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Chase Bank and The Very Bad, No Good, Unclear Regulation

Posted on | January 27, 2013 | 9 Comments

I am currently undergoing a ridiculous ordeal with Chase Bank. A situation that is so absurd, it should embarrass the entire banking industry. Bear with me as I take you through it, I’m going to give you as many of the steps as possible so you can appreciate the ride for yourselves.
(if you want the abridged version, skip to the end for the most recent bits)

Early this week, I received a call from someone claiming to be from Chase (this was supported by the caller ID) He informed me that “Chase Risk” has reviewed their policies and decided to sever relationships with certain types of businesses, specifically third-party providers, because they were considered “high risk”. They determined that, as a payroll company, my business is a third-party provider and they would no longer host my account.

He repeatedly told me it was nothing I had done and I shouldn’t take it personally. He admitted that my account is blemish free and so should be the type of account they would normally want to keep. He could not come up with an explanation as to why my business was suddenly a risk.

After a lot of back and forth that went nowhere, he said he would take my cell number and check with a supervisor for more info. I was very angry for a while, but on my drive home I started to think it was too absurd to be real.

  • I called my local branch (Branch A), who said they had never heard anything like that and I should call the branch where I opened my account.
  • I called that branch (Branch B), and they also said they had no idea what the call was about but directed me to customer service, just in case.
  • I called Chase Customer Service who said they weren’t aware of any such thing, but that it sounded like their verbiage. They directed me to Chase loss prevention.
  • I called Chase Loss Prevention who said there was no program like that to their knowledge and the phone number from my caller ID didn’t track back to any of their departments.

So, at this point I chalked it up to a hoax or phishing attempt. Perhaps they thought I would be so distraught I’d be willing to give up confidential data to “verify” my account? I figured they didn’t get the reaction they wanted and so that would be the end.

Two days later, I got a call from a business banker at Branch A telling me that “Chase Risk has evaluated our accounts and has determined that we must sever relationships with all third-party providers. As such, we will be closing your _____________ account in the next 30 days.” I could not get her to tell me how the decision was made, or give me anyone to talk to that had the information or power. She just kept telling me that businesses in my sector were considered a risk – though she could not expand on what exactly that risk might be. Had to hang up on her due to my growing level of frustration.

At this point, all I am left with: “Your business is risky

You know what? All businesses are risky, particularly to the business owner. They are also most risky in the early years, not after more than 6 years of stable operation.

My business consists of me providing a service, billing a client, receiving a check, and depositing it in my account. There is no more risk to Chase Bank from my processing payroll than there would be if I sold Avon or mowed lawns.
Chase Bank message
At this point, I had resigned myself to the fact that I must relocate my accounts. Of course, that means moving ALL my accounts, not just the one in question, because I have no intention of doing business with a company that doesn’t want to do business with me.

Friday, I got a call from a business banker at Branch B. He was calling because it seems that first call I had received was from his underling who was concerned at how upset I had become and passed my number on. He wanted to see if there was anything he could do for me, but was reiterating the fact that my account would be closed. Again, he was unable to explain how my account suddenly presented a risk.

He did tell me, though, that the change was because of a new OCC regulation that required them to monitor the business practices of their third-party providers and, since they were unable to monitor the business practices of all their customers who provide those services, they were electing to cease servicing them. He tells me repeatedly that the decision was based on government regulation over which Chase had no control.

Now, far be it for me to doubt our government’s willingness to crush businesses, but this seemed too odd. I spent the day researching and found several things.

The “regulation” he mentioned is not a regulation, so much as a regulatory suggestion. It also is at least a decade old. It states that banks, in order to maximize profit and utilize broader expertise, have turned to third-party providers for such things as loan origination, credit card processing, and foreclosure services. This presents risk, in their estimation, because customers perceive they are doing business with the bank itself. If proper business procedures are not followed, the bank would be at risk. Therefore, banks are obligated to monitor the activities of any third-party providers. They state, very clearly, however, that they are referring to third-party providers operating on the banks behalf, or at their behest.

The “new” piece of the puzzle is the Risk Review issued by OCC (apparently the first one they’ve ever bothered to publish) In the report, they claim banks are under pressure to be profitable and so are being lax with their oversight, specifically with loan origination and third-party providers – who they again clarify as working on the bank’s behalf.

In other words, if I was processing the payroll for one of their branches, or they were recommending my services to their depositors, they would be opening themselves to risk and would be obligated to monitor my practices (or cut ties if they were unable). As it stands now, however, my business as a payroll processor presents no more risk to Chase Bank than it would if I sold cupcakes.

So, did a Chase executive read the Risk Review, misread the regulation and panic, flagging all business accounts they thought might provide third-party services for closure? Unlikely. Banking execs are not always known for making great decisions, but such horrible reading comprehension seems a bit much, even for them.

