(GEN-22-14) Cash Management – Tier One and Tier Two Arrangements

Publication Date
October 13, 2022
DCL ID
GEN-22-14
Subject
Cash Management – Tier One and Tier Two Arrangements
Summary
This letter reminds institutions of their regulatory obligations in overseeing Tier one and Tier two arrangements with financial institutions.

Please note that the Consumer Financial Protection Bureau (CFPB) released a report today detailing findings on college banking agreements related to campus debit and pre-paid cards.

Dear Colleague:

Tier one (T1) and Tier two (T2) arrangements are agreements with financial institutions to offer financial account products to students, such as debit or prepaid cards, in some cases as a way for those students to receive their Title IV credit balance funds. Institutions with such agreements must, pursuant to the cash management regulations at Subpart K of 34 CFR, Part 668:

  • Ensure student options for receiving credit balance payments are described and presented in a clear, fact-based, and neutral manner;

  • Disclose conspicuously contracts establishing a T1 or T2 arrangement between the institution and any third-party servicer, including the prior-year compensation and services received by either party under that arrangement;

  • Notify the Department of third-party servicer contracts; and

  • Ensure that the terms of accounts offered under a T1 or T2 agreement are consistent with the best financial interests of students.

We are aware of certain practices that may pose risks or excessive costs to students. Institutions have a responsibility to protect their students when it comes to financial products. Institutions administer Title IV funds as fiduciaries for their students, and they must meet their obligations under the regulations with respect to T1 and T2 arrangements, especially those related to disclosure, reporting, and ensuring that account offered through arrangements with third parties do not contain terms that are inconsistent with the best financial interests of students. We are concerned that institutions may be failing to meet their regulatory obligations and are issuing this letter to highlight those areas of most concern.  Because T1 and T2 arrangements control the disposition of funds that belong to students, including Title IV funds, it is imperative that they be transparent and maintain student choice, and that the accounts established under them serve the best financial interests of students. When an institution has a campus banking partnership, it must also meet these fiduciary obligations on behalf of its students. 

We discuss the applicable regulations in greater detail below. The Department will monitor compliance and take corrective actions to enforce these regulations where necessary.  Institutions should also ensure they are in compliance with applicable state and federal consumer protection laws including any prohibitions on unfair, deceptive, or abusive acts or practices. 

Reasonable Due Diligence of T1 and T2 Service Providers

The Department of Education is concerned that institutions are failing to meet their regulatory obligations to ensure that accounts offered pursuant to T1 and T2 arrangements do not contain terms, including the imposition of any fees, that are inconsistent with the best financial interests of students. The Secretary considers this requirement to be met if an institution documents that it conducts reasonable due diligence reviews of fees to ascertain whether they are consistent with or below prevailing market rates. These reviews should be independent; solely reviewing material by the provider of the account is not a reasonable due diligence review. As part of the due diligence requirement, institutions should also look for and consider evidence that certain fees are out of line with prevailing market rates. Such evidence could include but is not limited to consumer complaints, federal and state regulatory findings, or public reports. For example, institutions can find evidence concerning prevailing market rates in the CFPB’s recent report on campus banking and its published overdraft and non-sufficient funds (NSF) metrics for Top 20 banks. The imposition of fees that are out of line with prevailing market rates is inconsistent with the best financial interests of students. For T1 arrangements, all overdraft fees are prohibited. For T1 arrangements, with respect to NSF fees, and for T2 arrangements, with respect to overdraft fees, NSF fees, and monthly account fees, institutions should carefully consider whether accounts that charge such fees are inconsistent with the best financial interests of students due to the wide availability of accounts that do not charge those fees and the documented consumer risks associated with them.  

Finally, the regulations require institutions to document these due diligence efforts. Making this documentation publicly available or otherwise sharing relevant due diligence efforts with other eligible institutions could benefit students and help ensure that all institutions are meeting their regulatory obligation to ensure financial services are in the best interests of students. 

Title IV Credit Balances (Student Choice) – 34 CFR 668.164(d)(4)

A student may choose to have his or her funds deposited into an institution-sponsored account or into an existing account owned by the student if the institution makes direct payments of credit balances by electronic funds transfer (EFT), including when the institution has established a T1 or T2 arrangement with a financial institution. Additionally, institutions must inform students in writing that they are not required to open or obtain a financial account or access device offered by or through a specific financial institution. 

