InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Releases Student Banking Report Examining Credit Card Marketing Deals Targeting College Students
On December 14, the CFPB released a student banking report analyzing roughly 500 marketing agreements between colleges, universities and affiliated organizations, and large banks in an effort to identify trends in the school-sponsored credit card market. The report found in part that while credit cards offered in conjunction with educational institutions have declined since the CARD Act was enacted in 2009, many similar offers and deals still exist and may include features that lead students to rack up hundreds of dollars in fees. As explained by CFPB Student Loan Ombudsman Seth Frotman, “Colleges across the country continue to make deals with banks to promote products that have high fees, despite the availability of safer and more affordable products.” According to Mr. Frotman, “Students shouldn’t get stuck with the bill when their school inks a deal for an account that’s not in their best interest.”
In conjunction with the publication of this report, the Bureau also published a new compliance bulletin to assist colleges in understanding their obligations under the CARD Act and Regulation Z related to college credit card agreements. This bulletin noted, among other items, that many of the largest colleges and universities do not publish credit card agreements on their websites or make them available to students and the public upon request, creating increased risks of non-compliance. The complete set of credit card agreement data collected by the Bureau in accordance with its obligations under the Credit CARD Act of 2009 can be accessed here.
CFPB Monthly Complaint Snapshot Spotlights Debt Settlement, Check Cashing, and Other Financial Services Complaints
On November 29, the CFPB released Volume 17 of its monthly complaint snapshot reports on consumer complaints stemming from financial services that fall outside of the Bureau’s major complaint categories. The “other financial services” covered in the report include debt settlement, check cashing, money orders, and credit repair. To date, the CFPB has handled approximately 1,035,200 complaints nationally across all products. As reported in the current snapshot: (i) Debt collection was the most-complained-about financial product or service in October; (ii) Student loan complaints showed the greatest increase—108 percent—of any product or service over the three-month period of August to October; and (iii) Alaska, New Mexico, and Missouri experienced the greatest year-to-year complaint volume increases from August to October 2016 period versus the same time period 12 months before. The current report also highlighted a trend in complaints coming from Oklahoma and the Oklahoma City metro area.
GAO Issues Report on Compliance with the SCRA Interest Rate Cap by Student Loan Servicers
On November 18, the GAO announced the release of its report and recommendations following the watchdog agency’s review of application of the SCRA’s rate cap by student loan servicers. According to the report, entitled Student Loans: Oversight of Servicemembers' Interest Rate Cap Could Be Strengthened, the number of servicemembers receiving the interest rate cap for their student loans has greatly increased since the Department of Education began requiring federal student loan servicers to automatically check the Department of Defense’s SCRA database to identify those who are eligible.
The report also identified several challenges commonly encountered by servicemembers seeking to take advantage of the rate cap, including: (i) inaccurate SCRA information from the database; (ii) lack of a requirement that private loan servicers use the automatic eligibility check to identify eligible servicemembers; and (iii) lack of routine oversight of SCRA compliance for nonbank private student loan lenders and servicers. The GAO recommended, among other things, that the DOJ require private loan servicers to use the automatic eligibility check to identify eligible borrowers. The report also highlighted an issue with the Department of Education’s new borrower complaint system, which lacks the ability to track SCRA complaints systematically.
CFPB Releases Supervisory Highlights Report for Fall 2016
On October 31, the CFPB released the 13th Edition of its Supervisory Highlights Report, covering the period May through August of this year. The report shares recent supervisory observations in the areas of automobile loan origination, automobile loan servicing, debt collection, mortgage origination, mortgage servicing, student loan servicing, and fair lending. The report found that the CFPB’s recent supervisory actions returned more than $11 million to approximately 225,000 consumers. The Bureau also set forth new examination procedures for reverse mortgage servicing, student loan servicing, and the Military Lending Act.
