BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
AB 1162 (Frazier) Hearing Date: July 3,
2013
As Amended: June 20, 2013
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 the governing bodies of
accredited private postsecondary educational institutions to
adopt policies to be used to negotiate contracts with banks and
other financial institutions for the disbursement of students'
financial aid awards and other refunds onto debit cards, prepaid
cards, or preloaded cards, as specified.
DESCRIPTION
1. Would require the Board of Governors of the CCCs and the
CSU Trustees, and request the UC Regents and the governing
bodies of private, for-profit and nonprofit, accredited
postsecondary educational institutions to adopt policies
that best serve the needs of their students, when
negotiating contracts between their educational institutions
and banks and other financial institutions for the
disbursement of financial aid and other school refunds onto
debit cards, prepaid cards, or preloaded cards.
2. Would require these policies to ensure that contracts
between postsecondary educational institutions and banks or
other financial institutions to disburse financial aid or
other refunds onto debit/prepaid/preloaded cards do at least
all of the following, consistent with federal law:
a. Ensure that students do not incur any cost to open
an account or initially receive their cards.
b. Ensure that students have convenient access to a
branch office of the bank or an automated teller machine
(ATM) of the bank in which the account is opened, or of
AB 1162 (Frazier), Page 2
another bank, where the students can use their cards to
withdraw money, without incurring fees. Would require
the branch office or ATMs to be located on the
educational institution's campus, in a school-owned or
operated facility, or immediately adjacent to and
accessible from the campus.
c. Ensure that the debit/prepaid/preloaded card can be
widely used by students.
d. Not market or portray the account or
debit/prepaid/preloaded card as a credit card or credit
instrument, or subsequently convert the account or card
to a credit card or credit instrument.
3. Would encourage postsecondary institutions to consider a
variety of additional factors when developing their
policies, including whether to:
a. Provide students a clear and unbiased choice of how
to receive their financial aid awards and other refunds.
b. Require at least one fee-free, regularly replenished
ATM on campus, and additional fee-free, regularly
replenished ATMs on campuses in high enough
concentrations to avoid students having to use multiple
ATMs.
c. Prohibit debit/prepaid/preloaded card use from
imposing fees such as insufficient fund fees at ATMs and
points of sale, account balance inquiry fees, PIN-based
transaction fees, inactivity fees, replacement card fees,
transfer or wire fees, dispute fees, and account closure
fees.
d. Require debit/prepaid/preloaded fees to be
prominently displayed on the partnering bank or financial
institutions' Internet Web site or information mailed to
students.
e. Prohibit debit/prepaid/preloaded cards from being
co-branded (i.e., including the logo of the school).
f. Require debit/prepaid/preloaded cards to include the
same level of consumer protections afforded to ATM
customers under the federal Electronic Fund Transfer Act.
AB 1162 (Frazier), Page 3
g. Prohibit debit/prepaid/preloaded card contracts from
including mandatory arbitration clauses.
EXISTING FEDERAL REGULATION
4. Pursuant to 30 CFR, Section 668.164, 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. Requires institutions that open bank
accounts on students' or parents' behalfs, establish a
process that students or parents can follow to open a bank
account, or assist students or parents in opening accounts
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.
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, or 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 immediately adjacent to and accessible from the
campus.
f. Ensure that the debit, stored-value, or ATM card, or
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other device, can be widely used (e.g., the institution
may not limit the use of the card or device to particular
vendors).
g. Not market or portray the account, card, or device
as a credit card or credit instrument, or subsequently
convert the account, card, or device to a credit card or
credit instrument.
COMMENTS
1. Purpose: This bill is intended to ensure that California's
colleges and universities establish policies for negotiating
contracts with banks and other financial institutions to
disburse financial aid and other refunds, in a manner that
best serves the needs of their students.
2. Background: Colleges and universities nationwide are
increasingly contracting with banks and other financial
institutions to disburse financial aid and process credit
balance refunds. Contracting with third-parties for these
services can save the institutions money, relative to
managing these activities in-house, and can also be part of
larger, money-saving contracts that outsource other
financial services required by the institutions, such as
faculty payroll. Some institutions may also receive signing
bonuses from financial institutions with which they enter
into contracts to disburse financial aid and process
refunds.
