The summer movie line-up always includes sequels or reboots of prior box office hits and this summer has been no exception. “Mamma Mia! Here We Go Again” was released on July 20. The Bureau of Consumer Financial Protection (BCFP) also released their own sequel on that date – and “here we go again” on branch employee sales goals and incentive compensation practices.
TCF National Bank (TCF) has become the latest bank to face regulatory scrutiny for its branch sales practices. TCF, with over $21 billion in assets, is headquartered in Wayzata, Minn. and operates approximately 318 retail branches in Arizona, Colorado, Illinois, Michigan, Minnesota, South Dakota and Wisconsin. This proposed settlement, with TCF in the starring role, should serve as a reminder to all banks to review their sales and incentive compensation practices to ensure that branch sales goals, whether for new account relationships or other services, do not fail at the regulatory box office.
Procedural Background
On Jan. 19, 2017, the BCFP (then known as the Consumer Financial Protection Bureau or CFPB) filed suit against TCF in federal district court alleging that the bank had violated Regulation E, which implements the requirements of the Electronic Fund Transfer Act, and had engaged in abusive and deceptive practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in connection with its marketing and sale of overdraft services for ATM or one-time debit card transactions. On July 20, the BCFP filed a proposed settlement with TCF.
Regulatory Requirements
Regulation E was amended in 2009 to establish consumer protections on overdraft fees arising from ATM or one-time debit card transactions. Under the rule at 12 C.F.R. § 1005.17, which became effective in 2010, a bank must obtain the consumer’s affirmative consent, or opt-in, before the bank may assess any fee or charge on the consumer’s account for paying an ATM or one-time debit card transaction, such as swiping a debit card at a store, pursuant to the bank’s overdraft service. If a consumer does not opt-in to the bank’s overdraft service, the bank may decline the transaction, but it cannot charge a fee. The new opt-in rule affected both new and existing accounts.
The opt-in rule generally provides as follows:
A financial institution holding a consumer’s account may not assess a fee or charge on a consumer’s account for paying an ATM or one-time debit card transaction pursuant to the institution’s overdraft service, unless the institution:
(1) Provides the consumer with a notice in writing, or if the consumer agrees, electronically, segregated from all other information, describing the institution’s overdraft service;
(2) Provides a reasonable opportunity for the consumer to affirmatively consent, or opt-in, to the service for ATM and one-time debit card transactions;
(3) Obtains the consumer’s affirmative consent, or opt-in, to the institution’s payment of ATM or one-time debit card transactions; and
(4) Provides the consumer with confirmation of the consumer’s consent in writing, or if the consumer agrees, electronically, which includes a statement informing the consumer of the right to revoke such consent.
CFPB’s Assessment of Overdraft Program at TCF
New Account Sales Practices
In the January 2017 complaint, the CFPB alleged that the new opt-in rule posed a “serious threat” to TCF because the bank received over $180 million in overdraft revenue in 2009 and depended on this revenue stream more than its competitors. To protect this revenue stream, the CFPB alleged that the bank conducted consumer testing of its sales practices in late 2009. The CFPB alleged that the bank determined from this “Pilot Program” that the less information the bank gave to consumers about opting-in, the more likely it would be that consumers would opt-in for the overdraft service. The “Pilot Program” allegedly identified that “over-explaining” the opt-in option was an obstacle to meeting the bank’s opt-in goal
The CFPB alleged that the bank determined that if new customers were asked to opt-in at the same time they were being asked to agree to other mandatory terms and conditions of a new account, the “take rate,” or opt-in rate, more than doubled. So, the CFPB alleged that the bank placed the opt-in decision in its account agreements after a series of mandatory items the consumer had to agree to in order open the account, rather than at the time they received the mandatory notice about their opt-in rights. The bank then provided branch employees with scripts that, as alleged by the CFPB, did not explain that opting-in was optional or that opting-in permitted the bank to authorize transactions that would result in fees. The CFPB alleged that these sales practices resulted in most consumers simply initialing the terms of the account agreement and agreeing to opt-in to the overdraft service.
