On July 25, the Consumer Financial Protection Bureau (CFPB) issued a long and detailed report, titled “Costs of Electronic Payments in K-12 Schools,” criticizing the fees middlemen charge parents in an otherwise mundane aspect of a parent’s life—paying for K-12 school lunches and other small-dollar incidentals.
The problem arose in a seemingly innocuous context. Whether schools charge students for lunch or are partially reimbursed by “free lunch” programs, school administrators have been faced with the costs of collection. In response, many school systems have contracted with payment system companies to provide the service of a proprietary credit card to be presented by the student at the lunch checkout rather than cash: the schools contract with the payment company for the card; the parents download funds to their child’s card from their bank account. The schools pay a fee as part of their contract, but schools also may agree to permit the payment company to charge a fee to the parents each time they load money onto the card. In some cases, the school systems absorb all costs of the system; in others, the school’s contract permits the payment company to charge the fee against the deposits made to the student’s card, which may be absorbed by the school system or deducted up front by the payment company—resulting in a lower net amount available to the student to pay for food. While providing convenience, the payment company systems may not be fully transparent, may shift the cost of the system to (often low-income) parents, and may impose excess costs on parents above the actual transactional costs the payment provider pays to the company that issues the card or any other incidentals. The CFPB found that one service, at the time of the study, charged between roughly $1.95 and $2.40 per transaction, when the cost to process a credit or debit card transaction was around 1.53 percent of the transaction, or between $0.26 and $0.50 for an ACH transfer. For the typical small card deposit, that download fee can constitute a significant burden on low-income parents.
Following a Sept. 18, letter from several U.S. Senators encouraging action, the U.S. Department of Agriculture (USDA) announced on Nov. 1, that schools and payment companies should discontinue these download fees by school year 2027-28 for low-income families. However, as explained in Tom Witherspoon, “CFPB School Lunch Focus Could Expand E-Payment Scrutiny” (Law360 Oct. 18) , challenges to the statutory authority of the CFPB (similar to those litigated against the FTC) may well handicap the federal government’s ability to reform such practices by regulation, rather than by case-by-case enforcement proceedings. Even if federal regulations could be drafted to pass court muster, the new administration may withdraw such regulations, or Congress can “veto” them pursuant to the Congressional Review Act, 5 U.S.C. Section 801 et sec.
The USDA does not list New Jersey as one of the states that have adopted prohibitions against these fees.
Parents in New Jersey and elsewhere would thus be left with no way to avoid the price gouging highlighted by the CFPB report and the USDA if their school district negotiates a contract permitting such fees.
Not to worry, the plaintiffs’ class action bar has stepped to the fore.
In a class action complaint filed in the District of New Jersey, Price v. PAMS Lunch Room LLC, plaintiffs allege that the defendants’ fees practices violate USDA guidance and the N.J. Consumer Fraud Act, one of the nation’s most powerful consumer protection statutes. Defendants are alleged to be headquartered in and to do business in New Jersey. According to the complaint, “In concrete terms, [the program] means that if a low-income single parent wanted to add $25 to her child’s lunch account at a $1.95-per-transaction-school, that [] transaction would cost [defendants] about $0.38 cents but would net [defendants] about $1.57 on top of its costs on the transaction or a profit rate of over five times the cost of the transfer.” Thus, the complaint alleges, payment processors such as the defendants may charge consumers up to nine times more than what it costs to process each transaction, thereby collecting a “staggering” $100 million each year from families across the country.
The complaint compares the defendants to schoolyard bullies who steal students' lunch money.
The conclusions of the CFPB report, the USDA’s proposed rules, and the allegations of the federal complaint are alarming. Indeed, it is surprising that the issue and litigation have not received greater publicity. (The New Jersey Law Journal did report the complaint’s filing.) We suggest that the case should not languish. Rather, the court and counsel should, post haste, work to resolve the matter, cease any improper practices, and refund a reasonable amount to participants in the programs, especially where the fees would be prohibited by the above USDA rule for low-income families. School districts should protect their constituents by avoiding exploitative contracts. Any fees charged to the parents should be made visible, and schools should provide opt-out procedures for parents who may prefer fair and non-exploitative systems.
If the federal class action is not resolved early, then New Jersey should step up by moving to join the case and by acting to prohibit the fees criticized by the CFPB, the USDA, and the Price complaint.