Consumer Finance Insights
December 9, 2017

Federal Reserve Settles with Pennsylvania Bank Over Alleged Deceptive Student Lending Practices


On December 6, 2016, the Federal Reserve Board announced that it entered into a consent order with a Pennsylvania bank ordering it to cease and desist deceptive student lending practices, and assessing millions of dollars in civil penalties.

According to the order, the state-chartered bank and its agent violated section 5 of the Federal Trade Commission (FTC) Act by providing deceptive financial aid disbursement services to college and university students.  Because the agent was not an insured depository institution as defined under federal law, it was necessary for the agent to form a contractual relationship with the state-chartered bank and other banks.

When providing disbursement services to the higher education institutions, students were instructed to go directly to the agent’s website to select their disbursement method.  Under the bank’s oversight, its agent offered three options to students for receiving financial aid refunds (i.e., the funds remaining after financial aid is distributed and tuition and other school expenses were paid).  These options included: (1) depositing the refund into a deposit account and student debit card offered by the agent; (2) an electronic transfer to another bank account;  or (3) a paper check, if the school permitted.

Under the bank’s supervision for approximately four months, the agent employed several deceptive practices, including a failure to disclose material information about ways students could receive their refund other than through opening bank accounts, a failure to disclose fees and limitations associated with the bank accounts prior to disbursement method selection (which included a 50 cent fee for using debit cards linked to the accounts), and a failure to disclose material information about ATM locations where funds could be accessed at no cost.

The Federal Reserve Board assessed a $960,000 penalty against the bank for these allegedly deceptive practices.  In December 2015, Enforcement Watch reported on a separate enforcement action taken by the Federal Reserve against the agent, which required the agent to refrain from future FTC Act violations and to provide $24 million in restitution for fees charged to roughly 570,000 students.

The post Federal Reserve Settles with Pennsylvania Bank Over Alleged Deceptive Student Lending Practices appeared first on Consumer Finance Insights (CFI).