The Penalty If You Don’t Balance the Books

Press Releases, August 1, 2015

Temenos – Company

A regional bank had a policy of scanning a customer’s deposit slip and crediting the customer’s account with the deposit balance that was scanned unless the actual amount of the deposit was $50 more or less than the amount scanned. It did not matter whether the error was on behalf of the customer or the bank. For example, if the deposit slip showed a total deposit of $500 but the items making up the deposit only totaled $490, the bank gave the customer credit for $500. On the other hand, if the items making up the deposit totaled $510 the bank pocketed the difference. If the difference was greater than $50, the bank verified the deposit and credited the customer with the actual amount deposited. The $50 was subsequently lowered to $25, but the bank continued the same practice.

My guess is that the thinking of the bank was that an incorrect balance on the deposit slip was random and that over time the pluses and the minuses would be about equal. Some customers would benefit, and some would be harmed, but it would be about the same. In addition, the scanner apparently malfunctioned sometimes and did not get the correct amount. Again, random. The bank looked at what it would cost to verify every deposit and decided that by verifying only those where there was a significant discrepancy, the bank could save a lot of money. I don’t think that the bank was trying to get ahead or behind the game. It was just looking at ways to save operational costs.

The regulators did not look upon the bank’s practice quite so kindly. They said that because the bank’s deposit account agreement indicated that the bank would verify deposits, that meant all deposits. Therefore, the bank’s practice was determined to be an unfair, deceptive and abusive act or practice, and the excrement hit the fan. The Consumer Financial Protection Bureau fined the bank $7.5 million. But wait, there’s more. The OCC fined the bank $10 million and the FDIC fined the bank $3 million. $20.5 million in fines. In addition, the bank was ordered to make approximately $11 million in restitution to customers who did not receive the full amount of their deposits. The bank apparently had this practice from 2008 through 2013. Can you imagine the cost of reconciling four or five years of deposits? Naturally, the bank received no credit or even an “Atta boy” for the over credits it had given to customers whose actual deposits were less than the amount on the deposit slip.

The only place in the regulations that I am aware of where financial institutions are given any leeway as to what is credited to a customer account is under Regulation Z for open-end credit lines. And there, the limit is not more than $1. Without any other guidance, that is apparently the limit of the regulator’s tolerance and sense of humor. When calculating interest on either a deposit or a loan credit, most banking automation systems debit whole cents to an account and then have a bucket that carries forward partial cents to the next billing period. You might check to see what your system is doing. If you are always dropping partial cents earned on a deposit account but rounding up partial cents earned on a loan, that might attract the regulator’s ire. Also, check to make sure that there are not any other areas of your institution where you are crediting or debiting something other than the exact amount of the transaction.

Because of the amount of the fines, I have to believe that there was something else going on other than just the violation cited. Something seems to have really rankled the regulators but maybe not. Whatever the facts, this would be a bad day to anyone. Make sure that there is nothing in your institution that a rogue examiner can sink his or her teeth into.