Statement for the Record. American Bankers Association. Committee on Banking, Housing, and Urban Affairs. United States Senate

Transcription

1 Statement for the Record On behalf of the American Bankers Association before the Committee on Banking, Housing, and Urban Affairs of the United States Senate

2 Statement for the Record On behalf of the American Bankers Association before the Committee on Banking, Housing, and Urban Affairs of the United States Senate July 31, 2014 Chairman Johnson, Ranking Member Crapo, and members of the Committee, ABA appreciates the opportunity to submit comments for the record on the availability of financial products for students. The ABA is the voice of the nation s $14 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend nearly $8 trillion in loans. Banks provide an array of products and services for students. Banks provide student loans, but that product was dramatically reduced due to onerous requirements on private lenders following the enactment of the Health Care and Education Reconciliation Act of The federal government now has the majority stake in student loan underwriting and, since 2010, the growth of student loans provided by the government has skyrocketed, rising over $100 billion annually. Private sector loans make up only 8% of the volume of student loans. Banks also provide checking accounts (usually with a debit card), direct deposit, convenience ATM and branch locations, bill payment options, and stored value and credit cards. Banks are committed to ensuring students have safe, convenient, and affordable access to banking services so they can buy books and pay their living expenses. Access to banking services at such a critical point in life is essential to the long-term financial health of America s students. Many students open their first bank account when they reach college. It is often a landmark event that brings a student into the banking system, promotes financial literacy and develops saving habits that will help them reach their long-term goals. The costs of providing account services to students is high and the revenue low as most accounts have low account balances and few transactions. Instead, banks offer services to students often at a loss in an effort to build a financial relationship with students that someday 2

3 will include more sophisticated products such as mortgages, college savings, investments and other services. The relationship formed with young adults helps to establish long-term banking relationships. Treating students right is the only way banks can keep customers for life. We are very concerned about the Department of Education s (DoE) proposal that was the subject of a recent negotiated rulemaking process ( proposal ). First, we believe that DoE has no authority to implement this proposal as a regulation given the plain text of the statute, the legislative history of the provision, and the comprehensive regulatory scheme already in place. Second, if the DoE concept is adopted, significant new regulations, burdens, and restrictions will be placed on any bank account that is the subject of a partnership between a bank (or credit union) and an educational institution. The result will be a discontinuation of accounts tailored to and beneficial to students, whether or not the account receives student loan aid balances. Although the DoE s Proposal seeks to ensure students have access to banking options, it will instead limit their access, harming students and educational institutions alike. Already, it is estimated that as many as 19 percent of college students in the United States have no access to banking services. The DoE proposal would likely make that number much higher. Make no mistake: it is students who will bear the brunt of the Department of Education s rulemaking. Students will find it harder to secure affordable, convenient bank accounts and services tailored to their needs, often including an on-campus presence. Students who come from families that do not have a bank account or any banking relationship may struggle with how to go about even opening an account. Without these options, many students will be compelled to turn to loosely regulated, less secure, less convenient, and more costly options. DoE s proposal will also negatively impact educational institutions. Banks have long partnered with educational institutions to offer financial services to students. The revenue received by educational institutions helps to offset tuition and other costs. The DoE proposal would make these arrangements less likely, reduce revenue for these schools, and tie schools up with unnecessary redtape all of which would make the cost of attending these schools by students higher than it has to be. In our statement we will make the following points: The Department of Education Proposal will severely limit banks ability to serve students, meaning fewer services will be available; Banks partner with educational institutions to offer services that benefit students; and 3

4 Educational institutions will bear a heavy cost. I. The Department of Education Proposal will Severely Limit Banks Ability to Serve Students, Meaning Fewer Services Will Be Available to Students There are very real costs in offering a checking account. The banks cost to open an account was estimated to be between $150 and $200 and between $250 and $300 annually to maintain it. 1 These costs have only increased since Balances on student accounts tend to be low and transactions are often limited. As a result banks earn little return on these accounts. These accounts often end up losing money for the bank, but are nonetheless offered to meet the needs of students and develop life-long relationships that continue long after graduation. Currently, banks partner with educational institutions to provided students no-cost and low-cost services and products. Typically, the accounts have no minimum balance requirements and waive monthly fees. They usually include a free university ID card that also serves as a debit card. Students have choice and are not obligated to open an account. Some banks also fund financial literacy courses or events. Unfortunately, the DoE s proposal in effect would regulate bank accounts by imposing significant requirements and restrictions on all accounts that are part of a bank and educational institution partnership whether or not the student is receiving federal student loan credit balances. Simply put, the DoE would be regulating bank accounts independent of any relationship with federal student loan credit balances. The requirements in the DoE proposal would greatly increase the net cost of opening these accounts on a prohibitive basis. The proposal would impose significant requirements and restrictions on bank accounts of students and parents eligible to receive student aid balances. Thus, the broad proposal affects any covered bank account whether or not it receives any student aid balances. The DoE requirements are designed to give away valuable bank account services for free while the bank bears the full cost including new regulatory requirements of providing these accounts. The significant costs of these added requirements and regulatory burdens will mean fewer of these accounts will be offered. It also means that the attractive accounts already offered under existing 1 Dan Fitzpatrick & Robin Sidel, End Is Seen to Free Checking, Wall Street Journal, June 16,

