In this series, we examine compliance violations and the resulting fines paid by companies. We will also explore the details of the violations to help other organizations steer away from these pitfalls.
In this fifth post, we will look into an interesting case – Bank of America’s $250 million settlement for abusing consumers.
What are CFPB and OCC?
The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) are two key agencies in the United States responsible for regulating and supervising financial institutions.
Consumer Financial Protection Bureau (CFPB)
Established in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB aims to protect consumers from unfair, deceptive, or abusive practices by financial institutions. The bureau ensures that consumers have access to transparent and fair financial products and services. It has authority over banks, credit unions, payday loan companies, mortgage service providers, and debt collectors.
Office of the Comptroller of the Currency (OCC)
The OCC is a bureau within the U.S. Department of the Treasury. It was created in 1863 and is responsible for chartering, regulating, and supervising all national banks and federal savings associations. It also has jurisdiction over the federally licensed branches of foreign banks that operate in the United States. The OCC ensures that these institutions operate safely, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. Its offices are in New York City, Chicago, Dallas, and Denver.
With this context of the institutions, let’s move to the case specifics.
Background of the Case
Bank of America, one of the largest financial institutions in the United States, faced significant scrutiny from the CFPB and OCC due to a series of consumer abuses and fraudulent activities. These violations included unauthorized credit card accounts, improper overdraft fee practices, and deceptive marketing related to credit card bonuses.
Unauthorized Credit Card Accounts
From 2012 onward, Bank of America employees opened credit card accounts in customers’ names without their consent. These accounts were created using illegally obtained credit reports without the consent of the concerned individual. The primary motivation for this fraudulent activity was to meet the aggressive sales targets set by the bank. This practice violated consumer trust and privacy and also had significant financial and credit implications for the affected customers.
Improper Overdraft Fee Practices
The bank charged overdraft fees multiple times for the same transactions. Typically, when a transaction is declined due to insufficient funds, the bank charges an overdraft fee. Bank of America, however, attempted the same transaction multiple times, each time charging a $35 fee. This practice led to substantial profits for the bank but caused considerable financial harm to consumers.
Deceptive Marketing of Credit Card Bonuses
The bank targeted individual users with offers and points for signing up for credit cards. However, it failed to provide these bonuses to tens of thousands of applicants, particularly those who submitted applications in person or over the phone. The fine print of these offers did not clearly state that the bonuses were only applicable for online sign-ups. As a result, many consumers were misled and did not receive the promised rewards. Furthermore, its existing systems and processes did not update the details correctly, and even eligible customers did not receive their promised rewards.
Settlement Details
In a coordinated settlement agreed upon by Bank of America, the bank was required to pay $250 million in total fines and compensations. This amount included $190 million to the CFPB for consumer harm and $60 million to the OCC.
The bank was ordered to pay $80.4 million in consumer compensation for those who were charged multiple $35 overdraft fees for the same transaction. Additionally, compensations were provided for costs faced by consumers due to the unauthorized opening of credit card accounts.
Along with paying the fines, the bank also made changes to its operations. It discontinued its sales incentives program for branch employees to prevent future abuses related to sales targets. Moreover, it made efforts to improve transparency in marketing practices to ensure consumers are fully aware of the terms and conditions of its future offers.
Learnings from the Settlement
The Bank of America case discussed above provides valuable lessons for financial institutions and regulatory bodies. These lessons can help prevent similar compliance violations and promote a culture of transparency and ethical behavior.
Ethical Behavior
Ethical behavior is the foundation for a trustworthy financial institution. Setting aggressive sales targets can lead to unethical behavior by employees, like opening unauthorized accounts in the above case. Banks must prioritize ethical practices over short-term financial gains. This involves creating a work environment that encourages integrity and accountability. Regular ethics training and clear policies can further reinforce the importance of ethical behavior.
Risk Management
A strong risk management framework helps identify and mitigate potential compliance risks. Regular audits can detect and address issues before they escalate. Also, ongoing training ensures employees understand compliance requirements and ethical standards. Banks must establish clear lines of accountability to make employees aware that they will be held responsible for their actions. Performing regular risk assessments identifies areas of potential vulnerability and implements strategies to address these risks.
Transparency
Transparency in marketing is essential to build and maintain consumer trust. Financial institutions must ensure that all marketing materials clearly state the terms and conditions of products and services. Clear communication avoids fine print that can mislead consumers, while the prominent display of important information removes ambiguity. Honest advertising that accurately represents products and services without deceptive practices can help customers make informed decisions. Moreover, customer education enables customers to understand the products they are considering, including detailed explanations of fees, interest rates, and other key terms.
Regulatory Compliance
Compliance with regulatory requirements is non-negotiable. Financial institutions must stay updated on regulatory changes and implement necessary measures to ensure compliance. Establishing comprehensive compliance programs including regular training, monitoring, and reporting is key to meeting the stringent compliance requirements. Also, maintaining open communication with regulatory bodies ensures that issues are promptly addressed and resolved.
Consumer Protection
Financial institutions must build trust and a long-term relationship with customers using multiple strategies. The first step is to address consumer complaints quickly and fairly. Also, provide adequate compensation for any harm caused by the bank’s actions, as seen in the $80.4 million paid to consumers for overdraft fees and unauthorized accounts. Implement policies and practices that prevent future abuses, like discontinuing sales incentive programs that may lead to unethical behavior.
Compliance Culture
Creating a culture of compliance within the organization is key for long-term success. Senior leadership must be committed to compliance and set the tone for the rest of the organization. Encourage employees to take ownership of compliance and ethical behavior, and provide them with the tools and support they need to succeed. Also, regularly review and improve compliance programs to adapt to changing regulations and emerging risks.
Regular Monitoring and Reporting
Put in place a reporting schedule to improve accountability and responsibility. These reports must be sent to the concerned stakeholders to establish trust. Moreover, encourage employees to report unethical behavior or compliance violations without fear of retaliation through whistleblower protections.
Customer-centric Approach
Take a customer-centric approach to align your business practices with consumer interests. Actively seek and incorporate customer feedback to improve your products and services. Above everything, treat all customers fairly and with respect, regardless of how they interact with the bank. It also helps to provide clear and honest information about products and services.
Internal Controls
Strengthen your internal controls to prevent compliance violations and protect the organization from potential risks. No single employee must have complete control over all aspects of a transaction, and ideally, segregate duties to prevent fraud. Also, implement robust approval processes for key activities like opening new accounts or charging fees to reduce fraud.
Thus, these are the important learnings from this Bank of America case. While many of these learnings apply only to financial institutions, nevertheless, other organizations can adapt them to suit their specific businesses.
Final Thoughts
The Bank of America case shows the consequences of unethical practices and non-compliance with regulatory standards. The $250 million settlement holds the bank accountable for its actions, and more importantly, sends a strong message to other financial institutions about the importance of consumer protection and ethical conduct.
Learning from this violation, organizations can take proactive steps to enhance their compliance frameworks, promote ethical practices, and prioritize consumer trust. Financial institutions must continuously strive to balance business objectives with regulatory requirements and consumer interests to build a sustainable and trustworthy banking environment.