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On August 26 and 28, the U.S. District Court for the Central District of California entered two final judgments (see here and here) against four of the defendants in an action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney alleging a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint alleged that the defendants violated the Consumer Financial Protection Act, the Telemarketing Sales Rule, 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 complaint asserts the defendants engaged in deceptive practices by misrepresenting (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness; and (iii) their ability to actually lower borrowers’ monthly payments.
The finalized settlements suspend a total judgment of over $95 million due to the defendants’ inability to pay, and requires the two defendants who settled on August 26, to pay a total of $75,000 to Minnesota, North Carolina, and California, and $1 each to the CFPB, in civil money penalties, and the two defendants who settled on August 28, to pay a total of $15,000 to the respective states and $1 to the CFPB in civil money penalties. In addition to the monetary penalties, the defendants are required to relinquish certain assets and submit to certain reporting and recordkeeping requirements. All four defendants neither admit nor deny the allegations, as part of the settlements.
On August 21, the U.S. Department of Education announced the implementation of the presidential memorandum extending a forbearance plan on federal student loans through the end of the year. As previously covered by InfoBytes, the memorandum directed the Department of Education to take action to continue to provide “deferments to borrowers as necessary to continue the temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education until December 31, 2020.” According to the announcement, until December 31, in addition to suspended payments and the waiver of all interest, there will be (i) no collections on defaulted federal loans; and (ii) borrowers will receive a refund of any continued employer garnishment related to defaulted federal loans. Additionally, non-payments by borrowers working full-time for qualified Public Service Loan Forgiveness employers will continue to receive credit towards their 120 payments.
On August 18, the Alternative Reference Rates Committee (ARRC) released reference rate transition guides for adjustable-rate mortgages (ARMs) and variable rate private student loans that reference LIBOR. Both guides are intended to support the transition from LIBOR to an alternative reference rate, such as the Secured Overnight Financing Rate (SOFR), and focus on LIBOR-based contracts that will continue to exist after LIBOR’s anticipated cessation at the end of 2021. The LIBOR ARM Transition Resource Guide and the LIBOR-Based Private Student Loan Transition Resource Guide cover key milestones, suggested readiness timeframes, transition risks, and stakeholder impacts, and include various resource guidance, tools, and templates to assist institutions in “fortify[ing] their products and support[ing] consumers’ transitions to SOFR.”
Find continuing InfoBytes coverage on LIBOR here.
On August 4, the Pennsylvania attorney general announced it had entered into an Assurance of Voluntary Compliance with a third-party financing company, which permanently shuts down the company’s operations in the state and requires the company to cancel nearly $200,000 in debt for its former customers. According to the AG, the company entered into agreements with various debt relief companies to provide third-party financing to student loan borrowers so they could be enrolled in certain federal student loan repayment programs offered by the Department of Education. However, the company allegedly violated provisions of the Pennsylvania Consumer Protection Law and TILA related to closed end credit transaction by, among other things, (i) misrepresenting that the finance plan was a revolving credit plan, when it was actually a closed end transaction; (ii) misrepresenting that it retained a security interest as a result of its financing agreements when in in fact it did not; (iii) financing consumers’ student loan debt relief services when it knew, or should have known, that consumers were not receiving the services as advertised; and (iv) failing to provide Regulation Z-required disclosures for closed end credit transactions, including the amount financed, finance charges, total of payments, and the number and amount of payments necessary to repay the total payments. In addition, the AG claimed that the company charged consumers unacceptably high interest rates. Under the terms of the settlement, the company is banned from financing or assisting others in financing student loan debt relief services and from collecting debt from Pennsylvania borrowers. The company must also request that credit reporting agencies delete the reported debts from consumers’ credit reporting files. Monetary relief in the amount of $930,000 is suspended unless a court determines the company has violated the terms of the settlement.