Department of Education Releases Final Regulations Creating Additional Protections for Student Borrowers and Establishing New Federal Standard for Borrower Defense to Repayment of Student Loans
On October 28, the Department of Education announced new Final Regulations (81 FR 75926) to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct. The new regulations establish the conditions under and process through which a borrower may assert a defense to repayment, also referred to as a “borrower defense,” of a Federal Direct Loan. Specifically, a borrower may now be eligible for discharge of Federal loans whenever a postsecondary institution: (i) makes false and misleading statements about school or career outcomes, (ii) makes false and misleading statements about financing needed to pay for those programs; or (iii) the institution fails to fulfill specific contractual promises regarding program offerings or educational services. By contrast, the current standard allows borrowers to assert a borrower defense only where a cause of action would arise under applicable state law.
Under the new regulations, a school participating in the Direct Loan program is also prohibited from obtaining any form of pre-dispute arbitration agreement or waiver of a borrower’s right to initiate or participate in a class action lawsuit. Further, participating schools may no longer require that students engage in internal dispute processes before seeking relief under the new “borrower defense” provisions. The final regulations also impose certain notification and disclosure requirements on any school that is the subject of a lawsuit filed in court or that are voluntarily submitted to arbitration after a dispute has arisen. The new regulations are effective July 1, 2017.
CFPB Student Loan Ombudsman's Annual Report Calls on Policymakers to Reform Rehabilitation Programs
On October 17, the CFPB Student Loan Ombudsman (Ombudsman) released a report on student loan complaints related to debt collection and servicing issues submitted to the CFPB between September 1, 2015 and August 31, 2016. During the period covered in the report, the CFPB received approximately 5,500 private student loan - and 2,300 debt collection - related complaints. Following an August 18 CFPB report that focused primarily on student loan complaints regarding income-driven repayment (IDR) plans, the Ombudsman’s recently issued report emphasizes alleged breakdowns in the “rehabilitation” process: “The majority of borrowers who cure a default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, these borrowers describe a range of communication, paperwork processing, and customer service breakdowns at every stage of the default-to-IDR transition.” According to the report, borrowers attempting to enroll in IDR plans face issues such as: (i) delays, do-overs, and dead ends when working with debt collectors to establish and verify income-driven rehabilitation payment amounts; (ii) communication gaps between debt collectors and servicers when transferring a borrower out of default and into an IDR plan; and (iii) servicers failing to “proactively take the steps necessary to help them understand how to access IDR and quickly enroll,” in some cases leading to subsequent delinquency and re-default. The report recommends that policy makers and industry stakeholders reform the default-to-IDR transition process by, among other things, (i) streamlining and simplifying its structure; (ii) improving borrower communication; and (iii) reevaluating the economic incentives currently in place for debt collectors and student servicers to encourage long-term borrower success, rather than focusing on short-term borrower outcomes.
CFPB Imposes $8 Million Civil Penalty on For-Profit Company over Allegedly Deceptive Student Lending Practices
On September 12, the CFPB entered into a consent order with a San Diego-based for-profit education company to resolve allegations that its student lending practices were deceptive in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Starting in 2009, the company, which owns two for-profit colleges, has operated an in-house institutional-lending program (Program). The CFPB alleged that under the Program thousands of students borrowed in the aggregate approximately $23,544,184, of which the company collected more than $4,900,000 in principle and interest, with more than $18,000,000 in debt remaining outstanding. The company claimed that, through the Program, students could repay their loans with a minimum monthly payment of $25; the CFPB contends, however, that the company’s marketing practices were deceptive because the typical loan payments under the Program exceeded $25. Pursuant to the consent order, the company must (i) provide cancellation of $18.5 million in existing student debt and pay $5 million in redress directly to affected students; (ii) ensure that students utilize the CFPB’s newly released Electronic Financial Impact Platform, which ultimately generates a customized disclosure for students regarding, among other things, finance offerings available and estimated post-graduate expenses; (iii) stop making allegedly misleading statements regarding students’ monthly payment obligations; (iv) remove any negative information that was reported to consumer-reporting agencies; and (v) pay an $8 million civil penalty.
