Cole Taylor Fined Millions for Insufficiently Monitoring Third-Party Higher One; Faces Potential Restitution Payments up to $30 Million (July 2, 2014)
Cole Taylor Bank has been ordered to pay more than $4.1 million by the Illinois Department of Financial and Professional Regulation (IDFPR) and the Fed for failing to properly monitor the activities of its third-party “agent” Higher One Inc. From May 4, 2012, to Aug. 14, 2013, Cole Taylor served as an insured depository institution in connection with Higher One’s OneAccounts, through which colleges and universities provide students with financial aid refund disbursements. Under federal and state legal and regulatory requirements, Cole Taylor was responsible for the actions of Higher One during this period with respect to Higher One’s compliance with applicable banking laws and regulations.
In addition to $4.1 million civil money penalties assessed by the Fed and IDFPR, Cole Taylor faces the possibility of up to $30 million in consumer restitution payments if the Fed issues an enforcement action against Higher One and Higher One cannot pay.
According to the cease and desist order (announced on July 1 and issued to Cole Taylor on June 26) during the relationship, Higher One engaged in deceptive and unsound banking practices relating to deficiencies in its Website disclosure, including failing to:
- Adequately disclose how students could access their financial aid payments without opening an online OneAccount.
- Adequately disclose fees, features and limitations of the OneAccount.
- Disclose information about the locations of ATMs where students could access their OneAccounts without incurring costs.
In addition, the Higher One Website prominently displayed school logos, which, the order says, may have implied the schools’ endorsement of the OneAccount product.
“This latest enforcement action, while not surprising, serves as another warning from regulators that financial institutions simply must do a better job of overseeing their third-party relationships, or there will be serious consequences,” Amy Ross Lauck, partner at Lindquist & Vennum LLP, tells Paybefore. “This is particularly true in prepaid, and even more so for prepaid providers in the student debit card space.”
The Fed also is pursuing remedial actions against Higher One, which includes restitution payment for Higher One’s past practices. The enforcement against Cole Taylor requires the bank to assume backup liability of up to a maximum of $30 million if Higher One is unable to pay. Chicago-based Cole Taylor Bank has assets of $5.7 billion as of March 31, 2013, and is a wholly owned subsidiary of Taylor Capital Group Inc.
If Higher One doesn’t have the financial wherewithal to cover the amount required for reimbursement, Cole Taylor might ultimately be required to shoulder some of the reimbursement costs, according to Lauck. “This should serve as a reminder that issuers need to do a thorough risk assessment and due diligence review to make sure they understand the level of risk the service provider presents to the issuer and whether the service provider will be able to stand behind its contractual obligations,” she says.
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