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. Relationships made with students when
they are in college can 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 other refunds has increased, so,
too, has criticism by consumer advocacy groups, concerned
about the fees imposed on students who elect to receive
their financial aid and refunds via debit, prepaid, or other
preloaded cards.
In May 2012, the United States Public Interest Research Group
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(USPIRG) released a report titled, "The Campus Debit Card
Trap: Are Bank Partnerships Fair to Students?" In that
report, USPIRG observed, "Banks and other financial firms
are taking advantage of a variety of opportunities to form
partnerships with colleges and universities to produce
campus student ID cards and to offer student aid
disbursements on debit or prepaid cards. In addition to
on-campus services, such as student ID functions offered on
the card, some cards offer traditional debit card services
linked to bank accounts; other cards provide additional
reloadable prepaid card functions. The disbursement of
financial aid and university refunds is the most significant
partnership identified.
While schools are obtaining revenues and reducing costs by
outsourcing certain services, the relationships between
schools and financial institutions have raised questions
because students end up bearing some costs directly -
including per-swipe fees, inactivity fees, overdraft fees
and more. Other issues include the effect of aggressive
marketing strategies by partnering companies on student
choice and weaker consumer protections on certain cards that
hold student aid funds."
In its report, USPIRG published seven principles that
characterize what it considers to be a well-structured
campus debit card program, and offered recommendations for
campuses, cardholders, and federal policymakers, including
the United States Department of Education and the federal
Consumer Financial Protection Bureau. Many of the optional
elements of AB 1162 are based on the specific
recommendations USPIRG directed to the U.S. Department of
Education in its report.
3. Discussion: Debate over appropriate practices in
connection with the debit/prepaid/preloaded cards students
are receiving focuses on four fundamental areas: a) student
choice (are students steered toward these cards or otherwise
forced to accept them, or are they offered other options for
timely receiving their financial aid and refunds?); 2)
access to funds (how easy is it for students to access the
financial aid and refunds that are loaded onto their cards,
without having to pay for the privilege?); 3) card use fees
(what fees do students incur when they use their cards, and
are these fees reasonable or predatory?), and 4) co-branding
(does placement of a school name or mascot on a
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debit/prepaid/preloaded card represent an endorsement of
that card by the school?)
The first issue (student choice) is addressed, at least
partially, by federal regulations, and is addressed in more
detail by a bill moving through the Legislature (SB 595,
Calderon). As noted above, regulations promulgated by the
U.S. Department of Education allow educational institutions
to establish policies requiring their 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.
SB 595 (Calderon) would amend state law to prohibit
community colleges and CSUs (and request that UCs refrain)
from contracting with any entity that requires a student to
open an account with that entity as a condition of receiving
his or her financial aid disbursement. SB 595 would also
require community colleges and CSUs (and request UCs) to
offer students the option of receiving their financial aid
via direct deposit into an account at a depository
institution of the student's choosing, as specified. SB 595
would apply not only to federal financial aid, but also to
state financial aid and to campus-based aid (such as loans,
grants, and scholarships provided by a school to a student
from school funds).
The second issue (access) is addressed by both federal
regulations and this bill. Federal regulations require
students to be provided with convenient access to a branch
office of a bank or an ATM where students can use their
cards to withdraw money loaded onto those cards, without
incurring fees. This bill would codify federal regulations
in state law, and, in doing so, apply these access
requirements to the disbursement of federal and state
financial aid and campus-based aid. As currently drafted,
this bill would require community colleges and CSUs and
request UCs and private postsecondary schools to consider
whether to include in their policies what the bill now
requires. The suggested amendments (see Amendments section
below) would, instead, state the intent of the Legislature
that institutions of higher education consider the number of
on-campus ATMs, and the relative distance from campus of
off-campus ATMs at which fee-free withdrawals can be made,
when negotiating contracts with financial institutions for
the disbursement of financial aid and refunds.
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The third issue (what fees may be charged to students in
connection with their use of their cards) is not addressed
by federal regulations, but is addressed by this bill. The
issue of fees is perhaps the most challenging one addressed
by this bill. While no one wants to see students' financial
aid and college refunds significantly diminished through the
imposition of card fees, many would agree that it is
unreasonable to expect financial institutions to give away
an unlimited amount of free financial services to all of
their student cardholders. This is an area where many
believe that schools have a responsibility to negotiate fee
schedules that protect the interests of students.
