Last week, the CFPB released its eleventh annual report to Congress on college credit card agreements. The annual report is mandated by the CARD Act.
The CARD Act requires mandatory reporting to the CFPB by card issuers on agreements with institutions of higher learning or certain affiliated organizations (such as alumni associations). The new report represents a return to the Bureau’s pre-2016 practice of including in the annual report not only the information on college credit card agreements mandated by the CARD Act but also information on other financial products marketed to students. In fact, in addition to titling the report “College Banking and Credit Card Agreements,” the Bureau devotes 34 pages of the new report to a discussion of the “college deposits market” and only 7 pages to a discussion of the “college credit card market.”
College Deposits Market. This section of the report focuses on contractual arrangements between institutions of higher education (IHE) and third party financial services providers to facilitate the disbursement of federal financial aid (also known as Title IV funds) to students (referred to as “college banking agreements.”) The CFPB’s key findings are:
- Many IHEs do not appear to prominently post the disclosures on their websites about college banking agreements (such as annual mean and median fees charged to students, compensation to and from an IHE to a financial institution) that are required by the Department of Education’s (ED) “cash management rules,” potentially making it difficult for students to assess their banking options and for regulators to assess consumer risk.
- Many students are being directed to websites where they are presented with account options for receiving Title IV funds by electronic deposit in ways that do not appear to comply with the “student choice” requirements in the cash management rules including that such options be presented in a “neutral manner” so as to avoid steering.
- Financial service providers and their partner IHEs often appear to offer and promote more costly products than what students could receive from other providers, or in some cases, the same financial institutions.
- It is unclear whether IHEs are conducting adequate contract and fee reviews. The cash management rules generally require IHEs to review college banking agreements to ensure that the terms offered to students “are not inconsistent with the best financial interests of students opening them.” ED considers this requirement to be met if an IHE documents that it conducts reasonable due diligence reviews at least every two years to determine if the fees imposed under the agreements are consistent with or below prevailing market rates and the contracts provide that they can be terminated by the IHE based on student complaints or the IHE’s determination that the fees are inconsistent with or above market rates. The CFPB observed that when IHEs perform such reviews, they may not have current information or know where to obtain information on prevailing market rates. It also observed that IHEs could strengthen their college banking agreements by establishing formal processes for student complaints (such as requiring the financial institution to identity, track and resolve student complaints and provide periodic reports to the IHE.) The CFPB stated that some IHEs receive financial inducements as part of their college banking partnerships which can result in conflicts of interest because an IHE’s financial interests would not be aligned with the best interests of students.
College credit card market. The CFPB’s key findings are:
- Based on a comparison of data from 2009 with year-end 2021 data, the number of college credit card agreements, overall payments from issuers to IHEs, and open accounts continue to decrease.
- College credit card agreements with alumni associations continue to represent most agreements, accounts, and payments by issuers.
Concurrently with the CFPB’s release of the report, ED issued a letter that “reminds institutions of their regulatory obligations in overseeing [college banking agreements] with financial institutions.” In the letter, ED referenced the CFPB report and stated that it is “aware of certain practices that may pose risks or excessive costs to students….We are concerned that institutions may be failing to meet their regulatory obligations [with respect to Title IV funds] and are issuing this letter to highlight those areas of most concern.” ED also stated that it “will monitor compliance and take corrective action to enforce these regulations when necessary.”
In the CFPB’s press release about the report, Director Chopra is quoted as saying that that the CFPB “’will continue to work with the Department of Education to help students find the best possible products.’” Except for this statement, the CFPB did not discuss what actions, if any, it plans to take based on its findings.
In the past, the CFPB seemingly deferred to other regulators, such as the Federal Reserve Board and the FDIC, which entered into settlement agreements with service providers and banks over their allegedly unfair and deceptive practices in connection with the solicitation and operation of student accounts. Now, however, a more activist CFPB has already asserted supervisory jurisdiction over colleges and universities that merely offer their own short term payment programs and temporary financial assistance programs, claiming that those programs are private education loans. It seems entirely likely that today’s CFPB may not be content to engage in sabre rattling, encouraging and supporting ED activity, and perhaps FTC activity, or even activity by the federal bank regulatory agencies, and may simply assert that colleges and universities are now covered persons offering or providing consumer financial products or services, enabling it to bring enforcement actions challenging the practices identified in its key findings as unfair, deceptive, or abusive.