Did a Chase executive read the Risk Review, decide to sever ties with the third-party providers they had previously used? More likely. Said exec sends out a memo to the effect “We have decided to sever business relationships with all third-party providers”, but they don’t clarify what that means. Whether they simply don’t think to include a definition or consciously don’t believe it is necessary, they are clearly wrong.

When that memo reached the regional level, it was read to mean that any business account associated with any kind of third-party provider, rather than just those they are obligated to monitor, will be closed.

This incident is a serious indictment of the current lack of critical & independent thought. Several people at multiple branches received direction to, basically, flush a large group of good, long-term customers and they all followed through without the slightest hesitation. None of them thought to question the action, none of them asked for more information. Not one of them was willing to look at MY case, or MY accounts, and consider ME as an individual, a good customer. Not one of them even felt a blip of remorse about what they believed their employer was doing.

It may turn out that I am wrong about this.
It may turn out that I am right and Chase will still sever the business “relationship”.

But, I’ll be damned if I am going to just let something like that slide without putting up a fight – and doing a bit of research.

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UPDATE (2/1/13): Just received a debit card for the business account Chase is threatening to close. Still, as yet, have not heard back from the business bankers for whom I left messages. Someone should be able to tell me “Yes, you are right” or “No, you are wrong”. Of course, that would involve someone understanding the situation.

UPDATE (2/7/13): It appears I finally called to the right person and my accounts won’t be closed. I am planning on writing a full recap, but as of 2/24 I am still not sure what all needs to be said.

UPDATE (4/7/13): It appears I was wrong about having talked to the right person. My payroll company account has been closed – and a check sent to me, so I have no access to those monies until it arrives in the mail. When I went to find out why I could not access that account, I found that my landlord account, which I use for processing rents on my own properties, had been flagged for closure within the week because “there is a chance you may be a property manager. We consider that to be a third party vendor and so can not do business with you”. Despite being able to prove the property is mine – and despite all of the above about the bank having no business in my business, and no risk from it – they would not budge. Thankfully I was able to get that money out & move it to a new bank before they tied it up, as well.
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UPDATE (1/30/13): Adding excerpts below for those who prefer not to slog through the linked papers:

  • “Banks utilize third parties in three main ways:
    1. To perform functions on the bank’s behalf. A bank contracts with third-party servicers to perform functions of the bank’s operations rather than conduct them internally (commonly referred to as “outsourcing”).

    This type of third-party relationship covers a wide variety of arrangements, including core information and transaction processing. Banks also may use third-party servicers to provide back-office management and support, such as electronic funds transfer, payroll processing, and mortgage servicing.”

  • • Third-party arrangements can be a legitimate and safe way to gain a competitive edge and improve earnings.
    • Management and the board remain responsible for managing the relationship.
    • Risk-management system should be commensurate with the risks posed by the arrangement and management’s expertise to oversee the activity.
    • Third-party arrangements should be subject to the same risk-management, privacy, security, and consumer protection policies that would be expected if the bank were conducting the activities directly.

  • “A Supervisory Perspective

    Before engaging in any third-party arrangement, a financial institution should ensure that the proposed activities are consistent with the institution’s overall business strategy and risk tolerances, and that all involved parties have properly acknowledged and addressed critical business risk issues. These issues include the costs associated with attracting and retaining qualified personnel, investments in the technology potentially needed to monitor and manage the intended activities, and the establishment of appropriate feedback and control systems. If the activity involves consumer products and services, the board and management should establish a clear solicitation and origination strategy that allows for after-the-fact assessment of performance, as well as mid-course corrections.

    Proper due diligence should be performed prior to contracting with a third-party vendor and on an ongoing basis thereafter. Management should ensure that exposures from third-party practices or financial instability are minimized. Negotiated contracts should provide the institution with the ability to control and monitor third-party activities (e.g., growth restrictions, underwriting guidelines, outside audits) and discontinue relationships that do not meet high quality standards.

    Reputation, compliance, and legal risks are dependent, in part, upon the intended activities as well as the public perception of both the financial institution’s and the third party’s practices. Therefore, careful review is warranted, and an adequate compliance management program is critical. In some cases, an institution may need processes in place to handle potential legal action. In any case, management should establish systems to monitor consumer complaints and ensure appropriate action is taken to resolve legitimate disputes.

    Finally, an institution’s audit scope should provide for comprehensive, independent reviews of third-party arrangements as well as the underlying activities. Findings should be provided to the financial institution’s board of directors and exceptions should be immediately addressed.”

  • “Bankers and examiners alike deal with third-party arrangements on a regular basis. Third-party arrangements can help financial institutions attain strategic objectives by increasing revenue or reducing costs and can facilitate access to needed expertise or efficiencies relating to a particular activity. However, inadequate management and control of third-party risks can result in a significant financial impact on an institution, including legal costs, credit losses, increased operating costs, and loss of business.

