Sometime this year, the Consumer Financial Protection Bureau will be quizzing financial institutions about how open they are about the products they make available to college students – often through incentives offered to colleges and universities, as well as their alumni associations.
Back in December, CFPB Director Richard Cordray encouraged banks and credit card companies to be more transparent about products like debit cards, prepaid accounts, and financial aid disbursement cards, to name a few. Currently, these companies publicly disclose credit card agreement information only.
Cordray sent out a warning to these purveyors of student-targeted financial products, stating that "When financial institutions secretly give kickbacks to schools, they are engaging in risky practices."
Who are these institutions that are engaging in a quid-pro-quo with higher education in order to make money from the captive student population? JPMorgan Chase and Capital One are two well-known entities, but the lion's share of the market – almost 67% -- belongs to FIA Card Services, a subsidiary of Bank of America (NYSE: BAC ) .
CARD Act has had a noticeable effect
In its year-end report to congress in December, the CFPB noted that the Credit Card Accountability Responsibility and Disclosure Act of 2009 has appreciably decreased the number of agreements between colleges and credit issuers each year since its implementation. Very likely, the CARD Act's prohibition against marketing cards to persons under 21 years of age without written proof of the applicant's ability to pay had something to do with the reduction in credit card agreements.
Still, the change in the number of agreements is impressive: a mere 617 agreements in 2012, according to the CFPB, compared to a whopping 1,045 in 2009. Credit-card issuers paid colleges and their affiliates, such as alumni groups, a smidge over $50 million for the privilege of reaching student customers, down from $84 million in 2009. Bank of America's affiliate, FIA, paid out $35.5 million of those incentives in 2012.
That isn't surprising, since FIA Card Services had the largest number of open accounts at the end of December, nearly 984,000 compared with JPMorgan Chase, which had only 83.3 million accounts.
New products taking the place of credit cards
The new transparency and the decrease in the number of accounts pushed onto financially unsophisticated young people is a great improvement, but problems remain. The CFPB notes that products not covered by the CARD Act are now being promoted on college campuses, offerings such as prepaid debit cards, checking accounts – as well as debit cards used to access financial aid, which often winds up costing students fees they should not have to pay.
While school officials say that 69% of debit card agreements between issuers and colleges are available for public scrutiny, the CFPB notes that finding them is very difficult to do, so all the players in this particular field are not known.
It appears that FIA may not be one, judging from a letter sent to financial institutions last fall from Congressional Democrats, asking whether or not they participated in this type of marketing behavior. Bank of America peers Citigroup and Wells Fargo were both on the mailing list, however .
One request by the CFPB to banks and card issuers will be that companies post debit card agreements on their websites, so that students and their parents can inform themselves about the terms of those agreements. So far, meetings between banks, universities, consumer groups, and the Department of Education have not produced an agreement, with industry groups unwilling to change a lucrative business venture. If the stalemate continues, students will continue to be the ones who pay the price.
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