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On March 18, the Department of Education announced a new, streamlined approach for ensuring federal borrowers who attended institutions that engaged in certain misconduct are able to receive full discharges of their William D. Ford Direct Loan Program loans. The new approach—which rescinds a methodology announced in December 2019 that relied “on publicly available earnings data and a scientifically robust statistical methodology to determine harm”—will immediately create a path for borrowers with approved borrower defense claims to date to receive full loan discharges, including borrowers who already had their claims approved and received only partial relief. In addition, the Department said full relief under the new approach will also include requests to credit bureaus to remove any negative ratings tied to the loans, and reinstatement of a borrower’s federal student aid eligibility, where applicable.
On March 9, NYDFS sent a letter on behalf of a multi-state coalition of financial regulators inviting recently confirmed Department of Education Secretary Dr. Miguel Cardona to partner with the states to ensure protections for student loan borrowers. Specifically, the letter urges Secretary Cardona to reverse two policies instituted by former Secretary Betsy DeVos that the coalition claims “undermine state supervision of private companies that service federal student loans.” The first is a 2018 interpretation (covered by InfoBytes here), which takes the position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program is preempted by federal law. The coalition argues that the Department’s 2018 preemption interpretation has made “state-level oversight of student loan servicers more burdensome.” As such, the coalition urges Secretary Cardona to promulgate a regulation rejecting federal preemption of state consumer protection laws to ensure borrowers can “benefit from state oversight of student loan servicers.” The letter also discusses former Secretary DeVos’s attempt to use the Privacy Act of 1974 “as a shield from necessary state oversight”—an action the coalition claims leaves states “with no choice but litigation” to obtain documents needed for industry oversight.
On October 28, the CFPB Private Education Loan Ombudsman published its annual report on consumer complaints submitted between September 1, 2019 and August 31, 2020. The report is based on approximately 7,000 complaints received by the Bureau relating to federal and private student loans. Of these complaints, roughly 1,700 were related to debt collection, while approximately 500 mentioned Covid-19. The Bureau’s press release notes that the continued decrease in both federal and private student loan complaints may be attributed to factors such as “borrower education and outreach by federal and state agencies and regulators; borrower education and outreach by consumer advocates; and continued maturation of some industry participants’ compliance management systems, complaint monitoring systems, and their internal consumer advocate and ombudsman offices.” Topics discussed within the report include (i) an analysis of socio-economic and racial gaps in the student loan market; (ii) supervisory examinations and prioritized assessments of federal student loan servicers; (iii) enforcement actions taken against student loan debt relief companies and a student loan trust; (iv) borrower education and outreach; and (v) the impact of Covid-19 on student loan borrowers, including CARES Act relief for federally held federal student loans. The report also discusses a Memorandum of Understanding reached with the Department of Education at the beginning of the year, which clarifies the roles and responsibilities for each agency and permits the sharing of student loan complaint data and other information and recommendations (covered by InfoBytes here).
The report provides several recommendations, including that policymakers—when addressing near-term and long-term repayment issues—“may wish to consider simplifying the various loan repayment plans and the various forgiveness, discharge, and cancellation programs,” as well as examine ways to (i) enhance data sharing between federal agencies; (ii) enroll debtors who file for bankruptcy in income driven repayment plans; (iii) revisit the undue hardship bankruptcy test; (iv) assess socio-economic and racial gaps in student loan debt load and degree attainment; and (v) pursue student loan debt relief scams.
