New Rules on Credit Cards Offered to College and Graduate Students

Effective February 22, 2010, new federal limits apply to the marketing of credit cards to college and graduate students. The Federal Reserve Board has issued these rules to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which amended the Truth-in-Lending Act.

Under the CARD Act and the new rules, colleges and universities must publicly disclose their agreements with card issuers and creditors. In turn, issuers and creditors are required to file an annual report setting out the terms and conditions of their agreements with all institutions of higher education, including affinity card agreements with a college or university, or with affiliated alumni organizations or foundations. In addition, the CARD Act imposes new requirements on prescreened offers to, or applications from, any person under 21. These provisions, although not targeted directly at higher education, will also reach a large portion of the student population.

Prohibited Inducements. The CARD Act prohibits a card issuer from offering to a college student any “tangible” item to induce the student to apply for or participate in an open-end credit account, if the offer is made as follows:

• on the campus as defined by the institution itself
• near the campus (within 1,000 feet of the border)
• at an event sponsored by or apparently related to the institution

“Tangible” includes physical items such as gift cards, T-shirts or magazine subscriptions. It does not cover non-physical items such as discounts or promotional credit terms. A tangible item will be an “inducement” only if the offer is conditioned on the student applying for an open-end credit plan. The tangible offer may be made in person or by mail.

“College student” encompasses undergraduate or graduate students who are enrolled full- or part-time. A person is considered a college student if he or she identifies as a college student in the application process. The issuer or creditor may rely on the applicant’s answer.

College Policies. The prohibited inducements apply only to the card issuer. However, the CARD Act encourages colleges to consider adopting the following policies:

• requiring credit card issuers conducting marketing on the campus to advise the college of the location where the marketing will take place
• limiting the number of locations on campus where the marketing takes place
• offering credit card, debt education and counseling sessions as a regular part of orientation programs for new students

There are no explicit sanctions (yet) for failure to implement these recommendations. Nevertheless, colleges and universities should consider adopting these policies as part of their comprehensive compliance programs.

Marketing to Students Under 21

The CARD Act also regulates credit card applications from, and pre-screened credit card offers to, a person under 21. According to the new restrictions, an application to open a credit card account by a consumer under 21 requires the signature of a cosigner – who may be the applicant’s parent, guardian or spouse, or any other individual who is 21 and has the means to repay the debt – together with financial information indicating that the cosigner has the ability to make the payments; otherwise, the applicant must demonstrate independent means of repaying the debt arising from the extension of credit. In addition, once a card has been issued, the credit limit may not be increased before the cardholder reaches 21, unless a cosigner who assumed the original obligation also agrees in writing to assume liability for the increased amount.

The CARD Act amended the Fair Credit Reporting Act to prohibit prescreened credit offers to anyone whose credit report shows an age of less than 21, unless the consumer has consented to furnishing credit reports.

Even though the under-21 provisions apply to student and nonstudent alike, they will affect virtually every credit card offering to college students. As a result, it will be prudent for higher education institutions to confirm with card issuers that any affinity, cobranded or sponsored cards conform to the new rules.

Required Disclosures. Every institution of higher education is now required to publicly disclose any contract or agreement with a card issuer or creditor for the purpose for marketing a credit card. This may be done by website posting, or by making the agreement available upon request and without charge, or in other appropriate ways. The agreement may not be presented in a redacted form, and any confidentiality provision in such an agreement that is inconsistent with the requirement will be invalid.

Reports by card issuers. Any card issuer that was a party to one or more “college credit card agreements” is required to submit an annual report to the Board containing certain information set out in CARD Act Section 305.

“College credit card agreements” is an elaborately defined term under the statute and rules, encompassing all business, marketing or promotional agreements with any college, university or an affiliated alumni organization or foundation. Covered agreements include those where one the following apply:

• the card issuer or creditor has agreed to donate a portion of the card proceeds of the credit card to the college, university or affiliated organization
• the issuer has agreed to offer discounted terms to the consumer
• the card bears the name, emblem, mascot, logo or other words, pictures or symbols readily identified with the college, university or affiliated organizations

The requirements will apply even to cards that are marketed primarily to alumni, faculty, staff and other non-student consumers if the cards are also issued to students.

Higher education institutions are well advised to consult with legal counsel to ensure compliance with these new federal laws.