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On July 15, the U.S. Court of Appeals for the Second Circuit held that private student loans are not explicitly exempt from the discharge of debt granted to debtors in a Chapter 7 bankruptcy. According to the opinion, the plaintiff filed for Chapter 7, which led to an ambiguous discharge order as to how it applied to his roughly $12,000 direct-to-consumer student loans. After the plaintiff received the discharge in 2009, the student loan servicer started collection efforts. Because the plaintiff did not know whether the discharge applied to his student loans, he repaid the loans in full. In 2017, the plaintiff moved to reopen his bankruptcy case and filed an adversary proceeding against the student loan servicer and the servicer’s predecessor (collectively, “defendants”), seeking a determination that his student loans were in fact discharged during the original proceeding. The servicer moved for dismissal claiming the loans were exempt under 11 U.S.C. § 523(a)(8)(A)(ii), but the bankruptcy judge denied the motion, ruling that the bankruptcy code “does not sweep in all education-related debt.” The district court subsequently certified the bankruptcy court’s order for interlocutory appeal.
On appeal, the 2nd Circuit reviewed whether the plaintiff’s private student loans could be discharged under bankruptcy. Under § 523(a)(8), the following types of student loans are exempt from discharge: (i) government or nonprofit institution student loans; (ii) obligations “to repay funds received as an educational benefit, scholarship, or stipend”; and (iii) qualified education loans. The defendants argued that the plaintiff’s loans fell into the “educational benefit” category, but the appellate court disagreed, concluding that § 523(a)(8) does not provide a blanket exception to the applicability of bankruptcy discharge to private student loans. In affirming the bankruptcy court’s ruling, the appellate court wrote, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.” The 2nd Circuit further added that “[i]nterpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that. . .do not usually require repayment,’. . .would improperly broaden § 523(a)(8)(A)(ii)’s scope.”
On July 7, the Connecticut governor signed SB 890, which requires student loan servicers of federal student loans to register with the Department of Banking commissioner and comply with various state requirements and consumer protection mandates. The act now requires, subject to certain exemptions, entities servicing federal student loans (directly or indirectly) to obtain a license from the commissioner. Private student loan servicers are also still required to obtain licenses from the commissioner, and no licensee or registrant will be permitted to use any name other than its legal name or a fictitious name approved by the commissioner. Among other things, the act’s amendments provide new definitions and outline servicer duties, responsibilities, and prohibitions. Additionally, the amendments grant the commissioner the authority to impose civil penalties for violations of the act’s provisions after providing notice and an opportunity for hearing, and permits the commissioner to “suspend, revoke or refuse to renew any registration filed pursuant to section 3 of this act if any fact or condition exists which, if it had existed at the time of filing for registration, would have precluded eligibility for such registration.” The amendments took effect July 1.
On June 29, the Colorado governor signed SB21-057, which expands the Colorado Student Loan Servicers Act by adding new provisions covering private lenders, creditors, and collection agencies connected to postsecondary non-federal student loans. The act adds “Part 2” to the Colorado Revised Statutes, which, among other things, provides new definitions and stipulates that on or after September 1, lenders may not offer or make a private education loan to a state resident without first registering with the administrator and then annually providing specific loan data and contact information. Additionally, the act (i) outlines cosigner disclosure requirements and specifies that private education lenders are required to grant a release to cosigners provided certain conditions are met; (ii) provides that if a cosigner dies, the lender will not attempt to collect against the cosigner’s estate except for payment default; (iii) expands disability discharge requirements so that a borrower or cosigner may be released from payment obligations if permanently disabled; (iv) requires lenders to provide additional disclosures related to loans that will be used to refinance an existing loan; (v) outlines prohibited conduct concerning unfair, deceptive, or abusive acts or practices, such as placing a loan into default or accelerating a loan while a borrower is seeking a loan modification or enrolling in a flexible repayment plan; (vi) discusses debt collection prerequisites; and (vii) allows borrowers to bring a private right of action, including a counterclaim, against a lender or collection agency to recover or obtain actual damages or $500 (whichever is greater), restitution, punitive damages, injunctive relief, credit report corrections, attorney fees and costs, among others. Additionally, if it is proven that a lender or a collection agency has provided false information, the court will award the borrower the greater of treble damages or $1,500. Moreover, a violation of Part 2 is defined as a deceptive trade practice. Lenders or collection agencies that fail to comply with the outlined provisions will be liable for, among other things, actual damages sustained by a borrower or cosigner, as well as a monetary award equal to three times the total amount collected from the borrower in violation of Part 2. The act takes effect immediately.