On August 4, the Pennsylvania attorney general announced it had entered into an Assurance of Voluntary Compliance with a third-party financing company, which permanently shuts down the company’s operations in the state and requires the company to cancel nearly $200,000 in debt for its former customers. According to the AG, the company entered into agreements with various debt relief companies to provide third-party financing to student loan borrowers so they could be enrolled in certain federal student loan repayment programs offered by the Department of Education. However, the company allegedly violated provisions of the Pennsylvania Consumer Protection Law and TILA related to closed end credit transaction by, among other things, (i) misrepresenting that the finance plan was a revolving credit plan, when it was actually a closed end transaction; (ii) misrepresenting that it retained a security interest as a result of its financing agreements when in in fact it did not; (iii) financing consumers’ student loan debt relief services when it knew, or should have known, that consumers were not receiving the services as advertised; and (iv) failing to provide Regulation Z-required disclosures for closed end credit transactions, including the amount financed, finance charges, total of payments, and the number and amount of payments necessary to repay the total payments. In addition, the AG claimed that the company charged consumers unacceptably high interest rates. Under the terms of the settlement, the company is banned from financing or assisting others in financing student loan debt relief services and from collecting debt from Pennsylvania borrowers. The company must also request that credit reporting agencies delete the reported debts from consumers’ credit reporting files. Monetary relief in the amount of $930,000 is suspended unless a court determines the company has violated the terms of the settlement.
States urge Department of Education to protect federal student loans borrowers as CARES Act deadline approaches
On August 6, the NYDFS sent a letter to the Department of Education, urging Secretary Betsy DeVos to take measures to protect student loan borrowers when federal student loan borrower relief under the CARES Act ends September 30. Currently, the CARES Act provides an automatic freeze for borrowers with Federal Family Education Loan Program and Federal Direct loans (covered by a Buckley Special Alert), and stipulates that during the suspension period, interest will not accrue, servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made.
The letter, sent on behalf of seven state student loan ombudspersons, expresses concerns that, despite protections afforded by the CARES Act, “many borrowers are being left behind and . . . borrowers will face hardships once the CARES Act coverage expires.” Specifically, the letter requests DeVos to take additional proactive steps, including: (i) expanding the CARES Act protections to federal borrowers not currently eligible for relief (i.e., “borrowers whose loans are owned by commercial lenders and Perkins Loan borrowers whose loans are owned by their schools”) and extending the term of those protections; (ii) ensuring servicers are prepared for the September 30 end-date to ensure that borrowers are not harmed when their student loan accounts are placed back into repayment status; and (iii) streamlining access to income driven repayment (IDR) plans by eliminating “logistical and administrative barriers to automated IDR plan enrollment” and recommending “that borrowers be able to self-report income and that applications be deemed provisionally approved upon submission, even if incomplete, so that relief is given as quickly as possible.”
State AGs ask court to vacate Department of Education’s 2019 “Institutional Accountability” regulations
On July 15, a coalition of state attorneys general from 22 states and the District of Columbia filed a complaint in U.S. District Court for the Northern District of California against Secretary of Education Betsy DeVos and the Department of Education, asking the court to vacate the Department’s 2019 final Institutional Accountability regulations (2019 Rule). As previously covered by InfoBytes, the 2019 Rule—which took effect July 1, 2020—revises protections for student borrowers who were significantly misled or defrauded by their higher education institutions, and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” Loans disbursed prior to July 1, 2020 remain subject to defenses under prior regulations issued in 2016 (2016 Rule). Earlier this year, H.J. Res. 76, which provided for congressional disapproval of the 2019 Rule (covered by InfoBytes here), was vetoed by President Trump.
The AGs allege in their complaint that the Department’s 2019 Rule, among other things, “completely eliminate[s] violations of applicable state consumer protection law as a viable defense to repayment of federal student loans” and “impose[s] additional requirements on a viable misrepresentation defense that are so onerous that they make this defense impossible for a student borrower to assert successfully.” Moreover, the AGs contend that the Department has “failed to meet its congressional mandate to specify actual borrower defenses” by promulgating a rule that serves only to prevent borrowers from obtaining relief. On these grounds, the AGs claim the 2019 Rule violates the Administrative Procedure Act (APA).
The AGs highlight several aspects of the 2019 Rule that support its claims, including that the elimination of the 2016 Rule’s limitations on the use of class action waivers and mandatory predispute arbitration agreements is arbitrary and capricious. According to the AGs, the Department’s “conclusion that requiring schools to disclose their use of mandatory predispute arbitration agreements and class action waivers will adequately protect borrowers is also contrary to substantial evidence and [the Department’s] own prior conclusions.”
