Add-Ons Cost Kentucky Bank $4.75M in Federal Reserve Board Action

Financial Services Law

A Kentucky bank must pay $4.75 million in restitution pursuant to a consent order with the Board of Governors of the Federal Reserve System in an enforcement action involving add-on products.

The relatively unusual action by the Federal Reserve Board was premised on alleged violations of Section 5 of the Federal Trade Commission (FTC) Act.

What happened

From roughly November 1994 to January 2017, Community Trust Bank, Inc., of Pikeville, KY, a state-chartered member of the Federal Reserve System, offered products containing bundles of consumer benefits to its deposit account holders, including payment card protection, lost key protection and medical emergency data cards.

While marketing the products, the bank represented that the full bundle of add-ons would be effective upon enrollment. In fact, the Federal Reserve Board said, account holders had to take certain steps post-enrollment to receive some of their benefits and the bank failed to adequately disclose this two-step enrollment process or that account holders would be billed regardless of activation.

The bank also acquired deposit accounts from another insured depository institution where the account holders had already enrolled in certain of the add-on products. The Federal Reserve Board alleged that despite the fact that the account holders did not receive all the benefits, the bank began charging them monthly fees.

By at least 2002 and continuing through January 2018, the bank charged approximately 4,270 account holders who enrolled in the add-on products fixed monthly fees ranging between $2 and $10, even though many of the account holders did not receive all the benefits included in the products that were sold to them, according to the consent order.

In addition to the add-on products, the bank marketed an Identity Protection Plus (IPP) product to its account holders. The package included credit monitoring, payment card protection and fraud support services. As with the add-on products, the bank marketed that the full bundle of benefits would be effective upon enrollment, when in reality, the products required a two-step enrollment process, the Federal Reserve Board said.

Again, account holders were billed regardless of activation, the regulator alleged, $4.95 per month beginning in December 2008 and continuing through November 2015. Roughly 6,700 account holders were charged despite not receiving all the benefits included in the IPP product, the Federal Reserve Board said.

These “deficiencies … resulted in unfair or deceptive acts or practices in or affecting commerce, within the meaning of Section 5(a)(1) of the FTC Act and unsafe or unsound banking practices,” according to the consent order.

To settle the charges, the bank agreed to cease and desist from violations of the statute. More specifically, the bank promised to refrain from making any misleading or deceptive representation, statement or omission, expressly or by implication, with respect to add-on products or similar products.

The bank must obtain approval from the Federal Reserve Board if it wants to collect fees from existing customers enrolled in the add-on products or market or sell any similar products. A written plan to strengthen oversight of the compliance risk management program by the board of directors is also required.

As for the $4.75 million in restitution for affected account holders, the money needs to cover the total amount of monthly fees paid for any month in which an account holder did not receive all the component benefits of the add-on or IPP products.

To read the consent order, click here.

Why it matters

Although add-on products are a frequent subject of enforcement from other banking regulators, including the Office of the Comptroller of the Currency and the Bureau of Consumer Financial Protection (under previous leadership), as well as the Federal Deposit Insurance Corporation, the allegations of unfair or deceptive acts or practices is not a typical action from the Federal Reserve Board. This action may represent a new area of enforcement focus for the Federal Reserve Board, and banks are cautioned to make sure that their provision of products and marketing of such products is fully compliant with applicable laws and regulations.