On April 22nd, Senator Warren, nine other Senators, and 14 members of Congress sent a letter (the “Letter”) to Secretary of Education Duncan urging that the Department of Education (DOE) exercise its rulemaking authority to regulate, limit or outright ban certain practices when colleges enter into agreements with financial providers to offer debit cards, prepaid card and other products which are used for purposes of distributing federal student financial aid to students. 

The Letter was sent in response to and in support of the ongoing efforts of the DOE’s Program Integrity and Improvement Negotiated Rulemaking Committee (the “Committee”) over the last several months to consider, among other things, revisions to the DOE’s Title IV’s 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). The CFPB has actively participated in supporting this negotiated rulemaking process, including by providing a presentation and related materials to the Committee during its negotiation session in March, regarding the CFPB’s perspectives on financial products marketed to students. Such materials reference and reflect earlier CFPB publications and statements relating to this topic, such as the CFPB findings on campus banking products released in October, 2013 , and the CFPB’s call for voluntary public disclosure of college/university financial product marketing agreements. 

More specifically, the Letter supports the creation of rules that, among other stated suggestions, would: (i) prohibit colleges from partnering with banks or other financial providers to offer debit or other financial card products that would charge fees in connection with the disbursement or use of Title IV aid; (ii) ban revenue sharing, so that the products are selected by colleges “based on their merits alone”, rather than college revenue potential or other considerations; (iii) require website publication of college agreements with banks, with a requirement of annual reporting to relevant governmental agencies (including the CFPB) for review; and (iv) require that such rules be applicable to “any college-sponsored account into which Title IV funds are transferred or deposited.” 

The Letter references the concerns expressed in the Government Accountability Office (GAO) study released on February 18th, which has been previously discussed in the CFPB Monitor, including the perceived need to deal with the “high” fees sometimes associated with such products, appropriate ATM access for students, and the “undue influence that colleges exert in pushing students to opt into a school-endorsed debit card or checking account.” 

The Letter serves to further underscore that financial institutions entering into and administering these debit or prepaid card sponsorship agreements with colleges should be planning now for the possible advent of new restrictions on their practices and agreements terms, including the distinct possibility of public disclosure of the agreements themselves.

The U.S. Government Accountability Office (GAO) has joined the CFPB’s call for more transparency in the area of campus financial products.  Last week, the GAO issued a report on college debit cards in which the GAO recommended that Congress consider requiring financial institutions that provide debit and prepaid card services to colleges to publicly disclose their agreements.  In December 2013, the CFPB called on financial institutions to voluntarily post on their websites their marketing agreements with colleges and universities for financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.  

The CFPB’s request was an outgrowth of findings on campus financial products it 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.  

The GAO found that about 40 percent of the nation’s college students are enrolled at colleges that had agreements with financial institutions to provide debit or prepaid cards services to their students.  (The percentage of students enrolled in college card programs was unknown.)  While finding that the benefits of college cards include convenience for students and cost savings and efficiencies for schools, the GAO highlighted three areas of concern: fees, ATM access and neutrality.  

With regard to fees, the GAO found that fees charged by college card providers generally were comparable to fees charged for similar bank products.  However, it found that two large providers charged a fee for card purchasers using a personal identification number (PIN) rather than a signature, and that such a fee was not typically charged by mainstream debit cards.  

With regard to ATM access, the GAO observed that Department of Education (ED) regulations require colleges to ensure “convenient access” to no-fee ATMs or bank branches for students receiving federal student financial aid.  The GAO is concerned, however, that the ED’s failure to specify what constitutes such access could make it difficult for students to avoid fees when making cash withdrawals of federal aid.

With regard to neutrality, the GAO found instances in which schools or card providers appeared to encourage students to enroll in a college card program instead of presenting neutral options about payment options. 

In light of its findings, the GAO wants the ED to specify what constitutes “convenient access” to no fee ATMs or bank branches and develop requirements for schools and card providers to present neutral information to students.  The GAO’s report included a letter from the ED in which the ED concurred with the GAO’s recommendations and indicated that these issues would be considered in negotiated rulemaking that is scheduled to begin this week and conclude on April 25, 2014.  The negotiated rulemaking is expected to result in the publication of proposed regulations.  According to the ED, the issues to be addressed in the rulemaking include a college’s responsibility for cash management with respect to how a student’s federal student aid funds are disbursed. 

Also included in the GAO’s report was a letter from CFPB Student Ombudsman Rohit Chopra describing the CFPB’s efforts to increase transparency.

