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.