Rule on Financial Products Draws Criticism, Praise

Colleges and banks say new Education Department rules governing debit cards and more would limit choice and might be illegal, while consumer advocates urge the agency to crack down even further.

July 6, 2015

WASHINGTON -- Virtually every college, company, advocacy group and other party that commented on proposed new federal rules on campus financial products by last week's deadline asserted that it had students' best interests at heart.

Yet the various parties offered greatly differing perspectives on whether the regulations proposed by the Education Department in May would make sound policy, are legal -- and would help students or not.

Financial institutions and associations representing postsecondary institutions by and large argued that the rules would discourage colleges and universities from using third-party services and ultimately give students worse, not better, access to their federal financial aid funds, by limiting students' options. Consumer groups, meanwhile, said the regulations would protect students by stopping banks (in collusion with colleges) from marketing undesirable financial services to them.

The rules, which the department issued unilaterally after negotiations involving industry, college and consumer groups broke down in May 2014, are aimed at ensuring that recipients of federal financial aid funds have convenient access to those funds without excessive fees or impediments. The regulations were motivated in part by federal reports criticizing arrangements between colleges and financial institutions, in which the institutions profit from referrals, as well as aggressive marketing of products to students on their campuses.

The draft regulations target two categories of financial products. First, the department is seeking to place the most stringent restrictions on debit cards and prepaid cards that colleges use to directly disburse federal grants and loans to students. For those accounts, the department would prohibit point-of-service fees, overdraft or insufficient funds charges, and ATM withdrawal fees.

A second category includes checking accounts or other financial products that are offered on campus or marketed to students under an agreement with the college. For example, some banks offer debit cards that are co-branded with the logo or mascot of a college. Those types of products would be prohibited from charging account access fees or in-network ATM withdrawal fees, and revenue-sharing and other agreements with colleges would have to be made public.

The department solicited feedback on the proposed rules, and the comment period ended Thursday with responses from more than 200 organizations or people.

Responses came from a wide variety of parties, including the attorney general of Massachusetts, the Association of American Publishers (related to a provision about textbook costs), and some students. But the overwhelming majority of responses came from financial aid or other officials at colleges, many of whom expressed philosophical support for the department's goals but significant practical opposition to much of what the agency actually proposed.

The National Association of College and University Business Officers, for example, warned in its submission that "if these rules are too proscriptive, too difficult and too expensive to implement, third-party servicers and banks will simply exit this marketplace, leaving colleges and universities without valuable partners who have helped them improve services to students." Several firms, the association said, "have already done so." Such an exit would hurt students, the group said.

Seven Democratic members of the House of Representatives also urged the department not to take steps that would discourage the use of third-party servicers.

NACUBO also backed the argument made by a coalition of banking organizations that the Education Department exceeded its legal authority in seeking to regulate not just student accounts that are linked directly to federal financial aid funds, but also financial products that have nothing whatsoever to do with federal funds.

"While the proposal contains a lengthy 'statutory authority' section, none of the provisions cited gives the department the authority to regulate bank accounts," the bank groups say in their comment. "Moreover, the proposal is incongruous with the existing well-developed and complex banking regulatory system, and it is highly unlikely that Congress intended to authorize the department to make large-scale incursions into the field of banking regulation.

"However, the proposal would require educational institutions to implement an extensive regulatory scheme, which in turn would result in extensive requirements on financial institutions -- in other words, adoption of the proposal would render the department a de facto regulator of financial institutions," the banking groups stated, in a warning that sounds more than a little like a precursor to a legal challenge.

In its comment, the National Association of Student Financial Aid Administrators echoes a complaint heard often from college officials these days. "We hope that the department heeds community concerns regarding overregulation, burden with no justifiable return and regulatory impediments to meeting the needs of a diverse student body," NASFAA said. "Entities cannot infinitely absorb burdens of regulatory inefficiencies as a cost of doing business."

The Student Perspective

If groups representing consumers and students had any reservations about the new rules, which they generally supported, it was that they didn't go far enough. The Center for Responsible Lending at the National Consumer Law Center said the proposed regulation "would bring robust and needed reforms to campus-bank marketing partnerships that allow banks, with the cooperation of colleges, to skim fees off of students’ federal grant and aid money." The group applauded the rule for banning overdraft fees on debit card and automated teller machine transactions on accounts tied to federal disbursements and requiring all campus-bank marketing agreements to be publicly disclosed.

But it joined the California State Student Association and other groups in urging the department to ban all revenue-sharing agreements between financial institutions and colleges, and said the department should "act quickly to stop colleges and banks from using federal financial aid as a marketing platform to steer students into high-fee bank accounts."

"Incoming college students are a plum demographic for banks to target," the consumer center wrote. "Banks are keenly motivated to get exclusive access to college students, especially on large campuses where they can secure a large volume of deposits and fee income. Half of the incoming students arrive on campus without a bank account, but are credit-worthy to get an account. Bank accounts are 'sticky' -- since consumers find it difficult to change them, they tend to stay in the same account for long periods of time."

And colleges can have a major influence by putting their imprimatur on students' choices, the group said. "The school’s involvement, including co-branding debit cards and other marketing assistance, suggests to the student that the school has determined that the account is safe and in their best financial interests. Servicers or banks may imply to the student that they are required to use the services offered. In many cases, these accounts have had a set of high, unfair or unusual fees, including high overdraft fees on ATM or debit card transactions; sustained overdraft fees; debit card transaction fees ('swipe fees'); or the inability to access fee-free ATMs. These fees make the bank account more expensive than alternatives that have not been presented to the student, or that the student could find on her own."

The Education Department will review the comments and could issue a final version of the regulation by November, to take effect next July.


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