Bank of America, the United States’ second-largest bank, has been ordered to pay $250 million in fines and customer compensation due to a series of deceptive practices, as reported by the Consumer Financial Protection Bureau (CFPB).
Even for an institution the size of Bank of America, it’s a significant sum – and that, alongside the reputational damage, is likely to have an effect on the company’s stock performance.
This significant development also sheds light on certain banking practices that harm consumers and underscores the importance of regulatory bodies in maintaining trust and transparency within the financial system.
Misconduct and Monetary Penalties
In this instance, the penalties went two ways as the CFPB’s revelation of Bank of America misconduct has led to one of the highest financial penalties imposed on the banking giant in recent years. Unlawful practices such as double-charging customers for non-sufficient funds (NSF), withholding credit card rewards, and opening unauthorized accounts were cited as reasons for the fine.
These unfair practices have led to a settlement between CFPB and Bank of America. That settlement breakdown includes $90 million to the CFPB, $60 million to the Office of the Comptroller of the Currency (OCC), and $100 million in customer restitution, with further amounts owed to consumers who were denied their rightful rewards bonuses.
In other words, the ruling combines both a substantial fine – and avenues for customers who suffered from unfair practices to recoup some of their losses.
‘Double-Dipping’ on NSF Fees
Non-sufficient funds fees (NSF fees), also known as bounced-check or returned-item fees, are charged when a customer’s account lacks sufficient funds to cover a transaction. Traditionally, these fees were levied to discourage customers from writing checks they couldn’t cover, but with the advent of electronic banking and debit cards, the dynamics have changed.
Bank of America had a policy that charged customers $35 for NSF fees whenever transactions were declined due to insufficient account funds. The larger problem, however, was the fact that the company kept charging this fee repeatedly for the same transaction.
This unfair double-dipping generated “substantial additional revenue” for the bank (at the cost of its customers) and was a significant contributor to the penalties incurred.
Recognizing the harm this practice caused consumers, BOA took the initiative in the first half of 2022 to eliminate all NSF fees and reduce overdraft fees from $35 to $10. This reform led to a more than 90% drop in revenue from these fees, but the damage had already been done. On an ongoing basis, however the reduction in fees will mean less damage for customers.
Accused of Unauthorized Account Opening
Fraudulent account opening is a severe breach of trust that can significantly damage a customer’s financial health. In BOA’s case, employees were found to have been opening unauthorized credit card accounts dating back to at least 2012 to reach sales-based incentive goals – though the incentive plans at the core of the matter are no longer in place.
The harm inflicted on consumers extended beyond unwarranted fees. These unauthorized accounts could have led to erroneous credit reporting, potentially lowering credit scores and impacting consumers’ ability to secure loans or other financial services.
It is a grossly unfair practice which mirrors what we saw in a 2017 scandal involving Wells Fargo, highlighting a disturbing pattern within the industry.
Withholding Credit Card Rewards
BOA was also found guilty of wrongfully denying credit card rewards to tens of thousands of consumers. In many cases, these were consumers who submitted applications in person or over the phone instead of online.
Credit card rewards are incentives that encourage customers to use their cards frequently. They can come in the form of cashback, points, or miles. Some cards also offer one-time bonuses for new users. These rewards are often linked to the amount you spend using the card.
These rewards are often significant factors in consumers’ choice of credit card. By failing to honor these promised rewards, BOA not only breached the contract but also eroded customer trust.
BOA’s Response In View Of A History of Offenses
Despite the severity of the allegations and the magnitude of the penalties, BOA has been somewhat silent on the issues. We did hear the admitting that it was taking steps to mitigate unethical practices like NSF fees, but it has yet to address the CFPB’s allegations about the opening of fake credit card accounts and wrongful denial of reward points.
But there’s a long history of transgressions. In 2022, BOA was fined for unlawful wage garnishments and the mismanagement of unemployment benefits during the pandemic. Earlier, in 2014, the bank was ordered to pay $727 million in redress for illegal credit card practices.
The CFPB’s proactive stance against illicit banking practices such as ‘junk fees’ has had a profound impact on the industry. The recent penalty against Bank of America serves as a stark reminder to all financial institutions about the importance of upholding ethical practices and the costly consequences of undermining consumer trust. As consumers, it’s crucial to stay informed about these practices, understand their rights, and know where to turn when things go wrong.
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