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On June 14, the CFPB announced a proposed settlement, subject to approval by a federal district court, with a company that manages student loans for a defunct for-profit educational institution resolving allegations it provided substantial assistance to the institution in engaging in unfair acts and practices in violation of the Consumer Financial Protection Act (CFPA). As previously reported by InfoBytes, the Bureau filed suit against the now-defunct for-profit institution in February 2014. The Bureau’s complaint against the institution alleged that the institution offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The complaint asserts that the institution then forced borrowers into “high-interest, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations, when their short-term loans became due. In the complaint in the current matter, filed the same day as the proposed stipulated judgment, the Bureau alleges that the management company: (i) was substantially involved in the creation and operation of the loan program, including raising money and overseeing the origination and servicing of the loans; and (ii) knew, or was reckless in not knowing, the risks associated with the loan program. The proposed stipulated judgment requires the company to (i) cease enforcement and collection efforts on all outstanding loans associated with the program; (ii) discharge all outstanding loans associated with the program; and (iii) direct credit reporting agencies to delete consumers’ trade lines associated with the loan program. The company must also provide notice of these actions to affected consumers. The proposed judgment does not include a monetary penalty or require refunds to consumers.
On May 24, Attorneys General from 47 states, American territories, and Washington D.C., sent a letter to Secretary Betsy DeVos of the U.S. Department of Education (Department) to implement an automatic discharge process for the student loans of veterans who are totally and permanently disabled or otherwise unemployable (known as a “TPD discharge”). The letter asserts that while the Higher Education Opportunity Act of 2008 requires that the Department discharge the student loans of veterans who are totally and permanently disabled as a result of service, the Department requires eligible veterans to take “affirmative steps to secure the loan forgiveness,” which “may prove [to be] insurmountable obstacles to relief for many eligible veterans due to the severe nature of their disabilities.” According to the letter, the Department has identified over 42,000 veterans who are eligible for discharges and carry over $1 billion in dischargeable student loan debt, yet fewer than 9,000 of the eligible veterans had applied for the discharge as of April 2018. In response to the Department’s concerns about the veterans’ potential tax liability, the Attorneys General pointed out that federal tax law excludes loan discharges for disabled borrowers from taxable income. Even if the discharge increases their state tax bill, the Attorneys General argued that most borrowers would prefer to have their outstanding loans completely discharged, and those that do not could be given notice and an opportunity to opt out. Because there is no statutory requirement that eligible veterans apply for the TPD discharges, the Attorneys General urged the Department to implement a program to automatically discharge the outstanding loans as expeditiously as possible.
On May 13, the Colorado governor signed SB19-002, the “Colorado Student Loan Servicers Act,” which requires an entity that services a student education loan owned by a Colorado resident to be licensed by the state. Under the bill, “student loan servicer” is generally defined as a person that receives a scheduled periodic payment from a student loan borrower and applies the payments of principal and interest with respect to the amounts received from such a borrower, and provides other similar administrative services. The bill requires any person seeking to act as a student loan servicer to be licensed through the state on or after January 31, 2020, and specifies the procedures for obtaining and renewing the license. Federal student loan servicers are automatically issued the license under the bill.
Among other things, the bill also specifies particular acts that are required of the student loan servicer, including (i) providing substantive responses within 30 days of receiving a written inquiry from a borrower; (ii) inquiring of borrowers as to how to apply overpayments; and (iii) applying partial payments in a manner that minimizes late fees and negative credit reporting. Additionally, the bill specifies prohibited acts, including (i) engaging in an unfair or deceptive practice toward any person or misrepresenting or omitting any material information in connection with servicing student loans; (ii) misapplying payments to the loan balance; and (iii) failing to report both favorable and unfavorable payment history to a consumer reporting agency. A violation of the bill is considered a deceptive trade practice, and the bill provides a private right of action for borrowers to seek punitive damages for violations. The bill is expected to take effect on August 2.
