remain in good standing with the agency. SBA Administrator Kelly Loeffler said that banks and regulators since the Obama administration have “weaponized the banking system against Americans who refused to bend the knee to a partisan ideology.” She mentioned individuals or organizations that were Christian, pro-life or Second Amendment in their orientation as potential victims.

The SBA asked lenders to identify any past cases of politicized debanking and try to reinstate customers they booted out, as well as invite customers they denied to re-apply for the bank’s products. 

The SBA’s request was a heavy lift that’s since been streamlined for community banks, notes Lori Sommerfield, a Troutman Pepper Locke partner. Banks with less than $30 billion in assets can now submit a form asserting they conducted a “reasonable review” of their policies for any debanking problems. Those that identified policies that encouraged debanking must review whether they denied access to customers over the last five years and lay out any steps taken to provide redress.

The forms are due Jan. 5. 

Backward-Looking Reviews
Banks that don’t do SBA loans should also undertake reviews to prepare for potential questions from regulators, says Doug Weissinger, a lawyer at Butler Snow. Weissinger, who advises many privately held rural banks, says whether smaller banks will get tough debanking scrutiny is a “million-dollar question.” But executives should be proactive nonetheless and review their operations.

If they do find potentially problematic cases, banks should ensure that they “followed their procedures at the time and properly documented any decision,” he says. “You’re going to have to have documentation that stands up to scrutiny when your examiner comes in.” He’s advising clients to tighten up procedures if their processes were more informal.

A lookback may be tough for some smaller banks, whose technology may not enable quick database searches of complaints, says Davis Wright Tremaine’s Gannon. But “you get credit for making the effort,” he says, noting surveys to loan officers and compliance teams can bring valuable information.

He also recommends that banks consider re-offering the service they denied to a customer if warranted.

Forward-Looking Policies
Lawyers also advise that banks review their policies for closing consumer accounts — and make adjustments where needed. For starters, they should remove anything in their policies that mention “reputation risk,” says Alan Kaplinsky, senior counsel at Ballard Spahr. Regulators had long stipulated that working with certain customers could damage a bank’s reputational standing and prompt customers to head for the exits. But they’re now eliminating the use of reputation risk in the supervisory process.

Banks should also modify any boilerplate language for deposit accounts that says they can    close individuals’ accounts for any reason, Kaplinsky says. Those types of blanket statements simply won’t comply with the executive order, he says.

Adequate record-keeping will be essential going forward, says Margaret Tahyar, a partner at the law firm Davis Polk. Specific policies on closing deposit accounts may vary at each institution, she says, but banks should implement clear processes to ensure it’s done properly. 

“At a minimum, you would want a policy,” she says. “You would want more than one person in the organization involved. You would want to be doing it for legitimate reasons — credit risk, anti-money laundering risk — and you would want to record it. It’s pretty sensible, practical stuff.” She adds: “Of the many, many hard and tricky things that banks do, this is not tricky.”

Legal Risks
To limit future risks, banks should ensure they prepare “substantiated and detailed written rationale” for why they closed a customer’s account or denied them a loan, says Troutman Pepper Locke’s Sommerfield. “That will be very helpful to rebut a presumption of debanking,” she says. She and other lawyers flagged potential legal risks for banks tied to regulators’ new debanking focus. 

Trump’s executive order, for example, directs regulators to review their supervisory data to identify banks that have engaged in debanking based on religion. The order directs regulators to refer cases to the Department of Justice, which could then bring civil action against banks under laws that prohibit discrimination based on race, sex, religion and other protected categories. 

Rejected customers, upon seeing headlines on debanking, may also decide to sue banks for their experience. 

Confidential Challenges
But Gannon, of Davis Wright Tremaine, says banks remain hamstrung by regulations that prohibit them from sharing confidential supervisory information.

Banks can struggle to defend themselves against debanking allegations if it involves confidential information, Gannon says, since they can’t share details to frustrated customers proving that they closed their account due to money laundering risks.

Gannon says he hopes the shackles around confidential supervisory information get loosened a little bit, so that banks can defend themselves. The secrecy is a feature that risks “undercutting public confidence in bank regulators and the banking system,” since the information void can prompt public speculation, University of Wyoming law professor Julie Hill wrote in a forthcoming paper on debanking. 

“It is time for a more permanent fix of the conditions that allow the debanking debate to persist,” she wrote.