Debit/prepaid/preloaded cards represent the first
opportunity that most students have to learn how to
responsibly use and manage a banking product. If card fees
are structured and disclosed responsibly, students can learn
valuable money management skills through use of their cards;
if card fees are structured and disclosed irresponsibly,
card usage can trigger fees that erode significant amounts
of money on which cardholding students are relying.
As presently drafted, this bill addresses the topic of fees in
an advisory fashion, by asking California's colleges and
universities to consider whether their contracts should
prohibit certain types of fees. The suggested amendments
would replace language regarding whether to prohibit fees
with legislative intent that institutions of higher
education consider the types and amounts of fees allowed to
be charged to students, pursuant to the contracts these
educational institutions negotiate with financial
institutions. The difference between the two approaches is
subtle, but potentially important. By encouraging
educational institutions to consider whether to prohibit the
imposition of certain types of fees within their card
contracts, the bill suggests that these educational
institutions will find financial institutions willing to
enter into card contracts that prohibit those fees. The
suggested amendments approach this topic in a more neutral
manner, by stating legislative intent that educational
institutions consider the types and amounts of fees allowed
to be charged to cardholding students. In doing so, the
bill treats the issue of fee type and size as topics that
should be negotiated, rather than suggesting that the only
appropriate question in connection with fees is whether or
not to prohibit them.
AB 1162 (Frazier), Page 8
The fourth issue (co-branding) is not addressed by federal
regulations, but is addressed by this bill. Some, including
USPIRG, have expressed concern that the inclusion of a
college name and/or mascot on a debit/prepaid/preloaded card
represents an endorsement of that card by the school.
Co-branding is often a way for students to reflect their
school pride; seldom, if ever, does it represent an
endorsement by a school. In the form in which this bill is
before the Committee, this bill encourages schools to
consider whether to prohibit co-branding. The suggested
amendments would, instead, require schools to disclose to
students that co-branding does not represent an endorsement
of a co-branded card by the school.
4. Summary of Arguments in Support:
a. Teachers unions, consumer advocacy groups, students,
student associations, campuses, and the California
Student Aid Commission support the bill. The supporters
believe that students should not incur exorbitant fees in
order to access their financial aid awards. They are
also strongly supportive of the adoption of campus
policies for debit/prepaid/preloaded cards that best
serve the needs of students. The Center for Responsible
Lending writes, "Students deserve to have a clear choice
over the most cost-effective and convenient way for them
to receive their financial aid funds. Students who opt
to get their financial aid on a debit card should be
entitled to fair limits on the fees they incur to access
and utilize their own money."
The Institute for College Access and Success observes that
this bill is particularly important for Cal Grant B
recipients, who receive an access award specifically
intended to help cover non-tuition costs of attending
college, including textbooks, transportation, and living
costs. A typical Cal Grant B recipient has a family
income well below the poverty line and few resources of
his or her own to pay for college. The access award's
purchasing power has already diminished dramatically over
time, and Cal Grant B recipients cannot afford to see
their aid further reduced by unnecessary fees.
The Student Aid Commission echoes these points. Hundreds
of millions of Cal Grant dollars and other Commission
administered financial aid awards are among the funds
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that may be placed on these debit cards. "While minimal
federal laws and regulations are in place, the lack of
enforcement of those laws has allowed certain practices
to chip away at students' financial aid and their access
to it." The Commission supports the establishment of
policies intended to focus on what is in the best
financial interest of their students, when negotiating
contracts with banks and financial firms to distribute
financial aid.
The Student Senate for California Community Colleges
believes that students deserve to have their financial
interests protected and not bear the cost of contracts
that include per-swipe fees, inactivity fees, overdraft
fees, and ATM fees. There is often weak consumer
protection in these contracts, and aggressive marketing
tactics by banks and financial institutions are
inhibiting students' ability to choose.
