On December 16, 2015, the federal Consumer Financial Protection
Bureau (CFPB) sent warning letters to 17
colleges directing them to improve disclosure of school-sponsored
credit card agreements as required by law. These letters, sent in
connection with the CFPB's annual report on college credit card
agreements, put colleges and universities on notice of the
importance of complying with consumer protection law when marketing
school-sponsored credit card agreements.
Over the past several years, the CFPB and the U.S. Department of
Education (DOE) have taken a number of steps to increase regulatory
requirements for schools and financial institutions that offer
financial products and services to students, such as credit, debit,
and prepaid cards. According to the CFPB, over 10 million students
attend a college or university that offers students the opportunity
to sign up for school-sponsored financial accounts, many of which
are endorsed with a school logo or linked to a student
identification card. For colleges or universities offering such
products, we highlight below recent CFPB and DOE initiatives in
this area and provide tips for ensuring compliance with applicable
consumer protection laws and regulations.
Why Are the CFPB and DOE Focused on College-Sponsored Financial Accounts?
Since its inception several years ago, the CFPB has focused, in
part, on financial products and services marketed to students by
colleges and universities. In 2012, the CFPB issued a consumer
advisory educating students about receiving scholarship and student
loan proceeds on school-endorsed debit cards. In 2013, the CFPB
launched an inquiry into this market, with a particular emphasis on
the use and marketing of credit cards, student identification cards
that double as debit cards, cards used to access scholarships and
student loans, and school-affiliated bank accounts.
As explained recently by CFPB Director Richard Cordray, "[T]he
Bureau will continue to promote and enforce transparency across
this market and stands ready to see that schools do the right thing
on behalf of their students." In the course of preparing its
annual report for 2015, the CFPB investigated 25 of the largest
colleges with active credit card partnership agreements to assess
compliance with applicable legal requirements. Specifically, the
federal Credit Card Accountability, Responsibility, and Disclosure
(CARD) Act, passed in 2009, requires credit card issuers to
disclose to the CFPB the terms and conditions of any college credit
card agreement, the number of new credit card accounts, and the
compensation paid by issuers to colleges and universities in the
previous year. In addition, schools must post these agreements on
their websites, or make the agreements available upon request by a
member of the public. According to the CFPB's 2015 annual
report, a number of deficiencies were identified at schools,
including failure to disclose credit card marketing contracts on
school websites and failure to provide access to agreements upon
request.
The CFPB's report and issuance of letters complements other
federal enforcement and rulemaking efforts. On October 27, 2015,
for example, the DOE finalized a rulemaking under the federal
Higher Education Opportunity Act of 2008 (HEOA) that imposes
greater transparency requirements for agreements between colleges
and companies in college debit and prepaid products. Prior to the
rulemaking, the DOE had identified several troubling practices in
the campus card market, including biased and incomplete information
provided to students and evidence that third-party servicers were
using their access to student information to persuade students to
select a preferred account over other options. The DOE also
identified a duty on the part of colleges and universities to use
their bargaining power to negotiate competitive product terms and
conditions for student-focused financial products.
Under the DOE's new rule, schools must give students greater
choice about how to receive student aid refunds (used to pay for
the cost of attending the institution). Among other provisions, the
rule:
- Prohibits schools from requiring students to open a certain account into which their student aid refunds are deposited.
- Requires institutions to ensure that students are not charged excessive and confusing fees.
- Requires an institution to provide students with a list of account options to receive student aid refunds, where each option is presented in a neutral manner, including that students can have their aid deposited to their preexisting bank accounts.
How to Minimize Potential Risk when Offering College-Sponsored Financial Accounts
The recent CFPB and DOE initiatives demonstrate the need for
colleges and universities to review and confirm their policies and
procedures related to school-sponsored financial accounts. Schools
must evaluate their relationships with financial product vendors
(including banks and nonbank credit card or prepaid card companies)
in accordance with specific laws and regulations, such as the CARD
Act and the HEOA, as well as the broader policy positions of the
applicable federal agencies. Within this complex and evolving
regulatory environment, there are a number of steps that schools
can take to minimize potential risk and scrutiny.
Review the CFPB's Safe Student Account
Toolkit. In connection with its 2015 annual report,
the CFPB released a Safe Student Account Toolkit to help schools
evaluate whether to co-sponsor a prepaid or checking account with a
financial institution. The Toolkit provides guidance on how schools
can evaluate costs and benefits for students, including information
about fees, features, and sales tactics. According to the CFPB,
approximately 40 percent of college students attend a school that
has made a deal with a financial institution where the college
helps with or allows the promotion of debit or prepaid cards.
Incorporate College-Sponsored Financial Accounts into a
Compliance Management System. The starting point for
regulatory compliance is the implementation of a compliance
management system (CMS) that covers a school's operations and
compliance with applicable laws. Any school that co-sponsors
financial accounts or otherwise engages in activities related to
marketing financial products to students should ensure that its CMS
includes controls tailored for these activities. These controls
should include the development of written policies and procedures,
training for relevant management and staff, regular audits, and a
process for monitoring for and responding to student complaints. In
addition, the CMS should include robust controls for third-party
oversight of the financial institutions that provide the underlying
financial service.
Monitor Regulatory Developments. The CFPB
and the DOE have taken a number of steps in recent months to
tighten regulatory requirements for the marketing of financial
products and services to students. This is an area of priority for
both agencies; additional changes are likely on the horizon for
2016. The CFPB, for example, is working to publish a final rule on
prepaid cards that will extend a number of consumer protections to
prepaid cards and similar accounts. The CFPB also has announced
that it will begin a rulemaking on the use of arbitration clauses
in consumer financial products and services. And, of course, the
CFPB and the DOE continue to scrutinize the student loan market,
including loan servicing and debt collection, among other issues.
As the regulatory framework continues to evolve, colleges and
universities must keep pace or risk drawing the attention of
regulators.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.