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CFPB’s Supervisory Highlights targets student loan servicers
On September 29, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools that directly lend to students. Highlights of the supervisory findings include:
- Transcript withholding. The Bureau found several instances where in-house lenders (i.e., where the schools themselves are the lender) are withholding transcripts as a debt collection practice. According to the Bureau, many post-secondary institutions choose to withhold official transcripts from borrowers as an attempt to collect education-related debts. The Supervisory Highlights states the position that the blanket withholding of transcripts to coerce borrowers into making payments is an “abusive” practice under the Consumer Financial Protection Act.
- Supervision of federal student loan transfers. The Bureau identified certain consumer risks linked to the transfer of nine million borrower account records to different servicers after two student loan servicers ended their contracts with the Department of Education (DOE). The review, which was handled in partnership with the DOE and other state regulators, identified several concerns, such as (i) the information received during the transfer was insufficient to accurately service the loan; (ii) transferee and transferor servicers reported different numbers of total payments that count toward income-driven repayment forgiveness for some borrowers; (iii) information inaccurately stated the borrower’s next due date; (iv) certain accounts were placed into transfer-related forbearances following the transfer, instead of in more advantageous CARES Act forbearances; and (v) multiple servicers experienced significant operational challenges.
- Payment relief programs. The Bureau found occurrences where federal student loan servicers allegedly engaged in unfair acts or practices when they improperly denied a borrower’s application for loan cancellation through Teacher Loan Forgiveness or Public Service Loan Forgiveness. The Bureau claimed that many servicers “illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief,” and “provided misinformation about borrowers’ entitlement to progress toward loan forgiveness during the pandemic payment suspension.” The Bureau said it will continue to monitor servicers’ practices to ensure borrowers receive the relief for which they are entitled, and directed servicers to address consumer harm caused by these actions.
The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of institution type. Student loan servicers, originators, and loan holders are advised to review the supervisory findings and take any necessary measures to ensure their operations address these risks.
Chopra highlights CFPB efforts on competitive consumer financial markets
On September 21, CFPB Director Rohit Chopra discussed Bureau efforts to ensure markets for consumer financial products and services are “fair, transparent, and competitive.” Speaking during the Exchequer Club Fireside Chat, Chopra explained that the agency’s authorizing statute specifically directs the Bureau to promote competition by consistently enforcing the law regardless of whether an entity takes deposits. He clarified that there should not be different standards for assessing when a firm violates the law, and highlighted several ways that the Bureau is working to fulfill its mandate to ensure competitive markets. One example Chopra provided relates to reshaping the Bureau’s approach to promoting new products and offerings, especially as they relate to refinancing options. He pointed to Bureau efforts to ensure both banks and nonbanks could launch products to save private student loan borrowers money as an example of making sure all potential market entrants could benefit. Chopra stated that the Bureau is also requesting feedback from investors, lenders, and the public on topics related to improving mortgage refinancing options (covered by InfoBytes here), and is working on ways to stimulate more credit card and auto loan refinancing. Additionally, Chopra touched on other areas of focus, including consumer finance offerings that rely on emerging technologies such as banking in augmented reality and the metaverse, nonbank supervision and oversight, bright-line regulatory approaches, competitive pricing and back-end fees, regulatory arbitrage, and personal financial data rights.
CFPB seeks better refi, loss-mitigation options
On September 22, the CFPB issued a request for information (RFI) regarding ways to improve mortgage refinances for homeowners and how to support automatic short-term and long-term loss mitigation assistance for homeowners who experience financial disruptions. According to the Bureau, refinancing volume has decreased almost 70 percent from last year as interest rates have risen. Additionally, periods of economic turmoil, such as the Covid-19 pandemic, can pose significant challenges for mortgage borrowers, the Bureau noted. Throughout the pandemic, 8.2 million borrowers entered a forbearance program, and as of July 2022, 93 percent have exited. Of those who have exited forbearance, five percent are delinquent or in active foreclosure. The Bureau is interested in the features of pandemic-related forbearance programs that should be made more generally available to borrowers. Specifically, the RFI requests information regarding, among other things: (i) targeted and streamlined refinance programs; (ii) innovative refinancing products; and (iii) automatic forbearance and long-term loss mitigation assistance. Comments are due 60 days after publication in the Federal Register.
VA clarifies Covid-19 forbearance timeline
On September 19, the Department of Veterans Affairs issued a change to Circular 26-21-20 extending the rescission date to align with the end of Covid-19 pandemic, including conforming changes to VA’s expectation as to the completion of a forbearance period. As previously covered by InfoBytes, the VA issued Circular 26-21-20 in September 2021 to clarify timeline expectations for forbearance requests submitted by affected borrowers. The September 2021 Circular stated thar “[f]or borrowers who have not received a COVID-related forbearance as of the date of this Circular, servicers should approve requests from such borrowers provided that the borrower makes the request during the National Emergency Concerning the Novel Coronavirus Disease 2019 (COVID-19) Pandemic,” and that all Covid-19 related forbearances would end by September 30, 2022. However, Change 1 stated that “September 30, 2022” should be replaced with “six months after the end of the National Emergency Concerning the Novel COVID-19 Pandemic.” The circular is rescinded March 1, 2023.
