The OCC and FDIC killed “reputational risk” as a supervisory category last month because the term was a fraud — a regulatory fig leaf that let the nine largest banks and their government examiners coordinate the political exclusion of entire legal industries without ever having to defend the decision on the merits. The cover is gone. The legal exposure that was always waiting underneath is now visible.
The steel-man case first. The OCC’s final rule, effective June 9, says that reputational risk is not a separate category of supervisory concern. The agency’s stated rationale: banks should assess actual financial and operational risks, not the hypothetical political consequences of serving a lawful customer. On its face, the rule is a procedural housekeeping measure — a return to the principle that a bank’s job is to lend and take deposits, not to police the political acceptability of its borrowers.
The reality the rule describes is different. The OCC’s preliminary finding, released in December, documented that the nine largest banks it supervises had, between 2020 and 2023, systematically restricted access to nine sectors: oil and gas, coal, firearms, private prisons, payday and payroll lending, tobacco, adult entertainment, political-action committees, and digital assets. The policies were, according to the OCC’s own report, “in place at each of the banks reviewed.” The agency is reviewing nearly 100,000 consumer complaints for further instances. Comptroller Jonathan Gould’s word for this was “unfortunate.” The word the facts support is “coordinated.”
Reputational risk was the mechanism that made the coordination invisible. A bank board that wants to stop serving gun stores or payday lenders has two options: vote to exit the business line and defend that decision to shareholders, or cite a vague regulatory concern and let the examiner’s preference do the work. The second option requires no paper trail, no cost-benefit analysis, no independent documentation of the underlying risk. That is not a compliance posture. It is a failure to exercise the duty of care.
Three distinct legal theories now converge on that failure, each advancing through a different channel. The first is the duty-of-care theory, already being tested by private litigants. ACEJ Holdings, doing business as United Gun Shop, is suing Capital One over a frozen $75,000 payment stream — the shop says the bank cited a “prohibited industry” designation without clear explanation, a pattern the shop’s complaint frames as a board’s failure to independently document the underlying risk. The next plaintiff in such a case could be a bank shareholder suing the very board that made the categorical exclusion decision without a defensible record. The second theory is criminal, not civil. The Justice Department’s June 10 subpoena to JPMorgan Chase, Bank of America, and Wells Fargo signals that the U.S. Attorney’s Office in the District of Columbia seeks documents on whether account closings violated the Financial Institutions Reform, Recovery and Enforcement Act, which carries criminal penalties for conduct affecting a federally insured institution. That office does not issue document demands of this scope — reported the day after the OCC’s rule took effect — without a theory of the case. The third theory is a federal constitutional question no court has addressed: whether coordinated government pressure to exclude a legal industry amounts to a taking without just compensation under the Fifth Amendment. The OCC’s own report, documenting uniform exclusion policies across all nine banks, is the kind of evidence that could establish state action — the government did not just permit the coordination, it incentivized it. The elimination of reputational risk as cover removes the banks’ best defense against that characterization. Someone will test the duty-of-care theory, the FIRREA theory, and the takings theory in the same term. The government’s own subpoenas suggest it knows how that test comes out.
The historical pattern here is not a novel theory. Operation Choke Point, launched by the Justice Department in 2013, used the same mechanism — regulator pressure on banks to drop entire industries, including the payday lenders the op-ed’s author once ran. The DOJ notified roughly 30 financial institutions. The IRS applied the same playbook against tea-party and conservative nonprofit applicants from 2010 to 2012, confirmed by the Treasury inspector general in 2013, who found the IRS used “inappropriate criteria” affecting 108,000+ applicants. Different examiners, identical mechanism: use a regulator’s discretionary authority to make disfavored activity expensive enough that the private institution does the discriminating for you.
The Supreme Court held unanimously in NRA v. Vullo, 602 U.S. ___ (2024), that a regulator’s threat to insurers and banks, used to pressure them into dropping disfavored customers, can state a First Amendment claim. The Second Circuit on remand still shielded the regulator, concluding Vullo was entitled to qualified immunity. The Fifth Amendment question — whether coordinated government pressure to exclude a legal industry amounts to a taking without compensation — has never been ruled on by any court. The OCC’s report documenting uniform exclusion policies across the nine largest banks changes the evidentiary landscape for that question. When a single agency can show that nine separate bank boards independently reached the same decision to exclude the same nine sectors over the same three-year period without any documented risk analysis, the “independent judgment” defense collapses. The coercion need not be proven by a smoking-gun memo. It is proven by the uniformity.
The regulators who drove banks out of payday lending and similar sectors did not eliminate the demand for that credit. The FDIC’s 2023 survey found 5.6 million unbanked households and 19 million more relying on nonbank credit. The average APR of a payday loan exceeds 400 percent, while the average bank overdraft fee is under $35 — the FDIC’s policy drove borrowers toward the vastly more expensive option. That credit need did not disappear when banks were warned to stay away. It went looking for another lender — a less regulated lender, charging higher rates, with less oversight. The consumer-protection rationale that justified the reputational-risk mechanism is refuted by its own consequences. The FDIC drove demand toward the very outcomes it claimed to prevent.
The OCC and FDIC, by eliminating the reputational-risk category, have done the legal system a service. They have shown the working parts of the machine. The regulatory architecture that produced 5.6 million unbanked households and 19 million borrowers pushed into costlier alternatives is what the litigation will now examine. Three legal theories — board liability, criminal statute, constitutional taking — converge on the same underlying fact: the cover story is gone, and the boards that made the decisions never wrote down the reasons. That silence is now evidence. Board liability addresses the failure to document risk; FIRREA carries criminal penalties for conduct affecting insured institutions; takings law asks whether the state action that produced the credit desert violates the Fifth Amendment.