BILL ANALYSIS �
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.
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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.
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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
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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
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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