BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session SB 845 (Correa) Hearing Date: April 30, 2014 As Amended: April 3, 2014 Fiscal: Yes Urgency: No SUMMARY Would require the Board of Governors of the California Community Colleges (CCCs) and the Trustees of the California State University (CSU) and request the Regents of the University of California (UC) and each governing body of an accredited private postsecondary educational institution to develop one or more model contracts for use at their respective systems to disburse financial aid, scholarship aid, campus-based aid, or school refunds onto debit, prepaid, or preloaded cards issued by a financial institution, as specified. DESCRIPTION 1. Would require the CCC Board of Governors and the CSU Trustees and request the UC Regents and each governing body of an accredited private postsecondary educational institution to develop one or more model contracts for use at their respective systems to disburse financial aid, scholarship aid, campus-based aid, or school refunds onto debit, prepaid, or preloaded cards issued by a financial institution. 2. Would require that each model contract be developed in consultation with specified stakeholders, consider the best interests of students, and, at a minimum, contain provisions that reflect conditions required for compliance with federal regulations governing the disbursement of federal financial aid. 3. Would require the CCCs and CSU and request UC and the private colleges and universities subject to this bill to make every model contract they develop publicly available on their Internet Web sites. 4. Would require the CCCs and CSU and request UC and the SB 845 (Correa), Page 2 private colleges and universities subject to this bill to additionally consider the following, when developing each model contract: a. The number of on-campus locations and proximity of off-campus locations where a fee-free withdrawal can be made by a student using a debit/prepaid/preloaded card. b. The type and size of fees a student would incur from debit/prepaid/preload card usage and whether provisions of the model contract ensure that the educational institution is provided information by the card-issuing financial institution to evaluate the costs of these fees to students. c. The impact, if any, that offering a card displaying the name or mascot of a campus or educational system would have on students, their campus, or their educational system. d. Whether provisions of the model contract ensure that the educational institution monitors compliance by the financial institution with federal Title IV requirements governing the disbursement of financial aid. e. Whether provisions of the model contract ensure a process to track and resolve student complaints about the card-issuing financial institution's credit delivery, customer service, and debit/prepaid/preloaded cards. f. The impact, if any, of the content of a dispute resolution clause on students, their campus, and their educational system, if a conflict were to arise between a student and the card-issuing financial institution. g. Whether provisions of the model contract ensure that the educational institution does not disclose student information to the card-issuing financial institution beyond what is necessary for that institution to perform the contracted financial aid disbursement function. h. Whether provisions of the model contract ensure that the card-issuing financial institution does not solicit or collect information from a student that is not necessary to perform the contracted financial aid disbursement function, as a condition of allowing the SB 845 (Correa), Page 3 student to access financial aid funds through a debit/prepaid/preloaded card. EXISTING FEDERAL REGULATION 5. Implements Title IV of the federal Higher Education Act of 1965, as amended. Relevant regulations implementing Title IV are contained in 34 Code of Federal Regulations (CFR) Section 668. Two sections of 34 CFR Section 668, which are particularly relevant to this bill, are summarized immediately below. These regulations are enforced by the Office of Federal Student Aid within the United States Department of Education. 6. Provides that schools may contract with servicers to administer any aspect of the school's participation in Title IV (i.e., federal financial aid) programs. Requires servicers that enter into written contracts with educational institutions to administer any aspect of the school's participation in any Title IV program to comply with all statutory provisions of or applicable to Title IV and all regulatory provisions prescribed under that statutory authority (34 CFR Section 668.25) 7. Provides that an educational institution may establish a policy requiring its students to provide bank account information or open an account at a bank of their choosing, as long as this policy does not delay the disbursement of specified federal loan funds to students (30 CFR Section 668.164). Pursuant to 30 CFR Section 668.164, institutions that open bank accounts on students' or parents' behalfs, establish a process that students or parents follow to open a bank account, or assist students or parents in opening accounts, are required to do all of the following: a. Obtain written consent from the student or parent to open the account. b. Inform the student or parent of the terms and conditions associated with accepting and using the account, before opening it. c. Refrain from making any claims against the funds in the account without the written permission of the student or parent, except to correct an error in transferring the funds. SB 845 (Correa), Page 4 d. Ensure that the student or parent does not incur any cost to open the account or initially receive any type of debit card, stored-value