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CFPB scrutinizes discharged private student loan billing and collection practices
On March 16, the CFPB released a compliance bulletin discussing student loan servicers’ practice of collecting on private student loans discharged in bankruptcy. The bulletin also notified regulated entities on how the Bureau intends to exercise its enforcement and supervisory authorities on this issue. Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts addressed the treatment of certain private student loans following bankruptcy discharge. The Bureau explained that in order to secure a discharge of a qualified education loan in bankruptcy, a borrower must demonstrate that the loan would impose an undue hardship if not discharged. Loans that do not meet this qualification (“non-qualified student loans”) can be discharged under standard bankruptcy discharge orders, the Bureau said.
Bureau examiners found, however, that several servicers failed to determine whether a borrower’s loan was qualified or non-qualified. As a result, non-qualified student loans were returned to repayment after a bankruptcy concluded, wherein servicers continued to bill and collect payments on the loans even through the borrower was released from this debt through the bankruptcy discharge. According to the Bureau, many borrowers, when faced with collection activities in violation of a bankruptcy court order, continued to make payments on debts they no longer owed.
The Bureau explained that servicers who collected on student loans that were discharged by a bankruptcy court violate the prohibition on unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. The bulletin described unfair practices observed by examiners, such as servicers relying entirely on loan holders to distinguish among the loans and not ensuring that such holders had in fact done so. The bulletin also provided examples of student loans that are eligible for standard bankruptcy discharge, including loans made to students attending schools that are ineligible for federal student aid and loans made to students attending school less than half time. Bureau examiners instructed servicers to immediately stop collecting on discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected borrowers.
DFPI issues more proposed changes to Student Loan Servicing Act
On March 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of second modifications to proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) In January, DFPI issued modified proposed regulations, outlining additional changes to definitions, time zone requirements, borrower protections, and examinations, books, and records requirements. (Covered by InfoBytes here.)
Following its consideration of public comments on the modified proposed regulations, DFPI is proposing the following additional changes:
- Amendments to definitions. Among other changes, the proposed changes amend “education financing products” to include private student loans which are not traditional loans. This change reverts the definition back to the word used in the original proposed rules. DFPI explained that this change “is necessary because the term ‘private student loan’ is defined later in the rules . . . but the term ‘private education loan’ is not separately defined.” The proposed changes also clarify “that the payment cap, which is the maximum amount payable under an income share agreement, may be expressed as an APR or an amount or a multiple of the amount advanced, covered, credited, deferred, or funded, excluding charges related to default.” Additionally, the changes revise the definition of “qualifying payment” to explain that “qualifying payments count toward maximum payments and the payment cap but not also the payment term.”
- Borrower protections. The first round of changes revised the time zone in which a payment must be received to be considered on-time to Pacific Time, in order to protect California borrowers. However, in further modifying the timing requirement, DFPI explained in its notice that “[r]equiring cut off times different than those posted on the servicer’s website just for California borrowers would deviate from standard current practices, would require system changes and enhancements that would be very expensive to implement and could cause confusion and operational risk to both servicers and borrowers. Limiting the exception to only those situations where the servicer has not posted the cut off time aligns with servicers’ operational capabilities and national banking standards.”
- Qualified written requests. The proposed changes clarify requirements for sending acknowledgments of receipt and responses to qualified written requests.
The second modifications also clarify provisions related to education financing servicing report requirements, and provide that upon notice, a student loan servicer must make available for inspection its books, records, and accounts at a licensed location designated by the DFPI or electronically.
Comments on the second modifications are due March 23.
CFPB report looks at junk fees; official says they remain agency focus
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
DFPI settles with student loan debt relief company
On February 28, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with an unlicensed student debt relief company and its owner. The announcement is part of the DFPI’s continued crackdown on student loan debt relief companies found to have violated the California Consumer Financial Protection Law (CCFPL), the Student Loan Servicing Act (SLSA), and the Telemarketing Sales Rule (TSR). According to the settlement, a DFPI inquiry into the company’s practices found that since at least 2018, the company placed unsolicited phone calls to consumers advertising its student loan forgiveness and modification services. The company allegedly gave borrowers the impression that it was a part of, or affiliated with, an official government agency, and would act “as an intermediary between borrowers and the borrowers’ lenders or loan servicers with the goal of helping those consumers lower or eliminate their student loan debts.” The DFPI found that since 2018 at least 790 California consumers enrolled in the company’s debt relief program, whereby the company collected at least $713,000 through up-front servicing fees ranging from $116 to $2,449 from California consumers. By allegedly engaging in unlicensed student loan servicing activities, engaging in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services, and by charging advance fees for debt relief services, the DFPI claimed the company violated the SLSA, CCFPL, and TSR.
Under the terms of the consent order, the company and owner must desist and refrain from engaging in the alleged conduct, rescind all debt relief, debt management, or debt consulting service agreements, and issue refunds to California consumers. The owner is also ordered to “desist and refrain from owning, managing, operating, or controlling any entity that services student loans, or which offers or provides any consumer financial products or services as defined by the CCFPL, unless and until he or the entity has the applicable approvals from the DFPI and is in compliance with the SLSA, CCFPL, TSR, and the Federal Trade Commission Act.”