The California State Student Association writes that, at
present, only CSU Fresno has a contract with a financial
institution to disburse financial aid. AB 1162 will
ensure that common sense student protections will be in
place, if any new CSU campus enters into a contract with
a bank or financial institution to disburse financial
aid. The CSU Office of the Chancellor concurs. "While
the bill does suggest numerous possible best practices,
[the measure is clear that] the institution retains the
responsibility to draft a policy that is most appropriate
for its student body, while allowing its campuses the
ability to reduce administrative costs." Although only
one CSU campus uses this option for students, "we agree
with the author that the system would be best served with
the adoption of a uniform policy for all 23 campuses to
follow going forward."
5. Summary of Arguments in Opposition:
a. The Civil Justice Association of California (CJAC)
opposes the bill, because it would encourage colleges and
universities to adopt policies discouraging the use of
arbitration in contracts with financial institutions that
provide debit/prepaid/preloaded cards to students. CJAC
observes that federal law, recently reaffirmed by the
U.S. Supreme Court in AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740, 1747, 179 L.Ed. 2nd 742 (2011),
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prohibits states from banning outright the arbitration of
a particular type of claim. State law of this type is
pre-empted by the Federal Arbitration Act. If a contract
entered into by a postsecondary institution with a
financial institution included such a ban, the contract
would be unenforceable and encourage litigation.
"Although we recognize that AB 1162 only 'encourages'
schools to ban arbitration in student credit card
contracts, we believe this mere encouragement of action
will lead to litigation. Encouraging contracts that
result in needless litigation is of great concern to us."
b. Higher One, characterized by USPIRG as the
card-issuing financial institution serving the largest
number of students nationwide, with 520 school card
partnerships at institutions with a total student
enrollment of 4.3 million, also opposes the bill. Higher
One observes that businesses like it can help save
colleges and universities considerable money. The growth
of electronic disbursement has helped hundreds of college
and university campuses eliminate inefficiencies and
avoid millions of dollars in expense. Since its
inception, Higher One has delivered over 3 million
disbursements on behalf of its institutional customers in
California. Using a conservative average cost of $5 per
paper check, including the cost of printers, check stock,
envelopes, and postage, Higher One has saved California
institutions approximately $15 million in hard costs.
Factoring in operational efficiencies, soft costs and
overhead, the overall cost savings are considerably
greater. Higher One believes that AB 1162 will add
additional, unnecessary burdens on institutions when they
evaluate vendors. The legislation may have the
unintended consequence of limiting the number of vendors
providing disbursement services in California.
c. The California Bankers Association (CBA) agrees with
the intent of the bill to provide a standard of
protection for students, but disagrees with the ban on
fees for services and the ban on mandatory arbitration
clauses. The contractual conditions in the measure that
require banks to abandon the ability to price for
services conflict with the National Bank Act. CBA also
believes that the provision of this bill that would
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require institutions to consider prohibiting insufficient
funds fees is unnecessary. Regulation E, the regulation
that interprets and implements the Electronic Fund
Transfer Act, already addresses the issue of insufficient
funds fees by requiring banks to provide customers with
two opportunities to avoid these fees. The first
opportunity is at account origination, where customers
must opt-in to a bank's overdraft protection program.
The second opportunity to opt out of an overdraft charge
is provided to the customer at an ATM.
6. Amendments: The following amendments are suggested to
clarify the application of provisions patterned on federal
regulations, require disclosures about fees and co-branding
(rather than asking institutions to consider whether fees
and co-branding should be prohibited), and remove
outstanding opposition. The amendments suggested to
paragraph (1) of subdivision (b) are consistent with
amendments agreed to in the Senate Education Committee;
proposed changes to this paragraph are purely clarifying in
nature.
Page 2, strike lines 13 through 23, strike page 3, and page 4,
strike lines 1 through 8. Make the following amendments,
beginning on page 4, line 9:
(c) (b)(1) The policies adopted pursuant to subdivision (a)
shall, consistent with federal law, ensure that contracts
between postsecondary educational institutions and banks or
other financial institutions to disburse a student's
financial aid award and other refunds onto a debit card,
prepaid card, or preloaded card do at least all of the
following:
(1) (A) Ensure that the student does not incur any cost in
opening the account or initially receiving the debit card,
prepaid card, or preloaded card.
(2) (B) (A) (i) Ensure that the student has convenient
access to a branch office of the bank or an automated teller
machine of the bank in which the account was opened or of
another bank, so that the student does not incur any cost in
making withdrawals from that office or those automated
teller machines.
