Campus Financial Products

The CFPB released its annual report on college credit card agreements (the fifth issued by the CFPB), together with a compliance bulletin regarding the obligation of colleges and universities under the CARD Act to publicly disclose their credit card marketing agreements.

Like the CFPB’s 2014 and 2015 annual reports, the new report consolidates the CFPB’s mandatory reporting under the CARD Act on college credit card agreements and “other information on financial products offered or marketed to students collected via our various market monitoring tools.”  According to the CFPB, this consolidation of information “will further the Bureau’s mandate in a manner consistent with our goal to focus holistically on the suite of issues facing student financial consumers beyond directly financing the costs of their education.”  For that reason, the CFPB “reframed” the report by titling it an annual report on “Student banking” and using one section of the report to discuss student debit cards and bank accounts and another section to discuss college credit cards.  The CFPB also notes that in a departure from prior practice, it is releasing all current and historical data collected by the CFPB and Federal Reserve Board “in a single, consolidated dataset alongside this report” and intends to maintain this dataset on an ongoing basis.  (The Fed submitted two CARD Act annual reports before responsibility for the report was transferred to the CFPB.)

Annual Report.  The CFPB’s findings in the new report regarding debit cards and bank accounts, which are based on its analysis of approximately 500 marketing agreements for such products in the Department of Education’s (ED) newly-created database, include:

  • In October 2015, the ED issued a final rule revising its Title IV Higher Education Act cash management rules to add new restrictions on financial products used to disburse credit balance funds to students.  The revised rule requires a school to ensure that the terms of such products are “not inconsistent with the best financial interests of students.”  The ED’s rule distinguishes between financial products offered under “tier one (T1) arrangements” and “tier two (T2) arrangements.”  T1 arrangements are arrangements between schools and a third-party servicer under which the servicer performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the school to financial accounts offered by the servicer.  T2 arrangements are arrangements between a school and a vendor that offers financial accounts through a financial institution and under which financial accounts are offered and marketed directly to students.  Accounts offered under T1 arrangements are subject to various restrictions, including a prohibition on overdraft and point-of-sale fees.  While acknowledging that such restrictions do not apply to accounts unless they are offered under T1 arrangements, the CFPB nevertheless appears to be suggesting that any marketing agreement a school enters into should either prohibit overdraft or other types of fees or place daily or other limits on such fees.  The CFPB observes that “largely, accounts marketed under general marketing agreements do not feature the baseline protections against high fees afforded to students offered under [T1 arrangements].  This may raise questions for colleges and other stakeholders considering whether general marketing agreements that permit high fees are consistent with the best financial interests of their students.”  The CFPB comments that marketing agreements generally do not require financial institutions to notify or seek approval from schools for future fee increases and some agreements do not require financial institutions to provide colleges with regular access to detailed data about fees.  It notes that under the ED’s rule, a school can satisfy its obligation to provide accounts that are “not inconsistent with the best financial interests of students” by documenting that it conducts periodic reviews to determine if account fees are consistent with prevailing market rates.  The CFPB suggests that schools would be “in better position to advocate for protections and more favorable terms” and have “a better ability to protect students from excessive fees” if they are provided with advance notice of changes to terms related to fees and detailed information on the amount and frequency of fees charged to students.
  • Noting that the ED’s rule requires schools to maintain the ability to terminate a marketing agreement based on student complaints, the CFPB comments that most agreements it reviewed did not require financial institutions to establish a system to identify, track and resolve student complaints related to school-sponsored products or provide periodic complaint reports to schools.  The CFPB observes that this practice “could better-position the college to analyze and act on information contained in these complaints.”

