‘Debanking’ Reviews Pose Open-Ended Challenge for SBA Lenders

Banks, credit unions, and other lenders seeking to comply with the Small Business Administration’s order to halt and remediate political “debanking” face staggering costs if the agency doesn’t put limits on the search.

The SBA last month directed its network of 5,000-plus lenders to “end politicized or unlawful banking practices,” as required under President Donald Trump’s executive order responding to alleged bias against cryptocurrency, conservative, and other businesses.

The SBA’s order requires lenders, by Dec. 5, to identify all customers that saw their accounts closed and potential customers that were denied loans or access to a bank account because of religious or political reasons.

But it doesn’t say how far back in time lenders have to search or what they can do to prove that their actions were appropriate. That means banks, credit unions, and other lenders are facing an open-ended compliance challenge that will cost significant time and money, said Alan Kaplinsky, senior counsel at Ballard Spahr LLP who advises banks and other lenders.

“Right now, it’s very unclear what the expectations are,” he said.

Trump’s order came after the crypto industry and others said banks illegally blocked them from accessing banking services during the Obama and Biden administrations.

The president said JPMorgan Chase & Co. and Bank of America Corp. rejected his own business on ideological grounds and the Trump Organization—the president’s company—sued “woke” Capital One Financial Corp. for dropping their accounts in March.

“Any bank that retaliates against otherwise eligible customers on the basis of reputational, religious, ideological, or political beliefs will be held to account,” SBA Administrator Kelly Loeffler said when the agency issued its order last month.

But banks and regulators from previous administrations have denied any systematic effort to deny financial services to customers solely for political reasons, and there’s little more than anecdotal evidence to support the claims.

Lenders are now bracing for a compliance headache as they struggle to make sense of the Trump administration’s debanking requirements.

“More information related to the EO will be forthcoming as the Administration continues to examine past debanking activities,” the SBA said in a statement last week.

Reasonable Efforts

Trump’s executive order requires the SBA to force lenders to make “reasonable efforts” to reinstate clients that were subject to what the administration called unlawful debanking.

The SBA’s order also calls for “reasonable efforts,” potentially providing a road map for lenders to follow to prove they didn’t remove a client or deny a loan improperly, said Brian Knight, senior counsel at the Alliance Defending Freedom, a Christian legal advocacy group.

“The administration is expecting reasonable efforts,” he said. “So barring some reason for an institution to suspect there was an instance in the deep past, a reasonable time limit is probably what they had in mind.”

To show their work, lenders will likely review practices and procedures to ensure that they didn’t engage in systematic debanking or emphasize “reputation risk.” They can also review complaints submitted by customers and adverse action reports sent to applicants who are denied a loan.

“These things get documented,” Kaplinsky said.

Even so, lenders will be stuck trying to prove a negative without further guidance, he said.

‘Potentially Indefinite’

Beyond seeking guidance on what types of information the SBA is demanding, lenders are concerned about the unlimited lookback period, said Ann Petros, the vice president for policy engagement and credit union operations at America’s Credit Unions, an industry group.

“It’s potentially indefinite,” she said.

It’s also unclear whether the SBA-required reviews are a one-time event or a continuous mandate, Petros said.

Petros added that credit unions broadly hadn’t engaged in debanking.

“There are very limited instances in which a credit union can deny services and expel members, and there are procedures around that,” she said. “There are also very strict guidelines for record retention.”

America’s Credit Unions has been in contact with the SBA to discuss its members’ concerns, she added.

Trump’s executive order also required the Treasury Department to develop a “comprehensive strategy” to combat alleged debanking and mandated that federal banking regulators police financial institutions for it.

The Office of the Comptroller of the Currency, which supervises national banks, on Monday issued guidance outlining how it weighs debanking allegations. The agency also announced it has requested information from the nine largest banks it oversees about their potential debanking activities.

But the OCC didn’t outline how long the look-back periods extended. An OCC spokesperson declined to comment beyond what was in the guidance.

Moving forward, the OCC and other federal banking regulators may provide more guidance and clarity for the institutions they oversee.

Until then, banks, credit unions, and other lenders face a monumental compliance task, Kaplinsky said.

“Hopefully they’re realizing that they’ve created a real time-consuming compliance issue,” he said.