A Pennsylvania bank reached a deal with the Board of Governors of the Federal Reserve System over Board-alleged violations of Section 5 of the Federal Trade Commission Act, agreeing to pay an almost $1 million civil penalty.

What happened

Higher One, Inc., of New Haven, Connecticut, provides institutions of higher education with financial aid disbursement services for students, including a deposit account and debit card product dubbed the “OneAccount.” As a nonbank entity, Higher One partnered with Customers Bank of Phoenixville, Pennsylvania, to offer OneAccounts beginning in August 2013.

But over the next four months, Higher One—and Customers Bank by extension—ran afoul of Section 5 of the Federal Trade Commission Act with deceptive marketing and advertising practices, according to the Board.

Specifically, the Board asserted that Higher One omitted material information about how students could obtain their financial aid disbursement without having to open a OneAccount, providing no information to students about alternative options to receive their disbursements such as ACH transfer to another bank or a paper check. The company similarly failed to provide material information about fees, features, and limitations of the OneAccount prior to requiring students to make a choice about the method of their financial aid disbursement, according to the Board.

Higher One also neglected to give students information about the locations and hours of availability for automated teller machines (ATMs) where students could access their disbursements at no extra charge, the Board said. In addition, the company prominently displayed the school logo on materials for the OneAccount, implying an endorsement by the educational institution that did not exist.

During the relevant time period, approximately 220,000 new OneAccounts were opened at the bank. Higher One and Customers Bank benefitted from students directing their financial aid refunds to the OneAccount instead of to an alternative bank account or paper check, the Board noted in a consent order with the bank, including income from fees paid by students in connection with the accounts. For example, Higher One charged a fee of 50 cents for using the debit card linked to the OneAccount as a point-of-sale purchase that was executed through the entry of a PIN, rather than by signature like a credit card, as well as a fee of 3.5 percent for withdrawing funds from a bank teller.

In December 2015, the Board took an enforcement action against Higher One, requiring the company to refrain from future violations of the FTC Act and provide restitution of roughly $24 million in fees to more than 500,000 students who opened accounts with Higher One while its website and marketing materials were deceptive. Those payments have now been “substantially completed,” the Board said, and Higher One took “material corrective action” to address its practices.

The Board then turned its sights to Customers Bank, which agreed to pay a $960,000 penalty. The bank also agreed to take “all action necessary to correct all violations of the FTC Act” and maintain future compliance with the statute. Further, the order to cease and desist mandates that the bank “shall not make, or allow to be made, any misleading or deceptive representation, statement, or omission, expressly or by implication, in the marketing materials, telemarketing scripts, sales presentations, websites, mobile applications, social media content, and/or any similar communications used to solicit any consumer in connection with any consumer or commercial deposit, lending, or other product or service that the Bank offers or may offer.”

A written plan to strengthen Customers Bank’s board of directors’ oversight of the compliance risk management program also must be submitted to the Board, along with progress reports.

To read the cease and desist and assessment of civil money penalty order in In the Matter of Customers Bank, click here.

Why it matters

The enforcement action serves as a reminder to financial institutions that the Board will hold banks responsible for the actions of their agents. In this case, Higher One’s violations of the FTC Act resulted in a cease and desist order requiring an updated compliance risk management program and civil money penalty of almost $1 million for Customers Bank.