The CFPB’s findings in the new report regarding college credit cards, which is based on the agreements and related information that issuers are required to submit annually to the CFPB, include:

  • Continuing a trend that began in 2009, the number of college credit card agreements, the total number of associated credit card accounts open at year-end 2015, and the amount paid by issuers to schools and affiliated organizations (such as alumni associations) declined again in 2015.
  • While agreements between an issuer and an alumni association represented a smaller share of agreements than in 2014, such agreements still represented more than half of all agreements reported to the CFPB and increased their predominance in other metrics, representing two-thirds of all associated accounts and three-quarters of all associated payments.
  • There were 254 agreements in effect as of year-end 2015.  The CFPB contrasts with the Department of Education’s calculation that in 2015 at least 832 colleges had agreements covering the provision of debit or prepaid card services to their students.

Compliance Bulletin.  The CARD Act requires colleges and universities to publicly disclose their credit card marketing agreements.  The Official Commentary to Regulation Z  (Comment 1026.57(b)-1) provides that colleges and universities can satisfy the CARD Act requirement for public disclosure either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.

The bulletin notes that in its December 2015 CARD Act report, the CFPB reported that after reviewing a sample of 25 colleges and universities with the largest number of accounts subject to active credit card agreements, it found that most schools did not make copies of these agreements available on their websites and most failed to provide alternatives ways to access the agreements.  The bulletin warns schools that they “put themselves at high risk of compliance failure when they do not use website disclosure.”  It states that based on the CFPB’s market monitoring and investigations, “[e]xcept in rare cases, schools that did not publish agreements on their websites, but rather instituted other procedures and mechanisms instead, created delays and burdens to access the information.”  The CFPB advises schools, “[g]iven this clear record,” to “begin publishing these agreements on their websites without delay if they are not already doing so.”

The bulletin also discusses the treatment of agreements that are no longer in effect, stating that while the CFPB has not interpreted how the CARD Act’s disclosure requirement applies to such agreements, “disclosure of such agreements is consistent with the transparency goals underlying the [requirement] where such agreements continue to be used to market or issue cards to students.”  The CFPB recommends that schools continue to provide students with access to such agreements until the following events have occurred: (1) the agreement’s stated term has expired, (2) the card issuer is no longer obligated to make any payments to the school under the agreement, and (3) cards are no longer marketed or issued to students under the terms of the agreement.

Earlier this week, the CFPB released  its sixth annual report on college credit card agreements, together with a new toolkit for schools to use when considering potential co-sponsorships of financial accounts, such as prepaid or checking accounts.  The CFPB also announced that it sent warning letters to 17 schools regarding their compliance with the CARD Act requirement to publicly disclose their credit card marketing agreements.

Report.  The annual report is required by the CARD Act.  The CFPB’s findings in the new report include:

  • Continuing a well-established trend, the number of schools and affiliated organizations (such as alumni associations) sponsoring credit card programs decreased in 2014 and the overall number of accounts issued under such programs also decreased in 2014.
  • The amount of compensation paid by issuers to schools and affiliated organizations pursuant to these arrangements fell from 2013. (The CFPB notes that because some college agreements cover financial products other than credit cards, payments made by issuers under such agreements may not relate solely to credit card accounts.)
  • For the second consecutive year, more than half the agreements reported to the CFPB by issuers were between an issuer and an alumni association and direct agreements between issuers and schools increased as a share of the reported agreements.
  • Although the overall number of open credit card accounts issued under these agreements has fallen consistently since 2009, the number of new accounts originated annually has been increasing since 2012.  However, approximately 75% of such account growth is attributable to agreements between issuers and alumni associations, which suggests most new accounts are issued to alumni rather than students.
  • Based on the CFPB’s review of school websites, most institutions of higher education do not make copies of these agreements available on their websites and also fail to provide alternative reasonable means of access to those agreements.

Toolkit.  The CFPB’s “Safe Student Account Toolkit” is intended to help schools evaluate potential co-sponsorships of financial accounts, such as prepaid or checking accounts.  The toolkit includes a scorecard that schools can use to solicit information about fees and other features from prospective vendors as part of a RFP.  It also includes a handbook to guide administrators in soliciting and evaluating proposals and in monitoring vendor performance.  The handbook reviews new rules adopted in October 2015 by the Department of Education for schools that partner with vendors to distribute Title IV funds and/or sponsor or directly market accounts to students.  The new rules are effective July 1, 2016.  Although the toolkit states that schools “can voluntarily choose to  use” the scorecard, the CFPB likely hopes that schools will feel reputational pressure to use it.

