Compliance Blog

By Kavitha Subramanian, Regulatory Affairs Counsel

Happy Monday, Compliance Colleagues! For those of you with a bit of the Monday blues, I hope today's post can help ease your compliance to-do list for the week ahead and provide a little clarity on a new regulation that at first blush appears much scarier than it actually is. A few weeks ago, the Department of Education finalized a new rule related to fees that can be charged to student accounts that receive federal student aid. Before you get concerned that there is yet another federal regulator overseeing credit unions, I want to clarify that this new DOE rule does not regulate all credit unions that have student members.

In simple terms, this rule will only impact credit unions and other financial institutions that (1) have entered a contract with a college or university to directly market their products and services to students on campus, (2) where the school meets the threshold amount of students in receipt of Title IV HEA program funds, and (3) an account opened through this agreement receives Title IV HEA program funds.

Because this rule seeks to prohibit educational institutions from steering students into using financial accounts that the college has an existing contractual relationship with, the regulation categorizes the educational institution's contractual relationship with certain third party financial providers as either Tier 1 (T1) or Tier 2 (T2).

• T1 arrangement: The school has a contract with a third-party servicer under which the servicer processes direct payments of Title IV HEA funds on behalf of the school and also offers one or more financial accounts to students.
• T2 arrangement: The school has a contract with a financial institution under which financial accounts are offered and marketed directly to students.

In general, according to the DOE, these T1 agreements are typically not with a traditional banking entity such as a credit union or bank. See 80 FR 67145. So, a majority of our focus is on the requirements when there is a T2 marketing agreement. Under a T2 agreement with a credit union, a financial account is directly marketed to students in three specific situations: (1) the school communicates information directly to its students about how to open the financial account; (2) the financial account or affiliated card is co-branded with the institution's name, logo, or mascot; or (3) a card that is provided to the student, such as a student ID card, is linked with the financial account.

The regulation creates a de minimus safe harbor for schools in T2 agreements that have a limited number of Title IV fund recipients. In order for the school to be covered by the regulations applicable to T2 agreements, the school must have at least five percent its student body receiving Title IV funds for the three most recently completed award years or an average of 500 students with a Title IV credit balance for the three most recently completed award years.

If a student account receiving Title IV funds is covered by a T2 agreement, there can be no cost associated with opening the account or with receiving any type of debit card, stored-value card, or ATM card. Additionally, the student must be able to make balance inquiries and access funds deposited in the financial accounts through surcharge-free in-network ATMs that are accessible near or around campus. While this type of account can be extended overdraft services, the credit union cannot charge an overdraft fee on an inadvertent overdraft charge.

So to recap, this regulation only applies to student accounts opened pursuant to a direct marketing agreement between the credit union and the university, where the student account receives federal student aid. Additionally, the university must have enough students that receive federal funds to not be covered by the de minimus safe harbor rule. For those covered accounts, the credit union cannot charge a fee for ATM withdrawals, opening the account, or inadvertent overdraft usage. These fee restrictions do not apply once the student graduates, stops receiving aid, or is no longer enrolled in the school.

I hope this helped provide some clarity for the covered credit unions! For a deeper, more substantive look at this new rule, please check out NAFCU's Final Regulation 15-EF-18, or reach out to me directly at ksubramanian@nafcu.org or 703-842-2212 with your questions.

Programming Note: NAFCU's Offices will be closed on Wednesday November 11, 2015 in honor of Veteran's Day. We'll be back blogging on Friday.