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FDIC and Federal Reserve Announce Settlement with Connecticut-Based Financial Aid Company Over Deceptive Practices
On December 23, the FDIC announced separate settlements with a Connecticut-based financial aid company and an affiliated Utah-based bank for alleged deceptive practices in violation of the FTC Act. Separately, the Federal Reserve announced a settlement solely with the Connecticut-based company for allegedly violating the FTC Act by employing deceptive practices. The company provides financial aid disbursements to higher education institutions for its students. According to the agencies, the company omitted material facts about its financial aid disbursement business, such as: (i) details about alternative disbursement methods available to students; (ii) a full and complete fee schedule; and (iii) information regarding the locations of fee-free ATMs. In addition, the agencies alleged that the company prominently displayed school logos, suggesting to students that schools had endorsed its refund product.
The FDIC’s orders against the company and the bank require each to pay a civil money penalty of $2.23 million and $1.75 million, respectively. In addition, the company and the bank together will pay approximately $31 million in restitution to roughly 900,000 consumers. Under the terms of the Federal Reserve’s order, the company will: (i) pay approximately $24 million in restitution to an estimated 570,000 consumers; (ii) pay a civil money penalty of more than $2 million; (iii) adopt a consumer compliance risk-management program; and (iv) refrain from future violations of section 5 of the FTC Act.
CFPB Issues Fall Rulemaking Agenda, Potential Student Loan Servicing Rules on Horizon
On November 20, the CFPB released its fall rulemaking agenda. The CFPB’s notable current initiatives include: (i) addressing arbitration clauses in contracts related to consumer financial products and services and providing an outline of rulemaking ideas such as “whether to propose rules that would prevent companies from using these agreements to foreclose consumers’ ability to bring class action lawsuits”; (ii) developing a Notice of Proposed Rulemaking, with an anticipated release date in the first quarter of 2016, to address concerns relating to payday and auto title lending; (iii) finalizing its December 2014 proposed rule, “Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z),” to address consumer protection concerns relating to reloadable cards and other similar prepaid products; and (iv) considering rules to designate consumer installment loans and vehicle title loans as “larger participants” under the CFPB’s supervisory authority. Looking ahead, the CFPB’s report highlights the potential for rulemaking to address issues related to credit reporting and student loan servicing. Regarding student loan servicing, the CFPB stresses that it “has made it a priority to take action against companies that are engaging in illegal servicing practices,” and that it will “continue to monitor the market for trends and developments and evaluate possible policy responses, including potentially proposing rules.”
Massachusetts AG Announces Settlements with Student Debt Relief Companies; Reveals Initiative to Aid Student Borrowers
On November 24, Massachusetts AG Maura Healey announced settlements with two student debt relief companies over allegations of charging consumers upfront fees prior to delivering the services offered. According to the AG’s Office, at least 200 students were affected by the companies’ deceptive practices, which included misleading consumers to believe that the companies were affiliated with the government or had special connections with the Department of Education and, therefore, could assist borrowers lower their monthly loan payments. To resolve the AG’s allegations, the companies will pay $56,000 and $40,000, respectively and agree to no longer provide or advertise services in Massachusetts.
Concurrent with the settlement announcements, the AG’s Office revealed an initiative designed to assist borrowers repay their loans. Working with trained attorneys in the Insurance and Financial Services Division, the new Student Loan Assistance Unit will provide borrowers with access to a dedicated hotline and mediation program. The program will review current student loan and payment situations to help borrowers (i) get out of default or delinquency; (ii) apply for various income-driven repayment plans offered by the federal government; and (iii) advocate for complete discharges of the loans in appropriate circumstances.
DOJ Settles with For-Profit Education Company Over Alleged FCA Violations
On November 16, the DOJ announced a $95.5 million settlement with the country’s second-largest for-profit education company to resolve alleged federal and state violations of the False Claims Act (FCA). According to the DOJ’s complaint, the company’s admissions personnel received payment based on the number of students they enrolled, a violation of Title IV of the Higher Education Act’s (HEA) Incentive Compensation Ban (ICB) and the Regulatory Safe Harbor. The DOJ alleges that the company misrepresented its compliance with Title IV of the HEA to the Department of Education by certifying in Program Participation Agreements that it had not “paid to any persons or entities any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments, financial aid to students, or student retention.” The Department of Education calculated that, from July 1, 2003 through June 30, 2011, the company, having submitted “a variety of claims to the government for Title IV funding that it [knew] to be false based upon its non-compliance” with the ICB, received more than $11 billion in government funding. Under the terms of the settlement, the $95.5 million will be divided among the United States, the co-plaintiff states, and the whistleblowers and their counsel in the FCA cases filed separately in federal court in Pittsburgh, Pennsylvania and Nashville, Tennessee.
