CFPB Report Finds Some Financial Institutions and Colleges May Be Steering Students to More Expensive Financial Products

On October 13, the Consumer Financial Protection Bureau (CFPB) released its 12th Annual Report to Congress on college credit card agreements. The report reviewed agreements and data covering the over 1.2 million student checking and credit card accounts that are governed by partnerships between institutions of higher education and financial services providers, and it highlighted market trends and possible risks. The key findings include that marketing efforts directed at students promote accounts that impose more costs than comparable accounts, and agreements between some financial institutions and colleges are not being disclosed in the manner required.

The provision of Regulation Z that implements Section 305 of the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) requires credit card issuers to annually submit to the CFPB a copy of any college credit card agreements in effect at any time during the preceding calendar year between the issuer and an institution of higher education or affiliated organization. Credit card issuers are further required to submit: (1) the total number of credit card accounts covered by an agreement; (2) the total dollar amount of payments made by the issuer to the institution during the year and the method or formula used to determine such amounts; and (3) the number of new college credit card accounts covered by an agreement opened during the year. The CARD Act also requires the CFPB to submit an annual report to Congress and make the information submitted by credit card issuers publicly available.

The CFPB’s review included data on 11 deposit/prepaid account providers, including nonbank financial service providers, banks, and credit unions offering more than 650,000 student accounts in partnership with 462 institutions of higher education. Among other findings from the report, the CFPB highlighted:

• Students are subject to direct marketing efforts that promote accounts that impose more costs than comparable accounts — even comparable accounts offered by the same financial services provider.  Some providers’ agreements with schools allow them to charge students five overdraft and/or nonsufficient funds penalties per day, which could total up to $175.
  
  
• Under Department of Education regulations, students must be allowed to select the way they receive their financial aid from a neutral list. The CFPB identified instances where students were told that financial aid payments might not be as timely if students did not choose a college-sponsored account.
  
  
• Schools are required to post on their websites the agreements they have with financial services providers, any compensation exchanged between them, and the average costs paid by students. The CFPB’s review found that hundreds of schools did not appear to have posted the disclosures in the manner required.
  
  
• With respect to the college credit card market, the report found that the number of credit card agreements, overall payments from card issuers to institutions, and open accounts pursuant to such agreements continue to decrease over prior years. Additionally, agreements with alumni associations continue to represent most agreements, more than two thirds of accounts, and payments by card issuers.

CFPB Director Rohit Chopra summarized the key findings as “[t]oday’s report suggests that there is more work to do to ensure that students are not steered into school-endorsed products with junk fees. We will continue to work with the Department of Education to help students find the best possible products.”

In response to the report, the Department of Education released a Dear Colleague Letter, reminding institutions of higher education of their regulatory obligations in overseeing arrangements with financial institutions. In addition, the Department of Education committed to:

• Improving the process institutions use to report their financial arrangements to the Department of Education;
  
  
• Bringing on additional staff to monitor such arrangements; and
  
  
• Continuing to review arrangements with financial institutions as part of the program review process.