Last week, Mr. Chopra published a blog post in which he renewed the CFPB’s call for voluntary disclosure of campus marketing agreements, noting the “potentially risky practice of not readily disclosing” such agreements.  In his post, Mr. Chopra described examples of campus marketing agreements the CFPB had found by “checking state open records databases and other websites where agreements were disclosed.”  According to Mr. Chopra, the CFPB found several agreements providing for payment of a licensing fee to a college for use of its logo in marketing or bonuses based whether students signed up for checking accounts.  It also found agreements under which colleges received discounted or free services in exchange for allowing a provider to market financial products to students, such as reduced charges to the college for transferring loan and scholarship funds to students.

 

The CFPB wants financial institutions to post on their websites their marketing agreements with colleges and universities for financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.  Pursuant to the CARD Act, card issuers must submit their campus credit card agreements annually to the CFPB together with their related marketing agreements and certain information, including the amount of compensation they paid to schools.  However, there is no federal law requirement for financial institutions to disclose their marketing agreements or similar information for other financial products.   The call for voluntary disclosure of such agreements was made yesterday in a blog post by Rohit Chopra, CFPB Assistant Director and Student Loan Ombudsman.

The  CFPB’s “request” is an outgrowth of the findings on campus financial products it 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.  (The CFPB has suggested this shift is the result of CARD Act and other federal law restrictions on credit card affinity arrangements and student loan referrals.)  Most notably, the CFPB found that arrangements between financial institutions and schools to offer student banking products “are not well-understood.”

Both the CFPB’s press release about its “call for transparency” and Mr. Chopra’s blog post indicated that a financial institution’s failure to disclose its campus marketing agreements could make it a target for examination, a threat which now seems to be almost a boilerplate provision for any CFPB release.  After noting that it prioritizes examinations based on “risks” posed to consumers, the CFPB stated in its press release that “[w]hen institutions do not make these college financial product arrangements transparent to students  and their families, they may increase such risks.”  This statement is somewhat difficult to understand, given that the CFPB fails to explain why the “risks” are so great that, regardless of the pricing for the financial products, they would, all by themselves, lead the CFPB to single out an institution for examination.

Similarly, in his blog post, Mr. Chopra stated that “not publicly disclosing [campus marketing] agreements raises potential [but again, unspecified] consumer protection risks.”  He also indicated that the CFPB plans to contact financial institutions in 2014 “to find out more about their commitment to transparency” and ask “about whether existing agreements are made available to students and families in a clear and conspicuous place on their company’s website.”  All of this might have been more meaningful had the CFPB indicated the extent to which the public now accesses its database of college credit card agreements, or even the extent to which the public has viewed its prior Reports, but that information was conspicuously absent from the 2013 College Credit Card Agreements Annual Report to Congress, released concurrently with the CFPB’s press release and Mr. Chopra’s blog post.

The Annual Report did disclose, though, that:  (1) the number of college card agreements in effect decreased by 41% between 2009 and 2012; (2) the total amount of payments schools received from card issuers in 2012 was about 40% less than the total amount they received in 2009; and (3) the number of new college accounts opened in 2012 was 18% less than the number of accounts opened in 2009.  The CARD Act requires the CFPB to issue this annual report to Congress based on the information it receives from card issuers about their campus credit cards.

 

 

Findings on campus banking products released this past Monday by the CFPB in conjunction with a Banking on Campus Forum held in Washington, D.C. appear to be a harbinger of new limitations on the marketing of these products.  The findings were based on comments the CFPB received in response to a January 2013 notice seeking input on a variety of issues with regard to these products, including the information shared between schools and financial institution providers, the way these products are marketed, the fee structures for these products, how marketing arrangements are established, and student experiences with these products. 

The CFPB found that campus financial product marketing partnerships have shifted toward student checking and debit or prepaid cards.  (The CFPB suggests this shift is the result of federal law restrictions on credit card affinity arrangements and student loan referrals.)  According to the CFPB, student checking products affiliated with colleges generally did not have more attractive features compared to unaffiliated products and in some cases, the unaffiliated products offered more attractive options.  

The CFPB also found that arrangements between financial institutions and schools to offer student banking products “are not well-understood.”  Director Cordray’s more pointed statement in his prepared remarks that students may be unaware when signing up for these products that their schools are “secretly making money” strongly suggests that disclosures regarding the benefits a school receives from affiliated banking products will be a component of any new CFPB initiative.