On May 16, Senator Warren (D-MA) released an April 23 letter from CFPB Director Kathy Kraninger outlining the Bureau’s efforts to oversee student loan servicers, which was sent in response to an inquiry by six democratic senators. As previously covered by InfoBytes, the senators wrote to the CFPB seeking additional information on the Bureau’s oversight of student loan companies and servicers involved in the administration of the federal Public Service Loan Forgiveness Program (PSLF) and asking about the effect of the Department of Education’s (Department) December 2017 guidance to loan servicing contractors not to produce documents directly to other government agencies. In response, Kraninger noted that since December 2017, the Bureau has conducted “several exams” of student loan servicers, some that included questions regarding PSLF. However, and most notably, Kraninger stated that, “[s]ince December 2017, student loan servicers have declined to produce information requested by the Bureau for supervisory examinations related to Direct Loans and Federal Family Education Loan Program (FFELP)…based on the Department’s guidance.” The Bureau has pursued “options” to obtain the information necessary for these examinations, according to Kraninger. Additionally, Kraninger noted that creating a new Memorandum of Understanding with the Department is a priority for the Bureau, once a new Student Loan Ombudsman is hired.
Maryland establishes student loan servicer provisions, prohibits unfair, abusive, or deceptive trade practices
On March 13, the Maryland governor signed HB 594, which establishes various provisions with respect to student loan servicing in the state. Among other things, student loan servicers are prohibited from (i) employing—either directly or indirectly—“any scheme, device, or artifice to mislead a student loan borrower”; (ii) engaging in any unfair, abusive, or deceptive trade practice with regard to the servicing of student loans; (iii) misrepresenting or omitting material information, including fees, payment amounts, repayment options, terms and conditions, or student borrower obligations; (iv) obtaining property through the misrepresentation or omission of material fact; (v) knowingly or recklessly misapplying or refusing to correct a misapplication of payments to the balance of any student loan; (vi) providing inaccurate information to a consumer credit reporting agency; (vii) refusing to communicate with a student loan borrower’s authorized representative; (viii) making false statements or omitting material facts in connection with an investigation; and (ix) violating federal laws concerning student loan servicing. In addition, on or after February 1, 2020, student loan servicers are also prohibited from “allocat[ing] a nonconforming payment in a manner other than as directed by the student loan borrower” provided the borrower meets certain criteria. The Act also requires student loan servicers to respond to a borrower’s inquiry or complaint within 30 days of receipt, authorizes the Commissioner of Financial Regulation (Commissioner) to enforce the Act’s provisions, and provides that the Student Loan Ombudsman many refer borrower complaints to the Commissioner for investigation. The Act is effective October 1.
On May 1, the CFPB announced a $3.9 million settlement with a student loan servicing company. The settlement resolves allegations that the company engaged in unfair practices by failing to make adjustments to loans made under the Federal Family Education Loan Program to account for circumstances such as deferment, forbearance, or entrance into the Income-Based Repayment (IBR) program. According to the consent order, between 2005 and 2015, certain accounts requiring manual adjustments to principal loan balances based on program participation were allegedly placed in “queues” to process the adjustments, which took, in some cases, years to process. The servicer allegedly did not inform affected borrowers that it did not complete the processing of their principal balances associated with the deferment, forbearance, or IBR participation. The queues allegedly resulted in some borrowers paying off incorrect loan amounts and other borrowers experiencing delays in loan consolidation while waiting for the servicer to adjust principal balances. In addition to the $3.9 million civil money penalty, the consent order requires the servicer to make the proper adjustments to the principal balances of the affected accounts or pay restitution to borrowers who paid off loans with inaccurate loan balances. The servicer is also required to comply with certain compliance monitoring, reporting, and recordkeeping requirements.
Department of Defense updating data-sharing agreement with Department of Education to preserve servicemember benefit
On April 16, the Department of Defense (DoD) published a proposal in the Federal Register to amend its routine use policy to accommodate a new data-sharing agreement between DoD and the Department of Education (ED). The new agreement ensures that servicemembers with student loans under Part D, Title IV of the Higher Education Act of 1965 receive the “no interest accrual benefit” on eligible loans during the period in which they received imminent danger or hostile fire pay. Through the proposal and the new agreement, ED will be able to access information in the Defense Manpower Data Center Data Base to identify servicemembers eligible for “no interest accrual benefit.” The proposal will take effect after the comment period ends on May 16 “unless comments are received which result in a contrary determination.”