card, other type of ATM card, or similar transaction device used to access the funds in that account. e. Ensure that the student has convenient access to a branch office of the bank or an ATM of the bank in which the account was opened (or an ATM of another bank), so that the student does not incur any cost to make cash withdrawals from that office or those ATMs. This branch office or these ATMs must be located on the institution's campus, in institutionally-owned or operated facilities, or on public property immediately adjacent to and accessible from the campus. f. Ensure that the debit, stored-value, ATM card, or other device can be widely used (e.g., the institution may not limit the use of the card or device to particular vendors). g. Refrain from marketing or portraying the account, card, or device as a credit card or credit instrument, or subsequently converting the account, card, or device to a credit card or credit instrument. EXISTING STATE LAW 1. Provides for a variety of student financial aid programs, including the Cal Grant programs and the CCC Board of Governors fee waiver program. COMMENTS 1. Purpose: This bill is intended to use the negotiating power and contracting expertise of California's higher education systems for the benefit of students who opt to receive their financial aid, scholarship aid, campus-based aid, or school refunds via a debit/prepaid/preloaded card issued by a financial institution that contracts with their school. 2. Background: Colleges and universities nationwide are increasingly contracting with banks and other financial institutions to disburse financial aid, scholarship aid, and campus-based aid and to process credit balance refunds. SB 845 (Correa), Page 5 Contracting out for these services can save some schools significant amounts of money relative to managing these disbursement activities in-house. Student card contracts negotiated by schools with financial institutions can also be part of larger, money-saving contracts that outsource other financial services required by the schools, such as faculty payroll. For their part, financial institutions are often eager to take on colleges and universities as clients, because of the access it gives them to students who are just beginning to enter the financial services marketplace. Colleges and universities provide a potentially lucrative marketing environment for financial institutions, because relationships made with students when they are in college often lead to financial relationships that survive long past graduation. However, as the use of banks and other financial institutions to disburse financial aid and school refunds has increased, so, too, has concern over the practices used by schools and financial institutions to market these cards to students, and over the extent to which students' financial aid and school refunds are being siphoned away by financial institutions through the imposition of fees on students' card usage. More recently, privacy concerns have also emerged. This bill attempts to address concerns raised by students, consumer advocates, and regulators, by requiring California's systems of higher education to negotiate model contracts with financial institutions for the disbursement of aid on debit/prepaid/preloaded cards. Under the provisions of this bill, these model contracts must consider the best interests of students, and, at a minimum, must require compliance by schools and financial institutions with relevant federal regulations governing the disbursement of financial aid. Recognizing that the federal regulations may not go far enough in certain areas, this bill also asks the systems to consider several additional topics when negotiating model contracts. These additional topics include areas that may not be sufficiently addressed by federal regulations. 3. Changing Federal Regulations: In November 2013, in SB 845 (Correa), Page 6 recognition of increasing concern around the disbursement of federal financial aid on debit, prepaid, and preloaded cards, the U.S. Department of Education (USDOE) announced its intent to revise its federal financial aid disbursement regulations as part of a negotiated rulemaking. That negotiated rulemaking is currently ongoing. The first negotiation session was held in February 2014, and the final one is currently scheduled to occur in mid-May (see http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/pro gramintegrity.html ) Negotiated rulemakings overseen by USDOE differ from the traditional rulemaking process followed by California state government entities. Under the rules followed by USDOE, consensus is defined as the lack of dissent by any member of the negotiating committee. If a negotiated rulemaking results in consensus, USDOE publishes the consensus work product in the Federal Register as part of a Notice of Proposed Rulemaking. If consensus is not achieved through a negotiated rulemaking process, UDDOE uses a different, longer process to promulgate final rules. First, the Department take a step back and considers whether it should continue to proceed with regulations. If the Department decides to move forward, it may use some portion of the regulatory language developed during the negotiated rulemaking as the basis for its Notice of Proposed Rulemaking, or may develop new regulatory language for all or a portion of its proposed regulations. Regardless of whether the negotiated rulemaking achieves consensus, USDOE publishes a Notice of Proposed Rulemaking in the Federal Register, in which it solicits public review and comment. Input received from the public on its proposed regulations is then used by USDOE to develop final regulations. According to individuals who are currently participating in the USDOE's ongoing, negotiated rulemaking, a consensus