POLICY TIP: A comprehensive Remediation Policy
will document the bank’s general standards for
determining the scope of a lookback period, with
sufficient flexibility to accommodate specific
circumstances. It will also spell out what factors
impact the adjustment.
When a widespread issue is discovered, banks must review accounts that may have been impacted historically. Remediation
policies should set expectations for when a lookback must be
performed and if so, how far back it must go. Again, consider
setting a threshold for determining when to perform a lookback.
Relevant considerations may include whether the issue is systemic
in nature—impacting a wide range of customers for a long period
of time, or whether it is more isolated in nature.
When a lookback is warranted, it may be simple enough to
identify when the error or control failure first began to impact
the customer base negatively. For example, let’s assume the bank
realizes, six months after changing a customer disclosure, that it
had not clearly specified when a late fee may be charged, thereby
calling into question the legitimacy of the late-fee charge. The
lookback period would be a full six months—from when the
erroneous disclosure was first provided and through the time
when the bank corrected it.
Other times, it is not as simple to determine the lookback
period. For example, reasonable minds may differ about whether
a specific disclosure in a particular piece of marketing collateral
may be misleading, and thus creating a risk for potential consumer
harm. In these cases where the consumer harm arguably exists,
you may want to err on the side of caution and remediate.
But what if the collateral has been in use for many years—with
no prior indicia of consumer harm? Where do you draw the line
in the sand for purposes of implementing a lookback? The bank
will want to ensure it considers the lookback time frame consistently and with an eye toward relevant factors which impact a
remediation effort. For example, you may want to consider system
limitations and account statuses, such as paid off or charged off
accounts (some information for these items may be retained in a
limited capacity). You may also want to consider precedent—and
whether the scope or range of lookbacks for a particular event is
commercially or operationally feasible in future cases.
Depending on the nature or severity of the underlying issue
giving rise to consumer harm, it will be important to obtain advice
of counsel as there may be wider legal ramifications to consider.
This may include, for example, assessing whether the remediation
process should be performed under the advice/direction of bank
counsel for privilege reasons.
Making the Customer Whole
POLICY TIP: A comprehensive Remediation Policy
will include provisions establishing the Bank’s
commitment to make harmed customers “whole”
through a process of restitution.
Once you’ve determined there is customer harm that must be
remediated and you’ve decided how far back you need to look
to identify customers eligible for remediation, you will need to
determine how to remediate the customer to make them “whole”.
As noted above, customer harm will most often be measured in
terms of a relatively straightforward calculation of financial loss,
based on a methodology that should be clearly documented and
empirically sound. Making the customer “whole” should always
include refunding in full, all amounts due. For example, if an
incorrect service fee was imposed, then appropriate restitution
would include calculating the number of times the fee was incorrectly charged to the customer and refunding that amount. The
bank’s stated methodology would include a description of how
the incorrect fee was identified on each customer’s account, and
the process by which the excessive fees were aggregated to arrive
at the total amount of restitution due.
Time Value of Money
When measuring the scope of consumer harm, it is wise to consider the length of time the customer has been harmed by being
without their funds. Consider whether the customer should be
given any additional allotment as compensation for the length of
time it has taken the bank to make restitution. Good faith efforts
to make consumers whole and reduce the risk of a UDAAP claim
might well justify giving the customer “a little something extra”
for their trouble. Depending on the facts and circumstances of
the remediation event, this may include, for example, paying the
customer a reasonable percentage of simple interest on the amount
of funds being refunded, offering an added amount to compensate
the customer for the inconvenience, or making other accommodations to address consequential losses the customer may have had.
If you do provide the customer with an additional accommodation, remember that it could raise ancillary tax reporting
and other issues for the impacted customer. And don’t forget that
the bank will need to include these sums in its 1099 reporting.
Making Restitution on Open Accounts
For identified customers with open and active accounts, the most
efficient and effective way to provide restitution is to apply corrective action directly on customers’ accounts, thereby fixing the
issue quickly and without significant administrative compliance
burden. In most cases, this will mean re-crediting a deposit account,
re-amortizing a loan account, or taking some other steps that will
eliminate the customer harm and make the customer whole. In
addition to adjusting the customer’s account, it will be important to
notify the customer of the actions the bank has taken. [See next page
for tips on how to communicate effectively with existing customers.]
The bank’s Remediation Policy should include
a general policy statement, or guiding principles
setting forth the bank’s commitment to making
harmed customers whole through prompt and
complete financial restitution.