On March 31, the New York governor announced the passage of the state’s FY 2020 Budget, which includes an amendment (known as “Article 14-A” or “the Act”) to the state’s banking law with respect to the licensing of private student loan servicers. Article 14-A requires student loan servicers to be licensed by the New York Department of Financial Services (NYDFS) in order to service student loans owned by residents of New York. The licensing provisions do not apply to the servicers of federal student loans—defined as, “(a) any student loan issued pursuant William D. Ford Federal Direct Loan Program; (b) any student loan issued pursuant to the Federal Family Education Loan Program, which was purchased by the government of the United States pursuant to the federal Ensuring Continued Access to Student Loans Act and is presently owned by government of the United States; and (c) any other student loan issued pursuant to a federal program that is identified by the superintendent as a ‘federal student loan’ in a regulation”—as the Act treats federal servicers as though they are a licensed student loan servicer. Banking organizations, foreign banking organizations, national banks, federal savings associations, federal credit unions, or any bank or credit union organized under the laws of any other state, are also considered exempt from the new state licensing requirements.
In addition to the licensing requirements, Article 14-A also prohibits any student loan servicer—including those exempt from licensing requirements or deemed automatically licensed—from, among other things, (i) engaging in any unfair, deceptive, or predatory act or practice with regard to the servicing of student loans, including making any material misrepresentations about loan terms; (ii) misapplying payments to the balance of any student loan; (iii) providing inaccurate information to a consumer credit reporting agency; and (iv) making false representations or failing to respond to communications from NYDFS within fifteen calendar days. Article 14-A requires student loan servicers (not including exempt organizations) to accurately report a borrower’s payment performance to at least one credit reporting agency if the organization regularly reports information to a credit reporting agency. Additionally, the Act specifies that a student loan servicer shall inquire on how a borrower would like nonconforming payments to be applied and continue that application until the borrower provides different directions. Article 14-A also outlines examination and recordkeeping requirements and allows for the NYDFS Superintendent to penalize servicers the greater of (i) up to $10,000 for each offense; (ii) a multiple of two times the violation’s aggregate damages; or (iii) a multiple of two times the violation’s aggregate economic gain. Article 14-A takes effect 180 days after becoming law.
White House releases 2020 budget proposal; key areas include appropriations and efforts to combat terrorist financing
On March 11, the White House released its fiscal 2020 budget request, A Budget for a Better America. The budget was accompanied by texts entitled Major Savings and Reforms (MSR), which “contains detailed information on major savings and reform proposals”; Analytical Perspectives, which “contains analyses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective”; and an Appendix containing detailed supporting information. Funding through appropriations and efforts to combat terrorist financing remain key highlights carried over from last year. Notable takeaways of the 2020 budget proposal are as follows:
CFPB. In the MSR’s “Restructure the Consumer Financial Protection Bureau” section, the budget revives a call to restructure the Bureau, and proposes legislative action to implement a two-year restructuring period, subject the CFPB to the congressional appropriations process starting in 2021, and “bring accountability” to the Bureau. Among other things, the proposed budget would cap the Federal Reserve’s transfers to the Bureau at $485 million in 2020.
Financial Stability Oversight Council (FSOC). The 2020 budget proposal requests that Congress establish funding levels through annual appropriations bills for FSOC (which is comprised of the heads of the financial regulatory agencies and monitors risk to the U.S. financial system) and its independent research arm, the Office of Financial Research (OFR). Currently FSOC and OFR set their own budgets.
Flood Insurance. The Credit and Insurance chapter of the budget’s Analytical Perspectives section discusses FEMA initiatives such as modifying the National Flood Insurance Program (NFIP) to become a simpler, more customer-focused program, and “doubling the number of properties covered by flood insurance (either the NFIP or private insurance) by 2022.” Separately, the budget proposal emphasizes that the administration believes that “flood insurance rates should reflect the risk homeowners face by living in flood zones.”
