CFPB Set for Crack Down on Student Debit Cards

American Banker, February 6, 2013 | Go to article overview

CFPB Set for Crack Down on Student Debit Cards


Byline: Rachel Witkowski

WASHINGTON -- The Consumer Financial Protection Bureau is poised for a deep and comprehensive look at the relationships between universities and banks, one that is likely to result in new regulations and restrictions on certain practices.

For years, colleges have partnered with financial institutions under the premise that students should easily gain access to bank accounts or credit on campus.

But some abuses in the system, including shady marketing tactics and hidden fees, has the CFPB looking far beyond its initial research into just student loans. That includes debit cards, which have become a lucrative way for institutions to reach out to student populations.

"There are big deals made between universities and banks and we think it's worth understanding how our students are essentially entering the financial services market that might continue far after they graduate," said Rohit Chopra, student loan ombudsman for the CFPB.

The CFPB kicked off a massive data gathering effort last week, which observers said could ultimately cause the agency to change financial disclosures to students and restrict certain kick-backs that schools receive for partnering with a bank.

"A big part goal here is to improve disclosures and not have aggressive or bad actors in the industry," said Michael Tarkan, an analyst at Compass Point Research & Trading. "It's certainly possible you will see some regulatory action."

Banks have already pulled back from the student finance arena, largely due to rising default rates and the Higher Education Opportunity Act of 2008, which pushed federal student loans to the Department of Education. At least 85% of the roughly $1 trillion in outstanding student debt is federal loans.

Many banks have also curtailed credit card offerings to students due to the Credit Card Act of 2009, which restricted certain fees and availability to younger consumers.

Yet the drawback in those areas has spurred new partnerships for banks to offer debit cards, savings accounts or other forms of credit that do not necessarily fall within the same level of disclosures outlined in the Credit Card Act.

After hearing complaints from students about hidden fees and other practices related to debit cards, the CFPB is now examining that area.

"One of the functions the bureau is anticipating are shifts in the marketplace" after regulations have taken effect, Chopra said. "We're taking a pulse check before there are real problems that emerge."

One of the areas the CFPB is looking at is student ID cards that can also be used as debit cards in return for partnering with a particular financial institution. Schools such as the University of Minnesota, University of Florida and University of Arizona have such partnerships.

Most of these agreements offer free accounts with no minimum balance requirement or ATM fees. But there are also royalties that schools receive based on the number of accounts opened or, in some cases, the transaction activity.

That has triggered concerns because the cards can hold everything from meal plans to financial aid reimbursements that are tied directly to the student's bank account.

"What's happening is schools are getting into bed with these financial institutions with these cards and some are doing it in order to be compensated by the bank," said John Hirabayashi, president and CEO of Community First Credit Union of Florida. "Generally, these are very, very large contracts ...we're talking millions of dollars."

The credit union in Jacksonville, Fla. has a smaller scale partnership with the University of North Florida where it pays the school to have a branch and ATMs on campus. Hirabayashi said they also once gave the university a percentage of the interchange fee from ATM usage but they no longer do that.

"I bet the CFPB's going after the whole disclosure of it in terms of who's getting what" from these partnerships, he said.

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CFPB Set for Crack Down on Student Debit Cards
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