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CFPB addresses risks facing student loan borrowers when payment suspension ends
On April 14, the CFPB’s Office of Research released a special issue brief addressing risks facing student loan borrowers once federal Covid-19 payment suspensions end later this year. The report documented the status of millions of student loan borrowers during the pandemic and found that borrowers most at risk include those who are 30 to 49 years of age and who live in low-income, high-minority census tracts.
The report examined data from its Consumer Credit Panel (a sample of nearly 34 million student loan borrowers, including those with private loans and loans which had not yet entered repayment as of February 2020) to identify the types of borrowers who may struggle to resume scheduled loan payments once the payment suspension ends. Analysis identified five potential risk factors: (i) pre-pandemic delinquencies on student loans; (ii) pre-pandemic payment assistance on student loans; (iii) multiple student loan servicers; (iv) delinquencies on other credit products since the start of the pandemic; and (v) new third-party collections during the pandemic. Researchers found that over five million borrowers had at least two of the five potential risk factors considered in the report, and that borrowers with multiple risk factors were more likely to live in low-income or high-minority census tracts. For instance, the report found that approximately 17 percent of student loan borrowers in the sample had multiple servicers for their loans before the pandemic. While having multiple servicers does not necessarily result in greater repayment difficulties, the report noted that some of these borrowers could face “increased risk of confusion or payment difficulties while coordinating communication and payments with multiple entities,” and cited previous findings which pointed to some student loan servicers denying or failing to approve qualified borrowers for income-driven repayment plans. Researchers also concluded that there are other borrowers outside the scope of the report who may not struggle immediately after the payment suspension ends but may face difficulties later.
Kentucky enacts student loan servicer licensing provisions
On April 7, the Kentucky governor signed HB 494 to establish the Student Education Loan Servicing, Licensing, and Protection Act of 2022. The act outlines licensing provisions for student loan servicers and implements consumer protections for borrowers. Among other things, the act requires, subject to certain exemptions, persons servicing student loans in the state to obtain a license from the commissioner. Under the act, the commissioner may require that the application and any supporting documentation be submitted to other agencies or authorities as part of a nationwide licensing system, “which may act as an agent for receiving, requesting, and distributing information to and from any source directed by the commissioner.” The commissioner may also conduct examinations and investigations, deny, suspend, or revoke a license, and enter an emergency order to suspend, limit, or restrict a license without notice or hearing if an investigation reveals that a “licensee has engaged, or is about to engage, in unsafe, unsound, or illegal practices that pose and imminent threat or harm to the public interest.” Additionally, the commissioner may impose civil penalties of up to $25,000 per violation for violations of the act’s provisions, and may order restitution, refunds, or expenses as deemed necessary. The act also prohibits student loan servicers from engaging in unfair, deceptive, predatory practices, or omitting material information connected with the servicing of a student education loan. Additional provisions related to licensing renewals and reinstatements, assessment fees, and reporting and net worth requirements are also provided. The act takes effect 90 days after the official adjournment of the session.
Virginia enacts qualified education loan servicer legislation
On April 11, the Virginia governor signed SB 496, which amends provisions related to financial institutions and qualified education loan servicers. The bill, among other things provides that a “qualified education loan servicer” is an individual that meets all of the following criteria: (i) “receives any scheduled periodic payments from a qualified education loan borrower or notification of such payments or applies payments to the qualified education loan borrower's account pursuant to the terms of the qualified education loan or the contract governing the servicing”; (ii) “during a period when no payment is required on a qualified education loan, maintains account records for the qualified education loan and communicates with the qualified education loan borrower regarding the qualified education loan, on behalf of the qualified education loan's holder”; and (iii) “interacts with a qualified education loan borrower, which includes conducting activities to help prevent default on obligations arising from qualified education loans or to facilitate certain activities.” The bill is effective July 1.
