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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.
DFPI issues more proposed changes to Student Loan Servicing Act
On March 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of second modifications to proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) In January, DFPI issued modified proposed regulations, outlining additional changes to definitions, time zone requirements, borrower protections, and examinations, books, and records requirements. (Covered by InfoBytes here.)
Following its consideration of public comments on the modified proposed regulations, DFPI is proposing the following additional changes:
- Amendments to definitions. Among other changes, the proposed changes amend “education financing products” to include private student loans which are not traditional loans. This change reverts the definition back to the word used in the original proposed rules. DFPI explained that this change “is necessary because the term ‘private student loan’ is defined later in the rules . . . but the term ‘private education loan’ is not separately defined.” The proposed changes also clarify “that the payment cap, which is the maximum amount payable under an income share agreement, may be expressed as an APR or an amount or a multiple of the amount advanced, covered, credited, deferred, or funded, excluding charges related to default.” Additionally, the changes revise the definition of “qualifying payment” to explain that “qualifying payments count toward maximum payments and the payment cap but not also the payment term.”
- Borrower protections. The first round of changes revised the time zone in which a payment must be received to be considered on-time to Pacific Time, in order to protect California borrowers. However, in further modifying the timing requirement, DFPI explained in its notice that “[r]equiring cut off times different than those posted on the servicer’s website just for California borrowers would deviate from standard current practices, would require system changes and enhancements that would be very expensive to implement and could cause confusion and operational risk to both servicers and borrowers. Limiting the exception to only those situations where the servicer has not posted the cut off time aligns with servicers’ operational capabilities and national banking standards.”
- Qualified written requests. The proposed changes clarify requirements for sending acknowledgments of receipt and responses to qualified written requests.
The second modifications also clarify provisions related to education financing servicing report requirements, and provide that upon notice, a student loan servicer must make available for inspection its books, records, and accounts at a licensed location designated by the DFPI or electronically.
Comments on the second modifications are due March 23.
CFPB report looks at junk fees; official says they remain agency focus
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
DFPI settles with student loan debt relief company
On February 28, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with an unlicensed student debt relief company and its owner. The announcement is part of the DFPI’s continued crackdown on student loan debt relief companies found to have violated the California Consumer Financial Protection Law (CCFPL), the Student Loan Servicing Act (SLSA), and the Telemarketing Sales Rule (TSR). According to the settlement, a DFPI inquiry into the company’s practices found that since at least 2018, the company placed unsolicited phone calls to consumers advertising its student loan forgiveness and modification services. The company allegedly gave borrowers the impression that it was a part of, or affiliated with, an official government agency, and would act “as an intermediary between borrowers and the borrowers’ lenders or loan servicers with the goal of helping those consumers lower or eliminate their student loan debts.” The DFPI found that since 2018 at least 790 California consumers enrolled in the company’s debt relief program, whereby the company collected at least $713,000 through up-front servicing fees ranging from $116 to $2,449 from California consumers. By allegedly engaging in unlicensed student loan servicing activities, engaging in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services, and by charging advance fees for debt relief services, the DFPI claimed the company violated the SLSA, CCFPL, and TSR.
Under the terms of the consent order, the company and owner must desist and refrain from engaging in the alleged conduct, rescind all debt relief, debt management, or debt consulting service agreements, and issue refunds to California consumers. The owner is also ordered to “desist and refrain from owning, managing, operating, or controlling any entity that services student loans, or which offers or provides any consumer financial products or services as defined by the CCFPL, unless and until he or the entity has the applicable approvals from the DFPI and is in compliance with the SLSA, CCFPL, TSR, and the Federal Trade Commission Act.”
States support DOE’s overhaul of IDR plans
On February 13, a coalition of state attorneys general led by California and Massachusetts submitted a letter in support of the Department of Education’s (DOE) proposed changes to income-driven repayment plans (IDR) for federal student loan borrowers. As previously covered by InfoBytes, last month the DOE announced a notice of proposed rulemaking (NPRM) designed to reduce the cost of federal student loan payments. According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan, and is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income-Contingent Repayment and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrower otherwise makes the monthly payments, and would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed.