Warning Letters.  The CARD Act requires colleges and universities to disclose their credit card marketing agreements.  The Official Commentary to Regulation Z  (Comment 1026.57(b)-1) provides that colleges and universities can satisfy the CARD Act requirement for public disclosure either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.  In the warning letters, the CFPB states that it has found that making agreements available upon request rather than disclosing them on a website “put[s] schools at risk of violating the law.”  According to the CFPB, the majority of colleges and universities in its “sample” failed to provide agreements when requested, presumably leading the CFPB to conclude that the alternative procedures were unreasonable because they were not effective.  The letters go on to state that publication of an agreement on a school’s website “is proving to be the least burdensome and most straightforward means of complying with Federal law.”  (The new report indicates that the CFPB reviewed a sample of 25 of the largest colleges with active credit card partnerships.)

The letters inform the schools to whom they were sent that a particular agreement the school had as of January 1, 2015, based on information in the CFPB’s database, “could not be publicly obtained using reasonable procedures and in a reasonable timeframe.”  They also state that the CFPB has not yet determined that the school is in violation of the CARD Act but “we urge you to reconsider your approach to public disclosure.” (The CFPB has been urging financial institutions to publicly disclose on their websites their marketing agreements for campus financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.)

On January 15, 2016, Ballard Spahr attorneys will hold a webinar on the CFPB’s CARD Act report issued earlier this month from 12 p.m. to 1 p.m. ET.  The webinar will include a discussion of the new report on college credit card agreements.  The webinar registration form is available here.

 

 

The U.S. Department of Education has issued proposed revisions to its Title IV Higher Education Act (HEA) cash management rules that include significant new restrictions on financial products used to disburse credit balance funds to students.  Credit balances result when the amount of Title IV HEA program funds credited to a student’s account exceeds the amount of tuition and fees, room and board, and other allowed charges.  The proposal is the result of a negotiated rulemaking process, which was actively supported by the CFPB.  The CFPB made a presentation to the negotiated rulemaking committee in which it provided its views on financial products marketed to students.

Among the key restrictions in the proposal are a prohibition against a college requiring students or parents to open or obtain an account or access device offered by or through a specific financial institution; a requirement for colleges to provide a list of account options that students and parents can choose from to receive program funds in which options are presented in a neutral manner and the student’s or parent’s preexisting account is shown prominently as the first and default option; and a prohibition on overdraft and point-of-sale fees in arrangements between colleges and third-party servicers.  Comments on the proposal are due on or
before July 2, 2015.  For more information on the proposal, see our legal alert.

 

 

Student loan servicers and providers of campus financial product were the focus of remarks given yesterday by Director Cordray at the Ohio College Presidents’ Conference.

Director Cordray stated that the CFPB estimates that eight million Americans “are now in default on a student loan – and strengthening student loan servicing is essential to getting this growing problem under control.”  He also stated that the CFPB shares “the concerns of many in the higher education community that student loan servicing needs drastic improvement.”

Servicing issues related to the collection of defaulted student loans were specifically identified in the CFPB’s Winter 2015 Supervisory Highlights.  In addition, earlier this year, the CFPB sent letters to check on the progress that student loan lenders and servicers have made in developing modification options.  However, to date, the CFPB has said nothing further about the responses it has received.‎ 

With regard to campus financial products, Director Cordray continued to take colleges to task for failing to adequately disclose their marketing agreements with financial institutions.  He referenced the model “Safe Student Account Scorecard” the CFPB issued for comment in January 2015 which is intended to be used by colleges and universities to obtain information from prospective financial institution partners offering financial products to students.

