CFPB Scrutiny of Bank-College Partnerships Deepens

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

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

But some abuses in the system, including shady marketing tactics and hidden fees, have 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 bureau 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 kickbacks that schools receive for partnering with a bank.

"A big part of the 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 over 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 because of the Credit Card Accountability Responsibility and Disclosure 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 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 created 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 in Jacksonville. "Generally, these are very, very large contracts … we're talking millions of dollars."

In a smaller partnership, with the University of North Florida, Community First 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 use, 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.

Chopra said its inquiry was also designed to help universities better negotiate the terms of the agreement.

"We've heard from schools that they often don't know what product features are important to negotiate" with financial institutions, he said.

The terms can vary significantly, depending on the school, and are constantly evolving, especially when a new regulation or investigation into any provider is launched.

"We are always looking at ourselves internally and asking the question: are we making the right decisions?" said David Looney, associate director of business services at the University of Florida.

Looney said the school received some questioning from the public last year when a student debit card servicing company, Higher One, was fined by regulators for allegedly charging outlandish fees on student accounts largely tied to financial aid disbursement. The University of Florida had an indirect relationship with the company because it used e-commerce services from a company that Higher One acquired.

The company services more than 1,200 higher-education schools, many of which came under criticism following Higher One's settlement with the Federal Deposit Insurance Corp. in August. The CFPB also immediately launched a warning to consumers.

"Everybody started looking at us and saying, What's going on here?" Looney said. "It's not about us trying to make money off anybody … the whole message is just a convenience factor for students."

The school has a separate partnership with Wells Fargo in which students have the option of linking their campus ID cards to a Wells Fargo checking account and use it as a debit card.

The CFPB is concerned about how universities are marketing these cards by letting students know it is only an option, not a requirement.

"This is a relatively new" feature, Chopra said. "On one side, it can be very convenient … but does it have features that are as good as or better than others?"

Looney said he is aware of schools that do not let students know that signing up for the debit card is optional, though he said his school was careful to clarify it is not mandatory.

The University of Florida also does not allow Wells Fargo's bankers to offer credit cards or loans during the orientation process. However, the school does receives royalties, including a one-time $8 for every account that remains opened for a year, a $25,000 bonus and $15,000 in cards reimbursement annually, according to the contract between Wells Fargo and the university.

Looney said the university treats its banking partnership very carefully by keeping each function open to separate bidders as well as restricting certain fees on the student-related accounts.

Much of the CFPB inquiry "is driven by other relationships structured to where there is a stronger financial incentive that has forced students into banking relationships," Looney said. "So it's probably fair to take second look at those programs."

Chopra added that the agency is particularly interested in comparing agreements with smaller financial institutions, nonbanks and perhaps online banks as schools try to meet the virtual demands of younger consumers.

"Another dimension of this is that students and consumers are often early adopters of emerging technology in the financial services space," he said. "Given these are young consumers, they don't need as many branch services. So I'm not sure how many universities would continue" to select the brick-and-mortar option "or form a partnership with a bank that may not have a physical branch."

Hirabayashi has his own partnership to protect, but he is encouraged by the consumer bureau's inquiry, because it would create a "level playing field" for smaller institutions to bid on these agreements by bring clarity to the public.

"There's a lot of pressure from universities to strike these deals with primary banks or national types of financial institutions that would try to maximize the amount of money that the university is going to receive," he said. "Anything that would protect the student and at least make them aware that they have options is good."