FTC Issues Paper on Lead Generation, Recaps "Follow the Lead" 2015 Workshop
On September 15, the FTC issued a paper summarizing the insights garnered through its October 2015 “Follow the Lead” workshop on lead generation. As previously covered in InfoBytes, the workshop focused on lead generation issues in the mortgage and education lending space. The FTC paper “detail[s] the mechanics of online lead generation and potential benefits and concerns associated with lead generation for both businesses and consumers.” The paper provides a synopsis of payday lenders’ role in the lead generation industry by describing their use of the “ping tree,” an automated process that enables aggregators to sell consumers’ personal information to lenders or other aggregators. Although the paper acknowledges that lead generators provide potential benefits to consumer, including the ability to offer competitive prices in the mortgage lending space, it never-the-less identifies the following key areas of concern: (i) complexity and lack of transparency surrounding industry policies and processes; (ii) the use of potentially aggressive or deceptive marketing techniques; and (iii) the potential misuse and mishandling of consumers’ personal information in the payday lending space.
CFPB Issues Consent Order to a National Bank Over Student Loan Servicing Practices
On August 22, the CFPB issued a consent order to a national bank to resolve allegations that its student loan servicing practices were unfair and deceptive in violation of the Dodd-Frank Act and that its payment aggregation practices violated the Fair Credit Reporting Act. The CFPB alleged that the bank failed to disclose key aspects related to its payment allocation process, including that partial payments would be distributed across all loans, even if a payment was sufficient to satisfy the minimum payment required for an individual loan. According to the consent order, the bank’s “allocation of a Partial Payment proportionally to all loans in the account sometimes caused consumers’ payments to satisfy fewer, if any, of the loan amounts due in the account than if the Partial Payment had been allocated in a manner that satisfied as many of the loan amounts as possible.” According to the CFPB, the bank’s failure to properly disclose its method for payment allocation resulted in consumers incurring improper late fees, which, if left unpaid for more than 30 days at the end of the month, were reported as delinquent to consumer reporting agencies. The CFPB further alleged that the bank’s payment processors used a late fee monitoring report that had a system coding error that improperly charged consumers late fees if a payment was made on the last day of a grace period, or if consumers chose to make partial payments instead of one payment. The CFPB contended that the bank failed to update, correct, or remove negative information that was inaccurately reported to credit reporting agencies. Pursuant to the consent order, the bank must (i) pay $410,000 in consumer redress; (ii) pay a civil penalty of $3.6 million; (iii) improve its student loan servicing practices to ensure that consumers’ partial payments are distributed in such a way that the amount due is satisfied for as many loans as possible, unless the consumer requests otherwise; (iv) enhance its disclosure statements; and (v) remove or correct errors on consumers’ credit reports.
CFPB Publishes Report on Student Loan Complaints, Issues Income-Driven Repayment Fix It Form
On August 18, the CFPB published a report to provide a midyear update on student loan complaints, focusing on “problems for borrowers who submit an application to enroll in or recertify income and family size under an income-driven-repayment (IDR) plan.” The report analyzes student borrower complaints related to IDR plans and offers recommendations to “address the challenges identified in [those] complaints.” The report analyzes complaints submitted from October 1, 2015 through May 31, 2016 and finds that “borrowers encounter obstacles when submitting applications for IDR plans, including poor customer service, unexpected delays, lost paperwork, and inconsistent or inaccurate application processing.” The CFPB recommends that student loan servicers take “immediate action” to address challenges with IDR processing, highlighting the policy guidance recently issued by the Department of Education as a “roadmap to strengthen practices related to the handling of IDR applications” and releasing an IDR Application Fix It Form (Fix It Form). Developed by the CFPB, the Fix It Form is a prototype that can be adopted by servicers seeking to adopt the recommendations in the report and is designed to “document[] any deficiencies with borrowers’ IDR applications and communicates to borrowers about how to address the deficiencies and get their applications back on track.”