An institution may have a policy requiring students to provide information about an existing bank account or to open an account at a bank of the student’s choosing; however, such a policy must not delay the timely disbursement of credit balance funds to students. A Title IV credit balance (defined in 34 CFR 668.164(h)) occurs whenever the amount of Title IV funds credited to a student’s ledger account exceeds allowable charges and must be paid within 14 days of that point, irrespective of whether the student has provided account information or made an affirmative selection from among account options. Specifically, a student who neither provides account information nor selects an account option is, nevertheless, entitled to receive a credit balance payment within the regulatory timeframe.  This may result in an institution having to disburse cash to the student, for which the institution obtains a signed receipt, or issue a check to the student. Failure to pay a credit balance within the prescribed regulatory timeframe for any reason, including because the student did not comply with an institutional policy regarding the selection of an account option, is a program violation. Additionally, an institution must allow a student, at any time, to change the previously selected payment option as long as the student provides the institution with written notice of the change in a reasonable timeframe. 

T1 Arrangements – 34 CFR 668.164(e)

A T1 arrangement is one in which an institution contracts with a third-party servicer to perform one or more of the functions associated with processing direct payments of Title IV funds on behalf of the institution, and the institution or third-party servicer makes payments to one of the following:

  • One or more financial accounts that are offered to students under the contract;

  • A financial account where information about the account is communicated directly to students by the third-party servicer or the institution on behalf of or together with the third-party servicer; or

  • A financial account where information about the account is communicated directly to students by an entity contracted or affiliated with the third-party servicer.

An institution offering accounts under T1 arrangements must ensure that the terms of the accounts offered pursuant to a T1 arrangement are consistent with the best financial interests of the students opening them. The Department considers the best financial interests of the student to be met if: 

  • An institution documents that it conducts reasonable and independent due diligence reviews at least every two years to ascertain whether the fees charged under the T1 arrangement, including any NSF fees, are consistent with or below prevailing market rates. The Department does not consider solely reviewing material by the provider of the account to be a reasonable due diligence review, and the Department expects institutions to identify and consider financial institutions that offer low-fee or no-fee student accounts. Institutions must take affirmative steps, including through contractual arrangements with the financial institutions as needed, to ensure these requirements are met; and 

  • All contracts marketed by the offering of an institution’s T1 arrangements to its students make provision for termination of the arrangement by the institution based on complaints received from students or a determination by the institution that the fees assessed under the T1 arrangement are inconsistent with or higher than prevailing market rates.

Under a T1 arrangement, an institution must ensure:

  • Convenient access to the funds in the financial account through a surcharge-free national or regional Automated Teller Machine (ATM) network that has ATMs sufficient in number and housed and serviced such that Title IV funds are reasonably available to students, including at the times the institution or its third-party servicer makes direct payments into students’ financial accounts;

  • A student’s consent to open any financial account is obtained before an access device is sent to the student – except an access device that is a card provided to the student for institutional purposes (such as a student ID card), which may be sent to the student without obtaining their consent. However, the institution or financial institution must obtain the student’s consent before enabling the device for access to the financial account;

  • The financial account provides students convenient access to Title IV funds in part and in full up to the account balance via domestic withdrawals and transfers without charge, during the student’s entire period of enrollment following the initial deposit;

  • The financial account or access device is not marketed or portrayed as, or converted to, a credit card; and

  • No credit is extended or associated with the financial account, and no overdraft charges are assessed to the student for any transaction that exceeds the balance in the financial account or on the access device.

Additionally, under a T1 arrangement, students may not incur any cost associated with:

  • Opening the financial account or initially receiving an access device;

  • Conducting point of sale transactions in a state that belongs to the surcharge-free regional or national network (assessed by the institution, third-party servicer, or a financial institution associated with the third-party servicer); or

  • Conducting a balance inquiry or withdrawal of funds at an ATM in a state that belongs to the surcharge-free regional or national network.

Contracts establishing a T1 arrangement between an institution and third-party servicer or financial institution, as well as the total amount of any remuneration, monetary or nonmonetary, paid or received by either party during the prior year, must be conspicuously disclosed (except for any portions of a contract that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities) on the institution’s website no later than 60 days following the most recently completed award year.  The institution must further conspicuously disclose on its website (also within 60 days following the most recently completed award year) the number of students who had financial accounts under the contract and both the mean and median of the actual costs incurred by those account holders for any year in which enrolled students opened 30 or more accounts under the T1 arrangement. Generally, conspicuous disclosures are difficult to miss and easily understandable by ordinary consumers. They use clear language and are not hidden or obscured behind vague hyperlinks or long blocks of text. 

