Federal Regulators Issue Interagency Guidelines Regarding Deposit Reconciliation Practices

The CFPB and four federal financial regulatory agencies have issued Interagency Guidance Regarding Deposit Reconciliation Practices.  The Guidance comes as a follow up to the consent orders entered into last fall against Citizens Bank N.A., Citizens Bank of Pennsylvania and their parent company, Citizens Financial Group, Inc. regarding deposit discrepancies.   The Guidance makes clear that the agencies have a zero tolerance policy as to deposit discrepancies and expect “financial institutions to adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”  The agencies expect financial institutions to:

• Effectively manage their deposit reconciliation practices;
• Insure that information provided to customers as to their deposit reconciliation policies is accurate;
• Implement effective compliance management systems that include appropriate policies, procedures, internal controls, training and oversight; and
• Review processes to ensure compliance with applicable laws and regulations.

While the Guidance provides for a zero tolerance policy, financial institutions are reminded that they are not liable for “bona fide errors”.  To establish a bona fide error, a financial institution must establish that a violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.  It is therefore imperative that financial institutions review their compliance management systems to insure they:

• Provide proper vendor management to ensure their service providers and affiliates properly and accurately resolve deposit discrepancies;
• Include written policies and procedures for conducting audits to insure deposits and deposit discrepancies are accurately handled, including the frequency, scope and depth of said audits;
• Put in place compliance measures, as well as policies, procedures and practices, to ensure accurate processing of deposits and deposit discrepancies;
• Incorporate sufficient monitoring and oversight of the processing of deposits and deposit discrepancies;
• Incorporate training of personnel to insure accurate resolution of deposit discrepancies; and
• Incorporate complaint procedures and processing to ensure deposit discrepancy complaints are identified, tracked and resolved in accordance with the Banks’ policies and procedures.

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FTC Sends Warning to Creditors Collecting Their Own Debts: Winter is Coming

Creditors collecting their own debts have often sought solace in the fact that they were not covered by the FDCPA; however, over the past few years that solace has been called into question by the CFPB and now the FTC.  In a blog post entitled “ThinkYour Company’s Not Covered by the FDCPA? You May Want to Think Again”, the FTC yesterday warned creditors to carefully consider whether they are covered by the FDCPA and, more importantly, warned that whether or not they are covered by the FDCPA, they are not immune from debt collection violations.  The warning was timely as I spent most of yesterday morning with a bank client discussing the same issue. So why should banks and other first party creditors be concerned?

The FTC Act and Dodd Frank generally prohibit deceptive and unfair practices and both the FTC and CFPB have used this umbrella to punish creditors for unfair and deceptive debt collection issues even where they were not covered by the FDCPA.  For instance, the draconian CFPB Consent Order with JP Morgan Chase which was entered in July, was premised in part on Dodd Frank’s general prohibition on unfair, deceptive or abusive acts because the bank did not fall under the FDCPA.  The FTC’s blog post makes no bones about the Commission’s intent to continue using the FTC Act’s general prohibition in absence of FDCPA coverage stating that “even if the FDCPA doesn’t apply, your collection activities are still covered by Section 5 of the FTC Act’s general prohibition against deceptive or unfair practices….[T]he FTC has taken action under Section 5 when first-party creditors engage in other practices expressly prohibited by the FDCPA – for example, revealing the existence of a debt to anyone other than the debtor.”

The CFPB Has Left Little Doubt that Impending Regulation F Will Encompass Creditors Collecting on Their Own Behalf.  To borrow a phrase from Jon Snow on Game of Thrones, “winter is coming” for the debt collection world even for those of us to consider it already here.  The CFPB will likely issue proposed regulations concerning debt collection in the first half of 2016 and those regulations are anticipated to address first party collections, as well as third party collections.  The Bureau’s recent enforcement actions, as well as other publications make clear their position that anyone collecting consumer debt, whether first or third party, cannot do so in an unfair or deceptive manner and all debt collectors will likely be encompassed in Regulation F. 

In 2013, the Bureau issued Compliance Bulletin 2013-07 which clearly laid out its position: “[a]lthough the FDCPA definition of “debt collector” does not include some persons who collect consumer debt, all covered persons and service providers must refrain from committing UDAAPs in violation of the Dodd-Frank Act.” Specifically, the CFPB identified several practices that they are particularly concerned with, including:

• Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees, and charges) not expressly authorized by the agreement creating the debt or permitted by law.
• Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer.
• Falsely representing the character, amount, or legal status of the debt.
• Misrepresenting that a debt collection communication is from an attorney or a government source.
• Misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency.
• Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.
• Threatening any action that is not intended or the covered person or service provider does not have the authorization to pursue
• False threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt.