3rd Circuit confirms adversary proceeding required to discharge student debt in bankruptcy
On March 25, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of an FDCPA and FCRA case against a student loan servicer and three credit reporting companies for attempting to collect a loan debt after it had been discharged in bankruptcy. After the discharge and completion of his bankruptcy case, the plaintiff filed suit, alleging the defendants violated the FDCPA and the FCRA by attempting to collect student loan debt that had been discharged. The district court granted the defendants’ motion to dismiss, ruling that the plaintiff failed to state a claim because under Section 523(a)(8) of the Bankruptcy Code, student loan debt is presumptively non-dischargeable and the plaintiff had not filed an adversary proceeding to determine otherwise.
On appeal, the plaintiff “argued that he was not required to file an adversary proceeding in Bankruptcy Court to determine the dischargeability of his student loan debt,” and that the Bankruptcy Court’s determination that the plaintiff was indigent rebuts “the presumption that his debt was nondischargeable by satisfying the exception in §523(a)(8) for undue hardship.” However, the appellate court held that “a finding of indigence is not the same as an undue hardship determination under §538(a)(8)” and that while the Bankruptcy Code does not require an adversary proceeding to discharge student loan debt, the procedures established in the Bankruptcy Rules do include such a requirement by providing that adversary proceedings include “a proceeding to determine the dischargeability of a debt” and are commenced by serving a summons and complaint on affected creditors. Accordingly, the appellate court affirmed dismissal.
President Biden extends moratorium on student loan payments
On April 6, President Biden extended the moratorium on collecting student loans until August 31, explaining that the extension “will assist borrowers in achieving greater financial security and support the Department of Education’s efforts to continue improving student loan programs.” The Department of Education released a statement noting that it will continue to assess the financial impacts of the Covid-19 pandemic on student loan borrowers and assist them, which includes “allowing all borrowers with paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.” In response to the extension, Secretary of Education Miguel Cardona stated that the Department of Education will continue "to ensure that all borrowers have access to repayment plans that meet their financial situations and needs.”
CFPB handled nearly 1 million consumer complaints in 2021
On March 31, the CFPB published its Consumer Response Annual Report for 2021, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2021. According to the report, the Bureau handled approximately 994,000 consumer complaints last year. Among other trends, the agency found that complaints about credit or consumer reporting continue to increase, accounting for more than 70 percent of all complaints received last year. Debt collection complaints are also increasing, accounting for more than 10 percent of all complaints. Consumers also reported difficulties with financial institutions failing to adequately address consumer complaints, giving consumers the runaround, and described issues with reaching companies to raise concerns about digital assets, mobile wallets, and buy-now-pay-later credit. The Bureau noted that during the second year of the Covid-19 pandemic, complaint data showed that the volume of complaints from consumers struggling to pay their mortgages is increasing as borrower protections have expired. While complaints related to vehicle loans have also increased, the Bureau reported that student loan complaints remain lower than pre-Covid levels due to the implementation of temporary relief programs. The top products and services—representing approximately 94 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to money transfers and virtual currency; vehicle finance; prepaid cards; student, personal, and payday loans; credit repair; and title loans.
CFPB settles with student loan servicer over unfair practices
On March 30, the CFPB announced a settlement with a student loan servicer to resolve allegations that the company engaged in deceptive acts with respect to borrowers with Federal Family Education Loan Program (FFELP) loans about their eligibility for Public Service Loan Forgiveness (PSLF), in violation of the Consumer Financial Protection Act, among other things. The CFPB alleged that the company engaged in unfair, deceptive, or abusive acts or practices by misrepresenting: (i) that FFELP borrowers could not receive PSLF; (ii) that FFELP borrowers were making payments towards PSLF before loan consolidation; and (iii) that certain jobs were not eligible for PSLF. The Bureau also alleged that the servicer “did not provide any information about how to become eligible for PSLF when borrowers inquired about the program or mentioned that they worked in a job that was likely a qualifying public-service job.”
