On October 13, the Consumer Financial Protection Bureau (CFPB) published a report, College Banking and Credit Card Agreements, which cited many instances of institutions not complying with reporting and disclosure requirements included in the Department of Education’s cash management regulations regarding accounts offered to students.
In a simultaneously published Dear Colleague Letter (DCL), ED stated it “is concerned that institutions are failing to meet their regulatory obligations to ensure that accounts offered” do not contain “terms, including the imposition of any fees, that are inconsistent with the best financial interests of students.” ED considers this requirement to be met if an institution “documents that it conducts reasonable due diligence reviews of fees to ascertain whether they are consistent with or below prevailing market rates.”
Colleges and universities that partner with banks or other financial institutions where accounts may be offered to students are being asked by ED to review those agreements along with ED’s cash management regulations. Schools should make sure that students’ best interests are considered when entering these agreements, among other provisions.
Banking Arrangements Reviewed by the CFPB
In its report, the CFPB looked at 11 account providers offering over 668,000 accounts in partnership with colleges and universities during the 2020-21 award year. The vast majority of accounts were what ED considers to be Tier One (T1) arrangements. Colleges and universities are considered to be in T1 relationships if they have an agreement with a third-party servicer where the servicer performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the institution and offers one or more financial accounts under the arrangement or markets an account to students itself or through another entity. The CFPB found over 473,000 active accounts at over 370 partnering colleges and universities. On average, the CFPB found that institutions paid T1 providers $1.66 per student for processing disbursements and providing students with a banking option in 2020-21.
The other types of accounts CFPB examined were defined by ED as Tier Two (T2) arrangements, where a college or university partners with a bank or other financial institution under which accounts are offered and marketed directly to students. In T2 arrangements, financial institutions often pay colleges and universities for direct access to the student body, including “both one-time payments and annual payments,” according to the report. In 2021, the CFPB estimates that issuers paid partner institutions a combined total of over $18.5 million.
The CFPB estimates that hundreds of colleges and universities “are not fulfilling disclosure requirements due to publicly available information such as investor presentations.” In the report, the CFPB cited one account provider’s earning call where the provider stated its number of university partners, while only half of those were able to be identified on ED’s database tracking such arrangements.
In its DCL, ED stated that “institutions have a responsibility to protect their students when it comes to financial products,” and highlighted specific areas of concern, citing that schools should:
- Ensure student options for receiving credit balance payments are described and presented in a clear, fact-based, and neutral manner;
- Clearly disclose contracts establishing a T1 or T2 arrangement between the institution and any third-party servicer, including the prior-year compensation and services received by either party under that arrangement;
- Notify ED of third-party servicer contracts; and
- Ensure that the terms of accounts offered under a T1 or T2 agreement are consistent with the best financial interests of students.
When ED’s most-recent revisions to the cash management regulations became effective in 2016, NACUBO provided numerous resources and summary guidance to member institutions on our Debit Cards and Campus Banking Products pages. The guidance is still relevant and includes a link to the final regulations, summaries of T1 and T2 requirements, reporting and disclosure details, and a flowchart to assist in determining which type of arrangement schools may have with banks and third-party servicers.