California bankruptcy court says a forbearance that modifies the original loan is subject to state usury laws in certain instances
Earlier this year, the United States Bankruptcy Court for the Northern District of California granted in part and denied in part cross-motions for summary judgment in an action concerning “piecemeal exemptions” to California’s usury law. Plaintiffs entered into a loan agreement secured by their residence carrying an interest rate of 11.3 percent and a default interest rate of 17.3 percent (plus late fees) with a then-unlicensed lender. They also signed a promissory note, which stated that should they fail to make a monthly payment within 10 days of the due date they would be assessed a late charge equal to 10 percent of the monthly payment. After plaintiffs struggled to make payments, the parties entered into an extension agreement to supplement and amend the original loan (but not replace it), which slightly lowered the initial interest rate but increased the monthly payments and default interest rate. The extension also included language adding a charge on the final balloon payment that was not part of the original loan. Plaintiffs again began to miss loan payments and sought to refinance the loan with a different lender. A payoff quote provided by the defendant included what was originally called a “prepayment penalty” but was later changed to represent a late charge on the principal balance in line with the extension.
Plaintiffs sued the defendant and related parties in state court, seeking damages and alleging claims related to breach of contract, fraud, and intentional interference. After the court denied plaintiffs’ motion for preliminary injunction, plaintiffs filed an appeal on the same day one of the plaintiffs filed for bankruptcy. The defendant eventually filed a motion for summary judgment on the claims in the amended complaint, whereas plaintiffs sought partial summary judgment on several new claims, including that (i) the extension violated state usury law; (ii) the defendant “demanded an illegal acceleration penalty” from plaintiffs; and (iii) the defendant illegally charged multiple late fees on a single loan payment.
In a case of first impression, the court held that under California law, a loan extension that modifies the original loan, including by extending the maturity date, is considered a forbearance subject to state usury laws because there was no other sale, lease, or other transaction involved. The court noted that the statute “provides a restricted definition of the term ‘arranged’ in relation to a forbearance,” and that it also “painstakingly sets forth the instances in which a forbearance negotiated by a real estate broker would be exempt under usury law: when that broker was previously involved in arranging the original loan and that loan was in connection with a sale, lease, or other transaction, or when that broker had previously arranged for the sale, lease or other transaction for compensation.” The court further stated that “[c]onspicuously absent from those instances is a scenario in which a forbearance is arranged on a simple loan of money secured by real estate, with no other sale, lease, or other transaction involved,” adding that it “cannot create an exemption here to save [the defendant].” In the subject transaction, the real estate broker involved when the original loan was made was not involved in the extension, the court said.
The court also held that the loan forbearance violated California usury laws although the original loan was exempt from usury laws, disagreeing with the defendant’s position that “an originally non-usurious transaction cannot be transformed into a usurious transaction at a later point.” The court pointed out the distinction in this case from others cited by the defendant, stating that the “difference between a non-usurious loan and a loan subject to an exemption is slight but distinct. . . . Once the exemption (no real estate broker involved) ceased to apply, the exemption disappeared, and the transaction became subject to the full consequences of the usury law.” Because the extension’s interest rate and default interest rate both violated state usury law, the defendant is entitled only to the principal balance of the extension minus the amount of usurious interest paid.
Additionally, the court determined that under California law, the liquidated damages provision of the loan extension was separate from the interest charged by the extension, and a late charge on top of a balloon payment under extension was an unenforceable penalty provision instead of a valid provision for liquidated damages. The court also declined to consider punitive or other damages and said it will make a determination in the future as to what the defendant is entitled to by way of reimbursements or costs, as well as any interest accrued and owed after the extension’s maturity date.
States request extension of PSLF forgiveness waiver
On July 29, a coalition of state attorneys general sent a letter to President Biden and Department of Education Secretary Miguel Cardona, requesting the extension of the deadline for individuals to file claims under the Public Service Loan Forgiveness (PSLF) program. As previously covered by InfoBytes, in October 2021, the Department announced several significant changes to its PSLF program, including that approximately 22,000 borrowers with consolidated loans (including loans previously ineligible) may be immediately eligible to have their loans forgiven automatically, and another 27,000 borrowers could have their balances forgiven if they are able to certify additional periods of public service employment. According to the AGs, “it is critically important to extend the waiver at least until new PSLF regulations take effect and to grandfather in waiver benefits for borrowers who miss administrative deadlines.” The AGs also asked the Biden administration to count all forbearance periods toward loan forgiveness, rather than making exceptions for servicemembers and longer periods of forbearance for everyone else. The letter stated that “[f]ailure to automatically count periods of forbearance toward loan forgiveness ignores pervasive and well-established servicing problems and inappropriately shifts the burden to borrowers to identify and prove that they were victims of servicer misconduct.” The AGs urged the Biden administration “to exercise its authority to synchronize the One-Time Adjustment and Limited PSLF Waiver into a unified adjustment policy.” The letter specifically stated that the “simplest way of doing so may be to incorporate certain critical aspects of the waiver into the One-Time Adjustment, including that qualifying employment at the time of forgiveness is not necessary and that consolidations (whether of FFEL or Direct Loans) occurring prior to the completion of the One-Time Adjustment do not negate past qualifying employment periods for PSLF.”
