Bankers in Illinois are urging federal regulators to take action on check fraud by forcing large banks to resolve disputes over bad checks in a timely manner.
The Community Bankers Association of Illinois is calling for the Federal Deposit Insurance Corp, the Federal Reserve and the Office of the Comptroller of the Currency to issue supervisory guidance for large financial institutions to reimburse other banks for fraudulently-altered checks within 90 days.
It is highly unusual for banks to request guidance from federal regulators on other banks. But check fraud has become so pernicious that it has prompted community bankers to raise concerns about compliance with Know Your Customer regulations, a legal requirement for financial institutions to establish a customer's identity. The Illinois trade group provided a list of "worst culprits" — large banks and credit unions that routinely fail to respond to bad check disputes.
"We want action, we want something done," said David Schroeder, senior vice president of federal government relations at the Community Bankers Association of Illinois, who sent a letter this week to prudential regulators. "This is a big bank problem and it's impacting customers of small community banks who are the front-line victims of this fraudulent activity."
Schroeder described a cycle of criminality in which check fraud has become so commonplace in the financial system that small banks are being pitted against large banks. The bank trade group named names — Bank of America, JPMorgan Chase, Wells Fargo, Navy Federal Credit Union, U.S. Bank, PNC Financial Services Group, Truist Financial, Capital One Financial, Regions Bank and Citigroup are all institutions that repeatedly fail to reimburse for bad checks..
Federal regulators generally do not get involved in bank versus bank disputes. The Fed, FDIC and OCC all declined to comment.
"We certainly believe regulators have a responsibility to address this issue," Schroeder said.
The large banks either declined to comment or did not respond to a request for comment. Only Navy Federal Credit Union responded, saying through a spokesman: "Navy Federal works diligently to help protect our members from fraud and works closely with law enforcement to hold perpetrators accountable."
Community banks have been
"Clearly the problem with Know Your Customer rules for banks is that if someone applies for credit — like a credit card or a personal line of credit — a lot of due diligence goes into making sure we know the customer's identity, because if the bank is wrong, the bank is likely going to lose money," said Steven Gonzalo, president and CEO of American Commercial Bank & Trust, a $1.3 billion-asset bank in Chicago, Ill., and a member of the trade group. "From a deposit perspective, some banks do not perform the same level of due diligence because the bank assumes the risk of loss to them is zero or minimal, and fails to consider losses due to fraud incurred by the counterparty banks. And therein lies the failure."
The Independent Community Bankers of America said incidents of check fraud more than doubled last year, with 501,477 incidents reported in 2022 and 249,812 incidents reported in 2021.
Though fewer people are writing checks, banks of all sizes are seeing a massive increase in check fraud since 2020. Recouping losses from bad checks is pitting banks against each other, and regulators may have to weigh in.
The refusal of many large banks to even respond to small banks' so-called fraudulent returns claims led the trade group to ask for joint supervisory guidance. Small banks want more rigorous examination and enforcement of compliance with the Bank Secrecy Act, and with customer identification program rules that require banks to retain information about customers at the time they open an account. Schroeder said large banks should be dinged for management failures in the CAMELS rating system, in which regulators assess the strength of a bank in six categories including management capability.
"The failure of the largest banks to reasonably address these reimbursement requests is a clear indication that they are not properly managing this process — the 'M' in CAMELS," said Schroeder. "The largest banks are enabling a weak link in this crime chain by permitting fraudulent accounts to be opened in the first place."
Check fraud has become a massive problem for the U.S. Postal Service. Robberies and assaults of postal workers have become a
"Every armed robbery of a letter carrier leads to hundreds of check fraud victims," he said. "Check fraud fueled by mail theft has spiraled out of control."
While a customer whose check gets stolen typically is reimbursed by their own bank, that bank struggles to get repaid by the so-called bank of first deposit, where the check was deposited. For small banks, the issue of check fraud has increased due, in part, to the use of mobile deposit technology that may not be capturing fraud. In addition, some bankers suggest that tellers are not being properly trained to catch fraudulently-altered checks, even though many of the checks are
"It's one of the worst kinds of fraud. It's attacking two sacred institutions in the United States: the Postal Service and your bank," said Jill Sung, the CEO of Abacus Federal Savings Bank, a $316 million-asset bank in New York. "When you put your mail in the mailbox, you trust that it will go to the person that is supposed to receive it. When you write a check to a vendor, you trust that that check will go to the vendor and the person will get paid. It's a breakdown."
Illinois bankers are asking for very specific supervisory guidance that would require banks to confirm within 15 to 30 days the receipt of a request for reimbursement. Banks would have another 90 days to resolve a claim by paying it. Community bankers also want banks to be penalized if disputes are not resolved after 180 days. Schroeder said community banks also should be able to appeal when big banks deny all liability.
The trade group surveyed its members and found that it takes an average of five months to get reimbursed by large banks for fraudulently-altered checks, though the process should take a maximum of 90 days. Some large banks are taking as long as 18 months to reimburse small banks. The bank losses range from $30,000 to $1 million, he added.
Anne Balcer, senior executive vice president and chief of government relations and public policy for the Independent Community Bankers of America, said: "We are proactively working to identify solutions to increase the efficiency of the return of funds, which will require close coordination between regulators, law enforcement and financial institutions to reverse this disturbing trend."
A spokesperson for the American Bankers Association said the rise in check fraud is a serious issue that affects banks of all sizes.
"ABA is working collaboratively with our members and other stakeholders to implement innovative solutions that target the real problem — the bad actors preying on customers and the banks that serve them," the spokesperson said.