States support DOE’s overhaul of IDR plans
On February 13, a coalition of state attorneys general led by California and Massachusetts submitted a letter in support of the Department of Education’s (DOE) proposed changes to income-driven repayment plans (IDR) for federal student loan borrowers. As previously covered by InfoBytes, last month the DOE announced a notice of proposed rulemaking (NPRM) designed to reduce the cost of federal student loan payments. According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan, and is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income-Contingent Repayment and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrower otherwise makes the monthly payments, and would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed.
In their letter, the states expressed support for the DOE’s NPRM, but urged the department to take further steps to support struggling borrowers. The states urged the DOE to expand the scope and reach of the proposed reforms by, among other things, creating a simple path for borrowers in default to enroll in IBR or REPAYE, counting all past forbearance and repayment periods and certain deferment periods towards borrowers’ loan forgiveness, making Parent PLUS loans eligible for REPAYE, and expanding the reach of its reforms to “provide more retroactive relief” to borrowers impacted by widespread servicing errors that prevented them from enrolling in IDR. According to the letter, the DOE should also raise the discretionary income threshold to make debt more manageable for borrowers with the greatest need, eliminate the reverse amortization of IDR loan balances, shorten the period in which borrowers must make payments to receive forgiveness under REPAYE, provide viable repayment options, and automatically enroll delinquent borrowers in IDR plans before they face negative credit reporting and default, among other measures.
DFPI modifies Student Loan Servicing Act proposal
On January 6, the California Department of Financial Protection and Innovation issued modified proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) The initial proposed rules also (i) defined the term “education financing products” (which now fall under the purview of the Act) along with other related terms; (ii) amended various license application requirements, including financial requirements for startup applicants; (iii) outlined provisions related to non-licensee filing requirements (e.g., requirements for servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021)); (iv) specified that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI; and (v) outlined new clarifications to the Student Loans: Borrower Rights Law to provide new requirements for student loan servicers (covered by InfoBytes here).
Following its consideration of public comments on the initial proposed rulemaking, DFPI is proposing the following changes:
- Amendments to definitions. The modified regulations revise the definition of “education financing products” by changing “private loans” to “private education loans,” which are not traditional loans. DFPI explained that changing the term to what is used in TILA will provide consistency for servicers and eliminate operational burdens. While the definition of “education financing products” also no longer includes “income share agreements and installment contracts” in order to align it with TILA, both of these terms were separately defined in the initial proposed rulemaking. The definition of “traditional student loan” has also been revised to distinguish which private student loans are traditional loans and which are education financing products (in order to help servicers determine the applicable aggregate reporting and records maintenance rules). The modifications also revise the definitions of “federal student loan,” “income,” “income share agreement,” “installment contract,” “payment cap,” “payment term,” and “qualifying payments,” remove unnecessary alternative terms for “income share,” and add “maximum payments” as a new defined term.
- Time zone requirement revisions. The modified regulations revise the time zone in which a payment must be received to be considered on-time to Pacific Time in order to protect California borrowers.
- Additional borrower protections. The modified regulations specify that servicers are required to send written acknowledgement of receipt and responses to qualified written requests via a borrower’s preferred method of communication. For borrowers who do not specify a preferred method, servicers must send acknowledgments and responses through both postal mail to the last known address and to all email addresses on record.
- Examinations, books, and records requirement updates. The modified regulations revise the information that servicers must provide in their aggregate reports for traditional student loans, including with respect to: (i) loan balance and status; (ii) cumulative balances and amounts paid; and (iii) aggregate information specific to ISAs, installment contracts, and other education financing products. Additionally, DFPI clarified that while the amount a borrower will be required to pay to an ISA provider in the future is unknown, many ISAs contain an “early completion” provision to allow a borrower to extinguish future obligations, and ISA providers must give this information to borrowers. DFPI further clarified that while servicers may choose to maintain records electronically, they must also be able to produce paper records for inspection at a DFPI-designated servicer location to allow an examination to be conducted in one place.
Comments on the modified regulations are due January 26.
District Court vacates DOE order on student loan servicer’s $22 million repayment
On December 16, the U.S. District Court for Eastern District of Virginia vacated and remanded the Department of Education’s (DOE) decision that a student loan servicer (plaintiff) had improperly collected $22 million in student loan-related subsidies from 2002 to 2005. According to the opinion, the plaintiff alleged that the DOE acted arbitrarily and capriciously in violation of the Administrative Procedure Act when it determined that the plaintiff erroneously claimed over $22 million in student loan-related subsidies. The plaintiff contended that in claiming those subsidies, it reasonably relied on two 1993 “Dear Colleague Letters” (DCL) from the DOE authorizing it to collect subsidies for student loans funded in whole or in part by tax-exempt obligations. According to the plaintiff, the DOE issued a new DCL in 2007 which disavowed the guidance in the DOE’s two 1993 DCLs, but nonetheless stated that the DOE would not collect past erroneous subsidies if the plaintiff prospectively followed the DOE’s revised interpretation set forth in the 2007 DCL. Nevertheless, the DOE initiated administrative proceedings seeking over $22 million in past subsidies collected by the plaintiff pursuant to the 1993 DCLs. The DOE’s acting secretary ruled in January 2021 that the plaintiff erred when it claimed those subsidies and must pay it back.
