On October 30, 2015, the Department of Education issued regulations to impose requirements on the marketing and terms of deposit and prepaid accounts offered to students at educational institutions that participate in Federal student aid programs. According to the DOE, the regulations are intended to ensure that students have convenient access to their title IV, Higher Education Act program funds, do not incur unreasonable and uncommon account fees on their title IV funds, and are not led to believe that they must open a particular financial account to receive Federal student aid. Most of these new rules take effect on July 1, 2016.
On December 16, the CFPB published a Safe Student Account Toolkit “to help colleges evaluate whether to co-sponsor a prepaid or checking account with a financial institution.” The Toolkit includes a Scorecard that can be used by schools when selecting a third-party vendor for student accounts and an Administrator Handbook designed to help school administrators gather relevant information to review, compare and evaluate accounts offered by different financial institutions.
The CFPB’s Toolkit provides guidance on the new DOE regulations, but with a focus on those provisions that are designed to protect students. The CFPB can bring and has brought enforcement actions against colleges under federal consumer protection laws. Their issuing of the Toolkit should be understood as a warning that they also will be enforcing the consumer protection portions of the DOE rules, though perhaps under their unfair, deceptive and abusive practices statute.
As the CFPB itself notes, the Toolkit addresses only some of the requirements under the new DOE regulations. Colleges therefore must understand both the new DOE regulations and the Toolkit to have a complete picture of the requirements and regulatory expectations. This article summarizes some of the key consumer protection rules in the new DOE regulations, with a focus on those addressed in the Toolkit.
Scope
The DOE regulations generally apply to institutions of higher education and certain postsecondary vocational institutions, each referred to as “institutions” in the regulation. The key consumer protections relate to student “financial accounts,” defined in the DOE regulations as “a student’s or parent’s checking or savings account, prepaid account, or other consumer asset account held directly or indirectly by a financial institution.”
The DOE regulations and the Toolkit distinguish between “tier one arrangements” and “tier two arrangements. A tier one or T1 arrangement is an arrangement in which:
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an institution has entered into a contract with a third-party servicer for the servicer to perform one or more functions associated with the processing of direct payments of title IV, HEA program funds on behalf of the institution; and
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the institution or third-party servicer makes payments to –
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one or more financial accounts offered to students under the contract;
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a financial account where information about the account is communicated directly to students by the servicer or the institution; or
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a financial account where information about the account is communicated directly to students by an entity contracting with or affiliated with the servicer
“Third-party servicer” is broadly defined in existing DOE regulations as including any individual, a State, or an organization that enters into a contract with an institution to administer any aspect of the institution’s participation in any title IV, HEA program. The term includes, among others, those third parties that receive, disburse or deliver title IV, HEA program funds, other than by “normal bank electronic fund transfers.” This subtle EFT distinction becomes important for purposes of the definition of tier two arrangements.
A tier two or T2 arrangement is one in which an institution has contracted with a financial institution, or entity that offers financial accounts through a financial institution, under which financial accounts are offered and “marketed directly” to students enrolled at the institution. The accounts will be considered to be marketed directly if the institution communicates directly with students about opening the account, the account or access device is cobranded with the institution’s name or logo and is marketed principally to its students, or if a card or tool is provided to the student for institutional purposes (such as an ID card) and it enables the student to use the device to access the account.
In contrast to T1 arrangements, no third-party servicer is involved in a T2 arrangement. The exclusion for normal bank electronic transfers is therefore important so that banks and other financial institutions that only disburse title IV funds by normal bank EFTs are not treated as third-party servicers and cause the T1 rules to apply.
It is possible for any particular educational institution to have both tier one and tier two arrangements. The DOE points out, however, that this could occur only if the institution has separate agreements with different financial account providers: “One that provided third-party servicing functions and the other that provided accounts that met the T2 arrangement direct marketing definition in some way….”
On the other hand, if a single provider serves as a third-party servicer and offers multiple account options to students of an institution, all of those account offerings must comply with the requirements for T1 arrangements even if absent the third-party relationship one or more of those offerings would only be T2 arrangements. The DOE’s rationale for this approach is that “a third-party service provider exerts a tremendous amount of control over the disbursement process and timing.”
Summary of Requirements
Student Choice. Under the DOE rules, an institution that makes direct payments to a student by EFT and that enters into a T1 or T2 arrangement must establish a selection process to allow the student to choose among “several options” for receiving those payments. This means, among other things, that the institution must ensure that:
The CFPB’s Scorecard, which the CFPB envisions could be used by institutions to solicit information from prospective vendors, requests information from vendors regarding their ability to comply with the following requirements, among other things:
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Informing students of the terms and conditions of the account before it is created, including with proper written notice that the account is not required;
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Presenting materials in an objective and fact-based manner; and
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Maintaining transparency about the vendor’s relationship with the institution.
Accounts Must Be In The Best Financial Interests of the Students. Under both T1 and T2 arrangements, the institution must “ensure” that the terms of the accounts “are not inconsistent with the best financial interests of the students opening them.” Part of the way in which an institution can satisfy this requirement is through documented due diligence at least every two years to determine whether the fees under the arrangement “are, considered as a whole, consistent with or below prevailing market rates.” The CFPB’s Administrator Handbook states that school administrators “may wish to continuously monitor the account fee schedule, policies for changing fees, and the total net fees paid by students.”
Free ATMs. Institutions entering into a T1 arrangement must ensure that students have “convenient access” to the funds in the account through a surcharge-free national or regional ATM network with a sufficient number of ATMs such that title IV funds are reasonably available. Balance inquiries must also be free at these ATMs. The rule is similar for T2 arrangements, except that it applies only if a specified number or percentage of the institution’s students had a title IV credit balance in the prior three award years. (A “title IV credit balance” is basically the amount of title IV funds for a payment period that exceeds the institution’s allowable charges associated with that payment.)
Other Fee Limits. For T1 arrangements, students cannot incur any cost to open the financial account or initially receive an access device. In addition, no charges may be imposed by the institution, third-party servicer, or a financial institution associated with the servicer, for point-of-sale transactions in a State.
No Credit and No NSF Fees. Financial accounts and access devices under either a T1 or T2 arrangement cannot be marketed or portrayed as, or converted into, a credit card. This rule will not apply to T2 arrangements if the institution had no students with title IV credit balances in the prior three award years. For T1 arrangements, no credit whatsoever may be associated with the financial account. A transaction that exceeds the account balance may be “inadvertently authorized” so long as no fee is imposed for overdrawing the account.
Consent to Access Device. Under both T1 and T2 arrangements, the institution must ensure that the student’s consent to open the financial account is obtained before any access device, or any representation of an access device, is sent to the student. (This rule applies to T2 arrangements only if the institution had at least one student with a title IV credit balance in the prior three award years.) The one exception is that the institution may send the student an “access device that is a card provided to the student for institutional purposes, such as a student ID card,” so long as the institution obtains the student’s consent before validating the device to enable access to the account. For these purposes, an “access device” is a card, code, or other means of access to a financial account that may be used by a student to initiate electronic fund transfers.
Regulation E Protections. Financial accounts marketed under either a T1 or T2 arrangement generally must comply with Regulation E. For financial accounts that are prepaid card accounts the Regulation E provisions applicable to payroll cards will apply.
Note: this post, despite its length, provides only a high level summary of the new DOE regulations and addresses only certain of those regulations. Every educational institution participating in a title IV, HEA program will need to be thoroughly familiar with all of the rules, preferably long before the July 1, 2016 effective date for most of these rules.