Under the terms of the consent order, the servicer is required to: (i) notify all affected borrowers of the Department of Education’s limited PSLF waiver to provide affected consumers the opportunity to take advantage of the waiver before it ends on October 31; (ii) “develop and implement a call script for Customer Service Representatives that, at minimum, requires them to solicit information from all FFELP Consumers about whether a consumer’s employment may make them eligible for PSLF, and if so, to direct them to a Public Service Specialist, who will provide accurate and complete information about PSLF”; and (iii) pay a civil money penalty of $1 million to the Bureau.
According to a statement by CFPB Director Rohit Chopra, the Bureau “has long been concerned that others in the student loan servicing industry have derailed borrowers from making progress toward loan cancellation,” and “CFPB law enforcement work has identified these problems for years, finding failures at multiple servicers.”
District Court: Consumer must notify furnisher directly to remove dispute notification from credit report
On March 21, the U.S. District Court for the Western District of Tennessee granted a Pennsylvania-based student loan servicer’s (defendant) motion for judgment on the pleadings, ruling that the servicer did not violate the FCRA when furnishing information to a credit reporting agency (CRA) that contained a notation of an “account in dispute” because the plaintiff submitted the removal request only to the CRA and not to the defendant itself. The plaintiff contended that his account was still being reported as in dispute even though he sent a letter to the CRAs indicating that he no longer disputed the tradelines and requesting that the dispute notification be removed. The CRAs forwarded the plaintiff’s dispute to the defendant. Several months later the plaintiff noticed the account was still being reported as in dispute on his credit report. The plaintiff sued, alleging the defendant violated Sections 1681s-2(b) and 1692s-2(b)(1) of the FCRA by, among other things, willfully failing to conduct a reasonable investigation after it received notice from the CRAs of the dispute. The court disagreed, pointing to caselaw which states that if a consumer wants to remove a dispute notification from his or her credit report, the consumer must alert the furnisher—not just the CRA. The court also referenced FTC guidance, which informs consumers that in order to correct mistakes on their credit reports they need to contact both the credit bureau and the furnisher that reported the inaccurate information. Additionally, the court wrote that “a defendant cannot, as a matter of law, fail to conduct a reasonable investigation under § 1681s-2(b) where the plaintiff never terminates the dispute directly with the furnisher, regardless of to whom the plaintiff initially disputed the account.”
District Court enters $2.8 million judgment in CFPB student debt relief action
On March 22, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against one 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 asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. Amended complaints (see here and here) also added new defendants and included claims for avoidance of fraudulent transfers under the Federal Debt Collection Procedures Act and California’s Uniform Voidable Transactions Act, among other things. A stipulated final judgment and order was entered against the named defendant in July (covered by InfoBytes here), which required the payment of more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states. The court also previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants and a settlement with two non-parties (covered by InfoBytes here, here, here, here, and here).
The final judgment issued against the settling defendant, who neither admitted nor denied the allegations except as specifically stated, permanently bans the defendant from participating in telemarking services or offering or selling debt-relief services, and prohibits it from misrepresenting benefits consumers may receive from a product or service. The defendant is also permanently restrained from violating applicable state laws, and may not disclose, use, or benefit from customer information obtained in connection with the offering or providing of the debt relief services. The settlement orders the defendant to pay more than $2.8 million in consumer redress, as well as a $1 civil money penalty to the Bureau and $5,000 to each of the three states.
New York college to cancel $20 million in unpaid loans
On March 2, the New York City mayor announced an agreement with a for-profit college resolving allegations that it violated various provisions of New York consumer protection laws. According to the press release, the New York City Department of Consumer and Worker Protection filed the lawsuit against the defendant in 2018, claiming that it, among other things: (i) collected debts that were not owed; (ii) concealed its identity from former students when collecting debts; and (iii) falsely misrepresented when debts were accrued on official documents. Under the terms of the settlement agreement, the defendant is required to cease collecting outstanding student loans incurred prior to January 2019, which are estimated to be valued at approximately $20 million. The defendant must also pay $350,000 in restitution, establish polices related to communicating with students about debt owed to the college, and ensure that the statutes of limitation on debt collection are observed.