work product is expected to be difficult to achieve. Thus, the timing and content of changes to Title IV regulations remain uncertain. This bill attempts to address that uncertainty by requiring schools' model contracts to "contain provisions that reflect conditions required for compliance with federal regulations governing the disbursement of federal financial aid." This broad language is intended to address any rulemaking scenario. SB 845 (Correa), Page 7 4. What Are The Key Issues Being Discussed? The primary issues being discussed during the negotiated rulemaking are summarized in a February, 2014 report issued by the US Government Accountability Office (GAO) to the US Senate Committee on Health, Education, Labor, and Pensions titled, "College Debit Cards: Actions Needed to Address ATM Access, Student Choice, and Transparency," and in a March, 2014 letter report issued by the USDOE's Office of the Inspector General (OIG) to the Office of Postsecondary Education and the Office of Federal Student Aid within USDOE, titled, "Third-Party Servicer Use of Debit Cards to Deliver Title IV Funds." The GAO report identified the following three key issues, which it recommended that USDOE address in its upcoming rulemaking: a. Some students may not be getting the information they need to determine whether a debit or prepaid card is the best match for them among their options for conducting financial transactions and receiving student aid. GAO recommended that USDOE develop requirements in consultation with the federal Consumer Financial Protection Bureau to ensure that students are provided with objective and neutral information regarding their options for receiving federal student aid payments. b. Some students may not be receiving the convenient access to their funds that federal regulations require. GAO recommended that USDOE provide a specific definition for what constitutes convenient access to ATMs or branch offices of card providers. c. Although millions of students attend institutions that offer college cards, comprehensive information is unavailable on the prevalence of agreements between schools and card providers, the terms of those agreements, and the experiences of students who use these cards. GAO urged USDOE to require schools to make their card contracts available. It observed that greater disclosures would provide greater transparency about the financial relationships between schools and card providers and could help students, policymakers, and regulators identify SB 845 (Correa), Page 8 potential concerns about these arrangements. The OIG identified six key issues, some of which mirror concerns raised by the GAO, and some of which are new: a. Schools that outsourced credit balance delivery gave servicers (i.e., the financial institutions with which they contracted) significant control over the Title IV funds (federal financial aid) delivery process and relied on them to meet Title IV regulations. However, the schools did not appear to routinely monitor servicer compliance with Title IV regulations, nor track or monitor resolution of student complaints about funds disbursement. b. Information about debit cards was not provided in a neutral or objective manner. Schools did not prevent their servicers from using marketing and other strategies to persuade students to select the servicer's debit card over other available options for receiving financial aid. c. Servicers appeared to deliver Title IV funds to students without charging fees. However, students who chose a servicer's debit card option could incur fees after the servicer deposited the funds into students' accounts. In some cases, those fees appeared to be unique or higher than those of the alternative financial service providers students could have used to obtain their financial aid. d. Schools had financial incentives in their contracts with servicers that created the potential for conflicts of interest. Those conflicts had the potential to influence school officials' decisions and actions at the expense of student interests. e. Some schools did not offer fee-free ATMs on campus for use by students that elected to receive their financial aid via debit cards. f. Schools provided, or servicers collected, information about students that was not needed by the servicers to deliver credit balances. Schools did not monitor servicers for compliance with federal rules for handling personally identifiable information. SB 845 (Correa), Page 9 Available information suggests that all of these issues are being discussed by those who are participating in the negotiated rulemaking. However, it is currently unclear how many of these issues will be included in the final rules expected to be issued by USDOE sometime later this year or next. Given this uncertainty, the Senate Education Committee recommended several amendments to this bill, which are intended to ensure that all of the issues identified above are addressed by schools in their model contracts. Those amendments, all of which were accepted by this bill's author, are contained on pages 3 and 4 of the bill. Thus, it appears that this bill addresses all of the areas of concern identified by the GAO and the OIG. 1. Summary of Arguments in Support: a. This bill's author states, "One of the challenges facing students and policymakers at the present time is the highly individualized approach taken by California campuses toward the contracts they enter into with financial institutions for the disbursement of financial aid, scholarship aid, campus-based aid, and school refunds onto debit/prepaid/preloaded cards. Several of these contracts have been criticized for failing to uphold the best interests of students, yet, to date, no public or private higher educational system in California has stepped in