On August 8, President Trump issued an executive order to Secretary of Education Betsy DeVos extending a forbearance plan on student loans through the end of the year. The executive order directs the Department of Education to take action to continue to provide “deferments to borrowers as necessary to continue the temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education until December 31, 2020.” The current forbearance program provided under the CARES Act (covered by a Buckley Special Alert) ends September 30. While the executive order states that it applies to “student loans held by the Department of Education,” it does not specifically outline which kind of federal student loans are covered under the new forbearance order.
States urge Department of Education to protect federal student loans borrowers as CARES Act deadline approaches
On August 6, the NYDFS sent a letter to the Department of Education, urging Secretary Betsy DeVos to take measures to protect student loan borrowers when federal student loan borrower relief under the CARES Act ends September 30. Currently, the CARES Act provides an automatic freeze for borrowers with Federal Family Education Loan Program and Federal Direct loans (covered by a Buckley Special Alert), and stipulates that during the suspension period, interest will not accrue, servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made.
The letter, sent on behalf of seven state student loan ombudspersons, expresses concerns that, despite protections afforded by the CARES Act, “many borrowers are being left behind and . . . borrowers will face hardships once the CARES Act coverage expires.” Specifically, the letter requests DeVos to take additional proactive steps, including: (i) expanding the CARES Act protections to federal borrowers not currently eligible for relief (i.e., “borrowers whose loans are owned by commercial lenders and Perkins Loan borrowers whose loans are owned by their schools”) and extending the term of those protections; (ii) ensuring servicers are prepared for the September 30 end-date to ensure that borrowers are not harmed when their student loan accounts are placed back into repayment status; and (iii) streamlining access to income driven repayment (IDR) plans by eliminating “logistical and administrative barriers to automated IDR plan enrollment” and recommending “that borrowers be able to self-report income and that applications be deemed provisionally approved upon submission, even if incomplete, so that relief is given as quickly as possible.”
On July 30, the Massachusetts attorney general announced a Nevada-based debt buyer will discharge nearly $300,000 in student loan debt in connection with a for-profit education company that sold allegedly ineffective online study guides and education materials. According to the assurance of discontinuance (AOD), the education company allegedly engaged in unfair and deceptive acts in the marketing and selling of its educational materials and services, which included arranging for consumers to finance equivalency exam fees. The company arranged for consumers to obtain financing from certain credit unions and those credit unions subsequently sold the loans to other entities, including the Nevada-based debt buyer.
The AOD requires the debt buyer to discharge and cease collection of the company’s loans for each of the 76 Massachusetts consumers, amounting to nearly $300,000 in debt. Additionally, the debt buyer is required to pay Massachusetts approximately $70,600 for the attorney general to distribute to consumers who made payments to the debt prior to the action, and is prevented from reporting any negative credit information.
On July 27, the U.S. Court of Appeals for the Third Circuit determined that the Commonwealth of Pennsylvania may pursue claims against a student loan servicer under the Consumer Financial Protection Act (CFPA) despite a concurrent action brought against the servicer by the CFPB. The appellate court also held that the Commonwealth’s claims under the Pennsylvania Unfair Trade Practices and Consumer Protection Law are not preempted by the federal Higher Education Act (HEA). The decision results from a lawsuit filed by the Commonwealth claiming the servicer, among other things, originated risky, high-cost student loans, steered borrowers into forbearance, failed to properly inform borrowers about income-driven repayment options, made misrepresentations related to cosigner release, and misapplied borrower payments. Because the CFPB filed a lawsuit alleging similar claims against the servicer nearly nine months prior to the Commonwealth’s suit, the servicer argued that under the applicable provision of the CFPA, the Commonwealth could not file a concurrent suit. The district court disagreed and denied the servicer’s motion to dismiss.