In their letter, the states expressed support for the DOE’s NPRM, but urged the department to take further steps to support struggling borrowers. The states urged the DOE to expand the scope and reach of the proposed reforms by, among other things, creating a simple path for borrowers in default to enroll in IBR or REPAYE, counting all past forbearance and repayment periods and certain deferment periods towards borrowers’ loan forgiveness, making Parent PLUS loans eligible for REPAYE, and expanding the reach of its reforms to “provide more retroactive relief” to borrowers impacted by widespread servicing errors that prevented them from enrolling in IDR. According to the letter, the DOE should also raise the discretionary income threshold to make debt more manageable for borrowers with the greatest need, eliminate the reverse amortization of IDR loan balances, shorten the period in which borrowers must make payments to receive forgiveness under REPAYE, provide viable repayment options, and automatically enroll delinquent borrowers in IDR plans before they face negative credit reporting and default, among other measures.
Bipartisan Senate legislation would offer stronger ISA protections
On January 31, Senators Mark Warner (D-VA), Todd Young (R-IN), Marco Rubio (R-FL), and Chris Coons (D-DE) reintroduced legislation to strengthen protections for students who enter into income share agreements (ISAs). The senators explained that ISAs are an innovative way for students to finance postsecondary education and serve as an alternative to high-interest student loans. Under an ISA, students agree to pay a percentage of their income over an agreed upon time period in exchange for tuition payments from nongovernmental sources. When the time period ends, students stop payments regardless of whether they have paid back the full amount.
The ISA Student Protection Act of 2023 would, among other things, (i) prevent ISA providers from requiring payments higher than 20 percent of a student’s income; (ii) exempt students from making payments towards their ISA should their income fall below an affordability threshold; (iii) establish a maximum number of payments and limit payment obligations to the end of a fixed window; (iv) set a minimum number of voluntary payment relief pauses; (v) require ISA providers to give detailed payment disclosures to students who may be considering entering into an ISA (including how payments under an ISA compare to payments under a comparable loan); (vi) provide strong bankruptcy protections for students who enter into an ISA “by omitting the higher ‘undue hardship’ standard for discharge required under private loans”; (vii) prevent funders from accelerating defaulted ISAs; (viii) ensure that ISA obligations end in the event of death or total and permanent disability; (ix) ensure that ISAs fall under federal consumer protection laws, including the FCRA, FDCPA, MLA, SCRA, and ECOA; (x) grant regulatory authority over ISAs to the CFPB; and (xi) clarify how ISA contributions should be treated for tax purposes for both funders and recipients.
States file brief in support of Biden’s student loan debt-relief program
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.
Education Dept. releases IDR proposal
On January 10, the Department of Education (DOE) announced a notice of proposed rulemaking (NPRM) to reduce the cost of federal student loan payments. According to the DOE, the regulations fulfill President Biden’s plan to provide student debt relief for approximately 40 million borrowers and to make the student loan system more manageable for student borrowers. As previously covered by InfoBytes, the three-part debt relief plan was announced in August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE, and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples. Plaintiffs, whose loans are ineligible for debt forgiveness under the program, sued the DOE and the DOE secretary claiming the agency violated the Administrative Procedure Act’s notice-and-comment rulemaking procedures and arbitrarily decided the program’s eligibility criteria. Plaintiffs further contended that the DOE secretary does not have the authority under the HEROES Act to implement the program. Specifically, the NPRM would establish that those making less than $30,577 as an individual or a family of four making less than $62,437 would have their monthly payments reduced to $0.
According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan. The NPRM noted that the DOE is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income Contingent Repayment (ICR) and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrowers otherwise make their monthly payments. Additionally, the NPRM would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed. The DOE released a Fact Sheet on increasing college accountability, which clarifies information on identifying the lowest-financial-value programs, protecting students and delivering value through greater accountability, increasing collaboration with accreditors, and building a record of action.
