Citizens Bank of Pennsylvania is a warning to the banking industry

Regulators’ action against Citizens Bank of Pennsylvania has huge ramifications for the banking industry. Three regulators − the CFPB, FDIC and the Office of the Comptroller of the Currency – have ordered Citizens to pay $14 million in refunds to consumers and another $20.5 million penalty.

Regulators’ action against Citizens Bank of Pennsylvania has huge ramifications for the banking industry. Three regulators − the CFPB, FDIC and the Office of the Comptroller of the Currency – have ordered Citizens to pay $14 million in refunds to consumers and another $20.5 million penalty. (The amounts are broken up between the three regulators.)

Citizens Bank regularly denied customers the full credits of their deposits when there were discrepancies between deposit slips and the actual money transferred into the bank, said CFPB Director Richard Cordray. “The bank chose to ignore these discrepancies and harmed many consumers by pocketing the difference,” he said.

From January 2008 to September 2012, the bank only looked into discrepancies greater than $50. From September 2012 to November 2013, the bank only looked into discrepancies greater than $25, the bureau said.

The bank violated rules put in place by the Dodd-Frank Act because it “frequently did not give consumers full credit for their deposits when the amount scanned on the deposit slip was less than the amount of the checks and cash deposited,” the CFPB said.

The bank’s deposit agreement also implied “that the bank would take steps to ensure consumers were credited with the correct deposit amount. But the bank’s practice was not to verify and correct deposit inaccuracies unless they were above the $25 or $50 threshold,” the CFPB said.

Two concerns for the industry

There are two big issues here for the banking industry. To illustrate, allow a brief review of recent banking history.

The practice of not fixing discrepancies below a certain dollar amount began decades ago. For centuries, paper was the basis for deposits; banks couldn’t use computers to audit deposits. Banks didn’t believe they should have to pay the significant amount required to catch small customer mistakes. The onus was on the depositor to ensure they correctly added up their deposits.

The deposit process has changed significantly in a short amount of time. When airplanes were grounded in the aftermath of September 11th, the movement of money came to a standstill. The resulting strain on banks lit a fire at the Federal Reserve to implement Check 21. Banks implemented the new Check 21 requirements from 2005 through 2007; then the financial crisis hit. Since then, bank managers’ eyes have been turned to cleaning up the bank and finding ways to book good loans. Operational procedure hasn’t been top of mind for years.

But now, after Dodd-Frank and with the advance of technology, shorting customers on deposit discrepancies will be viewed by the CFPB as a deceptive act or practice.

For the industry, the first big issue is that Citizens Bank’s policy is still common. “It may not be well-known internally, it may be something that evolved over time in the name of being ‘cost effective,’ it may not be documented in policy,” said Bob Browne, president and CEO of Cedar Creek Consulting, Inc., Kansas City, Mo. “This could be a significant issue for many banks.”

The second big issue for the industry is that a whistleblower (a bank employee) reported Citizen’s practice to the bureau. There are significant financial incentives for employees to alert the CFPB to policies like shorting customers on deposits, Browne said. The Dodd-Frank Act states that regulators “Shall pay an award or awards to one or more whistleblowers who voluntarily provided original information… that led to the successful enforcement of the covered judicial or administrative action.” Such an award will be “not less than 10 percent… of the monetary sanctions imposed… and not more than 30 percent,” Dodd-Frank says.

The Citizens story has media appeal. The Wall Street Journal, among others, is reporting that “the CFPB said it became aware of wrongdoing from a whistleblower.” As the story works its way down to local media, how long will it be before the lead teller that a bank let go last year reports their old employer to the CFPB? Given the financial incentives of 10 percent on a $20 million monetary sanction, banks need to address the problem now, Browne said.

How to fix it

Banks that discover they are shorting customers for deposit discrepancies can look to the CFPB’s enforcement order for guidance in resolving the issue, Browne said. The bureau required Citizens to develop a written “Consumer Compliance Internal Audit Program” for the processing of deposits and deposit discrepancies.

Among other requirements, the program must include:

● written policies and procedures for conducting audits of deposits and deposit discrepancies. The policy must specify the frequency, scope, and depth of these audits;

● written policies and procedures for expanding sampling when exceptions based on potential violations of applicable federal consumer financial laws are detected with respect to the processing of deposits;

● incorporate sufficient training of personnel involved in the processing of deposits; and

● enhance or incorporate complaint procedures and processing to ensure complaints related to the processing of deposits are identified, tracked, and resolved.

Regulators went back five years for Citizens Bank of Pennsylvania. “Banks wanting to avoid regulatory consequences need to go back that far and refund customers,” Browne said. “But don’t only refund, you also need to take funds back from those who were credited too much. That can help offset the cost of refunding,” he said.

Browne also said he doesn’t suggest self-reporting the issue to the prudential regulator. “Look at the example of Capital One in 2012,” he said. “The bank discovered a bad practice, quantified it and created a plan to correct it. It brought that plan to the OCC and was given a pat on the back for taking corrective action of its own accord. Then the OCC informed the CFPB and the CFPB forced the OCC to make an example of Capital One,” Brown said, reporting information he gathered from Capital One employees familiar with the enforcement action.

The banker associations and bankers on advisory boards at the CFPB, Federal Reserve and FDIC need to ask the regulatory community to be fair, Browne said. “They need to give the industry time to react to Dodd-Frank changes,” he said. “After that, hit the players who are not following the law.”

Fredrikson & Byron Law