He also commented that “all contracts between schools and financial institutions to offer financial products to students-including checking account products, prepaid account products, and credit card products-should be entirely transparent to students, their families, and the public.  I frankly see no reason why any school would fail to put these contracts on-line as an easy means of disclosure that allows ready access to their terms.  That is now easy as a matter of technology, and any further obstacles to this kind of transparency are not justified.”

Director Cordray’s remarks on campus financial products echo statements made in the CFPB’s fifth annual report on college credit card agreements issued in December 2014.  In that report, the CFPB appeared to be criticizing colleges and financial institutions for not disclosing marketing agreements for such products on their websites.

As we commented when we blogged about the report, the CFPB’s apparent position that adequate public disclosure of campus agreements requires the agreements to be posted on a website finds no support in applicable law.  The Official Commentary to Regulation Z  expressly allows colleges to satisfy the CARD Act requirement for public disclosure of their credit card marketing agreements either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.  And unlike credit cards, there is no federal law that requires financial institutions to publicly disclose their marketing agreements or similar information for other financial products.

The December 2014 report contained a veiled threat of increased CFPB scrutiny for financial institutions that fail to meet the CFPB’s expectations for disclosure of campus marketing agreements.  Director Cordray’s latest remarks suggest that both financial institutions that partner with colleges and student loan servicers will continue to be a CFPB focus in 2015.

The CFPB has issued a request for information (RFI) in which it seeks comments on a draft “Safe Student Account Scorecard” to be used by colleges and universities to obtain information from prospective financial institution partners offering financial products to students.  The scorecard is intended to be used by schools to obtain information on product features and fees when selecting a partner, such as in a request for proposal seeking a marketing partnership.  Although use of the scorecard would be optional, the RFI’s wording suggests that the CFPB hopes that schools will feel reputational pressure to use it.  According to the RFI, the scorecard’s goal “will be to provide responsible institutions of higher education with a standardized format to solicit critical cost and feature information from prospective financial institution partners.”

The draft scorecard appears to be designed for use in connection with products other than credit cards, such as debit cards, prepaid cards, and deposit accounts.  It consists of four sections as follows:

  • The first section lists various “Safe Account features” to be provided without charge and, if the respondent’s product would include any fees or charges for such features, asks the respondent to provide details about any fees or charges associated with such features.  It also asks the respondent whether it will waive students’ monthly maintenance fees and, if not, to describe such fees and any circumstances under which they would be waived.
  • The second section asks for details about fees charged for various features and services.
  • The third section asks about the financial institution’s marketing practices and its ability to adhere to specified guidelines. Such guidelines include the financial institution’s adherence to “transparency” about its relationship with the school in accordance with the “contract transparency requirements” listed in the scorecard.  Those transparency requirements would mandate that the financial institution post its marketing agreement with the school on its website, something the CFPB has previously called upon financial institutions to do voluntarily.  They would  also mandate that the financial institution provide information about revenue sharing and royalties.  Also included in the guidelines is the financial institution’s provision of an annual fee report that would include the number of student account holders in the previous year, the average and median fees paid by a student account holder per year, the three most frequently incurred fees per year, and the average and median fees paid by a student for each fee imposed.
  • The fourth section asks the respondent to provide supplemental information on various “core features” of financial accounts offered to students, such as details on access to regional/national networks of surcharge-free ATMs and the number of surcharge-free ATMS that would be in close proximity to campus locations.

The RFI also includes a sample response by a financial institution to the draft scorecard as well as eight questions on “general areas.”  The questions generally relate to use of the scorecard and the process used by schools to select a financial institution partner.  However, one question asks what fees students most frequently incur under existing campus marketing arrangements for “checking accounts, prepaid cards and other financial products,” the degree to which fees and transaction patterns vary among different student populations, and how this compares “to the frequency of fee assessments on accounts unrelated to these marketing arrangements.”  Comments are due on or before March 16, 2015.

In response to the proposed scorecard, the Consumer Bankers Association issued a statement in which it observed that “[m]any of the concerns outlined in the CFPB’s request for information are based on an antiquated study which primarily focuses on the wrongdoings of one non-bank institution and are not based on the actions of our depository institutions which must abide by strict federal disclosure rules and account opening procedures.”

