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District court rejects financing company’s dismissal bid in student loan debt relief scam
On March 11, the U.S. District Court for the Southern District of New York denied the motion of a Minnesota-based indirect finance company (defendant) to dismiss allegations that its participation in a student loan relief operation violated the Racketeer Influenced and Corrupt Organization Act (RICO), ruling that the borrowers had properly alleged mail and wire fraud and had established a pattern of “open-ended continuity.” According to the named plaintiffs, the defendant contracted dealers who marketed “student loan assistance services” to federal student loan borrowers, who were then redirected to pay the defendant a fee of $1,300 to file applications on their behalf for adjustments such as loan consolidation or enrollment in an income-driven repayment plan. Because the dealers could not legally accept the payments directly, the defendant allegedly approved borrowers for financing and made upfront payments to dealers for each recruited borrower. In denying the dismissal bid, the court ruled that “these allegations, if assumed true, establish that, in devising the scheme, [the defendant] intended to deceive borrowers so that they would incur debts to it.” Moreover, “[g]iven these allegations, the Amended Complaint contains sufficient allegations that reveal ‘the threat of continuity,’. . . and sufficient support for the proposition that [the defendant] ‘ha[s] been trying to continue’ the alleged scheme with respect to individuals in addition to the [n]amed plaintiffs,” the court wrote.
As previously covered by InfoBytes, last December the CFPB denied a petition by one of the defendants to modify or set aside a civil investigative demand (CID) issued by the Bureau, which seeks information as part of an investigation into the defendant’s promotion of student loan debt relief programs. Separately, the FTC and the Minnesota attorney general entered a stipulated order against the defendant for violations of TILA and the assisting and facilitating provision of the Telemarketing Sales Rule, which resulted in the defendant being permanently banned from engaging in transactions involving debt relief products and services or making misrepresentations regarding financial products and services (covered by InfoBytes here).
FTC obtains default judgment in student debt relief operation
On March 10, the FTC announced that it obtained default judgments of over $10.7 million against three defendants in a student loan debt relief operation that the FTC alleged violated the FTC Act and the Telemarketing Act. The defendants were alleged to have deceptively marketed services to reduce or eliminate student loan debt and to have tricked borrowers into paying illegal upfront fees for these services. In its order granting the default judgment, in addition to the monetary penalties, the court permanently enjoined the defendants from (i) participating in telemarketing; (ii) selling secured and unsecured debt relief products and services; and (iii) making misrepresentations related to financial products and services.
Bill overturning Department of Education’s 2019 Borrower Defense Rule sent to president
On March 11, the U.S. Senate, in a 53-42 vote, joined the House in passing H.J. Res. 76, which provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (the Rule). As previously covered by InfoBytes, the Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” If signed by the president, H.J. Res. 76 would undo changes made by the Rule that, among other things, would have required individuals to apply to the Department for a defense to repayment (under the 2016 Rule, applications could be submitted on behalf of an entire group). H.J. Res. 76 would also undo the Rule’s elimination of automatic closed-school discharges and its ban on pre-dispute arbitration and class action waivers that were previously contained within the 2016 Rule.
State student loan ombudspersons push for automatic student loan discharges for disabled civilian borrowers
On March 3, student loan ombudspersons from seven states and the District of Columbia sent a joint letter to U.S. Department of Education (Department) Secretary Betsy DeVos and Social Security Administration (SSA) Commissioner Andrew Saul advocating for the automatic discharge of student loans for eligible borrowers under the Total and Permanent Disability (TPD) loan discharge program. Describing the current TPD program’s application process as “onerous,” the letter cites to the Department’s implementation of a presidential directive in 2019 that granted automatic student loan discharges to disabled veterans (covered by InfoBytes here), as an example of how to provide relief to borrowers “without further burdening them with a cumbersome application process.”
As asserted by the ombudspersons, the Higher Education Act of 1965 makes clear that a qualifying borrower’s loans shall be discharged if the borrower is (i) “permanently and totally disabled,” or (ii) “is ‘unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months.” The ombudspersons claim that the current TPD program’s application process is difficult for disabled borrowers to complete, and the difficulties posed by the annual documentation submission requirement during the post-discharge three-year monitoring period poses a risk of “having the[] discharged loans reinstated.” The student loan ombudspersons urged the Department and the SSA to work together to allow the Secretary to accept information shared by the SSA that the borrower is permanently disabled for the purpose of granting the discharge of student loan debt, and to minimize or eliminate the need for borrowers to proactively participate in the post-discharge monitoring process.
