Bank Of America Federal Lawsuit

Bank Of America Federal Lawsuit – Read Close Text by Kate Berry About Kate twitter kateberry1 mailto [email protected] linkedin kate-berry-aa69353 Feb 22, 2022, 7:32 pm 12 min EST

Federal regulators are investigating Bank of America for its role in administering government benefits under a California program that was riddled with fraud at the height of the COVID-19 pandemic.

Bank Of America Federal Lawsuit

According to sources familiar with the matter, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau are investigating BOFA’s actions as the state’s exclusive provider of prepaid debit cards to unemployment, disability and pandemic survivors. are doing

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The Office of the Comptroller of the Currency and Consumer Financial Protection Bureau is investigating Bank of America for potential weaknesses in fraud protection practices related to the administration of California’s unemployment benefit program.

Both the OCC and CFPB investigations are in the final stages, according to sources familiar with the inquiry. The OCC has indicated that enforcement action is likely, sources told American Banker.

File a lawsuit against a $3.2 trillion-asset bank that it alleges failed to respond to tens of thousands of cardholders who reported unauthorized transactions that led to account closures and fraud. in an attempt to root out legitimate beneficiaries from accessing their accounts.

The federal inquiries BofA is facing in California is an extreme example of how government contracts can create regulatory headaches for banks. Some banks with such contracts typically fail to properly value the compliance and operational risks that potentially tens of thousands of people have to answer for, experts said.

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Any fines or penalties assessed against BofA would be one of the first enforcement actions against the megabank under the Biden administration.

For BofA, a regulatory fine would add to a messy and costly defeat that has already seen 14 class action lawsuits, dozens of individual lawsuits, and thousands of fraud claims reviewed by court order.

BOFA spokesman Bill Halden said the Charlotte, North Carolina-based company’s policy is not to comment on the existence of regulatory inquiries.

But in a regulatory filing with the Securities and Exchange Commission late Tuesday, BofA warned that its dealings with California’s benefits program could put the bank at risk.

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“The Corporation’s participation in enforcing government relief measures, including pandemic and other federal and state government relief programs, processing unemployment benefits for California and certain other states, such additional judgments, orders, settlements, penalties And fines may result.” BofA said in its annual 10K. “Litigation and investigative costs, substantial legal liability or significant regulatory or governmental action against us could materially harm our business, financial condition, liquidity, and results of operations, including, and/or our reputation.”

BofA has administered California’s unemployment benefits program since 2010 under an exclusive contract with the state Department of Employment Development. The program faced unprecedented stress after California’s unemployment rate hit 16.4 percent in April 2020.

The state estimates that $20 billion of the $180 billion in benefits paid out since March 2020 went to fraudsters, members of organized crime rings and prison inmates who applied and were not eligible to collect. .

Scams reached a fever pitch in the early months of the pandemic amid attempts to take advantage of people who lost their jobs. The high-profile fraud sparked a frenzy of calls to both state agencies and Bank of America as tens of thousands of Californians complained their money was stolen through unauthorized transactions.

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Many California beneficiaries complained that they were turned away when they contacted customer service trying to resolve discrepancies. Some said they could not access their money despite waiting on hold for hours. Many said they could not get a response from BOFA or the Department of Employment Development. Others said that when they reached out to BofA, they were told to speak with the EDD, or the department referred them to the bank.

“California, like many states, decided at the beginning of the pandemic that it was better to pay people than to withhold any money,” said Haywood Takoff, fraud expert and CEO of Lexus Nexus Special Services.

The Department of Employment Development said the fraudsters were able to backdate the claims and self-verify their eligibility because the federal pandemic unemployment assistance program does not require prior income or employment verification. Additionally, EDD’s contract with BofA dates back to 2010, before chip card technology was in widespread use.

“A lot of the funding went into the hands of really needy workers,” said an EDD spokesperson.

