It is no surprise.

As Congress contemplates transferring consumer protection functions to a new consumer financial protection agency or bureau, federal banking agencies are growing more aggressive in wielding their authority to curb unfair or deceptive acts or practices. As a result,  banks should expect that regulators will be scrutinizing their relationships with certain sellers and third-party payment processors.

A recent example of this is the April 19, 2010 announcement by the Office of the Comptroller of the Currency that it had settled charges that T Bank, N.A., Dallas, had engaged in unfair practices under Section 5 of the Federal Trade Commission Act and unsafe or unsound banking practices through its handling of the account activities of a third-party payment processor for telemarketers and Internet merchants (sellers).

The charges involved remotely created checks (RCCs) and other similar instruments the processor created using consumer bank account information collected from the sellers and then deposited into the sellers’ accounts at T Bank. According to the Consent Order for a Civil Money Penalty, a “substantial number” of these instruments were returned to T Bank for various reasons, including that the consumers had not authorized removal of the funds from their accounts. The OCC stated that in some cases the return rates exceeded 60 percent of the total deposited.

The Consent Order recites that T Bank’s improper practices included inadequate due diligence before opening the accounts, inadequate monitoring of the rate of return on the instruments, and inadequate policies, procedures, systems, and controls relating to T Bank’s relationship with the sellers.

The Consent Order requires T Bank to pay a $100,000 civil penalty, and T Bank’s settlement agreement with the OCC requires it to pay $5.1 million in restitution to affected consumers. The settlement restricts T Bank from entering into new relationships with:

  • Telephone, Internet, or direct mail merchants that deposit RCCs
  • Payment processors that regularly deposit RCCs on behalf of such merchants
  • Any originator or merchant that has a monthly average RCC return rate above 2.5 percent or a monthly average of unauthorized ACH return rate above 1 percent
  • Payment processors for originators or merchants with such return rates

Before entering into such relationships, T Bank must develop policies, procedures, and standards for them and submit those items to the OCC for review and a determination of supervisory non-objection.

A similar alleged scheme involving the use of RCCs by telemarketers and payment processors led the OCC to enter into a settlement in 2008 requiring a different national bank to pay more than $150 million in restitution. The alleged scheme also led to a private class action in which the bank’s conduct was characterized as racketeering. The lawsuit was settled in conjunction with the OCC settlement.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

Copyright © 2010 by Ballard Spahr LLP.
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