Senate Democrats ask Office of Civil Rights to address student lending racial disparities
On February 27, Senators Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Cory Booker (D-NJ) sent a letter to the Department of Education’s Office of Civil Rights (OCR) asking how the office plans to address reports of racial disparities within the federal student loan industry. The letter discusses OCR’s responsibility for enforcing civil rights laws that prohibit discrimination in Department-funded programs and activities, including student aid funding, and notes that OCR also bears the responsibility for examining the role federal student loan contractors may play in racial disparities faced by students of color after they leave their institution of higher learning. The Senators claim that for-profit colleges “disproportionately target students of color and often leave them deep in debt while providing little education value in return.” The Senators also cite new Department data, which shows that “despite using [income-driven repayments] at a much higher rate than other borrowers with the same level of education, Black student borrowers continued to have a higher default rate than their peers, regardless of the type of institution they attended.” Latino and Native student borrowers are also affected by these racial disparities, the letter notes.
Among other things, the Senators request the following from OCR by March 26:
- Provide a summary of all current and ongoing actions, including enforcement actions, that OCR has taken since January 2017 to address racial disparities in student loan borrowing and outcomes;
- Conduct a comprehensive investigation into the ways predatory colleges and the student loan industry contribute to racial disparities, such as through servicing and debt collection practices, access to repayment plans, and debt cancellation options for borrowers of color; and
- Develop a plan to address racial disparities in the student loan industry, including legislative recommendations and new policy guidance to entities involved in the industry.
New York AG settles with student debt relief companies
On February 18, the U.S. District Court for the Southern District of New York approved a settlement between the State of New York and a student loan debt relief operation including five debt relief companies and one individual (defendants) in order to resolve allegations that the defendants violated the Telemarketing Sales Rule, the Federal Credit Repair Organizations Act, TILA, state usury laws, and various other state laws. As previously covered by InfoBytes, the New York attorney general brought the lawsuit in 2018 alleging that the defendants “engag[ed] in deceptive, fraudulent and illegal conduct…through their marketing, offering for sale, selling and financing” of debt relief services to student loan borrowers. The AG claimed that, among other things, the defendants allegedly (i) charged consumers who purchased the debt relief services illegal upfront fees; (ii) misrepresented that they were part of or working with the federal government; (iii) falsely claimed that fees paid by borrowers would be applied to borrowers’ student loan balances; and (iv) induced borrowers to enter into usurious financing contracts to pay for the debt relief services.
Under the terms of the agreement, the defendants—without admitting or denying the allegations—agreed to a judgment of $2.2 million, which will be suspended if the defendants promptly pay $50,000 to the State of New York and comply with all other provisions of the agreement. The defendants are also permanently banned from advertising, marketing, promoting, offering for sale, or selling any type of debt relief product or service—or from assisting others in doing the same. Additionally, the defendants must request that any credit reporting agency to which the defendants reported consumer information in connection with the student loan debt relief services remove the information from those consumers’ credit files. The defendants also agreed not to sell, transfer, or benefit from the personal information collected from borrowers. According to the settlement, six additional defendants were not included in the agreement and the AG’s case against them continues.
District court dismisses FCA claims against student loan collectors
On February 11, the U.S. District Court for the District of Columbia dismissed a relator’s False Claims Act claims, which alleged that a group of prime private student loan debt collectors (defendants) defrauded the federal government of funds intended for small businesses in relation to contracts to service student loans with the Department of Education (Department). The 2015 lawsuit filed by the relator accused the defendants of, among other things, allegedly concealing that “the purportedly small business subcontractors were affiliated with ‘co-conspirator’ larger businesses, ‘making them ineligible to be claimed as small businesses by the prime contractors on the [Department’s private collection agency] task orders.’” The relator also claimed that the defendants convinced the Department to award contracts and provide bonuses they did not deserve. According to the relator, the defendants made claims that hinged “on the factual allegation of undisclosed affiliation and associated submission of false claims and/or misrepresentations concerning business size.”
In the order, the court determined, among other things, that the relator fell short of alleging the specific facts necessary to convince the court that the defendants engaged in fraudulent inducement and implied certification. The court held that “despite [the relator’s] contrary contentions, [the relator’s] pleading does not establish with the requisite particularity the time and place of the false misrepresentations, what constitutes the allegedly false claim for each discrete defendant, and what, precisely, ‘was retained or given up as a consequence of the fraud.’” Specifically, the court stated that the relator “fail[ed] to connect several critical dots in the alleged scheme, leaving the [c]ourt unclear as to what, precisely, was allegedly actionably false and/or fraudulent.” However, the court allowed the relator leave to file an amended complaint, stating that “because the allegation of further facts might cure the identified deficiencies (although the [c]ourt has its doubts, given the length of the investigation and [the relator’s] counsel’s central role in the investigation), the [c]ourt sees no reason to deviate from the general rule [allowing leave].”
