CFPB's 'Scorecard' Could Alter Bank Bids with Schools

WASHINGTON — Colleges may get an upper hand on the bidding process for selecting a financial institution to market products on their campus.

The Consumer Financial Protection Bureau said Wednesday that it was seeking comment on a "safe student account scorecard" that colleges could use to see how banks structure the fees, features and "sales tactics" of financial products to students before forming a partnership.

The scorecard is a part of a larger effort by the CFPB to make the bidding process between schools and banks more transparent, since products like debit cards, prepaid cards and mobile banking are not required to be publicized. Campus credit cards were covered by a law enacted in 2009, but other card products were not.

"So in the past five years, more institutions have turned to marketing these cards instead of credit cards. In fact, 40% of college students now attend schools that have agreements to provide debit or prepaid cards to their students," CFPB Director Richard Cordray said during a conference call with reporters Wednesday. "Our goal is to help students get the best deal available on these kinds of products."

Cordray said they were building the scorecard off prior work done by the Federal Deposit Insurance Corp. so schools could compare the costs and features of financial products from various financial institutions before striking a deal.

"I think it's great they are helping schools to really scrutinize potential contracts for student financial products," said Lauren Saunders, associate director of the National Consumer Law Center. "These may be the first accounts that students get and they may carry it with them for a while, so it shouldn't be based on what's best for the schools and financial institutions."

Many in this industry said they were still assessing the proposed scorecard, but there are early indications that it could have a significant impact on the bidding process between schools and banks if the cost structures are made public.

"Responsible colleges are on high alert to ensure that they endorse transparent financial products. We are working to arm them with the information they need to negotiate products that are in the best interests of their students," Cordray said. "Without clear information on specific account features and fees, it may be hard to tell which products provide the best deal for students."

Here's how the scorecard would theoretically work: schools would pose a list of questions from the scorecard to the banks wanting to market their products on campus. The questions largely center on the potential fees, reasoning behind the fees and ATMs in the area, to name a few. The financial institution would also have to disclose its marketing practices.

Part of the CFPB's reasoning behind this is to prevent campuses from steering students to institutions that offer high-cost accounts, particularly when the school gets royalties based on how many students sign up for an account.

"On the scorecard, a financial institution would fully disclose information about its marketing practices, including how it will guarantee that students receive objective and neutral information about financial product choices," Cordray said. "For example, the financial institution would provide an explanation as to how it will ensure that the college can approve certain marketing materials that use the college's brand or logo."

Schools are required under the CARD Act of 2009 to publicize their credit card agreements with financial institutions, which the CFPB has sought to enforce. The agency has also aggressively pushed for the parties to voluntarily post their other financial agreements not required under the CARD Act.

Part of the concern is that two affiliated financial institutions were cited by regulators in recent years for charging fees on debit accounts that were linked to federal financial aid. And some schools get revenue based on how many students sign up for an account.

But the industry argues that the bad actors are rare and many contracts do not have kickbacks or charge fees to students for having a debit account.

"Many of the concerns outlined in the CFPB's request for information are based on an antiquated study which primarily focuses on the wrongdoings of one nonbank institution and are not based on the actions of our depository institutions which must abide by strict federal disclosure rules and account opening procedures," said Richard Hunt, president and chief executive of the Consumer Bankers Association, in a written statement. "CBA's members will continue to support a transparent market which offers products that are safe and clearly explained to students."

Based on a handful of contracts that American Banker has received in recent months, the agreements can vary greatly with some schools receiving large sums of revenue, sometimes based on how many students sign up for an account. Other contracts have minimal or no revenue paid to schools that simply allow the bank to offer a free debit card on campus or are real estate agreements for the financial institution to rent branch space.

As part of the scorecard process, financial institutions would have to provide the school with an annual summary that largely breaks down the types of fees charged to students per year and the most common fees. The CFPB said such a tool could help schools avoid partnering with a bank that sets up "tricks and traps" on financial products to students, like excessive overdraft fees.

"Higher education institutions should look to CFPB's new tool as part of their efforts to assess their institutions' financial services arrangements and the impact on their students," said Janet Napolitano, president of the University of California, in a statement that was emailed by the CFPB. "And financial service providers should look to CFPB for best practices that the higher education community and the public will expect of their offerings."

The information could also potentially be used as a powerful tool for research and enforcement at the CFPB depending on how much data the schools share with the agency and what the schools might require partnering financial institutions to make public. For now, a CFPB official said, it is waiting to see what commenters say about transparency of contracts as well as perhaps making the annual summary of the scorecard public.

"If people find it more valuable to make that [annual summary part] more transparent as well, that's something that we want to hear," said Rohit Chopra, the student loan ombudsman for the CFPB. "There are a lot of questions that we all have: How much are financial institutions paying for this type of access? What sort of fees are being charged? How many of the students are actually adopting these products? Are there codes of conduct in place, such as banning gifts to school employees? We hope that a lot of these will be able to be addressed through this scorecard."