The Consumer Financial Protection Bureau (CFPB) recently issued a report, focused on the current student loan servicing market that laid out the results of several supervisory efforts related to student lending. Higher education lenders and loan servicers should pay close attention to the report’s findings, which signal the CFPB’s interest in enforcing the Consumer Financial Protection Act (CFPA) and other federal laws in the higher education context.
After initiating supervision over certain institutional lenders that extend private loans to students, the CFPB determined that certain blanket policies of these lenders were abusive under the CFPA.
Private student loans are extensions of credit made to students or parents to fund undergraduate, graduate, and other forms of postsecondary education that fall outside of the Department of Education’s lending programs. They can include a variety of financing products, including in-school loans, tuition payment plans, and loans used to refinance existing student loans. Although these lenders have historically not been subject to the same regulatory oversight as traditional lenders, the CFPB is now more closely focused on assessing their compliance with federal consumer financial laws.
The CFPB determined that some institutional lenders had a policy of withholding student transcripts from student borrowers who were delinquent or in default on their debts to the school (specifically debts arising from extensions of credit). According to the CFPB, given the importance of obtaining a transcript for students who are taking the next steps after their education, whether that be applying for a job, going back to school, or earning a professional certification, the consequences of withholding a transcript can be severe and disproportionate to the underlying debt. The CFPB further stated that it does not believe student borrowers have a reasonable opportunity to protect themselves in these circumstances. The CFPB’s determination echoes recent legislation that has recently passed in eight states (California, Colorado, Illinois, Louisiana, Maine, Minnesota, New York, Ohio, and Washington) that either expressly prohibits or limits the use of transcript holds.
Colleges that operate their own lending programs should pay close attention to the CFPB’s report, and ensure that current practices do not constitute an abusive practice under the CFPA. In particular, institutional lenders should examine all policies that put collateral consequences in place for failure to pay debts related to an extension of credit to ensure they are not vulnerable to the CFPB or another federal or state regulator accusing the institution of taking advantage of the imbalance of power between it and the student borrower. In addition, institutional lenders who are offering “income share agreements” should be aware that the CFPB is likely to monitor those programs for potential violations of the CFPA although such programs may not constitute an extension of credit under applicable law. Institutions should be wary of how they address tuition costs for individuals who lose their loan eligibility due to failure to complete courses, and should provide sufficient education to borrowers about loan terms. Finally, institutional lenders should be aware of collection practices and ensure that transcripts are not withheld, as the CFPB has declared this an abusive practice and directed institutional lenders to cease this practice.
Student Loan Forgiveness
The CFPB also engaged in oversight of student loan servicers, particularly those responsible for handling certain loan forgiveness programs, and in many cases determined that servicers failed to provide appropriate access to established loan forgiveness programs to which student borrowers were entitled. According to the CFPB, these failures also constitute abusive acts or practices under the CFPA.
The CFPB examined multiple programs, including the Teacher Loan Forgiveness, Public Service Loan Forgiveness, and Income-Driven Repayment programs. Common issues related to these programs included alleged failures to: (1) appropriately process applications; (2) verify underlying borrower eligibility; and (3) educate borrowers about program terms. Although the specific acts and practices varied, in each case, the CFPB asserted that the loan servicer’s practices resulted in substantial injury to consumers who either lost their loan forgiveness or had loan forgiveness delayed.
In many cases, the CFPB stated that loan servicers could remedy the issue and provide appropriate remediation by implementing programmatic changes to their practices. However, loan servicers should be aware that any current or future practices related to these complex programs will no doubt be equally subject to CFPB oversight, and should remain vigilant to ensure practices do not constitute abusive acts or practices under the CFPA or other applicable law.
Specifically, servicers should: (1) respond timely to applications for any of the loan forgiveness programs, even if information is provided in a nonstandard format; (2) process recertification requests timely; and (3) invest in appropriate data management to ensure student borrowers have access to the correct data, can address past errors, and are credited appropriately for payments that should be credited to the program.
The report signals the CFPB’s close scrutiny of higher education-related financing activities by institutional lenders and loan servicers. Following issuance of the report, the CFPB expects regulated entities to address any relevant concerns within their policies and portfolios as appropriate. Institutional lenders and servicers of student loans should address these issues immediately and, to the extent not already in place, develop and maintain a robust compliance program to ensure that student borrowers’ interests are protected as mandated under federal law.
 For a discussion of the potential impacts of the recent Fifth Circuit decision in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau on the CFPB’s current and future actions, see coverage here and here.