The U.S. Department of Education is cracking down on the relationship between financial institutions, universities, and the student/customers they share, but it’s not clear that credit unions have much skin in this particular game.
The DOE announced last week that it had finalized rules that ban overdraft and transaction swipe fees on student debit and prepaid card accounts. The rules also prohibit schools from requiring students to open an account with a specific institution in order to receive student aid funds.
The regulators also are aiming at practices they say include biased and incomplete information provided to students, and unfairly allowing third-party servicers to use access to student information to persuade them to select a preferred account over other options.
The regulations also allow more borrowers to limit the amount of their payments to 10% of their income. And they cited reports that some students paid high fees by using these accounts and lost their federal student aid.
While that may sound like a shot across the bow to university-affiliated credit unions across America, at least one industry insider says that may well not be the case. “I think this is something isn’t really relevant to the most credit unions,” says Renee Buckner, vice president of regulatory and compliance for Credit Union Student Choice.
There are about 500 credit unions nationwide that offer student lending. Buckner says she has heard from several clients of her student lending CUSO wondering if they were affected by the DOE's proposed final rule. "They’re not. These specific proposed regulations are really aimed at the schools that offer a specific bank card for students to use for accessing credit balances, rather than depositing overpayments to a banking account of the student’s choosing,” Buckner says.
I never want to scare credit unions, but the political environment being the way it is, we’ve all seen how one regulatory body can take one thing and make it apply to something else. But at this point, I think the DOE regulations are aimed at something pretty limited in scope and not relevant to the great majority of credit unions.
“The most egregious of these are the school-branded cards that are only usable at school vendors such as the school union or school-owned bookstore. To access the funds to use elsewhere, students can incur a fee,” she says. “I don’t think these really fit into the credit union model of doing things that are in the best interest of the member.”
Or as Gary Perez, president and CEO of USC Credit Union ($311.57M, Los Angeles, CA) says, “We’re not into charging students $30 for a Happy Meal.”
University Federal Credit Union ($1.92B, Austin, TX) is another cooperative closely aligned with its original sponsor — the 50,000-student University of Texas — who doesn’t have that kind of relationship with the schools it serves or its students, says UFCU’s senior manager of university relations, Rhonda Summerbell.
Summerbell says the new rules apply to financial institutions that provide third-party financial aid disbursement services and co-branded campus ID cards that double as debit/pre-paid cards which are directly marketed to students.
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“We do not have either of these types of relationships with the schools we serve,” Summerbell says. “These new regulations were designed to protect students from relationships that are not in the best interest of students. There are only a handful of financial institutions with these types of relationships, mainly Wells Fargo and SunTrust and a couple others.”
Bottom line, according to Buckner at CU Student Choice, “At this point, I do not see this specific set of regulations impacting late fees charged on credit union loans, even those for student loan purposes.” The new rule also requires schools to provide a list of account options, so credit unions may, presumably, pick up some new business that way.
More To Come?
However, they should pay attention to less-positive potential consequences, as this general kind of banking relationship is something other federal regulators, including the CFPB, are showing an increased interest in, Buckner says.
“I never want to scare credit unions, but the political environment being the way it is, we’ve all seen how one regulatory body can take one thing and make it apply to something else,” she says. “But at this point, I think the DOE regulations are aimed at something pretty limited in scope and not relevant to the great majority of credit unions.”
But it does affect a lot of people. The Government Accountability Office and the U.S. Public Interest Research Group say approximately 9 million students are involved, and that about 40% of all college students have debit or prepaid card agreements.
And while few credit unions may be directly involved, the big credit union trades are less than impressed with what the DOE calls new consumer protections.
“Government regulation that stands in between a member-owned credit union and its members isn’t consumer protection when it impedes the delivery of service. So, we’ll carefully review the rule but we’re skeptical that this will be positive for credit union members.” Ryan Donovan, CUNA’s chief advocacy officer, told Credit Union Times.
And NAFCU Regulatory Affairs Counsel Kavitha Subramanian told the trade publication: “Unfortunately, DOE’s rule fails to recognize credit unions’ unique model that allows each institution to pass earnings directly to their student members in the form of lower fees, particularly those credit unions formed by students and alumni of a university for the specific purpose of meeting the financial needs of their campus community.
“We look forward to continuing to work with the Department of Education to improve this rule to help credit unions continue to provide financial access to students in the future.”