On July 13, the Connecticut governor signed SB 716 to provide additional protections for student loan borrowers and impose new requirements on student loan servicers. Among other things, the act requires servicers to provide certain information to borrowers and cosigners regarding their rights and responsibilities, including cosigner release eligibility and the cosigner release application process. The law also prohibits a student loan servicer from engaging in an abusive act or practice when servicing a student loan and expands the definition of “servicing” in state student loan servicer law. The law provides a list of exempt persons, which includes banks and credit unions and their wholly-owned subsidiaries. The act states it took effect July 1.
On June 26, the Minnesota governor signed omnibus bill HF 6, which, among other things, creates a Student Loan Bill of Rights and outlines new provisions for student loan servicers. The act provides new definitions and, subject to exemptions, requires entities servicing student loans in the state to be licensed. The act outlines servicer duties and responsibilities, including those related to responding to borrower communications, applying overpayments and partial payments, handling student loan transfers, providing income-driven repayment program options, and maintaining records. Additionally, servicers are prohibited from (i) misleading borrowers; (ii) engaging in any unfair or deceptive practices or misrepresenting or omitting information related to a borrower’s student loan obligations; (iii) misapplying payments; (iv) knowingly or negligently providing inaccurate information; (v) failing to provide both favorable and unfavorable payment history to consumer reporting agencies; (vi) refusing to communicate with a borrower’s authorized representative; (vii) making false statements or omitting material facts connected “with any application, information, or reports filed with the commissioner or any other federal, state, or local government agency”; (viii) violating any federal, state, or local law; (ix) providing incorrect information regarding the availability of student loan forgiveness; and (x) failing to comply with outlined duties and obligations. Furthermore, the state commissioner has authority to conduct examinations; deny, suspend, or revoke licenses; censure servicers; and impose civil penalties.
Additionally, as part of the omnibus bill, the definition of “collection agency” now includes a “debt buyer,” which is defined as a “business engaged in the purchase of any charged-off account, bill, or other indebtedness for collection purposes, whether the business collects the account, bill, or other indebtedness, hires a third party for collection, or hires an attorney for litigation related to the collection.” The act also defines an “affiliated company” as “a company that: (1) directly or indirectly controls, is controlled by, or is under common control with another company or companies; (2) has the same executive management team or owner that exerts control over the business operations of the company; (3) maintains a uniform network of corporate and compliance policies and procedures; and (4) does not engage in active collection of debts.” The commissioner is also required to allow affiliated companies to operate under a single license and be subject to a single examination provided all of the affiliated company names are listed on the license. Under the act, debt buyers are required to submit license applications no later than January 1, 2022; however, a debt buyer who has filed an application with the commissioner for a collection agency license before January 1, 2022, and has a pending application thereafter, “may continue to operate without a license until the commissioner approves or denies the application.”
The provisions take effect August 1.
On May 28, Richard Cordray, Chief Operating Officer of Federal Student Aid (FSA) at the Department of Education, issued a memorandum to FSA vendors revising guidance related to handling outside requests for Department records and data. In 2017, the Department instructed loan servicers working for FSA to avoid responding directly to inquiries from third parties, including state and federal regulators, and required state attorneys general and regulators to submit requests for information directly to the Department. However, according to a blog post announcing the revised guidance, Cordray noted that FSA usually rejected the requests, thus forcing states to file lawsuits against FSA and student loan servicers in order to obtain the information. Cordray further emphasized that states and regulators need access to company policies and procedures, handbooks, consumer complaints, and other information should they think a student loan servicing company might be violating a law or regulation. The revised guidance supersedes the Department’s 2017 guidance and creates a “streamlined and expedited process” for reviewing information requests made by any state or federal authority for information pertaining to companies engaged in student loan lending or collections. Instructions are provided for vendors that receive information requests seeking to obtain Department records or data.