In its fifth annual report on college credit card agreements, the CFPB takes financial institutions as well as colleges and universities to task for failing to adequately disclose their marketing agreements for campus financial products.  The annual report is required by the CARD Act.

The CARD Act requires institutions of higher education to disclose publicly their credit card marketing agreements.  The CFPB “found little indication of institutions proactively disclosing their credit card agreements.”  The report states that the CFPB examined agreements covering 35 institutions and “[f]or the overwhelming majority of institutions within the sample, our review identified no information on their websites regarding the relevant agreement.”  According to the CFPB, these results “suggest that institutions of higher education are generally not choosing a method of disclosure whereby students and members of the public can reasonably ascertain whether an institution has a current affinity arrangement.”

In the CFPB’s report on campus financial products released in September 2013, the CFPB found that campus financial product marketing arrangements have shifted away from credit cards towards student checking and debit or prepaid cards.  In the new report, the CFPB states that “there are now more college debit and prepaid card agreements than credit card agreements.”  As it did in the 2013 report, the CFPB once again suggests that the shift is the result of CARD Act and other federal law restrictions on credit card affinity arrangements.  The CFPB’s press release on the new report notes that marketing arrangements have shifted “from credit cards toward other products such as debit and prepaid cards, which generally have fewer sunshine protections” and includes the following quote from Director Cordray: “Today, financial institutions are cutting more deals with colleges and universities to market student banking products that require less disclosure.”

In December 2013, the CFPB urged financial institutions to publicly disclose on their websites their marketing agreements for campus financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.  In the new report, the CFPB states that “as a general matter, issuers and institutions [of higher education] have not chosen to disclose in a readily accessible manner these deposit account, debit card, or prepaid card agreements.”  The CFPB is apparently criticizing financial institutions for not disclosing these agreements on their websites.

The CFPB’s apparent position that adequate public disclosure of campus agreements requires the agreements to be posted on a website finds no support in applicable law.  The Official Commentary to Regulation Z  (Comment 1026.57(b)-1) expressly states that colleges and universities can satisfy the CARD Act requirement for public disclosure of their credit card marketing agreements either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.  And unlike credit cards, there is no federal law requirement at all for financial institutions to publicly disclose their marketing agreements or similar information for other financial products.

The CFPB’s December 2013 call for disclosure was accompanied by the threat that a financial institution’s failure to disclose its campus marketing agreements could make it a target for examination and the new report includes another veiled threat.  The CFPB concludes the new report’s final section on compliance activity with the following statement: “Given the lack of transparency of these arrangements, as well as compliance problems related to institutions with significant market share, the Bureau will continue to carefully assess risks to consumers.”

 

Republican Senator Mike Crapo, Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, sent a letter last week to Department of Education (ED) Secretary Arne Duncan to raise several concerns with the ED’s Title IV rulemaking efforts.  Earlier this year, the ED engaged in negotiated rulemaking, with the CFPB among the those participating in support of the rulemaking.  Negotiated rulemaking did not reach a consensus, and the ED is expected to soon be issuing its proposal. 

In his letter, Senator Crapo raises the concern shared by many observers that the ED’s proposal will include significant new restrictions on products that banks sell to college students, even if the product is not specifically designed to distribute financial aid.  He observes that in the negotiated rulemaking, the ED proposed a definition of a “sponsored account” that would include any financial account that “an enrolled student or parent of an enrolled student may choose to open, obtain, or use…to receive Title IV, HEA program funds.”  He points out because the definition “could include a basic bank account set-up by a student during freshman orientation that never receives or was intended to receive Title IV funds,” it would be impossible for banks to know which account is a “sponsored account” and lead to a presumption that most accounts held by college students are “sponsored accounts” subject to the ED’s regulations.  He expresses concern that “such an expansive approach exceeds the [ED’s] statutory authority under the HEA and will interfere with the prudential banking regulation of such financial products.” 