11th Circuit: Guaranty agency collecting nonexistent DOE loans is not a debt collector
On February 7, the U.S. Court of Appeals for the Eleventh Circuit issued a split opinion holding that a student loan guaranty agency that mistakenly attempted to collect nonexistent student loans cannot be sued under the FDCPA because, as a guaranty agency operating on behalf of the Department of Education (Department), it does not qualify as a “debt collector” under the Act. According to the opinion, the plaintiff alleged that during a scheduled deferment period, the agency notified the plaintiff that it had paid a default claim on the loans and demanded full repayment. The plaintiff alleged that she called to dispute the demand and was told the agency had no record of her debt. Subsequently, the agency ordered the plaintiff’s employer to garnish her wages, and the plaintiff filed a complaint alleging, among other things, that the defendant violated the FDCPA by making false or misleading representations and failing to validate the debt. The plaintiff also alleged that the defendant engaged in fraudulent business practices. The district court granted summary judgment in favor of the defendant, ruling that the defendant was not a debt collector subject to the FDCPA because it was acting “incidental to a bona fide fiduciary obligation” to the Department. While the plaintiff conceded that a guaranty agency’s actions are incidental to a fiduciary obligation when it attempts to collect valid defaulted student loans, she argued that the exemption does not apply when the guaranty agency attempts to collect debts that do not exist.
On appeal, the majority agreed with the district court, holding that determining whether the defendant was a debt collector subject to the FDCPA did not depend on the validity of the claimed debt. The majority held that as long as the defendant was acting in good faith, its collection efforts would be incidental to its fiduciary obligation to the Department and exempted from the definition of “debt collector.” Specifically, the majority referenced language from the FDCPA establishing that the fiduciary obligation exemption applies when an agency attempts to collect a debt that is “owed or due or asserted to be owed or due another,” holding that such language must apply to efforts to collect debts that do not exist or that phrase would have no meaning. According to the majority, “Congress easily could have written the [FDCPA] to impose liability on persons who attempt to collection nonexistent debts pursuant to a fiduciary obligation,” but Congress chose not to.
CFPB, DOE sign MOU on student loan complaint data
On February 3, the CFPB and the Department of Education (Department) announced a new agreement to share student loan complaint data. (See press releases here and here.) The newly signed Memorandum of Understanding (MOU) is the first information sharing agreement between the agencies since the Department terminated two MOUs in 2017. As previously covered by InfoBytes, the Department cancelled the “Memorandum of Understanding Between the Bureau of Consumer Financial Protection and the U.S. Department of Education Concerning the Sharing of Information” and the “Memorandum of Understanding Concerning Supervisory and Oversight Cooperation and Related Information Sharing Between the U.S. Department of Education and the Consumer Financial Protection Bureau,” and at the time rebuked the Bureau for overreaching and undermining the Department’s mission to serve students and borrowers.
The new MOU clarifies the roles and responsibilities for each agency and permits the sharing of student loan complaint data analysis and other information and recommendations. Among other responsibilities, the Department will direct complaints related to private loans governed by TILA to the Bureau, and both agencies will discuss complaints regarding federal student loans with program issues that may have an impact on federal consumer financial laws. The agencies will also conduct quarterly meetings to discuss complaint observations and borrower characteristics, as well as complaint resolution information when available. Additionally, the MOU addresses permissible uses and confidentiality of exchanged information and the development of tools for sharing data analytics.
The MOU was released a few days after Senators Sherrod Brown (D-Ohio) and Robert Menendez (D-NJ) sent a letter to CFPB Director Kathy Kraninger expressing frustration with the Bureau’s oversight of federal student loan servicers and delay in reestablishing an MOU with the Department that would allow the Bureau to resume examining federal student loan servicers.
State AGs support congressional disapproval of 2019 Borrower Defense Rule
On January 14, a coalition of attorneys general from 19 states and the District of Columbia sent a letter to Congress in support of H.J. Res. 76, which was passed by the House of Representatives on January 16, and provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (covered by InfoBytes here). The Department’s 2019 Borrower Defense Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.”
The AGs claim, however, that the 2019 Borrower Defense Rule “provides no realistic prospect for borrowers to discharge their loans when they have been defrauded by predatory for-profit schools, and . . . eliminates financial responsibility requirements for those same institutions.” The AGs further argue that the new provisions require “student borrowers to prove intentional or reckless misconduct on the part of their schools,” which they claim is “an extraordinarily demanding standard not consistent with state laws governing liability for unfair and deceptive conduct.” Other standards, such as requiring student borrowers to “prove financial harm beyond the intrinsic harm caused by incurring federal student loan debt as a result of fraud” and establishing a three-year time bar on borrower defense claims, would further reduce protections for student borrowers. Citing to several state enforcement actions taken against for-profit schools for alleged deceptive and unlawful tactics, the AGs stress the need for a “robust and fair borrower defense rule.”