The DOE also released a request for information (RFI) to solicit comments on identifying the best ways to calculate the metrics that may be used to identify low-financial-value programs and inform technical considerations. Finally, the DOE released a Fact Sheet on transforming IDR. Among other things, the Fact Sheet discusses decreasing undergraduate loan payments, stopping unpaid interest accumulation, and lowering the number of monthly payments required to receive forgiveness for borrowers with smaller loan balances. Comments are due 30 days after publication in the Federal Register.
DFPI modifies Student Loan Servicing Act proposal
On January 6, the California Department of Financial Protection and Innovation issued modified proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) The initial proposed rules also (i) defined the term “education financing products” (which now fall under the purview of the Act) along with other related terms; (ii) amended various license application requirements, including financial requirements for startup applicants; (iii) outlined provisions related to non-licensee filing requirements (e.g., requirements for servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021)); (iv) specified that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI; and (v) outlined new clarifications to the Student Loans: Borrower Rights Law to provide new requirements for student loan servicers (covered by InfoBytes here).
Following its consideration of public comments on the initial proposed rulemaking, DFPI is proposing the following changes:
- Amendments to definitions. The modified regulations revise the definition of “education financing products” by changing “private loans” to “private education loans,” which are not traditional loans. DFPI explained that changing the term to what is used in TILA will provide consistency for servicers and eliminate operational burdens. While the definition of “education financing products” also no longer includes “income share agreements and installment contracts” in order to align it with TILA, both of these terms were separately defined in the initial proposed rulemaking. The definition of “traditional student loan” has also been revised to distinguish which private student loans are traditional loans and which are education financing products (in order to help servicers determine the applicable aggregate reporting and records maintenance rules). The modifications also revise the definitions of “federal student loan,” “income,” “income share agreement,” “installment contract,” “payment cap,” “payment term,” and “qualifying payments,” remove unnecessary alternative terms for “income share,” and add “maximum payments” as a new defined term.
- Time zone requirement revisions. The modified regulations revise the time zone in which a payment must be received to be considered on-time to Pacific Time in order to protect California borrowers.
- Additional borrower protections. The modified regulations specify that servicers are required to send written acknowledgement of receipt and responses to qualified written requests via a borrower’s preferred method of communication. For borrowers who do not specify a preferred method, servicers must send acknowledgments and responses through both postal mail to the last known address and to all email addresses on record.
- Examinations, books, and records requirement updates. The modified regulations revise the information that servicers must provide in their aggregate reports for traditional student loans, including with respect to: (i) loan balance and status; (ii) cumulative balances and amounts paid; and (iii) aggregate information specific to ISAs, installment contracts, and other education financing products. Additionally, DFPI clarified that while the amount a borrower will be required to pay to an ISA provider in the future is unknown, many ISAs contain an “early completion” provision to allow a borrower to extinguish future obligations, and ISA providers must give this information to borrowers. DFPI further clarified that while servicers may choose to maintain records electronically, they must also be able to produce paper records for inspection at a DFPI-designated servicer location to allow an examination to be conducted in one place.
Comments on the modified regulations are due January 26.
2nd Circuit affirms dismissal in FCRA suit
On January 4, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s decision to grant summary judgment for a credit reporting agency (defendant) in a suit alleging FCRA violations. According to the opinion, four years after the plaintiff took out a student loan, he filed for bankruptcy protection. The bankruptcy court issued a final decree of discharge, which released the plaintiff from all “dischargeable debts,” but did not specifically indicate that the loan was discharged. The student loan servicer indicated that the student loan was not discharged, and the plaintiff executed a loan modification agreement with the loan holder and made payments for several years. The plaintiff filed suit against the defendant consumer reporting agency, alleging that it violated the FCRA and New York law for including the loan on his credit report. The district court granted summary judgment in favor of the defendant after determining that the consumer’s loan had not been discharged. The plaintiff appealed.
On appeal, the 2nd Circuit noted that the plaintiff’s claim “hinges on the resolution of an unsettled legal question”: whether the loan was in fact discharged in the bankruptcy proceeding. Making such a determination would have required the defendant to resolve a legal question related to the debt, which the appellate court concluded was not required under the FCRA. As a result, the appellate court affirmed the dismissal of the plaintiff’s complaint because the alleged inaccuracy is not considered to not be an actionable “inaccuracy” under the FCRA.