Several years ago, we stopped offering a CD product that allowed customers to make deposits after initial account opening. Any language related to this product was removed from our CD disclosures. The product is no longer listed on our product sheet. A year later, a customer was allowed to open a CD under the discontinued terms. Audit caught the error and the system was updated to reflect a standard product. However the customer was not informed he could not continue to make deposit. This was recently uncovered in another audit finding. The Deposit Ops Manager is insisting the deposits be allowed to continue. She also increased his rate to a special rate and refuses to change it, even though the Board voted several months ago to stop offering this rate on specials due to cost of funds concerns. The rate is double the local average.

I know this is a lot to unwind, but I’m concerned because we are under an enforcement action that includes issues related to governance and consumer compliance risk management. We really can’t afford to raise any red flags. I’m new to audit and concerned about the resistance to corrective actions.

My questions are:
1. Are we at risk with Reg DD concerning proper disclosures?
2. Is there governance/oversight risk in applying a rate the board has voted to eliminate?
3. Are we required to offer this product to all customers if we offer it to one? Is it only a potential reputation risk or is it possible discrimination/ unfair practices? This product was discontinued because it became a headache to maintain. I don’t want to subject to additional risk because of operations issues due to volume.
4. Any advice on handling stubborn responses to audit findings? I’m documenting this from top to bottom but finding the level of resistance on this one frustrating.

Any help at all on any part of this is much appreciated.

1. You are stuck with whatever rate was disclosed on the TISA at account opening until account maturity. If the CD automatically renews, you provide updated disclosures 20 calendar days prior to the end of the grace period stating the new terms.
2. The bank is free to offer negotiated deposit rates to specific customers, but the process should be dictated by policy and procedures and your ALCO committee should be in charge of how this process is handled to appropriately manage the bank's interest rate risk.
3. No. There are no "Fair deposit" regulations and staff may negotiate rates (again subject to limitations, authority levels and procedures put in place by the ACLO Committee).
4.The Audit Department should have a directly line to either the audit committee or the equiivalent board/board committee. Since you ae independent of reporting to management, you should have the authority to provide your concerns to the applicable board members. It is then their fiduciary responsibility to determine if they are comfortable with the risks management is taking in lack of oversight of business lines or if accountability needs to be enhanced.

Brian, would the same answers hold true if the customer was an employee, officer or director? One bank I was with had a special rate for a director, and the regulator (and compliance officer) were not happy when we found out about it.

This was helpful. Thank you for your response.

RockyP, the answer changes for employees, officers and directors.

Sec. 376 [Federal Reserve Act, Sec. 22]

Interest on deposits of directors, officers, and employees
(e) No member bank shall pay to any director, officer, attorney, or employee a greater rate of interest on the deposits of such director, officer, attorney, or employee than that paid to other depositors on similar deposits with such member bank.

The Deposit Ops Manager is insisting the deposits be allowed to continue. She also increased his rate to a special rate and refuses to change it, even though the Board voted several months ago to stop offering this rate on specials due to cost of funds concerns

I can assure you once our board found out about this she would no longer be the Deposit Ops Manager.