District Court issues judgment against student debt relief operation
On June 10, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against an individual defendant who participated in a deceptive debt-relief operation. As previously covered by InfoBytes, in 2019, the Bureau, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees. In the third amended complaint, the Bureau and the states alleged that since at least 2015, the debt relief operation violated the CFPA, TSR, FDCPA, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by, among other things, misrepresenting: (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness for borrowers; and (iii) their ability to actually lower borrowers’ monthly payments. Moreover, the debt relief operation allegedly failed to inform borrowers that it was their practice to request that the loans be placed in forbearance and also submitted false information to student loan servicers to qualify borrowers for lower payments.
Under the terms of the final judgment, in addition to various forms of injunctive relief, the individual defendant must pay a $1 civil money penalty to the Bureau and $5,000 each to Minnesota, North Carolina, and California. The individual defendant is also “liable, jointly and severally, in the amount of $95,057,757, for the purpose of providing redress to Affected Consumers,” although his obligation to pay this amount is “suspended based on [his] inability to pay.”
District Court issues judgment against student debt relief operation
On May 24, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against an individual defendant who participated in a deceptive debt-relief enterprise operation. As previously covered by InfoBytes, in 2019, the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees. In the third amended complaint, the Bureau and the states alleged that since at least 2015 the debt relief operation violated the CFPA, TSR, FDCPA, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by misrepresenting, among other things: (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness for borrowers; and (iii) their ability to actually lower borrowers’ monthly payments. Moreover, the debt relief operation allegedly failed to inform borrowers that it was their practice to request that the loans be placed in forbearance and also submitted false information to student loan servicers to qualify borrowers for lower payments. Under the terms of the final judgment, the individual defendant must pay a $483,662 civil money penalty to the Bureau.
CFPB report finds variance in mortgage servicers’ pandemic response
On May 16, the CFPB released a report examining data collected across 16 large mortgage servicers from May through December 2021 on the servicers’ responses to the Covid-19 pandemic. According to the Bureau, there is significant variation in how servicers collected information on borrowers’ language preference, stating that “the substantial lack of information about borrowers’ language preference and varying data quality made it challenging to make any comparison between servicers.” However, the report also found that “the number of non-[limited English proficiency] borrowers who were delinquent without a loss mitigation option after forbearance declined over time, with the greatest decrease between October and November 2021, while the number of unknown and limited English proficiency (LEP) borrowers did not reflect the same decrease.” The report noted that servicer response to the Bureau’s requests for borrower demographics, including “a breakdown of the total loans they service by race, and race information for forbearances, delinquencies, and forbearance exits” was limited, precluding comparisons. The report encouraged "servicers to ensure that they are preventing discrimination in the provision of loss mitigation assistance.” Other key findings from the report included: (i) by the end of 2021, more than 330,000 borrowers’ loans remained delinquent – with no loss mitigation solution in place; (ii) the average hold times of more than ten minutes and call abandonment rates exceed 30 percent for certain servicers; (iii) the percentage of borrowers in delinquency and who had a non-English language preference increased during the reviewed period, but the percentage decreased for borrowers in delinquency and who identified English as their preferred language; (iv) more than half of the borrowers in the data received are categorized as race “unknown”; and (v) most borrowers exiting Covid forbearance exited with a loan modification (27 percent), while 15.2 percent exited in a state of delinquency.
States urge Biden to forgive student debt
On May 2, a coalition of state attorneys general, led by New York Attorney General Letitia James, announced that they are urging President Biden to cancel all outstanding federal student loan debt. In the letter, the AGs argue that full cancellation of student debt is necessary to address: the (i) enormity of the debt owed; (ii) effects of the Covid-19 pandemic; (iii) “systemically flawed repayment and forgiveness system”; and (vi) disproportionate impact on the borrowers’ debt burden, among other things. The AGs further noted that using resources to help individuals who have been “tricked” into forbearance plans, suing contractors who “bungle critical processes,” and protecting consumers from “aggressive” and “predatory” for-profit colleges have provided the AGs with a “deep understanding of the systemic challenges” facing federal student loan borrowers. The AGs stated that President Biden has authority to act under the Higher Education Act, and that such action “would benefit millions of borrowers and be one of the most impactful racial and economic justice initiatives in recent memory.”