 

Comments made by Director Cordray in an interview with the Washington Post indicate that the CFPB will be taking an aggressive approach to rulemaking in the coming months. 

Director Cordray indicated that prepaid cards are “a real front-burner issue for us” and that the CFPB is “moving forward to write rules to make sure they are protected under the [Electronic Fund Transfer Act.]” Consistent with statements he recently made in another interview, Director Cordray indicated that the CFPB will be “undertaking rulemaking  in the debt collection area” and indicated that work on those rules “will get started this fall.”  

With regard to payday lending, Director Cordray stated that “there will be activity in this area in the near future.”  He noted that the CFPB has been “building partnerships” with other regulators to address the reliance of online payday lenders on banks “for financing and collecting the money.” 

In what might be described as his most “chilling” comment, Director Cordray indicated that the CFPB is “engaged in analyzing” how the ability-to-repay model might be applied beyond mortgages and credit cards to other consumer credit products.

 

On September 30, 2013, the CFPB will hold a forum in Washington, D.C. on financial products marketed to college students.  In January 2013, the CFPB issued a notice asking for input on a variety of issues with regard to these products, including the information shared between schools and financial institution providers, the way these products are marketed, the fee structures for these products, how these marketing arrangements are established, and student experiences with these products.  At the forum, the CFPB will present its findings based on the comments it received in response to the notice.

The forum will also feature remarks by industry, student advocates, and the higher education community about how students and schools might better navigate the financial marketplace.

 

 

Credit CardsIn addition to a flurry of news reports, the U.S. Public Interest Research Group Education Fund’s report on the use of debit cards to disburse federal financial aid to college students has also triggered a letter to the CFPB and the U.S. Department of Education by two Democrat lawmakers.  Issued last month, the report found that nearly 900 colleges and universities have agreements with financial institutions under which debit cards are issued to students to access any balance of their financial aid  remaining after amounts for tuition and fees have been deducted. 

The letter was sent by Senator Richard Durbin (D-IL) and Representative George Miller (D-CA) and indicates that the lawmakers “have opened an inquiry into the use of bank-sponsored debit cards to disburse federal student aid.”  It asks the CFPB and DOE, on a coordinated basis, to “carefully examine the full-range of bank-affiliated student debit card practices at participating schools.”  The letter refers to various “troubling practices” identified in the US PIRG report, such as charging “numerous, opaque fees” and “subjecting students to aggressive and misleading marketing.”    

The letter also asks the CFPB and DOE to provide information on several specific issues, including (1) how much fees and penalties cost a student, on average, (2) whether the fees and penalties violate any federal statutes or regulations, (3) whether the debit cards provide adequate consumer protections, and (4) to what extent the DOE is pursuing enforcement action.

 

By Jeremy T. Rosenblum and Stefanie H. Jackman

Recently, the Consumers Union, Center for Public Policy Priorities, Center for Responsible Lending, Coalition of Religious Communities, National Consumer Law Center, SC Appleseed Legal Justice Center and U.S. PIRG called on the CFPB to extend various protections afforded to debit cards under the Electronic Fund Transfer Act and Regulation E to reloadable prepaid cards. The necessity of new regulation is questionable, since Reg E protections are already provided voluntarily by most issuers of prepaid cards, at least where the cards permit loads of wages or government benefits.

Worse, the consumer groups are not content with extending existing Reg E protections to prepaid cards. In addition, they are proposing that the period for consumers to complain about transactions on their statements should run from when the consumer actually accesses the statement rather than when the statement becomes available. This encourages consumer negligence and penalizes issuers by exposing them to potential liability for an indefinite period. It is precisely the kind of regulatory overkill that results in higher product costs and reduced availability.

The consumer groups have also expressed (or reiterated) the view that “overdraft fees should be completely eliminated from prepaid cards and the credit should not be tied to a deposit account ….” Thus, these groups seek to preclude any overdraft fees, thereby foreclosing the consumer’s option to affirmatively request overdraft protection after receiving disclosures carefully designed by the Federal Reserve Board. Seemingly, the consumer groups are assuming that credit or overdraft services relating to prepaid cards or deposit accounts are inherently unfair or abusive. However, assumptions of this type are insufficient; this kind of paternalistic regulation could only be justified by a showing that informed consumers are for some reason incapable of knowing what is in their best interests.

As the consumer groups recognize, consumers like prepaid cards and like overdraft protection. The groups in question are therefore at odds with their supposed constituents.