On April 18, the FDIC announced a consent order against a Delaware-based bank alleging that the bank engaged in unsafe and unsound banking practices and violated various federal consumer protection laws, including Section 5 of the FTC Act, the Truth in Lending Act (TILA), and the Servicemembers Civil Relief Act (SCRA).
According to the FDIC, the bank:
- Misclassified millions of consumer credit cards as commercial accounts. The misclassification allegedly lasted for approximately 17 years and caused the accounts to be hit with higher interchange fees.
- Overcharged merchants by more than $1 billion. The higher interchange rates were passed on to merchants using the bank’s proprietary network, resulting in substantial overcharges.
- Violated federal consumer protection laws. The FDIC alleged that the bank’s practices constituted unfair acts or practices under Section 5 of the FTC Act, and also cited violations of TILA, SCRA, and the Electronic Records and Signature Commerce Act.
The Consent Order requires the bank to distribute a minimum of $1.225 billion to adversely affected merchants, merchant acquirers, and other adversely affected parties and $150 million penalty to the U.S. Treasury.
In addition to the monetary penalties, the bank will be required to take extensive corrective actions, including enhancing its board oversight, risk management framework, consumer compliance program, vendor management procedures, and controls surrounding account classification. These measures must be implemented through clearly defined plans, subject to review and non-objection by the FDIC, and are designed to ensure ongoing compliance with consumer protection laws and prevent future harm.
Putting It Into Practice: While the future of CFPB enforcement and regulation remain somewhat unclear under the Trump administration, both federal and state regulators continue to actively pursue enforcement actions to address consumer protection violations (previously discussed here and here). This enforcement action reflects the FDIC’s heightened focus on ensuring that financial institutions maintain robust compliance systems capable of identifying and preventing such violations.