T2 Arrangements – 34 CFR 668.164(f)

A T2 arrangement is one under which an institution contracts with a financial institution or other entity to offer financial accounts that are marketed directly to students. A financial account is marketed directly if:

  • The institution communicates information directly to its students about the financial account and how it may be opened;

  • The financial account or access device is cobranded with the institution’s name, logo, mascot, or other affiliation and is marketed principally to students at the institution; or

  • A card or tool provided to the student for institutional purposes, such as a student ID card, is validated, enabling the student to use the device to access a financial account.

Under a T2 arrangement, an institution must ensure that:

  • Student accountholders can make balance inquiries and access funds through surcharge-free in-network ATMs sufficient in number and such that funds are reasonably available;

  • Student consent to open the financial account has been obtained before the institution provides any personally identifiable information about the student to the financial institution, other than directory information;

  • Financial accounts are not marketed or portrayed as, or converted into, credit cards; and

  • Students incur no cost for opening the account or initially receiving or validating an access device.

An institution offering accounts under T2 arrangements must ensure that the terms of the accounts offered pursuant to a T2 arrangement are consistent with the best financial interests of the students opening them. 

The Department considers the best financial interests of the student to be met if: 

  • The institution documents that it conducts reasonable and independent due diligence reviews at least every two years to ascertain whether the fees imposed under the T2 arrangement are, overall, consistent with or below prevailing market rates. The Department does not consider solely reviewing material by the provider of the account to be a reasonable due diligence review and expects institutions to identify and consider prevailing market rates in order to determine whether any fees assessed under their T2 arrangements, including any overdraft, Non-Sufficient Funds (NSF), or monthly account fees, are inconsistent with students’ best financial interests, particularly given the wide availability of accounts that do not charge such fees; and

  • All contracts for the marketing or offering of accounts to students allow the institution to end the arrangement based on complaints from students or a determination in an institutional review that the fees assessed under the T2 arrangement are not consistent with or exceed prevailing market rates.

An institution entering a T2 arrangement must (similar with T1 arrangements) conspicuously disclose on its website, no later than 60 days following the most recently completed award year, any contract between the institution and a financial institution (except for portions of a contract that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities), as well as the total amount of any remuneration, monetary or nonmonetary, paid or received by either party during the prior year. The institution must further disclose on its website (also within 60 days following the most recently completed award year) the number of students who had financial accounts under the contract and both the mean and median of the actual costs incurred by those account holders for any year in which enrolled students opened 30 or more accounts under the T2 arrangement. 

Note: Under a T2 arrangement, institutions that average fewer than 500 students with Title IV credit balances for the three most recently completed award years are not required to disclose remuneration paid or received by either party or the number of students who had financial accounts under the contract, ensure that student accountholders have access to a surcharge-free network of ATMs, or ensure that the terms of accounts offered under a T2 arrangement are consistent with the best financial interests of students opening them, including due diligence reviews that ensure contract termination if the provider has failed to meet all requirements. However, we strongly encourage exempt institutions to voluntarily comply with these provisions to better serve their students. 

Reporting T1 and T2 Disclosures to the Department

The Department published a suggested disclosure format for student financial accounts in a Federal Register notice on July 18, 2017.  Additionally, for both T1 and T2 arrangements, institutions must provide the Department an up-to-date URL for the contract and contract data for publication in a centralized database accessible to the public. Some institutions have not disclosed updated fee and contract information to students or to ED since before the COVID-19 pandemic began. The regulations require institutions to update their information for the 2021-2022 academic year. Federal Student Aid provides the centralized database accessible to the public of contracts or agreement URLs, as submitted by institutions, at its studentaid.gov website here

For more information on T1 and T2 requirements, please refer to 34 CFR 668.164(d), (e), and (f), and Volume 4, Chapter 2 of the Federal Student Aid Handbook. More discussion is available in the “Cash Management Information” topic on Federal Student Aid’s Knowledge Center website. Over the coming months, we will make more resources available on this topic. 

Thank you for your attention on these important issues.  Please send questions related to cash management through the Customer Support process in Federal Student Aid’s Help Center: https://fsapartners.ed.gov/help-center/contact-customer-support. When submitting a question, please enter your name, email address, topic, and question. When selecting a topic, please select “FSA Ask-A-FED/Policy.” 

Sincerely,

Annmarie Weisman
Deputy Assistant Secretary for Policy, Planning, and Innovation 
Office of Postsecondary Education