During the height of the pandemic, unemployment and other benefit payments ballooned, and payments made to a prepaid card for benefits increased accordingly. Nearly every state in the U.S. reported rampant fraud as crime rings took advantage of weak systems to create fake claims and to steal funds from those who legitimately should have received benefits.
Bank of America, which has run the prepaid card program for the State of California for over a decade, is being scrutinized by The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau for they way they handled payments for false claims and inquiries of fraudulent transactions. According to the American Banker, the bank’s compliance with Regulation E is under review. They are also being criticized for not using prepaid cards with EMV chip technology, despite the State of California’s refusal to pay for the more secure technology. It makes a bank think twice about supporting these types of programs.
Here are some key excerpts from the article:
Federal regulators are investigating Bank of America for its role in administering government benefits under a California program that was plagued by fraud at the height of the COVID-19 pandemic.
Both the OCC and CFPB investigations are in their later stages, according to sources familiar with the inquiries. The OCC has indicated that an enforcement action is possible, the sources told American Banker.
The federal inquiries BofA is facing in California are an extreme example of how government contracts can create regulatory headaches for banks. The few banks that have such contracts generally have failed to properly price in the compliance and operational risks of potentially having to respond to tens of thousands of people, experts said.
Many California beneficiaries seeking to resolve discrepancies complained they got a runaround when they contacted customer service. Some said they couldn’t access their money, even after waiting on hold for hours. Many said they couldn’t get any response from either BofA or the Employment Development Department. Others said that when they got through to BofA, they were told to speak to the EDD, or that the department referred them to the bank.
Regulators are looking into whether BofA responded promptly, as required by statute, to consumers who alleged errors or fraud on their accounts, according to sources familiar with the matter.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group