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Regulators Issue New Guidance on Expectations of Deposit Reconciliations: Beware of the UDAAP Implications

By Thomas A. Brooks, Joann Needleman / May 20, 2016

In response to a recent consent order against a depository institution and several other examinations of major banks, five federal financial regulators have issued an inter-agency guidance ensuring that depository institutions are aware of the agencies' supervisory expectations relating to customer deposit account reconciliation. The five agencies are the Board of Governors of the Federal Reserve System (Federal Reserve), the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of Currency (OCC).

For years, prudential regulators, in the course of their examinations, have uncovered discrepancies in deposit reconciliations. Because the focus of these examinations primarily were concerned with safety and soundness issues, the discrepancies were noted but viewed as minor, especially in those instances where the error was in the consumer's favor. The discrepancies were certainly not prevalent enough to be the subject of an assessment of a penalty against the institution. The CFPB changed that paradigm by concluding in a recent consent order  that the failure to adequately reconcile deposit accounts posed significant risks to consumers.  

The guidance now mandates that all depository institutions have written policies and procedures to prevent such discrepancies. The agencies found that adequate technology is available to fully reconcile all depository accounts while at the same time acknowledging that reconciliation cannot happen 100% of the time, even with technological enhancements.

The Expedited Funds Availability Act (EFAA), implemented by Regulation CC, requires that financial institutions make funds deposited in a transaction account available for withdrawal within prescribed time limits. The agencies determined that failure to adequately reconcile accounts might prohibit consumers from having timely access to the correct amount of funds. The agencies also warned that failure to comply with EFAA and Regulation CC could result in civil liability and enforcement actions by the appropriate agency. More importantly, the guidance refers to Section 5 of the Federal Trade Commission Act, which prohibits any financial institution from engaging in unfair or deceptive practices as well as Section 1036 of the Dodd-Frank Act, which addresses unfair, deceptive acts or practices (UDAAP). This appears to be the first instance where particular conduct by a financial institution has been described as a UDAAP.

Financial institutions, regardless of their size, should immediately review their written policies and procedures to ensure that deposit reconciliation is adequately addressed. Any technology used in this process must be assessed to determine that reconciliations are done correctly and accurately. Re-training of employees and staff could be required as well as the testing of internal controls to ensure that future deposit discrepancies are detected and remediated quickly. 

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Clark Hill's Consumer Financial Services Regulatory & Compliance Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in - and an in-depth understanding of - the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.