The private student loan market, over several years, has been the focus of various federal regulatory agencies, including the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Commission (FDIC), the Federal Trade Commission, the Department of Education, and now the Board of Governors of the Federal Reserve System (the Federal Reserve and collectively with the previously named entities, the Agencies). This year, the CFPB investigated or brought enforcement actions against a number of the top ten servicers of student loans and on October 27, 2015, in a ruling against Corinthian College, the CFPB won a judgment of over $530 Million. The cited alleged violations include the Fair Debt Collection Practices Act (the FDCPA), the Consumer Fair Practices Act (the CFPA), and the Federal Trade Commission Act (the FTCA).

In a slightly unusual action, the Federal Reserve stretched its authority and took an action against a vendor to two banks subject to FRB supervision. Using their Section 7 authority under the Bank Service Company Act (12 U.S.C §1867) (the BSCA), the FRB on December 23rd published the settlement agreement with Higher One, Inc., (Higher One) along with certain affiliated parties, through an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent. Although Higher One is not a licensed bank or bank holding company subject to FRB supervision, the FRB has, at times, asserted jurisdiction over vendors to such regulated and examined institutions. Under Section 7 of the BSCA, if a depository institution causes services authorized under the BSCA to be performed, then the Federal Reserve may exercise jurisdiction over such performance and will have the same powers and authority with respect to regulation and examination as it would if such services were being performed by the depository institution itself. Higher One has also been the subject of a number of other investigations and enforcement actions, including one by the FDIC which fined the company in amounts equal, and in addition, to the fines of the Federal Reserve.

At issue in the present case was Higher One, as a vendor, providing services to students of colleges and universities for the disbursement of student loan refunds. Such refunds result when all required student tuition, books, and other expenses have been paid and additional financial aid funds to the student remain. In the present case, and as described in the settlement, the schools required students to use Higher One to receive their refunds. Further, according to the FRB documents, Higher One offered students limited options to receive their refunds. The settlement alleges that students were most often provided the option that financially benefited Higher One while Higher One did not properly disclose fees and limitations involved with that choice.

The Federal Reserve settlement cited the following issues as most concerning:

  1. Higher One controlled students’ access to and information about refund disbursement options and the manner in which the information was presented could have caused students to believe that:
    1. The Higher One account option was the only option available to them, rather than an ACH Transfer to another bank, or a paper check; and
    2. The Higher One account option was endorsed by their school.
  2. Higher One benefited from the deposit of student refunds and imposed fees, some of which the Federal Reserve characterized as “unusual” and which the Federal Reserve alleged were not properly disclosed.

These issues created the possibility for violations of the FTCA and Higher One agreed to correct their prior alleged deficiencies and take certain actions to help prevent any future concerns. Higher One will:

  1. Disclosure:
    1. ​Provide improved disclosure regarding options for students to receive financial aid refunds other than through the Higher One account;
    2. Ensure that marketing and account materials do not contain material omissions with regard to fees;
    3. Make certain that the relationship between, and any co-branding with, universities does not improperly imply that the school endorses or prefers the Higher One account; and
    4. Ensure the proper disclosure of fees.
  2. Risk Management Program:
    1. Create, and have approved, a plan to enhance the consumer compliance risk management program.
  3. Restitution:
    1. Deposit $24 million into a settlement fund to pay restitution to the students who incurred fees and charges that the Federal Reserve felt may have been hidden or misleading; and
    2. Have the Federal Reserve approve of the notice to be sent to customers informing them of their right to restitution.
  4. Independent Third-Party Auditor:
    1. Hire a third-party auditor that is acceptable to the Federal Reserve.
  5. Civil Money Penalty:
    1. Pay a civil money penalty of more than $2.2 million to the Federal Reserve.

A copy of the order is available here.

With more than $1.2 trillion outstanding in student loans owed by more than 40 million Americans, and with numerous institutions having alleged violations of federal laws and regulations, it seems natural that regulators have made this a priority; however, there remains a concern that in addition to legitimate enforcement actions, regulators may be (i) sweeping in companies that have only minmal and/or good faith violations and (ii) potentially leveling excessive fines.