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From Banking and Finance Law Daily, July 02, 2014

Cole Taylor Bank to pay $4.1M for agent’s deceptive acts

By John M. Pachkowski, J.D.

To address its role in deceptive practices in violation of section 5 of the Federal Trade Commission Act, Cole Taylor Bank of Chicago, Ill., entered into a consent order and agreed to pay a $3.51 million civil money penalty to the Federal Reserve Board and a $600,000 civil penalty to Illinois Department of Financial and Professional Regulation (IDFPR).

The consent order specifically addressed Cole Taylor’s conduct in its business relationship with one its agents, Higher One, Inc., of New Haven, Conn. Under that relationship, Higher One, a nonbank entity, provided institutions of higher education with financial aid refund disbursement services for students through its debit card product known as the “OneAccount.” A financial aid refund is any amount owed to a student once tuition and other amounts are paid to a school.

As part of its business practices, Higher One typically offered students three methods of receiving their financial aid refund: (1) paper check; (2) ACH transfer to an existing bank account; or (3) direct deposit to the Higher One deposit account and the OneAccount debit card. Since Higher One is not a bank, it was required to partner with banks to offer the OneAccount. From May 4, 2012, to Aug. 14, 2013, Cole Taylor served as one of the banks providing deposit accounts in connection with the OneAccount, with approximately 439,489 new OneAccounts opened at Cole Taylor.

Deceptive practices. The actions addressed in the consent order involved the following deceptive practices by Higher One, under Cole Taylor's oversight, that, at various points in the financial aid refund selection process, misled students about the OneAccount debit card:

  • the omission of material information about how students could get their financial aid refund without having to open a OneAccount;
  • the omission of material information about the fees, features, and limitations of the OneAccount product, which may have made it more difficult for students to make fully informed decisions prior to selecting the method for financial aid refund disbursement;
  • the omission of material information about the locations of ATMs where students could access their OneAccount without cost and the hours of availability of those ATMs; and
  • the prominent display of the school logo, which may have erroneously implied that the school endorsed the OneAccount product.

The Fed noted in a press release that Higher One is taking material corrective action to address these practices in its current disclosures to students, but added that “appropriate remedial actions against Higher One, including the payment of restitution for its past practices, are currently being pursued.”

Backup restitution liability. In the case where Higher One cannot pay any future restitution amounts, the consent order also requires that Cole Taylor Bank assume backup restitution liability of up to $30 million.

Compliance plan. Finally, the consent order requires Cole Taylor to submit a compliance risk management plan if the bank plans to enter into an agreement with a third party under which the third party solicits, markets, or services a consumer deposit product on behalf of Cole Taylor.

The compliance risk management plan must have, among other things, measures to ensure that third-party relationship is developed in accordance with the Fed’s supervisory guidance which include: “Guidance on Managing Outsourcing Risk;” “Community Bank Risk-Focused Consumer Compliance Supervision Program;” “Consumer Compliance Examination Procedures for the Unfair or Deceptive Acts or Practices Provisions of Section 5 of the Federal Trade Commission Act;” and “Unfair or Deceptive Acts or Practices by State-Chartered Banks.”

Commenting on the consent order, Manuel Flores, Acting Secretary of the IDFPR, said, “It is unconscionable for any company to seek profit by misleading customers about the terms of their financial accounts. Too many students and their families end up with a massive burden of education debt, so it is especially important to protect students from deceptive practices. I’m gratified by our efforts to protect these students’ finances by holding a bank accountable for its unlawful business conduct.” Sheila Saegh Henretta, Acting Director of the Illinois Division of Banking, added, “Holding Cole Taylor accountable and ensuring that the bank makes a financial commitment to support restitution to these students should send a clear message that we take this situation seriously. We will not tolerate any deceptive banking practices in Illinois.”

Companies: Cole Taylor Bank; Higher One, Inc.

MainStory: TopStory BankingOperations CreditDebitGiftCards EnforcementActions FederalReserveSystem IllinoisNews StateBankingLaws UDAAP

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