New Haven’s hottest young tech company must pay $11 million in restitution to 60,000 students for “alleged unfair and deceptive practices,” according to a settlement reached with the Federal Deposit Insurance Corporation (FDIC).
FDIC announced a settlement Wednesday with Higher One, a fast-expanding financial services company based in New Haven’s Science Park. Hatched in a Yale dorm room, the company now handles financial aid disbursement for 830 colleges campuses, serving about 6.2 million students.
The charges stem from Higher One’s OneAccount student debit card program, which it operated in conjunction with the Delaware-based Bancorp Bank.
The FDIC found the two companies were: “charging student account holders multiple nonsufficient fund (NSF) fees from a single merchant transaction; allowing these accounts to remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing; and collecting the fees from subsequent deposits to the students’ accounts, typically funds for tuition and other college expenses,” according to a statement the FDIC issued Wednesday.
“We commend the FDIC for holding Higher One accountable,” said Rich Williams, higher education advocate for US PIRG, a watchdog group that has targeted Higher One for the fees it collects from college students on financial aid.
“Student aid should not be a piggy bank for banks to dip into especially when their practices are unfair or deceptive,” Williams said in a press statement.
“This announcement resolves the open 2010 FDIC compliance examination of The Bancorp Bank and Higher One,” said Mark Volchek, Chief Executive Officer of Higher One, in a statement Wednesday. “We have already voluntarily incorporated or are in the process of incorporating the FDIC suggested improvements to our policies for compliance management systems, past overdraft charging of persistently delinquent accounts, collections, and transaction error resolution. With respect to the restitution, we voluntarily credited account holders in December of 2011 pursuant to our voluntary customer credit plan — which impacted less than two percent of our customers.”
In a previous interview, company COO Miles Lasater argued that critics like US PIRG misunderstand the situation, that Higher One stacks up well against its competition in keeping fees down for students. (More about that later in this article.)
The FDIC ordered Higher One to change its NSF fees in the following way: “1) to not charge NSF fees to accounts that have been in a continuous negative balance for more than 60 days; 2) to not charge more than three NSF fees on any single day to a single account; and 3) to not charge more than one NSF fee with respect to a single automated clearing house (ACH) transaction that is returned unpaid within any 21-day period.”
Higher One was also ordered “not to make misleading or deceptive representations or omissions in its marketing materials or disclosures and to institute a sound compliance management system.”
Higher One agreed to pay back students for certain illegal NSF fees “for a period beginning July 16, 2008, to such time as Higher One ceased charging the fees in question.” The FDIC estimated the restitution would total about $11 million. The FDIC also imposed civil fines of $110,000 for Higher One and $172,000 for The Bancorp Bank.
“We believe the relatively low civil money penalty imposed reflects how seriously we take our commitment to our customers, the degree of the issue, and our level of cooperation with the FDIC,” Volchek said.
Lasater’s Side
In a previous Independent interview, Lasater said his company, which was hatched in 2000 in a college dorm room, has always aimed to provide students low-cost alternatives to other banking options. He said the company offers student accounts for no monthly fee and no minimum balance, never charges for the delivery of student aid money, and instructs students on how to maintain the account for free. In an effort to be transparent, company posts the fee schedule on its website and requires students to review the fees before signing up for an account.
Lasater said the PIRG report “misses the larger picture that we offer a good value for students, which is a good alternative compared to their other options.”
For example, the report highlights the hidden cost of students’ signing up for Higher One accounts. The “annual median cost of maintaining each of the 2 million OneAccounts is $49 per student,” the report states.
Lasater said that’s true — and it’s cheaper than competitors’ fees.
He pointed to a report Higher One commissioned by the financial services firm Bretton Woods, which compared the “median cost to students of using prepaid cards, regional and national checking accounts, paper checks and the OneAccount.” The report showed Higher One’s $49 far below the other averages: $240 to $464 for “national bank offerings,” $184 to $429 for “regional bank offerings,” and $98 to $239 for prepaid cards.
“We stack up very well” against the competition, Lasater said.
Higher One’s fees work out to $4 per month, Lasater said. Meanwhile, some experts predict monthly maintenance fees on basic checking accounts will rise to between $12 and $15 this year.