(B) (ii) Ensure that the The branch office is or automated
teller machines are must be located on the postsecondary
educational institution's campus, in an institutionally
owned or operated facility, or immediately adjacent to and
AB 1162 (Frazier), Page 12
accessible from the campus.
(3) (C) Ensure that the debit card, prepaid card, or
preloaded card can be widely used ; for example, the
institution may not limit the use of the card to particular
vendors .
(4) (D) Not market or portray the account or debit card,
prepaid card, or preloaded card as a credit card or credit
instrument, or subsequently convert the account or debit
card, prepaid card, or preloaded card to a credit card or
credit instrument.
(2) The policies shall additionally ensure that contracts
between postsecondary educational institutions and banks or
other financial institutions to disburse a student's
financial aid award and other refunds onto a debit card,
prepaid card, or preloaded card do at least all of the
following:
(A) Ensure that a description of the nature and amount of
all fees associated with the card's use is provided, either
electronically or in writing, in a manner that is clear and
conspicuous, to each student before he or she consents to
receive his or her financial aid award or other refund on a
debit card, prepaid card, or preloaded card. Ensure that
that a printable version of this fee schedule can be readily
accessed from the home page of the Internet web site of the
bank or financial institution that issues the card.
(B) Disclose to any student that is offered a debit card,
prepaid card, or preloaded card, which includes the name or
mascot of a school, that such co-branding does not represent
an endorsement of the card by the school.
(d) It is the intent of the Legislature that the policies
adopted pursuant to subdivision (a) governing contracts
between postsecondary educational institutions and banks or
other financial institutions to disburse a student's
financial aid award and other refunds onto a debit card,
prepaid card, or preloaded card additionally consider all of
the following:
(1) The number of on-campus automated teller machines, and
approximate distance from campus of off-campus automated
teller machines at which fee-free withdrawals may be made by
the student using his or her debit card, prepaid card, or
preloaded card.
(2) The types and sizes of fees that may be incurred by
students in connection with their use of their debit cards,
prepaid cards, and preloaded cards.
(3) The impacts, if any, on the educational institution and
AB 1162 (Frazier), Page 13
its students, of a decision to offer a co-branded card, on
which the identity and/or logo of the educational
institution or its mascot is displayed.
(4) The impacts, if any, on the educational institution and
its students, of the mechanism used to resolve disputes
arising with the bank or other financial institution that
issues their card.
7. Prior and Related Legislation:
a. SB 595 (Calderon), 2013-14 Legislative Session:
Would require each community college and CSU campus and
request each UC campus to refrain from entering into a
contract with any entity that requires a student to open
an account with that entity as a condition of the student
receiving his or her financial aid disbursement. Would
also require each community college and CSU campus and
request each UC campus to offer each student the option
of receiving his or her financial aid disbursement via
direct deposit into an account at a depository
institution of the student's choosing, as specified.
Pending in the Assembly Higher Education Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Associated Students of Modesto Junior College
Associated Students Of University of California Davis
California Community College Association of Student Trustees
California Community College Association of Student Trustees
California Federation of Teachers
California Public Interest Research Group (CALPIRG)
California State Student Association
California State University Office of the Chancellor
California Student Aid Commission
California Teachers Association
CALPIRG UC Berkeley Chapter
CALPIRG UC Davis Chapter
CALPIRG UC Irvine Chapter
CALPIRG UC Riverside Chapter
CALPIRG UC Santa Barbara Chapter
Center for Responsible Lending
Coast Community College District Student Council
Community College League of California
AB 1162 (Frazier), Page 14
Consumer Action
Consumers Union
Contra Costa Community College District
Contra Costa Community College District
Faculty Association of California Community Colleges
Institute for College Access and Success
Napa Valley College Board of Trustees
Private individual (San Jose Community College District student
trustee)
Rancho Santiago Community College District
Santa Ana College
Santa Rose Junior College
Student Senate for California Community Colleges Regions IV and
VIII
University of California Student Association
West Los Angeles College Associated Student Organization
Opposition
California Bankers Association
Civil Justice Association of California
Higher One
Consultant: Eileen Newhall (916) 651-4102