On October 13, 2022, the Consumer Financial Protection Bureau (CFPB) published its annual report regarding the banking products offered to students by the financial institutions that are partners of institutions of higher education (IHE). As part of the report, the Department of Education (ED) issued its own reminder to colleges and universities of their disclosure and product neutrality obligations, and threatened to strengthen enforcement in this area. The ED noted that it would “look to the CFPB” when assessing these financial arrangements – a critical announcement given the bureau’s recent assertion of broad jurisdiction over institutional lenders who offer loans to private education as defined in the Truth in Lending Act (from which EDs are not exempt, such as ED Z regulations, interest-free payment plans of less than 12 months). This decision also signals the resurgence of coordination between the CFPB and the ED, similar to what we have seen under the Obama administration.
ED Cash Management Rules
In October 2015, the ED finalized new cash management rules affecting IHEs that have entered into agreements with banks and third-party providers processing Title IV credit balance refunds.
There are two types of arrangements covered by the cash management rules: level one (T1) and level two (T2). The regulations require colleges and universities to disclose the contract establishing a T1 or T2 agreement on their website and provide the CEO with the contract’s web address.
Although the rules for T1 and T2 relationships are different, there are guidelines that form the basis of the CFPB research and report that are important for IHEs to be aware of. In addition to publicly publishing all T1 and T2 arrangements, IHEs should focus on:
- Ensure that students have options and complete information about the terms and conditions of any account under which they may receive their Title IV credit balances.
- Obtain the student’s consent to open the financial account before issuing the student a debit card or other means of accessing funds.
- Do not share student information with banks or other financial service providers until the student has selected the financial account.
- Ensure that the student has convenient access to the financial account through a national or regional ATM network without surcharge, and that there are no other fees associated with opening the account.
- Ensure the account is not marketed or converted to a credit card.
- Ensure that the terms of the accounts are in the best financial interests of the students opening them, by conducting a due diligence review at least every two years.
Report finds misaligned incentives and regulatory violations in college-sponsored products
The report focuses on the college-associated deposit account market, a mechanism through which IHEs distribute hundreds of millions in federal student aid each year. It also raises concerns about the disclosure of financial accounts and school-sponsored fees, as well as the opacity of agreements between universities and financial companies. Specifically, the office found in its review that:
- IHEs did not prominently post required disclosures on their websites, making it difficult for students to assess their banking options and for policymakers to assess the risk to consumers, violating management regulations cash from the ED.1
- IHEs did not present options for students to receive direct payments in a neutral way. Instead, a large proportion of eligible students were directed to websites where account options were presented to them in a way that did not appear to comply with ED cash management regulations.2
- IHEs, along with their partner financial institutions, often promoted products that were more expensive than what students could receive from other vendors or, in some cases, even from the same financial institution. Promoting products with “unreasonable and unusual financial account fees” violates the express intent of ED Cash Management Rules.
- With a third of accounts surveyed having a revenue-sharing agreement with the partner school, the report suggests that the financial incentives associated with product sponsorships may compromise the ability of some colleges and universities to prioritize the financial well-being of their students.
The CFPB also analyzed the college credit card market, but found that the number of school- or organization-sponsored credit card agreements in effect and the number of accounts continued their multi-year decline.
ED Finds Regulatory Violations and Commits to Strengthen Enforcement
As part of the office’s findings, the ED, in a “Dear Colleague” advisory letter, reminded IHEs of their obligation to ensure that campus financial products are in line with the best financial interests of students in accordance with regulations. from 2015 of the ED. The guidelines emphasized IHEs’ responsibility to protect students with respect to financial products, including that the terms of accounts offered under an agreement with financial partners are in line with students’ best financial interests. The ED further noted that institutions that administer Title IV funds act in a fiduciary capacity. Accordingly, IHEs must comply with the DR’s regulatory obligations under the regulations with respect to agreements with partner financial institutions, including:
- Ensure that student options for receiving credit balance payments are described and presented in a clear, factual and neutral manner.
- Disclose sponsorship agreements with financial institutions, including previous year’s compensation.
- Independently assess whether assessed fees are at or below prevailing market rates and document this due diligence research.
The ED also announced in its newsletter that it will take steps to strengthen enforcement of its cash management regulations by tracking new data and hiring additional staff to monitor college banking arrangements. .
The report and accompanying commitment to increase enforcement resources to monitor compliance with ED cash management rules and student best interest standards suggests that institutions in this space should confirm their compliance. Financial products marketed through IHEs have long been a focus of the office and director Rohit Chopra. The bureau’s recent announcements and oversight guidelines illustrate its continued review and focus on these products, and it’s likely to remain a priority going forward. In January 2022, the CFPB announced that it would begin reviewing post-secondary schools, such as for-profit colleges that provide private loans directly to students, and it released an updated review procedures manual. education loans. That same month, the bureau announced it was seeking public comment on potential “unwanted fees” charged by financial firms, including assessed fees for student loans and other student financial products. In September, the CFPB’s special edition of Student Loans Service Highlights claimed, among other things, that withholding student transcripts until they make outstanding loan payments violates the UDAAP standard (unfair, deceptive or abusive acts or practices).
Given the strong enforcement promised by the ED, IHEs and partner financial firms should take a close look at fees, terms, and disclosures for school-sponsored financial products. Likewise, with the CFPB’s announcement earlier this year that it is interpreting Regulation Z more broadly to include institutional lenders providing private education loans, the bureau will likely relax its review authority in this domain.
Cooley regulatory analyst Shane Zerr also contributed to the alert.
- 34 CFR §§ 668.164(e)(vi)-(vii), (f)(iii)-(iv)
- 34 CFR § 668.164(d)(4)