Trade Group: FDIC Targeted Porn Biz on Moral Grounds Only

WASHINGTON, DC—Yesterday, a trade group called the Third Party Payment Processors Association (TPPPA) filed a starkly worded friend-of-the-court brief in Community Financial Services Association of America v FDIC, a lawsuit filed in June by the payday lenders trade group that, as American Banker put it today, “accuses the FDIC, the Office of the Comptroller of the Currency and the Federal Reserve Board of trying to drive payday lenders out of business by exerting pressure on the banks they depend on to access the payment system.” But payday lenders weren’t the only ones targeted by the government, claims the TPPPA. In its support of the plaintiff’s case, the third party processors group directly accuses the government corporation of not only generally engaging in “moralistic efforts to abolish whole industries that the government disfavors,” but specifically accuses government regulators of targeting pornography because they did not believe it was "good for consumers.” According to the TPPPA via its amicus brief, which was filed yesterday as Exhibit A in a larger filing seeking the court’s permission to introduce the amicus, the trouble began in 2011, when “the FDIC published a non-exhaustive list of thirty merchant categories, highlighting them to banks as ‘high risk’ and thus deserving of heightened scrutiny. The list included, without explanation or distinction, both lawful and illicit industries. For example, the list included: payday loans, credit card schemes, coin dealers, debt consolidation scams, dating services, Ponzi schemes, firearm sales, racist materials, ammunition sales, pornography, drug paraphernalia, and fireworks sales.” The amicus brief continues, “Not long after the list came out—and obviously in connection with it—FDIC examiners started using the examination process to coerce and intimidate banks to end relationships with TPPPs that processed payments for merchants in the pornography industry. FDIC examiners’ targeted enforcement against the pornography industry was the advent of its improper practice of moralistic regulation over the banking industry. Regulators did not target the pornography industry because there was evidence of consumer fraud relative to that industry. The TPPPA is constrained therefore to conclude that regulators targeted the industry because they thought pornography was not good for consumers.” It was after that initial test of the waters that TPPPA accuses FDIC examiners of expanding “the scope of disfavored industries that they pressured banks to disavow.” They also, according to TPPA, brought increased pressure to bear by “promising that the FDIC would ‘make [the bank]’s life a living hell’ if it did not end specific relationships with processors and/or merchants in certain disfavored industries. Additionally, examiners have told banks that they would be subjected to ‘the toughest examination that [the bank] ever had’ unless they ended relationships with specific processors and/or merchants in disfavored industries. Furthermore, examiners have threatened to lower banks’ examination ratings unless they ended relationships with customers in disfavored industries.” Allegations of funny business by banking institutions or the FDIC are not new. AVN reported on both in April, and few of the individuals or businesses associated with adult entertainment that have had accounts closed will be surprised by the charge of “moralistic regulation over the banking industry” levied by TPPPA against the government. Still, having the allegations reiterated in black and while as part of a court filing adds a certain level of brutal reality to a situation that, while very unpleasant for those victimized by it, was vague as far as who preciesly was leveraging whom—were the feds really being moral banking cops or were the banks using loose FDIC language as an axcuse to target businesses they don't like? Or was it a little of both? Not surprisingly, the FDIC still claims it is being unfairly branded the bad guy. According to American Banker, “The FDIC withdrew the list of so-called high-risk industries in July, saying that it had been misinterpreted to mean that the categories of merchants listed were prohibited or discouraged… In response to the suit, lawyers for the FDIC wrote in an August court filing that any decisions by banks to cut ties with payday lenders were the banks' own business decisions.” Hopefully, the court can determine who’s telling the truth and who’s full of shit. The TPPPA amicus brief can be read here.