CFPB Files Suit Against Student Financial Aid Company
On October 29, the CFPB filed a complaint in the U.S. District Court for the Southern District of California against a California-based student financial aid operation and its owner (Defendants). According to the complaint, the Defendants represented that by paying a fee and sending in an application, consumers were applying for financial aid or the Defendants would apply for aid on behalf the students. The CFPB alleges, however, that consumers did not receive the promised services in exchange for their payment and that the Defendants collected more than $4 million from at least 76,000 consumers from January 2011 through the filing of the complaint. The CFPB alleges that the Defendants violated the CFPA by (i) deceiving students to pay for services that the Defendants did not actually provide; (ii) using letterhead that falsely indicated affiliation with the government and university financial aid offices; and (iii) pressuring students to enroll in the program and pay a fee by creating false deadlines and making deceptive statements about the consequences of missing the deadlines. The CFPB also alleges that the Defendants failed to provide privacy notices to consumers as required by Regulation P. The complaint seeks a civil money penalty, restitution to harmed consumers, and a prohibition against future violations.
Department of Education Finalizes Rules Affecting Federal Student Loan Borrowers
On October 27, the Department of Education announced final regulations regarding how students access Federal student aid and implementing a Revised Pay As You Earn (REPAYE) program. The new rules addressing access to Federal student aid (i) protect students against “excessive” fees to access aid; (ii) require institutions to give greater choice and information to students about how to receive aid; and (iii) prohibit institutions from requiring students to open certain accounts for the deposit of student aid refunds, among other things. The rules also limit the amount of information institutions can share with third party institutions providing campus debit and prepaid cards to students under partnerships with schools and require schools to disclose on their websites the terms of those partnerships. The second set of rules announced on October 27 establishes an expanded Pay As You Earn program, which caps payments at 10 percent of annual income. The REPAYE plan covers five million more Direct Loan borrowers, without regard to when the borrowers first obtained their loans.
Illinois District Court Enters Final Judgment Against For-Profit College to Resolve CFPB Litigation
On October 28, the U.S. District Court for the Northern District of Illinois filed a default judgment and order against a for-profit college company to resolve litigation with the CFPB. In a September 2014 lawsuit, the CFPB alleged that the company engaged in unfair and deceptive practices by making false and misleading representations to students to encourage them to take out private student loans. The CFPB also alleged that the company violated the FDCPA by taking aggressive and unfair action to collect on the loan payments when they became past due. The court order requires the company to pay approximately $531 million in redress to student borrowers, which the company is unable to pay because it has dissolved and its assets have been distributed in its bankruptcy case. The CFPB indicated that it will continue to seek additional relief for students affected by the company’s practices despite the company’s inability to pay the judgment.
CFPB Releases Annual Report on Student Loan Complaints
On October 14, the CFPB released its annual report of the CFPB Student Loan Ombudsman, which analyzes consumer complaints submitted from October 1, 2014 through September 30, 2015 and provides an examination of issues raised in its September student loan servicing report. The CFPB is predominantly concerned about the group of borrowers facing repayment issues with older federal student loans made by banks and private lenders under the Federal Family Education Loan Program (FFELP). According to the CFPB’s report, at least 30 percent of borrowers who participated in FFELP are either behind in their loan repayments or already in default. The report includes the following additional noteworthy data: (i) more than one in five of borrowers with federal loans made by private lenders are past-due, with more than 10 percent in forbearance; and (ii) 95 percent of borrowers with federal loans made by private lenders are not enrolled in income-driven repayment plans. The content of the report emphasizes the importance of the Department of the Treasury, Department of Education, and the CFPB’s joint statement to improve student loan servicing practices, promote borrower success, and minimize defaults.
Agencies Unveil Student Loan Servicing Regulatory Framework
On September 29, the CFPB issued a report examining public comments and providing policy recommendations to address issues in the student loan servicing market. The report follows a May 2015 Request for Information notice where the CFPB, together with the Department of Treasury and the Department of Education (collectively, the Agencies), sought feedback on ways to improve student loan servicing practices.
In a parallel announcement, the Agencies released an interagency Joint Statement of Principles on Student Loan Servicing, which is expected to serve as a regulatory framework in the reformation of current student loan servicing practices, and establish minimum federal compliance requirements.
CFPB Files Complaint Against Student Financial Aid Consulting Company for Allegedly Illegal Sales and Billing Practices
On July 23, the CFPB announced that it had entered into a proposed consent order with a Sacramento-based company that provides fee-based student financial aid counseling and preparation services. The CFPB’s simultaneously filed complaint alleges that the company violated the Telemarketing and Consumer Fraud and Abuse Prevention Act by engaging in deceptive sales tactics through its websites and call center representatives. The complaint claims that from at least July 21, 2011 to present (recognizing that the company no longer operates one of the websites effective July 13, 2015), the company offered consumers certain services “as an upgrade from its ‘standard’ service level at ‘no additional cost.’” However, consumers were allegedly charged future annual fees of $67 to $85 for such upgrades. The Bureau also alleges that the company violated the Electronic Fund Transfer Act by enrolling consumers in automatic, recurring payments without their knowledge or consent: “The Company did not provide consumers a copy of the consumers’ authorization for electronic fund transfers in which the terms of the preauthorized transfers – including automatic, recurring charges going forward – were clear and readily understandable.” The proposed consent order would require the company to pay $5.2 million in consumer relief and cancel all automatic and recurring charges currently in place. Due to the company’s limited financial resources, the proposed order seeks a civil money penalty of $1.00.