Senator Crapo also comments that based on outreach from his office to the federal banking regulators, the ED completed the negotiated rulemaking process “without a single consultation with prudential banking regulators even though the very product the [ED] is proposing to regulate—a consumer’s checking account—is subject to [a] myriad of existing Federal and state laws.”  He notes his concern that the ED has taken policy positions “without giving due regard to the current regulatory framework” which could lead to “inconsistent and confusing compliance regimes for financial institutions, supervisory challenges for Federal and state banking regulators, and to unintended consequences that may in the end limit student choice and convenience.” 

Finally, Senator Crapo expresses concern with the proposal’s timing.  He notes that the ED has said it intends to move quickly to have a final rule in place for next year.  According to Senator Crapo, because the ED would have to finalize its rule by November 1, 2014 for it to become effective in July 2015, this might not allow sufficient time for the ED to obtain and consider stakeholder input.  Commenting that “it is more important to get the rule right” than to finalize it by November 1, he states that the rule’s magnitude and complexity warrants a 90-day comment period.

 

According to a new blog post about “secret banking contracts” by Rohit Chopra, the CFPB’s Student Loan Ombudsman, the CFPB is sending letters to colleges and universities “to make sure they know that their bank partner has not yet committed to transparency when it comes to student financial products” because it has not yet posted its marketing agreement with the school on its website.   

Last December, in a “call for transparency,” the CFPB urged financial institutions to publicly disclose their marketing agreements for campus financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.  That call was accompanied by the threat that a financial institution’s failure to disclose its campus marketing agreements could make it a target for examination. 

In its letters, the CFPB tells schools with such marketing agreements that “[b]ased on a scan of your financial institution partner’s website, it appears that [name of financial institution] has not disclosed this agreement.  We wanted to alert you that this failure to be transparent may pose potential consumer protection risks.” 

In his new blog post, Mr. Chopra states that at least 13 of the 14 Big Ten schools have entered into arrangements with banks to market financial products to students.  He states that of those 13, the CFPB could “easily find only four contracts on the partner websites, but three of those four contracts did not contain important information, such as how much they pay schools to gain access to students in order to market and sell them financial products and services.” 

 

On Thursday, July 31, 2014, the Senate Committee on Banking, Housing, and Urban Affairs  will conduct a hearing on “Financial Products for Students: Issues and Challenges.”

The witnesses scheduled to appear are:

  • David A. Bergeron, Vice President for Postsecondary Education Policy, Center for American Progress
  • Christine Lindstrom, Higher Education Program Director, U.S. Public Interest Research Group
  • Kenneth Kocer, President, South Dakota Association of Student Financial Aid Administrators and Director of Financial Assistance, Mount Marty College
  • Richard Hunt, President and CEO, Consumer Bankers Association

We find it surprising that the witness list does not include any representatives from either the CFPB or the Department of Education.  The CFPB has been calling on financial institutions to publicly disclose their campus financial product marketing agreements with colleges and universities.  The ED is expected to soon be issuing proposed revisions to its Title IV cash management rules that many observers believe will contain new restrictions on products that banks sell to college students, even if the product is not specifically designed to distribute financial aid.

 

 

We recently commented that financial institutions offering financial products to college students, including debit or prepaid cards, under agreements with colleges should be planning now for the possible advent of new restrictions from the Department of Education (ED) on their practices and agreement terms, including the distinct possibility of public disclosure of the agreements themselves.  A proposed rule from the ED now appears to be imminent.  According to the ED’s semiannual Regulatory Agenda, this July, the ED plans to issue proposed revisions to its Title IV cash management rules (34 CFR 668, Subpart K), including those relating to acceptable methods of disbursement of eligible Title IV funds to students (34 CFR 668.164).  

Over the last few months, the ED has been engaged in negotiated rulemaking concerning its Title IV rules, with the CFPB actively participating in support of the rulemaking.  Many observers expect the ED’s proposal to include significant new restrictions on products that banks sell to college students, even if the product is not specifically designed to distribute financial aid.