VIDEO: Reopening A Closed Deposit Account
In this Halloween special Compliance Clip (video), Adam discusses a spooky topic: raising an account from the dead. Well, it’s not really creepy in the Halloween sense, but reopening a closed deposit account is a risky practice, and Adam discusses why, citing a recent enforcement action.
Video Transcript
The following is a transcript of this video.
Thank you so much for joining us for our Halloween special Compliance Clip. This is a spooky topic because we're going to be talking about raising accounts from the dead - in other words, we’re talking about reopening a closed deposit account.
So the question we've had come in is this: can we reopen a closed deposit account?
This is a practice that some banks have been doing for decades. I don't know if your financial institution is doing this, but this is a very spooky topic. That's why we brought this up as our Halloween special this year.
Now, the answer to this is a little bit outside of the compliance realm because this really is a question for an attorney. It has to do with your legal contract and the legal rights you have to reopen a closed account, but what we can do is we can take a look at a recent enforcement action from the CFPB that gives us a pretty good idea of how this is viewed by the regulators. So let's take a look at what this enforcement action is.
This enforcement action relates to USAA Bank. In this enforcement action, the CFPB stated the USAA bank engaged in unfair acts or practices by reopening closed consumer deposit accounts in certain circumstances without providing timely notice. So USAA had this practice where they were sometimes reopening a closed deposit account without providing timely notice to consumers. And the CFPB called this an unfair, deceptive act and practice. So that is the regulation that the CFPB hung their hat on. It wasn't any other type of consumer deposit compliance regulation like Regulation DD or Regulation CC. This is, again, more of a legal contract. And so when financial institutions are not following what their contract says they will do, and there's consumer harm, that's when the regulators use UDAAP, an Unfair, Deceptive and Abusive Act or Practice, as their citation for enforcement actions. And that's exactly what we saw here. So let's take a little bit deeper dive into what the CFPB found.
Specifically, the CFPB said that the bank reopened the accounts without obtaining the consumer’s prior authorization and providing timely notice to consumers informing them when their accounts had been reopened. Now, I understand a lot of you are not doing this practice, but I know there are some financial institutions that have been doing this, possibly for decades. And when you ask them why they're doing this, they say, “Well, it's just what we've always done.” If that's the case, what you really need to do is consult an attorney, but you need to be looking also to see if you are obtaining the consumer's prior authorization and providing them timely notice, letting them know that the accounts have been reopened.
So first of all, you need to take a look at your legal contract to see if that's even a possibility. And then if you are doing this, you should be obtaining the prior authorization and informing them when the account has, in fact, been reopened.
Now let's move on. It was found that USAA reopened accounts to process debits and when they did this, some account balances became negative and therefore potentially subject to various fees, including overdraft fees and fees for non-sufficient funds. So the CFPB had issues when these accounts were being opened to process debits because it was overdrawing the account, it was causing fees and it was having a negative effect on the consumer.
Now when they were processing credits, the CFPB also had a concern. So the credit would be when money's going into the account, you would think, well, that's a good thing for the consumer, we're helping them out. Well, here's what the CFPB said about that. They said when USAA reopened an account to process a credit, creditors had the opportunity to initiate debits to the account and draw down the funds, possibly resulting in a negative balance and the accumulation of fees.
The bottom line is that USAA's practice of reopening consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers. So at the end of the day, that's what UDAAP is concerned about. Are you, number one, doing what your disclosures and contracts say you're going to do? And if you're not doing what your disclosures or contracts say you're going to do, that's where UDAAP becomes a risk for your organization. Secondly, under UDAAP, if you're causing consumer harm, that significantly outweighs your risk of a UDAAP violation. So in your financial institution, it's very important to have this risk management conversation if you are, in fact, raising accounts from the dead.
Again, there's not a hard regulation on this, but this is a risk conversation your organization needs to have. You really should seek legal advice if you are, in fact, reopening closed deposit accounts because the risk of course is having a UDAAP violation that causes substantial consumer harm.
So that's it for this Compliance Clip.