Government Sponsored Enterprises. Noted within the MSR, the budget proposes doubling the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators from 0.10 to 0.20 percentage points from 2020 through 2021. The proposal is designed to help “level the playing field for private lenders seeking to compete with the GSEs” and would generate an additional $32 billion over the 10-year budget window.
HUD. The budget proposes to eliminate funding for the Community Development Block Grant program, stating that “[s]tate and local governments are better equipped to address local community and economic development needs.” The proposal would continue to preserve access to homeownership opportunities for creditworthy borrowers through FHA and Ginnie Mae credit guarantees. The budget also requests $20 million above last year’s estimated level to help modernize FHA’s information technology systems and includes legislative proposals to “align FHA authorities with the needs of its lender enforcement program and limit FHA’s exposure to down-payment assistance practices.”
SEC. As stated in both the budget proposal and the MSR, the budget again proposes to eliminate the SEC’s mandatory reserve fund and would require the SEC to request additional funds through the congressional appropriations process starting in 2021. According to the Appendix, the reserve fund is currently funded by collected registration fees and is not subject to appropriation or apportionment. Under the proposed budget, the registration fees would be deposited in the Treasury’s general fund.
SIGTARP. As proposed in the MSR, the budget revives a plan that would reduce funding for the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) “commensurate with the wind-down of TARP programs.” According to the MSR, “Congress aligned the sunset of SIGTARP with the length of time that TARP funds or commitments are outstanding,” which, Treasury estimates, will be through 2023. The reduction reflects, among other things, that less than one percent of TARP investments remain outstanding. This will mark the final time payments are expected to be made under the Home Affordable Modification Program.
Student Loan Reform. As with the 2019 budget proposal, the 2020 proposed budget seeks to establish a single income-driven repayment plan that caps monthly payments at 12.5 percent of discretionary income. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the proposal would eliminate subsidized loans and the Public Service Loan Forgiveness program, auto-enroll “severely delinquent borrowers,” and create a process for borrowers to share income data for multiple years. With certain exceptions, these proposals will only apply to loans originated on or after July 1, 2020.
Treasury Department. The budget states that combating terrorist financing, proliferation financing, and other types of illicit financing are a top priority for the administration, and $167 million has been requested for Treasury’s Office of Terrorism and Financial Intelligence to “continue its work safeguarding the financial system from abuse and combating other national security threats using economic tools.” The proposed budget also requests $125 million for the Financial Crimes Enforcement Network to administer the Bank Secrecy Act and its work to prevent the financing of terrorism, money laundering, and other financial crimes. An additional $18 million was proposed for strengthening and protecting Treasury’s IT systems.
On March 6, the U.S. Court of Appeals for the 4th Circuit held that Congress did not waive sovereign immunity for lawsuits under the FCRA, affirming the lower court’s dismissal of a consumer action. According to the opinion, a consumer filed a lawsuit against the U.S. Department of Education (the Department), a student loan company, and the three major credit reporting agencies, alleging numerous claims, including violations of the FCRA for failing to properly investigate disputes that federal student loans were fraudulently opened in his name. The Department filed a motion to dismiss to the FCRA claims against it arguing the court lacked subject matter jurisdiction based upon a claim of sovereign immunity. The lower court agreed, holding Congress had not affirmatively waived sovereign immunity for suits under the FCRA.
On appeal, the 4th Circuit agreed with the lower court. The appellate court noted that, although the FCRA includes a “government or governmental subdivision or agency” as part of the definition of “person” in the statute, there is a “longstanding interpretive presumption that ‘person’ does not include the sovereign,” and that waivers of sovereign immunity need to be “unambiguous and unequivocal.” The appellate court noted that Congress waived immunity in other sections of the FCRA, which were not at issue in this case and, had Congress waived immunity for enforcement purposes under the FCRA, it would raise a new host of “befuddling” and “bizarre” issues, such as the prospect of the government bringing criminal charges against itself. Therefore, the appellate court concluded that the federal government may be a “person” under the substantive provisions, but that without a clear waiver from Congress, the federal government is still immune from lawsuits under the FCRA’s enforcement provisions.
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- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
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- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
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