On May 26, the Colorado attorney general filed a complaint against a Pennsylvania-based student loan servicer that handles the Public Service Loan Forgiveness (PSLF) program, alleging the servicer failed to comply with state law when asked to provide certain documentation. Under the Colorado Student Loan Servicers Act (SLSA), the state is “authorized to conduct examinations and investigations of student loan servicers that are servicing student education loans owned by residents of Colorado.” The SLSA also allows the state to enforce compliance by bringing a civil action to prevent servicers from violating the SLSA and to obtain other appropriate relief. According to the AG’s press release, the state requested information related to the servicer’s handling of the PSLF program during the Covid-19 pandemic. The servicer allegedly refused to produce the requested materials and only provided certain limited documents regarding non-government owned loans related to its business line. The complaint seeks a preliminary and permanent injunction compelling the servicer to comply with the AG’s oversight authority and provide the requested documentation.
On May 5, the U.S. District Court for the Northern District of New York certified a class of student loan borrowers who claimed a defendant student loan servicer and other associated entities interfered with their rights to prepay or consolidate their Federal Family Education Loan Program student loans in accordance with certain guarantees under federal law. Specifically, the class alleged that they suffered harm when their applications seeking loan forgiveness were denied because the defendant failed to complete and return required loan verification certifications (LVCs) within 10 days. According to the class, the defendant allegedly “admitted that it failed to return LVCs within the time period mandated by law,” and in 2019 had entered into consent orders with the CFPB and NYDFS, “in which it conceded that it had failed to do so.” (Covered by InfoBytes here and here.) The complaint alleges several claims, including violations of New York General Business Law, breach of contract, and breach of the implied covenant of good faith and fair dealing.
On April 27, the Oklahoma governor signed SB 261, which creates the Oklahoma Student Borrower’s Bill of Rights Act and outlines new provisions for student loan servicers. Among other things, the act prohibits student loan servicers from (i) directly or indirectly defrauding or misleading student loan borrowers; (ii) engaging in unfair or deceptive practices, such as “misrepresenting the amount, nature or terms of any fee or payment due or claimed to be due on a student education loan, the terms and conditions of the loan agreement or the borrower’s obligations under the loan”; (iii) obtaining property by fraud or misrepresentation; (iv) incorrectly applying or failing to apply a borrower’s loan payments to an outstanding balance; (v) providing inaccurate information to a credit bureau about a borrower; (vi) failing to report a borrower’s favorable and unfavorable payment history at least once a year except in the case of loan rehabilitation; (vii) refusing to communicate with a borrower’s authorized representative; (viii) making false statements or misrepresenting by omission any material facts in connection with a government investigation; (ix) failing to inform borrowers of their federal income repayment options prior to offering deferment or forbearance; and (x) failing to inform borrowers if their loan does not qualify for a loan forgiveness program. The act takes effect November 1.
On February 26, the U.S. District Court for the Middle District of Pennsylvania granted a student loan servicer’s request for interlocutory appeal as to whether questions concerning the CFPB’s constitutionality stopped the clock on claims that it allegedly misled borrowers. The court’s order pauses a 2017 lawsuit in which the Bureau claimed the servicer violated the CFPA, FCRA, and FDCPA by allegedly creating obstacles for borrower repayment options (covered by InfoBytes here), and grants the servicer’s request to certify a January 13 ruling. As previously covered by InfoBytes, the servicer argued that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB)—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. The court disagreed, ruling, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.”
The court’s order sends the ruling to the 3rd Circuit to review “[w]hether an act of ratification, performed after the statute of limitations has expired, is subject to equitable tolling, so as to permit the valid ratification of the original action which was filed within the statute of limitations but which was filed at a time when the structure of the federal agency was unconstitutional and where the legal determination of the presence of the structural defect came after the expiration of the statute of limitations.” Specifically, the court explained that this particular “question does not appear to have been addressed by any court in the United States. . . .Not only is there a lack of conflicting precedent, there is no supporting precedent; indeed, no party has identified any comparable precedent.” Further, “[i]f this court erred in applying the doctrine of equitable tolling, it would almost certainly lead to a reversal on appeal and dismissal of this action,” the court noted.
- Jeffrey P. Naimon to provide “Fair lending update” at the Colorado Mortgage Lenders Association Operational and Compliance Forum
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- Jonice Gray Tucker to discuss "Fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss “State law regulatory and enforcement trends” at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
- H Joshua Kotin to discuss “Modifications and exiting forbearance” at the National Association of Federal Credit Unions Regulatory Compliance Seminar
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute