You might be inclined to stop reading this column when you learn it is about a new set of federal regulations directed at the banking and financial-services industry. Parts of this law, however, have direct application to higher education, and other parts have spill-over implications for colleges and universities.
In July of 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. By doing so, it comprehensively changed the regulation of the consumer financial products and services industry to address weaknesses it believed were responsible for the 2008 financial meltdown.
The act contains a number of new requirements that directly apply to higher-education debit-card and credit-card use as well as private-education loans. The act also sets forth requirements that do not affect higher education directly but that lay the groundwork for even more robust federally mandated enterprise risk management, regulatory compliance, executivecompensation scrutiny, and independent governance structures at colleges and universities.
Private-education loans. The Federal Reserve System, through the act’s newly created Consumer Financial Protection Bureau, will oversee entities that provide private-education loans to consumers. Although it is not clear yet whether the Fed’s anticipated regulations will include colleges and universities, we can assume they will, given that higher-education institutions are not specifically exempted from the law. The bureau will regulate and audit all entities under its broad authority in the consumer financial products and services arena.
Debit-card and credit-card charges. The act vests the Federal Reserve with the authority to issue new rules to keep in check excessive fees charged by credit-card networks to merchants for consumer debit-card use. As to credit cards, the act will provide educational institutions with the power to determine minimum and maximum amounts for charges that can be paid by credit card. Colleges and universities also will be able to offer discounts for certain forms of payment, like cash, as long as the non-discounted price is noted.
Spill-over provisions. Though not mandated, other areas of potential impact on higher education include:
- Corporate governance. Corporate governance long was the province of states to regulate until 2002, when the federal government passed the Sarbanes- Oxley Act. Like Sarbanes-Oxley, the Dodd-Frank Act includes governance mandates which may eventually become best practices for higher education, including disclosures about combined board positions, conflicts of interest, and relationships between board members. In addition, Dodd-Frank expresses Congress’ clear intention to control executive compensation by, among other things, placing more stringent requirements on executivecompensation committees of boards to assure only “reasonable” compensation is paid to executives.
- Institution-wide risk management. The Dodd-Frank Act directs certain financial-service industries and their boards to engage in enterprise risk management. These mandates portend a wider influence over non-financial sectors, similar to the influence Sarbanes-Oxley had on strengthening the independence of higher-education governing boards through robust audit committees. Some colleges and universities already engage in active risk management as a means to identify and mitigate key risks. Those institutions will be ahead of the game, because risk management may become a new best practice in the higher-education sector.
- Regulatory compliance. Congress raises the volume in Dodd-Frank of its intention to encourage whistleblowers to report corporate wrongdoing. The Dodd-Frank Act expands the ability of whistleblowers to receive substantial rewards, even beyond the steps that Congress took over the last couple of years though strengthening laws like the False Claims Act. Although the Dodd-Frank Act’s new provisions apply to securities-law violations, at minimum college and university boards should understand the increasing Congressional intolerance for regulatory noncompliance.
Presidents and board members at higher-education institutions, and their affiliated academic health systems, would be smart to familiarize themselves with the requirements of the Dodd-Frank Act. Aside from the specific mandates, this new law is likely to set a higher bar than in the past for certain best practices in higher education.