    As illustrated in the preceding examples, the risks inherent in third-party arrangements are not significantly different from other risks financial institutions face. In fact, the risks are often the same—the difference is where to look for them. Likewise, the framework for risk management is very similar. Risks should be identified, activities managed and controlled, information monitored, and processes periodically audited. Identified weaknesses should be documented and promptly addressed. As with any other undertaking by a financial institution, poor strategic planning, inadequate due diligence, insufficient management oversight, and a weak internal control environment are common elements in problem situations. Similarly, the primary element for success is effective management.”



Comments

9 Responses to “Chase Bank and The Very Bad, No Good, Unclear Regulation”

  1. Doug
    January 27th, 2013 @ 6:00 pm

    Sounds like unintended consequences and it sounds like another bank will gain at Chase’s expense.

  2. ChaseRiskAnalyst
    January 30th, 2013 @ 7:29 am

    You may want to pull your ChexSystems and EarlyWarning Systems report and make sure nothing derogatory is on file for yourself or your company. 99% of the time that is what will cause a risk closure.

  3. Vox AZ
    January 30th, 2013 @ 11:17 am

    Nope, nothing derogatory. In fact, the associates who called to tell me my account would be closed were VERY clear that it was nothing I had done & no reflection on me “personally”

    I also called the risk/loss prevention directly and was told there was no blemish or note in my account that would trigger a closure.

    Just the misread OCC reg.

  4. Mary
    January 30th, 2013 @ 4:41 pm

    This is absolutely incredible. Chase stands to lose millions in revenue for stupidity. Of course they, and other banks, probably do that on a daily basis, but this is so blatant. And how many levels did it pass through without one person exercising their critical thinking skills. I am just going to have to walk away shaking my head and let this process. Really, there are no business banker executives that are more intelligent than this? No wonder smart people have trouble getting jobs, stupid people got them and they are randomly signing off on regulations because it is easier tahn taking the time to think for themsleves.

    Okay, probably better leave now before it gets much worse. In summary: WOW!

  5. John Moore
    February 3rd, 2013 @ 4:13 pm

    The big banks seem to have no soul and no brain. Bank of America ruined my credit rating for 5 years or so over a misunderstanding. I had canceled one of the Visa accounts and they kept it open, and then when I didn’t pay the annual fee (I was throwing away the envelopes from them – I thought they were solicitations – the thing was supposed to be closed), they had a collection agency go after me for $87. So, I paid them off so the whole thing would go away.

    The bank later explained, when I discovered the credit ding a few years later, that if I had not paid the collection agency (who, after all, had in good faith bought what they thought was a bad debt from the bank), then my credit would *not* have been wrecked. So stiff the collection agency, and fine – that’s their advice!

    I also worked with someone who had previously worked for a big bank I don’t dare name. That person was present at a meeting where the staff was analyzing postal delivery times. The purpose: for each area where a cardholder lived, how to maximize the time to get the statement to them, and for the payment to come back, in order to create late fees which are a big source of profit for the banks. This is one reason your statement may come from one obscure city and have to be sent back to a different one.

    Even though my credit has been fine for a few years now, I’m shifting my banking arrangements. It may be that a local bank or credit union (especially the latter) may make more sense. Local means: they have to care. Besides, after the way the banks participated in blowing up the world in 2008, I’m not real fond of big banks – even being the evil capitalist that I am.

    We shall see.

  6. Vox AZ
    February 4th, 2013 @ 9:26 am

    I wish I could find a reliable local bank, they all seem to have been swallowed up.

    I tried a credit union a few years back; besides lacking any convenient locations, they couldn’t handle my business accounts, they had a policy to “hold” all checks for a week (even those drawn on their bank, even if they cleared the check writers account immediately, etc) Plus, I guess due to lack of branches, they were always packed. I don’t want to wait 15 minutes for a teller or 45 minutes to talk to a banker.

    Certainly Chase (and the others) could find employees with two brain cells to rub together. In this economy, with so many competent people out of work, they should have their pick of sharp minds – why don’t they hire some?

    Incidentally, it is now February 4th and I have still not gotten confirmation of what is or is not happening to my account. I am guessing that after I left the voice mails explaining the OCC regulation, they just decided to pretend they had never called and alienated their customers in the first place.

  7. nevi
    April 28th, 2014 @ 9:41 pm

    I just had the same letter for my personal and biss acc. Well time to move to Citi Bank 🙂

  8. Vox AZ
    April 28th, 2014 @ 10:17 pm

    It is so crazy. Now they apparently won’t allow you to deposit cash, into your own account, without I.D.

    Is there a rash of people randomly depositing cash in other people’s accounts? Because I would like to go on record as being just fine with a stranger fattening up my balance 🙂

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