The plaintiff appealed, arguing that the DOE’s decision in 2021 failed to consider its reliance on the previous policy statements in the 1993 and 2007 letters. However, the DOE argued it was “unreasonable” for the plaintiff to rely on the DCLs, saying that the loan company should have known that the 1993 letters contradicted the Higher Education Act. Siding with the plaintiff, the court relied on the U.S. Supreme Court’s decision in Department of Homeland Security v. Regents of the University of California, which found that when an agency alters existing policy, it must assess “whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” The court further held that it is DOE's job to “weigh the strength of those reliance interests,” and it failed to do so.
CFPB releases education ombudsman’s annual report
On October 20, the CFPB Education Loan Ombudsman published its annual report on consumer complaints submitted between September 1, 2021 and August 31, 2022. The report is based on approximately 8,410 complaints received by the Bureau regarding federal and private student loans—a 59 percent increase from the previous reporting period. Of these complaints, roughly 2,000 were related to debt collection, while approximately 900 mentioned Covid-19 (the categories increased by 122 and 23 percent, respectively). The report discussed certain risks raised in the consumer complaints, including difficulty pursuing claims and defenses against predatory institutions of higher learning, improper collection attempts on non-qualified private student loans that have been discharged in bankruptcy, and processing errors and servicer misrepresentations that have caused federal student loan borrowers to not be able to take full advantage of pandemic-related relief.
The report advised policymakers to consider several recommendations, including: (i) examining whether holders of private student loans originated to fund predatory for-profit schools are abiding by state and federal law; (ii) ensuring holders and servicers of private loans are not collecting on non-qualified discharged debt; and (iii) examining whether servicers may be creating barriers to pandemic-related relief. The Bureau also advised policymakers to consider whether to make loan forgiveness programs “opt out” rather than “opt in,” and whether simplifying consumer-facing incentives for consolidating commercial Federal Family Education Loan Program into Direct Consolidation Loans could benefit borrowers if made permanent.
CFPB updates education loan servicing examination procedures
On September 28, the CFPB updated the education loan examination procedures in its Supervision and Examination Manual. According to the Bureau, the update to the education loan servicing examination procedures clarifies that when determining its authority to supervise a private student lender, the Bureau “look[s] only to the definition of private education loan in the Truth in Lending Act and not also to Regulation Z.” The Bureau noted that depending on the scope of an examination, “and in conjunction with the compliance management system and consumer complaint response review procedures,” an examination will cover at least one of the following modules: (i) advertising, marketing, and lead generation; (ii) customer application, qualification, loan origination, and disbursement; (iii) student loan servicing; (vi) borrower inquiries and complaints; (v) collections, accounts in default, and credit reporting; (vi) information sharing and privacy; and (vii) examination conclusion and wrap-up.
CFPB’s Supervisory Highlights targets student loan servicers
On September 29, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools that directly lend to students. Highlights of the supervisory findings include:
- Transcript withholding. The Bureau found several instances where in-house lenders (i.e., where the schools themselves are the lender) are withholding transcripts as a debt collection practice. According to the Bureau, many post-secondary institutions choose to withhold official transcripts from borrowers as an attempt to collect education-related debts. The Supervisory Highlights states the position that the blanket withholding of transcripts to coerce borrowers into making payments is an “abusive” practice under the Consumer Financial Protection Act.
- Supervision of federal student loan transfers. The Bureau identified certain consumer risks linked to the transfer of nine million borrower account records to different servicers after two student loan servicers ended their contracts with the Department of Education (DOE). The review, which was handled in partnership with the DOE and other state regulators, identified several concerns, such as (i) the information received during the transfer was insufficient to accurately service the loan; (ii) transferee and transferor servicers reported different numbers of total payments that count toward income-driven repayment forgiveness for some borrowers; (iii) information inaccurately stated the borrower’s next due date; (iv) certain accounts were placed into transfer-related forbearances following the transfer, instead of in more advantageous CARES Act forbearances; and (v) multiple servicers experienced significant operational challenges.
- Payment relief programs. The Bureau found occurrences where federal student loan servicers allegedly engaged in unfair acts or practices when they improperly denied a borrower’s application for loan cancellation through Teacher Loan Forgiveness or Public Service Loan Forgiveness. The Bureau claimed that many servicers “illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief,” and “provided misinformation about borrowers’ entitlement to progress toward loan forgiveness during the pandemic payment suspension.” The Bureau said it will continue to monitor servicers’ practices to ensure borrowers receive the relief for which they are entitled, and directed servicers to address consumer harm caused by these actions.
The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of institution type. Student loan servicers, originators, and loan holders are advised to review the supervisory findings and take any necessary measures to ensure their operations address these risks.