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“BofA was completely caught off guard trying to deal with fraud,” said David P. Weber, professor of forensic accounting at Salisbury University’s Purdue School of Business. He is former Special Counsel for Enforcement at the OCC and former Supervisory Counsel at the Federal Deposit Insurance Corporation.

Weber reviewed thousands of relevant documents related to BofA’s administration of the Employment Development Department program as an expert on former CBS investigations of bank failures. Weber said Buffa underestimated the risk of the program and left it to technology. EDD’s prepaid debit cards used outmod magnetic stripe technology, not EMV chip technology that provides more sophisticated authentication to protect consumers from fraud.

While the state agency has taken the brunt of criticism in the legislative investigation, “the responsibility for consumer protection ultimately rests with the depository institution,” Weber said. “Policies, procedures, risks and controls are the responsibility of the bank.”

Over the past two years, the bank has provided unemployment benefits to 9 million Californians through prepaid cards, said BofA spokesman Haldane.

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“With California’s unemployment program facing tens of billions of dollars in fraud, Bank of America’s goal has always been to ensure that legitimate recipients can access their benefits,” Halden said.

In its best year, BofA’s contract with EDD generated $1 million in pretax income, according to BofA. The bank’s revenue-sharing agreement with the state allows it to earn revenue from interchange fees paid by merchants with each swipe of a prepaid card.

BofA told state lawmakers last year that it earned $687 million in total revenue but spent $927 million in the 10-year period ending Dec. 31, 2020, bringing the program’s total loss to date to $240 million. reached the dollar.

Still, BofA’s losses in the program are a small fraction of its annual profits. In the fourth quarter, BofA posted net income of $7 billion on revenue of $22.1 billion.

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Regulators are reviewing whether BofA responded promptly, as required by law, to customers who allege errors or fraud in their accounts, according to sources familiar with the matter.

The key issue is whether BOFA complies with the Electronic Funds Transfer Act. The 1978 law required banks to complete an investigation within 45 days and provide temporary credit within 10 days of the cardholder being notified of an error such as an unauthorized transaction during the error investigation. On the 45th day, if fraud is detected, the entire credit becomes permanent.

This law was passed decades ago when modern computer technology enabled quick and easy access to deposits. As with consumer protection legislation, EFTA has no immunity or leniency provisions for cyber-attacks or organized fraud, leaving banks vulnerable to regulatory scrutiny.

The CFPB has jurisdiction over EFTA and its implementing statute, Regulation E. The CFPB issued a compliance bulletin on February 15 that explained the obligations of banks and other financial institutions under EFTA and Reg E.

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“EFTA consumer protections apply to government benefit accounts and financial institutions can be held liable for violating this requirement,” the consumer bureau said.

The first proposed class action against BofA, filed last year by 25 unemployed people, alleges the bank breached its contract with cardholders by failing to protect customers from fraud.

Brian Dentz, a partner at the San Francisco law firm Kochette, Pitre & McCarthy, filed the lawsuit alleging that BofA tried to avoid paying millions of dollars in temporary and permanent credit after the fraud complaint. Dantz alleged that BofA knowingly denied the cardholder’s claim without justification.

“BofA promises that if an unauthorized transaction occurs, they will not only comply with Reg E, but they will ensure that there is no liability for the cardholder,” Denitz said. “When fraud began to occur during the pandemic, Bank of America summarily denied these claims to avoid compliance with Reg E. It was a deliberate, cold-hearted decision based purely on the bottom line.”

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BofA also told California lawmakers that it faced a deluge of 40,000 fraudulent claims a month from late 2020 to early 2021. That’s when he began using a “fraud filter” of his own design to weed out criminals.

The bank told state lawmakers in December 2020 that it had paid out “hundreds of millions of dollars” in temporary credit to fraudsters who cheated the state on eligibility for benefits, and then claims to get temporary credit. Tried to double by filing.

The bank’s own fraud detection program showed significant flaws, however, treating many honest people as if they were frauds.

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