Education Department Plan Is an 'Incursion' into Banking, Industry Says

WASHINGTON — Bankers are fighting back against a proposal by the Department of Education that would restrict how universities disburse federal student loan funds, calling it a "large-scale incursion" into the banking sector that goes beyond the department's statutory authority.

The proposal, which was published in May, is aimed at setting bounds on certain practices associated with debit and prepaid card programs that many schools offer in partnership with financial institutions in order for students to access their federal student loan funds.

But banking groups argue the plan would effectively turn the Education Department into a banking regulator.

"The proposal is incongruous with the existing well-developed and complex banking regulatory system, and it is highly unlikely that Congress intended to authorize the department to make large-scale incursions into the field of banking regulation," the American Bankers Association, Consumer Bankers Association and Financial Services Roundtable wrote in a joint letter. "The proposal would require educational institutions to implement an extensive regulatory scheme, which in turn would result in extensive requirements on financial institutions — in other words, adoption of the proposal would render the department a de facto regulator of financial institutions."

The proposal would bar schools from requiring or implying that students must establish accounts with a private financial services provider in order to access their funds, and would set limits on overdraft fees for such accounts and bar schools from prioritizing disbursement to partnered accounts, among other changes. Schools would be required to tell students that they may receive their funds at existing banks accounts or a neutral list of accounts they could establish. The plan would also establish different requirements for universities that enter into exclusive disbursement agreements with companies from those that have a variety of options to choose from.

Education Undersecretary Ted Mitchell said the proposal would allow students to "freely choose how to receive their federal student aid refunds" and that "students need objective, neutral information about their account options."

But bankers said the Education Department had no legal right to tell universities, banks or other financial institutions which products they could offer, whom they could overdraft or anything else concerning the disbursement of student loans. They also said that, contrary to its stated purpose, the proposal will make it harder for students to access their federal funds, the groups said.

"A federal agency can exercise only authority delegated to it by Congress," the Network Branded Prepaid Card Association, an interagency group of banks, credit card networks, processors, nonbanks and others, wrote in its comment letter. "Absent such delegation, action taken by the agency would be outside the bounds of the agency's jurisdiction, and may be set aside by a court under the Administrative Procedure Act."

Wells Fargo was more measured in its comment letter, saying that it supports "the department's desire to ensure that students have convenient access" to their federal student loan balances and that they "do not incur unreasonable and uncommon financial account fees" in the process. But the bank echoed the banking groups' concerns that the proposal as written may exceed the department's authority to the extent that its rules apply outside of the disbursement of student loans issued under Title IV of the Higher Education Act.

"The department should not by regulation create a basis for becoming a market participant competing in the offering of general treasury management banking services outside of facilitating payment of title IV, HEA program funds," wrote Tom Levandowski, senior company counsel for Wells.

Levandowski criticized other aspects of the plan as well.

Under the proposal, the "default" disbursement option — that is, the means by which a student's loan balance would be disbursed if no other affirmative choice is made — would be to directly deposit the balance into an existing account. Levandowski said in his comments that this could be impractical, because privacy rules would make it impossible for schools to gather information about existing accounts or know which one to deposit funds into, if there is more than one.

The bank also said that it is not clear whether the rules — which set limits on pricing and other terms — would apply to any bank account a student has their funds placed into, or whether they would have to be offered specifically and exclusively to students as part of a partnership.

"In this regard, the proposed rule seriously undermines fundamental right so financial institutions and its customers to rely on the integrity of preexisting contracts," Levandowski said.

Lawmakers also voiced their concerns about the proposal. In a July 28 letter, a group of 30 Republican Senators and House members warned the agency that if the plan was adopted, students will suffer "limited customer choice with fewer campus bank accounts available." The lawmakers asked for "specific information on how this rulemaking will benefit schools and their students" and a "cost-benefit analysis that takes into consideration the potential unintended consequences we highlight here."

A separate letter signed by seven Democratic lawmakers praised the Department of Education for working to ensure that the Title IV disbursement process is "focused on serving the best interest of students" and said the proposal includes "important steps that will improve the process for distributing financial aid." But the Democrats also said that many universities rely on outside services to get financial aid to students and asked the department to ensure that "institutions are able to continue using third-party servicers, that providers can continue operating in this space, and that new customer protections created by the rule are available to students."

Other public advocacy groups criticized the plan for not going far enough. The Center for Responsible Lending and National Consumer Law Center said in a joint comment letter that though the proposal was "strong," it could be strengthened further. Among the groups' suggestions were barring all ATM and debit fees associated with accounts marketed to students via an agreement with an university; keeping students' personal data out of the hands of marketers; and banning revenue sharing between universities and service providers for affiliated accounts.

The groups said that the actions of one firm, Higher One, highlight the need for strong protections. Firms like Higher One "highjack" the disbursement process, as demonstrated by 2014 enforcement actions by the Federal Reserve against Higher One's bank partner Cole Taylor, NCLC said. In that action, the Fed said that Higher One products were "likely to mislead students" and steer them toward high-fee or hidden-fee products without informing students of lower-cost alternatives.

"For-profit corporations, like Higher One, contract with schools to manage all or part of the disbursement process," the groups' letter said. "Although the Department of Education imposes controls on third-party servicers, these controls have been inadequate to stop them from turning the disbursement process into a marketing platform for their own financial accounts."

Higher One, for its part, limited its comments to fairly specific aspects of the proposal that it found objectionable. The plan's 30-day moratorium on fees from the time the student opens the account, Higher One said, would effectively make the low-cost debit or prepaid option "economically unviable, removing an important option that a substantial portion of students currently prefer."

Higher One also said that requiring universities to offer a paper check as an option to receive their student loan balances "is likely to result in more students choosing this option," which in turn could subject students to expensive check-cashing services and the risk of carrying large amounts of cash.

"With the fee restrictions proposed by [the agency] on Tier 1 accounts, there is no reason not to continue to pursue a goal of 100% electronic disbursement to an FDIC-insured account," Higher One said.