As anticipated, on August 7th, the White House published its Executive Order designed to address the "unlawful debanking" of certain individuals and industries. The Executive Order titled Guaranteeing Fair Banking For All Americans was issued to ensure banking decisions are made on the basis of "individualized, objective, and risk-based analyses" and not as a "tool to inhibit...beliefs, affiliations, or political views." Issuance of the Order is in response to claims by some individuals and businesses that banking services have been denied or terminated either due to their political or religious beliefs or for "reputational risk" concerns to the institution. Certain business types that have been identified in the "debanking" context include businesses in the firearms, gas and oil, and cryptocurrency industries.
Content of the Order
The Order defines "politicized or unlawful debanking" as restricting "access to, or adversely modify the conditions of, accounts, loans, or other banking products or financial services of any customer or potential customer on the basis of the customer's or potential customer's political or religious beliefs, or on the basis of the customer's or potential customer's lawful business activities that the financial service provider disagrees with or disfavors for political reasons."
The Order directs regulators to withdraw the use of "reputational risk" or other similar concepts from guidance documents, manuals, and other regulator materials that could lead to debanking, which regulators have already undertaken efforts to do, and to provide formal guidance to their examiners on the removal of these concepts. Furthermore, the Order directs federal regulators to "consider rescinding or amending existing regulations" that may result in inappropriate debanking of customers. Additionally, the Order directs the Small Business Administration ("SBA") to provide notice to all financial institutions under the SBA's jurisdiction and supervision requiring that the financial institutions: (i) make reasonable efforts to identify and provide notice of reinstatement to previous clients who have been denied services due to unlawful debanking activities; and (ii) identify all potential clients who have been denied financial services or payment processing services due to unlawful debanking activities and provide notification and the renewed option to access previously denied services.
The Order also directs federal regulators to review and identify financial institutions that have "had any past or current, formal or informal, policies or practices that require, encourage, or otherwise influence" the financial institution to engage in debanking practices and instructs regulators to take "appropriate remedial action," including fines and consent orders.
What It Means
The Order will have broad applicability. It covers a wide range of banks, credit unions, savings associations, and other nonbank financial institutions. There is no size threshold and no time limitation for the required actions.
Although major financial institutions have repeatedly denied restricting services to customers and potential customers based on their political, religious, or other beliefs, this Executive Order will place pressure on all financial institutions to prove that services were not withheld or denied based on unlawful debanking activities. This could prove difficult given the types of records that may be available and the timelines in which to produce them. Complicating matters more, financial institutions may have legitimate reasons to deny their services to a customer or potential customer. Having to provide proof to federal regulators that unlawful debanking did not occur may prove onerous.
The Order does not specify how far back federal regulators are to retroactively review a financial institution's practices. Given that the offending institution can face fines, consent orders, or other regulatory measures if found in violation, the expected extent of the review can implicate retention or other recordkeeping complications for the financial institution.
Conversely, removing restrictions related to "reputational risk" will allow financial institutions freedom to bank customers who may have previously been perceived as too risky to onboard as clients. This could potentially make new industries available as emerging customer markets, allowing financial institutions more freedom to provide services to certain customer bases such as firearm and ammunition entities.
Additionally, removing supervisory focus on "reputational risk" relieves a financial institution of additional drivers that may have historically caused the financial institution to exit a customer relationship. Financial institutions may have more control over the services they are able to provide and maintain with their customers.
Follows State Action
The debanking concern has also occurred at the state level with the proliferation of fair access laws in Florida (focusing on political opinions, religious beliefs, and certain "social credit factors"), Tennessee (non-risk based factors allowing for written reasons for denials), and Idaho ("social credit scores" related to religious, political, diversity, abortion, fossil fuel or firearms industries and requires a written explanation). Similar laws have also been proposed in other states, including in Arizona, Georgia, Indiana, Iowa, Kentucky, Louisiana, South Dakota, Nebraska, and West Virginia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
