WASHINGTON — Credit unions and banks alike are fighting back against a proposal by the Department of Education (ED) that would restrict how universities disburse federal student loan funds, arguing the agency has overstepped its statutory authority.
The proposal would restrict 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.
The proposal also 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 over-draft fees for such accounts.
Schools also 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."
Credit union trade groups were quick to express concern that the ED's proposal would impose "significant new restrictions" on financial products used to disburse credit balance funds to students.
"We believe the broad scope of the proposal may result in negative unintended consequences," wrote Luke Martone, senior director of advocacy & counsel at CUNA, adding that instead of applying a broad brush-stroke to the problem, the government should target "problem areas" and exclude credit unions from the changes.
"While we recognize there are some bad actors within all sectors of the financial marketplace, we urge [ED] to recognize that credit unions generally are not among them in the areas addressed by this rulemaking," Martone said. "We believe it is critical that [ED] employ a more targeted approach than the proposal would provide. [ED's] attention should focus on the handful of companies that have been the source of the majority of anti-consumer behavior."
Similarly, the National Association of Federal Credit Unions (NAFCU), told ED that it "generally supports" the proposals, but expressed concern that some of them could harm" the ability of well-regulated credit unions to serve this important student demographic.
"Students need access to safe and reliable financial services more than most since they often have no prior banking experience or a credit history," wrote Kavitha Subramanian, NAFCU's regulatory affairs counsel in a letter to ED. "Credit unions are uniquely situated to meet the needs of student consumers, since credit unions have a long track record of providing exemplary financial services at low fees and competitive rates."
Subramanian pointed out that a number of credit unions have even been formed by students and alumni of a university "for the specific purpose of meeting the financial needs of those students and alumni, regardless of that person's income or credit history."
In addition, she indicated that while many credit unions have "contracts" with a university as a "landlord-tenant relationship" in order to maintain a branch on campus to better serve students, such agreements do not imply that the university has a "preference" or will "pressure" students into opening an account with a certain financial institution.
Mike Long, executive vice president and chief credit officer at the $2 billion University of Wisconsin Credit Union in Madison, told Credit Union Journal that his institution had formally responded to the ED proposals and that the CU's president & CEO Paul Kundert was part of the original Negotiated Rulemaking Committee that was formed to draft new rules.
"While that committee did not reach a final conclusion, much of what the ED is now proposing mirrors that effort," he said. "As a result, UW Credit Union is generally supportive of the proposed rules, with a few hesitations and requests for clarification."
Long added that while UWCU is a large originator of private student loans, "we believe students should be free to direct those proceeds to whatever bank or credit union they prefer, without pressure or consequences from their school. The spirit of the ED proposal is fair and in the best interests of college students."
But banking groups took their arguments even further, saying the plan would effectively turn the ED 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."
But bankers said the ED 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."
One group that unambiguously commended the new ED proposals is the Center for Responsible Lending, a nonprofit research organization and policy group based in Durham, N.C.
Maura Dundon, the organization's senior policy counsel, wrote that since colleges are responsible under federal law for disbursing federal student aid funds to students, "they must use the disbursement system to get money safely and swiftly to students — not as an opportunity to gain side profit by marketing students to banks." She added that "they must also be prohibited from using other marketing opportunities, like issuing student ID cards, as a bank marketing channel."
