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 access   accessing   
                      financial  , scholarship, or campus-based  aid  or  
                      refunds   funds  through 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