to provide guidance or assistance to the individual campuses that are negotiating these card contracts. "SB 845 would give California's public and private higher education systems responsibility for developing model card contracts for use by the campuses within their systems. Because of their size, bargaining power, and contracting expertise, each of the systems is much better positioned to negotiate card contracts with financial institutions than individual campuses within each system. The systems can also use these model contracts to help ensure greater uniformity in the terms and conditions that apply to debit/prepaid/preloaded cards issued to California's college students. SB 845 (Correa), Page 10 "SB 845 recognizes that a one-size-fits-all approach may not work for all institutions of higher learning in California, nor even for all campuses within a single higher education system. For that reason, the bill contains language directing systems to develop one or more model contracts for use by campuses within their systems, and directs each system to consult with stakeholders, including both students and individual campuses, when developing these model contracts. Above all, SB 845 directs the systems to ensure that all of their model contracts put the best interests of their students first." b. The California State Student Association is sponsoring SB 845, because the bill not only looks out for the best interests of students, but also gives students a voice in the development of the model contracts the bill requires. "SB 845 will ensure that common sense protections are in place for students who receive financial aid on debit cards." The University of California Student Association and Community College League of California support the bill for similar reasons. The Community College League states, "SB 845 (Correa) strikes the correct balance between preserving the flexibility of California's community colleges to negotiate with vendors to provide financial aid disbursement services, while at the same time giving guidelines that will help protect student's financial interests." c. Higher One, one of the largest financial institutions that issues debit and prepaid cards to students, believes "that SB 845 is a fair compromise for all stakeholders and represents legislation that will protect the best interests of students and institutions of higher education alike." 2. Summary of Arguments in Opposition: None received. 3. Amendments: a. Public Comment: As currently drafted, SB 845 relies on a group of key stakeholders to negotiate the model contracts the bill envisions, but does not require these SB 845 (Correa), Page 11 stakeholders to solicit public input before finalizing the model contracts. The following amendment would ensure that no model contract is finalized without first soliciting public comment. Page 2, line 14, before the period, insert: , and shall not be finalized before public comment is sought and considered. b. Increased Transparency: SB 845 envisions that individual campuses will use the model contracts developed by their systems when entering into binding contracts with financial institutions to disburse aid and refunds onto debit/prepaid/preloaded cards. Although the author expects that these binding contracts will be based on the model contracts, some customization of the binding contracts is anticipated, as individual campuses are likely to seek contract provisions that best meet the needs of their specific campus and campus population. At present, this bill requires the systems to post their model contracts on the Web, but does not apply a public disclosure requirement to the binding contracts that are expected to flow from these model contracts. The following amendment would ensure that these binding contracts are made publicly available: Page 2, line 18, after "subdivision (a)", insert: and every binding contract negotiated by an educational institution under their jurisdiction with a financial institution for the disbursement of a financial aid award, scholarship, campus-based aid award, or school refund onto a debit card, prepaid card, or other preloaded card c. The following technical amendments are also suggested, to clarify some of the changes made in the Senate Education Committee: i. Page 4, line 13, strike: services ii. Page 4, line 23, amend as follows: perform the contracted financial , scholarship, or campus-based aid or refund disbursement function. iii. Page 4, lines 27 and 28, amend as follows: SB 845 (Correa), Page 12 contracted financial , scholarship, or campus-based aid or refund disbursement function as a condition of allowing the student to accessaccessingfinancial , scholarship, or campus-based aid or refundsfundsthrough a debit card, 4. Prior and Related Legislation: a. AB 1162 (Frazier), 2013-14 Legislative Session: Would have required the Board of Governors of the CCCs and the Trustees of CSU and request the UC Regents and the governing bodies of accredited private nonprofit and for-profit postsecondary educational institutions to adopt policies to be used for negotiating contracts between their institutions and banks and other financial institutions to disburse students' aid awards and other refunds onto debit/prepaid/preloaded cards. Failed passage in the Senate Banking and Financial Institutions Committee. b. AB 1927 (Frazier), 2013-14 Legislative Session: Similar to AB 1162 (Frazier) from 2013. Passed the Assembly Higher Education Committee. Pending a hearing in the Assembly Banking and Finance Committee. LIST OF REGISTERED SUPPORT/OPPOSITION Support California State Student Association (sponsor) Community College League of California Higher One University of California Student Association Opposition None on file Consultant: Eileen Newhall (916) 651-4102