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CFPB scrutinizes discharged private student loan billing and collection practices
On March 16, the CFPB released a compliance bulletin discussing student loan servicers’ practice of collecting on private student loans discharged in bankruptcy. The bulletin also notified regulated entities on how the Bureau intends to exercise its enforcement and supervisory authorities on this issue. Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts addressed the treatment of certain private student loans following bankruptcy discharge. The Bureau explained that in order to secure a discharge of a qualified education loan in bankruptcy, a borrower must demonstrate that the loan would impose an undue hardship if not discharged. Loans that do not meet this qualification (“non-qualified student loans”) can be discharged under standard bankruptcy discharge orders, the Bureau said.
Bureau examiners found, however, that several servicers failed to determine whether a borrower’s loan was qualified or non-qualified. As a result, non-qualified student loans were returned to repayment after a bankruptcy concluded, wherein servicers continued to bill and collect payments on the loans even through the borrower was released from this debt through the bankruptcy discharge. According to the Bureau, many borrowers, when faced with collection activities in violation of a bankruptcy court order, continued to make payments on debts they no longer owed.
The Bureau explained that servicers who collected on student loans that were discharged by a bankruptcy court violate the prohibition on unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. The bulletin described unfair practices observed by examiners, such as servicers relying entirely on loan holders to distinguish among the loans and not ensuring that such holders had in fact done so. The bulletin also provided examples of student loans that are eligible for standard bankruptcy discharge, including loans made to students attending schools that are ineligible for federal student aid and loans made to students attending school less than half time. Bureau examiners instructed servicers to immediately stop collecting on discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected borrowers.