Garnet Capital Advisors Blog

Citizens Bank and two of its subsidiaries have been fined more than $34 million for inconsistencies and unfair practices regarding its deposit processing. The fine, which includes compensation to victims, a civil penalty and federal penalties, could have a more widespread effect on other financial institutions around the country.

The key concern is that the news of Citizens' punishment may open up other banks to increased scrutiny from the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

CFPB leads action against Citizens
In a recent press release, the CFPB outlined the violations and the penalties against Citizens Bank and its subsidiaries - Rhode Island-based Citizens Bank NA and Citizens Bank of Pennsylvania. According to the bureau, the financial institution had a number of irregularities with its deposit processing between 2008 and 2013.

During that time, Citizens had deposited less money in accounts than outlined on deposit slips. Citizens did nothing to address the issue, while any difference was pocketed by the bank itself. Therefore, consumers have lost millions of dollars over the five year span, according to the CFPB.

"Citizens Bank regularly denied customers the full credits of their deposits when there were discrepancies between deposit slips and the actual money transferred into the bank," CFPB Director Richard Cordray explained in a statement. "The bank chose to ignore these discrepancies and harmed many consumers by pocketing the difference."

In addition to a lack of reimbursement, Citizens was also penalized for falsely claiming that it would verify all deposits. An outline of the penalties from the CFPB include $11 million for victims, a $7.5 million civil penalty and $20.5 million in federal penalties.

Penalty could affect other banks
According to American Banker, the initial tip about the Citizens Bank violations came from a whistle-blower, and this could be the beginning of future actions against other financial institutions.

The reason is because of the nature of the violations - an inconsistency between the amount on a deposit slip and the amount actually transferred into a bank account. This is likely related to the actual processes used by Citizens, and not an issue of malicious intent. As some observers told American Banker, this type of problem is not uncommon among banks.

Furthermore, it may appear that Citizens Bank is being used as a warning sign for all other financial institutions. Led by the CFPB, the mission since the financial crisis is to crack down on any irregularities in banking processes.

"My sense is that the government has decided to send a message to the industry about a common banking practice, and rather than giving direction to the industry through a rulemaking or guidance, they are sending a directive to the industry through an enforcement action," Andrea Mitchell, a partner at Buckley Sandler, told American Banker.

Should you have any questions about the current landscape of the financial services industry, feel free to reach out to the loan sale advisory firm Garnet Capital Advisors for more information.