The CFPB concluded by stating that “[o]riginal creditors and other covered persons and service providers involved in collecting debt related to any consumer financial product or service are subject to the prohibition against UDAAPs in the Dodd-Frank Act.  The CFPB will continue to review closely the practices of those engaged in the collection of consumer debts for potential UDAAPs, including the practices described above.”

The FDCPA does not provide a blanket exception for creditors collecting on their own behalf.  As the FTC blog aptly notes, the definition of debt collector under the FDCPA may include creditors collecting on their own behalf under several limited scenarios.  First, the FTC points out that “if a creditor collects its own debt but uses a different name that suggests that it’s a third party debt collector…then the company is now a debt collector subject to the FDCPA”.   The FTC also points to a second scenario – when a creditor is collecting a debt on its own behalf which was in default at the time it was obtained by such person.  What is troubling, however, is that the FTC, misses the second crucial element of the definition of a debt collector - specifically, that the creditor’s principal business purpose must be debt collection.  The FTC blog suggests by implication that banks who acquire loans may be subject to the FDCPA; however, the majority of courts who have examined that issue have ruled to the contrary.

The Bottom Line?  Creditors who collect debt on their own behalf need to examine their policies, procedures and compliance management systems to insure their collection efforts are consistent with the FDCPA whether or not they are “debt collectors” under the Act.  Both the FTC and CFPB have made clear their intention to enforce unfair and deceptive debt collection practices under the FTC Act and Dodd Frank when the FDCPA is unavailable.  Additionally, it is likely that any debt collection regulation proposed by the CFPB will include creditors collecting on their own behalf.  Winter is coming – creditors should be prepared.

Federal Regulators and the CFPB Fine Bank and Order Remediation as to Deposit Discrepancies

In a joint enforcement action, the CFPB, OCC and FDIC have entered into consent orders with Citizens Bank N.A., Citizens Bank of Pennsylvania and their parent company, Citizens Financial Group, Inc.  (the “Banks”). The consent orders allege the Banks engaged in unfair and deceptive practices between 2008 and 2013 with respect to their handling of deposit discrepancies.  In total, the Banks are being ordered to refund any deposit discrepancies which were not properly credited to customer accounts (estimated to be in excess of $16 million dollars) and pay over $20 million in penalties.  Additionally, the Banks are being ordered to remediate their practices and put compliance management programs and audit procedures in place to prevent further issues.

The consent orders allege that between January of 2008 and November of 2013, the banks violated §5 of the FTC Act and §1036 of Dodd Frank by engaging in unfair and deceptive practices regarding their deposit discrepancy policies.  The consent orders allege that the Banks’ violations were two fold.  The Consent Orders allege that the Banks told customers that deposits were subject to verification, suggesting that the banks would take steps to ensure deposits were accurately credited when a discrepancy arose between the deposit slip and the actual amount of the deposit.  Second, the Banks made no adjustments to the deposit amounts where deposit discrepancies were under a certain threshold ($50 from January 2008-September 2012 and $25 from September 2012 through November 2013). In other words, the deposits were credited for the amount on the deposit slip irregardless of the discrepancy.  The net effect was that if a customer miscalculated its deposit and the discrepancy was under the thresh hold, the deposit was never credited to reflect the discrepancy. 

The Orders require the Banks to:

• Provide proper vendor management to ensure their service providers and affiliates properly and accurately resolve deposit discrepancies;
• Establish a Compliance Committee to monitor and coordinate the Banks’ adherence with the consent orders;
• Develop a written Consumer Compliance Internal Audit Program for the processing of deposits and deposit discrepancies which includes written policies and procedures for conducting audits to insure deposits and deposit discrepancies are accurately handled, including the frequency, scope and depth of said audits;
• Submit a Compliance Plan which:
  • Puts in place compliance measures, as well as policies, procedures and practices, to ensure accurate processing of deposits and deposit discrepancies;
  • Incorporates sufficient monitoring and oversight of the processing of deposits and deposit discrepancies;
  • Incorporates training of personnel to insure accurate resolution of deposit discrepancies; and
  • Enhance or incorporate complaint procedures and processing to ensure despot discrepancy complaints are identified, tracked and resolved in accordance with the Banks’ policies and procedures.

The Orders additionally require the Banks to reimburse affected account holders for the amount of any funds not properly credited to their account as a result of the discrepancy, plus any bank charges resulting from the under-crediting (for instance, overdraft) and interest.  Additionally, the Orders require the following civil penalties: $7.5 million to the CFPB, $3 million to the FDIC and $10 million to the OCC.