On April 9, the CFPB released updated guidance for student loan borrowers during the Covid-19 pandemic. As previously covered by InfoBytes, the Bureau first released student loan borrower information on March 27, which covered debt relief provided by the CARES Act, including the automatic freeze on student loan payments until September 30 for those with federally held loans. Servicers will send required notices detailing the payment freeze to borrowers by the middle of April. The guidance notes that some federal student loans—including some Federal Family Education Loans—may be held by commercial lenders. These loans and other privately held loans do not qualify for automatic suspension of payments, and the Bureau encourages borrowers to contact their servicers for debt relief options such as deferment or forbearance if borrowers have difficulty making payments at this time. Borrowers with Perkins loans may also request loan forbearance from the borrowers’ institution for up to three months without submitting documentation.
On April 8, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), Sherrod Brown (D-OH), and Richard Blumenthal (D-CT) sent a letter to the Department of Education urging the Department to focus the CARES Act funding for institutions of higher education on public and nonprofit schools. In addition, the lawmakers call for “strong accountability polices” if for-profit colleges are eligible for the funds. The recommended policies “to protect students and taxpayers” include: (i) requiring that all funding must be used for “student instruction, emergency financial aid to students, and student support services”; (ii) preventing for-profit colleges from using the funds for executive compensation and freezing executive compensation; (iii) preventing publicly-traded for-profit colleges from buying back their stock; (iv) preventing for-profit colleges from using the funds for recruiting, marketing and advertising; (v) preventing for-profit colleges that receive funds from receiving other CARES Act funds; (iv) “[c]onsider[ing] CARES Act funding as federal funding for 90/10 compliance”; and (v) requiring that Congress receive a report detailing “how for-profit colleges used the funds.” The letter requests replies to the questions by April 21.
On March 25, U.S. Secretary of Education Betsy DeVos announced that in order to provide additional relief for student loan borrowers, the Department will take a number of actions which include the following:
- Stop collection activities and wage garnishments for at least 60 days, effective March 13;
- Stop requests to the Department of Treasury to withhold funds from “defaulted borrowers' federal income tax refunds, Social Security payments, and other federal payments”;
- Refund almost $2 billion to over 830,000 borrowers from funds previously withheld as of March 13;
- Direct private collection agencies to “halt all proactive collection activities, including making phone calls to borrowers and issuing collection letters and billing statements,” however, “[p]rivate collection agencies are permitted to provide assistance upon the borrower's request”;
- Begin to “monitor employers' compliance with the request to stop wage garnishment.” Those “[b]orrowers whose wages continue to be garnished after March 13 should contact their employers' human resources department.”
Borrowers with defaulted loans who would like to “continu[e] a prior payment arrangement, consolidat[e] their loans, or begin a loan rehabilitation arrangement with their private collection agency, should contact the Department's Default Resolution Group at 1-800-621-3115 (TTY for the deaf or hearing-impaired 1-877-825-9923).”
For more information, borrowers may visit StudentAid.gov/coronavirus.
On March 11, the U.S. Senate, in a 53-42 vote, joined the House in passing H.J. Res. 76, which provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (the Rule). As previously covered by InfoBytes, the Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” If signed by the president, H.J. Res. 76 would undo changes made by the Rule that, among other things, would have required individuals to apply to the Department for a defense to repayment (under the 2016 Rule, applications could be submitted on behalf of an entire group). H.J. Res. 76 would also undo the Rule’s elimination of automatic closed-school discharges and its ban on pre-dispute arbitration and class action waivers that were previously contained within the 2016 Rule.
- Jonice Gray Tucker to discuss “How the new administration sets the tone for 2021” at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Sherry-Maria Safchuk to discuss UDAAP in consumer finance at an American Bar Association webinar
- Jeffrey P. Naimon to discuss "What to expect: The new administration and regulatory changes" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Steven R. vonBerg to discuss "LO comp challenges" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss “The False Claims Act today” at the Federal Bar Association Qui Tam Section Roundtable