5 programs would be jettisoned (since they could not be offered by partnering with the school) and students would have to seek out an account that may not be as tailored to their needs as students as the ones currently offered. In addition to the new requirements imposed on financial institutions, there are also requirements placed on the educational institutions in relation to these sponsored accounts. The educational institutions must: Base their decision to partner with a bank on the interests of the account holders. This includes financial terms, account features, and customer service. Review any information that is provided to the account holder when the account is opened to ensure that it is clear, fact-based, and neutral. Disclose on their site links to all sponsored accounts, accompanied by a summary of terms and conditions of the contract. Educational institutions already are sensitive to these issues and handle them in different ways depending upon the particular accounts they sponsor and their student needs. Imposing a rigid framework adds additional and unnecessary costs. Instead of helping students, these onerous requirements will result in the opposite of their intention. There will be fewer, if any, specialized accounts offered to students and parents, whether they are seeking financial aid or not. II. Banks Partner With Educational Institutions to Offer Services that Benefit Students Access to safe, secure banking services is critical to students academic success and long-term financial wellbeing. Many students sign up for their first bank account when they arrive at college. Hundreds of colleges and universities have long standing agreements both formal and informal with banks to offer convenient, affordable, and secure banking services to their students. As noted above, typically, the agreements include a specially designed free checking account with a debit card (possibly co-branded with the college) that can also serve as a college ID card. The students have the clear option for a traditional ID card instead. The students with the account also have access to free on-campus ATMs and possibly a banking center. Often part of this package is 5

6 financial literacy education. If students lose access to these tailored options they will be forced to do without an account or seek other accounts that may not offer services that students value most. Students have a choice in what bank to use. There is no mandate to use any campus related checking account. Moreover, there are already clear and transparent disclosures provided to the students. The fact is many students opt for these accounts because they are tailored to their needs. They provide convenient access to secure banking services on campus. It also facilitates transactions with local businesses who accept payment with their college ID card. This DoE proposal would directly limit the financial autonomy of students, and prevent them from individually pursuing the options that best suit them. Students who arrive on campus without a checking account will have to open an account somewhere else or simply go without one. At best, a student will have to find a traditional bank account from an area bank (which may not be tailored to students and may lack some of the convenient features like on-campus ATMs and links to the college ID). In fact the GAO in February 2014 noted that: Most of the college card fees we reviewed generally were not higher, or in some cases were lower, than those associated with a selection of basic or student checking accounts. At worst, students may not establish a bank account, have to receive financial aid disbursements by check, and use costly check cashing services. Cashing and storing large loan checks involves risks that simply are unacceptable. Students from traditionally unbanked demographics will be hit hardest. Restricting financial services offerings to students who are eligible for financial aid will disproportionately harm those students with the greatest need. Students receiving financial aid may come from families with little or no banking relationships. They may not understand the value of a bank account, are perhaps the most in need of financial education, and may not seek out off-campus banks to set up accounts. The goal should be to encourage all students to establish a banking relationship. By discouraging bank accounts in partnership with educational institutions, the DoE proposal makes this goal much harder to achieve to the disadvantage of students. III. Educational Institutions Will Bear a Heavy Cost As Well Students will not be the only ones to suffer if the DoE proposal is adopted. Educational institutions will lose access to valuable programs which provide revenue to help offset expenses and keep tuition and other costs as low as possible. These schools will also be subject to new regulatory 6

7 burdens which also absorb resources. The end result will be to increase the costs at these schools which will result in higher tuitions paid for by all students. Educational institutions already choose which options are right for their students. There are generally competing banks offering account services enabling the school to find the best fit. Educational institutions are able to leverage these relationships to provide financial literacy programs for students, faculty, and staff. They are also able to leverage these relationships to build campus infrastructure, ensuring a network of ATMs and sometimes branches on campus. Funds provided by these relationships also fund scholarships, endowments and infrastructure that would otherwise be unavailable. The DoE s conceptual proposal would place tremendous burdens on educational institutions that choose to partner with a bank. Banking regulations are complex, and require substantial specialized knowledge to comply with them all. The proposal would place the burden of ensuring compliance on the educational institution. Managing banking regulations is a monumental task even for banks accustomed to complicated banking regulations. In contrast, educational institutions, whose staff has no experience in banking regulations, stand little chance of being able to comprehend and comply with complex bank account regulation. Conclusion Having convenient, inexpensive and secure bank accounts are extremely important for students. These are often the very first accounts for these students. Banks are dedicated to providing these services as they know it will establish a long-term banking relationship with the students. Banks can only be successful in building and maintaining those relationship if they treat the students right and provide the services that they need. Educational institutions also benefit from these services, providing revenue that keeps student costs as low as possible. ABA shares the goals of promoting financial education among students and ensuring that they have meaningful account choices. However, the Department of Education s proposal goes beyond its authority and will curtail campus banking products and unduly restrict the manner in which banks can serve students ultimately hurting student access to safe and convenient banking services. Congress should stop the Department of Education from implementing this harmful rule that will hurt student access to affordable, safe, and reliable financial services. 7