Existing Account Sales Practices
In the January 2017 complaint, the CFPB alleged that TCF also initiated a telephone campaign to get its customers who already had an account to opt-in using a script prepared by the bank. The CFPB alleged that TCF instructed its staff to ask customers if they wanted their “TCF Check Card to continue to work as it does today?” rather that asking customers whether they wanted to have their overdrafts covered for a $35 charge. The CFPB alleged that many customers did not understand that by choosing to have their debit card “continue to work as it does today,” they were granting the bank permission to authorize transactions and charge overdraft fees that the customers would not otherwise have to pay.
Employee Training, Incentive Compensation Practices, and Sales Goals
In the January 2017 complaint, the CFPB alleged that TCF instructed its staff not to “over explain” the terms and conditions of its opt n program. If new or existing consumers challenged or questioned opting-in, the bank instructed its staff to sell the product by suggesting a hypothetical situation, such as an emergency with high stakes where they would desperately need access to money.
The CFPB’s complaint also alleged that TCF’s opt-in sales strategy in 2010 included paying bonuses to branch staff for obtaining opt-ins from consumers. A TCF Director had allegedly indicated that the incentives were meant to “achieve as high an Opt-In [rate] as possible.” The complaint alleged that the tellers and branch supervisors “served as front line troops in the Opt-In campaign.” Branch managers at the bank’s larger branches could earn up to $7,000 in bonuses for obtaining a high number of opt-ins on new checking accounts. Frontline branch employees were also offered financial incentives to meet certain opt-in goals.
After TCF phased out the direct incentives in early 2011, the CFPB alleged that certain regional managers then instituted similar opt-in goals for their branch employees. Under this campaign, branch employees were generally required to maintain an opt-in rate of 80 percent or higher for all new accounts. Branch managers were required to meet this same goal for all accounts opened at their branch. Although the bank’s official policy was that an employee could not be terminated for low opt-in rates, the CFPB alleged that many employees believed they could lose their job if they did not meet their opt-in sales goals.
Measuring Results
The CFPB alleged that the bank’s opt-in campaign was so successful that by mid-2014, 66 percent of the bank’s checking account customers had opted in to the bank’s overdraft service. This rate was more than triple the average opt-in rate at other banks. According to the January 2017 complaint, TCF’s senior executives were so pleased with the bank’s effectiveness at convincing consumers to opt-in that they had parties to celebrate reaching sales milestones, including a party to celebrate 300,000 opt-ins and another party at 500,000 opt-ins. The CFPB alleged that senior TCF executives attended both parties.
Proposed Settlement
Monetary Restitution and Penalties
TCF did not admit or deny any of the allegations in the January 2017 complaint. Under the terms of the proposed settlement with the BCFP, TCF has agreed to pay $25 million in restitution to its customers who were charged overdraft fees and an injunction to prevent future violations. The proposed order would also impose a civil money penalty of $5 million. This penalty would be adjusted to account for a $3 million penalty imposed by the Office of the Comptroller of the Currency (OCC) in a separate order entered on the same day.
Consumer Reporting Remediation
The proposed order also requires TCF to contact all consumer reporting agencies to which it furnished information reflecting covered overdraft fees for affected consumers within the past 7 years and request that the reported information be corrected to update or remove such information. If a checking account was closed due to a negative balance caused by overdraft fees, the bank must contact ChexSystems and similar consumer reporting agencies to whom it furnished such information and request that they correct any such negative reporting in connection with the closed account.
Elena A. Lovoy is of counsel in the Birmingham office of McGlinchey Stafford and concentrates her practice in banking, mortgage lending and servicing, and consumer financial services regulatory compliance matters at both the federal and state levels. She also assists companies in all industries on data privacy issues, including the management of incident response plans.