In addressing whether a concurrent suit is permitted, the appellate court noted, “that the clear statutory language of the [CFPA] permits concurrent state claims, for nothing in the statutory framework suggests otherwise.” With respect to whether the applicable provision of the HEA expressly and impliedly preempts the Commonwealth’s suit, the 3rd Circuit stated that the statute only expressly preempts claims “based on failures to disclose information as required by the statute,” and not claims “based on affirmative misrepresentations.” Thus, because the Commonwealth’s claims were based on alleged affirmative misrepresentations and misconduct, it affirmed the district court’s ruling that the Commonwealth’s case may proceed. The 3rd Circuit highlighted, however, a circuit split over whether the HEA impliedly preempts state-law claims, pointing to the 9th Circuit’s holding that “allowing state law causes of action to proceed would conflict with the purpose of uniformity.” The 3rd Circuit’s decision joins those issued by the 7th and 11th Circuits, which both rejected the argument that uniformity was an intended purpose of the HEA.
The CFPB and the defendants filed with the district court in May dueling motions for summary judgment in the concurrent CFPB action, but the court has yet to issue a ruling on those motions.
State AGs ask court to vacate Department of Education’s 2019 “Institutional Accountability” regulations
On July 15, a coalition of state attorneys general from 22 states and the District of Columbia filed a complaint in U.S. District Court for the Northern District of California against Secretary of Education Betsy DeVos and the Department of Education, asking the court to vacate the Department’s 2019 final Institutional Accountability regulations (2019 Rule). As previously covered by InfoBytes, the 2019 Rule—which took effect July 1, 2020—revises protections for student borrowers who were significantly misled or defrauded by their higher education institutions, and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” Loans disbursed prior to July 1, 2020 remain subject to defenses under prior regulations issued in 2016 (2016 Rule). Earlier this year, H.J. Res. 76, which provided for congressional disapproval of the 2019 Rule (covered by InfoBytes here), was vetoed by President Trump.
The AGs allege in their complaint that the Department’s 2019 Rule, among other things, “completely eliminate[s] violations of applicable state consumer protection law as a viable defense to repayment of federal student loans” and “impose[s] additional requirements on a viable misrepresentation defense that are so onerous that they make this defense impossible for a student borrower to assert successfully.” Moreover, the AGs contend that the Department has “failed to meet its congressional mandate to specify actual borrower defenses” by promulgating a rule that serves only to prevent borrowers from obtaining relief. On these grounds, the AGs claim the 2019 Rule violates the Administrative Procedure Act (APA).
The AGs highlight several aspects of the 2019 Rule that support its claims, including that the elimination of the 2016 Rule’s limitations on the use of class action waivers and mandatory predispute arbitration agreements is arbitrary and capricious. According to the AGs, the Department’s “conclusion that requiring schools to disclose their use of mandatory predispute arbitration agreements and class action waivers will adequately protect borrowers is also contrary to substantial evidence and [the Department’s] own prior conclusions.”
On July 20, the FTC announced that the U.S. District Court for the Central District of California issued a final judgment permanently banning defendants in a student loan debt relief operation from telemarketing or providing debt relief services. As previously covered by InfoBytes, in 2019 the FTC charged the defendants with violations of the FTC Act and the Telemarketing Sales Rule (TSR) for allegedly, among other things, (i) charging borrowers illegal advance fees; (ii) falsely claiming they would service and pay down borrowers’ student loans; and (iii) obtaining borrowers’ credentials in order to change consumers’ contact information and prevent communications from loan servicers.
The court’s order granted the FTC’s motion for summary judgment, finding that the defendants received revenues of at least $31.1 million derived unlawfully from payments received from borrowers due to the defendants’ violations of the FTC Act and TSR. Of these revenues, only about $3.1 million had been paid by the defendants to borrowers’ federal student loan servicers, the order stated, although the court noted that the defendants allegedly refunded about $408,089 to consumers. The court imposed a roughly $27.6 million judgment against the defendants as equitable monetary relief, and permanently banned the defendants from offering similar services in the future, including misrepresenting, or assisting others in misrepresenting, any facts materials to a consumer’s decision to purchase financial products or services.
- Hank Asbill to discuss "The federal fraud sentencing guidelines: It's time to stop the madness" at a New York Criminal Bar Association webinar
- Daniel P Stipano to moderate "Digital identity: The next gen of CIP" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference