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PNC info sought in fraud investigation

| Tuesday, March 4, 2014, 12:01 a.m.

PNC Financial Services Group disclosed on Monday that the Justice Department has demanded information about payment processors and merchants as part of what the bank said was an investigation into fraud against consumers.

The Pittsburgh-based bank said it was cooperating with federal investigators. PNC said it was served with a subpoena seeking information about transactions by merchants and payment processors who do business with the bank.

“We believe that the subpoena is intended to determine whether and to what extent PNC may have facilitated fraud committed by third parties against consumers,” PNC said in a securities filing. Spokesman Fred Solomon declined further comment.

The Justice Department did not return telephone messages for comment.

It's unclear exactly what federal prosecutors are investigating and how the information from PNC fits into their probe. Consumer advocates last year raised concerns about Internet lenders using banks and payment processors to deduct unauthorized payments from consumers' bank accounts.

PNC's disclosure follows by two months a Justice Department action against a North Carolina bank holding company, Four Oaks Fincorp Inc., which was accused of allowing millions of unauthorized debit transactions against consumers' bank accounts.

On Jan. 9, Four Oaks agreed to pay $1.2 million to settle the case. The settlement requires the bank to cooperate with federal criminal investigations into credit-repair services, short-term Internet lending, mortgage assistance relief services, telemarketing and other high-risk businesses.

“Banks have an obligation to avoid processing payments for illegal activities, whether the activity is an illegal payday loan, gambling operations, Internet fraud or debt settlement scheme,” said Tom Feltner, director of financial services at the Consumer Federation of America.

The Four Oaks settlement was part of a broad probe by the Justice Department of banks that fail to fulfill their roles as gatekeepers to the financial system.

The probe is called “Operation Choke Point,” according to The New York Times. It reported that the agency is scrutinizing banks large and small over whether they, in exchange for handsome fees, enable businesses to illegally siphon billions of dollars from consumers' checking accounts, state and federal officials briefed on the investigation told the Times.

According to the DOJ complaint, Four Oaks permitted an unidentified payment processor with whom it had a relationship to originate more than 9.8 million debits for the bank's merchants, worth more than $2.4 billion. In return for access to the payment network, the processor paid Four Oaks more than $850,000 in fees. More than 97 percent of the transactions were for payday loans.

The subpoena served on PNC is related to the return rate of unauthorized debit transactions for its customers, the bank said. The return rate measures how often consumers dispute a transaction and request a refund. Regulators permit a return rate of 1 percent, and higher rates are an indication of fraud.

In the payment process, banks receive fees from third-party payment processors, which receive fees from their merchants. And the merchant keeps money from the consumer's account. If the customer detects an unauthorized transaction and requests a refund, the bank makes fees on processing the return. The DOJ complaint said Four Oaks authorized return rates of 30 percent.

“We strongly support the ongoing efforts of DOJ to ensure that transactions in violation of important consumer protection laws do not result in unauthorized access to consumers' bank accounts,” Feltner said.

In its filing with the SEC, PNC gave additional details on subpoenas it received last year from federal prosecutors in New York related to loans made by National City Bank and insured by the Federal Housing Administration. PNC acquired National City on Dec. 31, 2008.

Those subpoenas also seek information regarding non-FHA-insured lending practices, PNC said.

A third subpoena from the U.S. Attorney's Office seeks information on expenses claimed by lawyers related to the foreclosure of loans insured by FHA, Fannie Mae or Freddie Mac.

PNC said it is cooperating with the investigations, which are in their early stages. Solomon declined to comment. PNC said its estimate of possible losses from all legal proceedings was $800 million as of Dec. 31, up from $450 million a year earlier.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or

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