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Appeals Court to consider whether CFPA covers trusts
On February 11, the U.S. District Court for the District of Delaware stayed a 2017 CFPB enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” As previously covered by InfoBytes, last December the court ruled that the CFPB could proceed with the enforcement action, which alleged, among other things, that the defendants filed lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations. The court concluded that the suit was still valid and did not need ratification in light of the U.S. Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert), upending its previous dismissal of the case, which had held that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. At the time, the court also disagreed with the defendants’ argument that, as trusts, they are not “covered persons” under the Consumer Financial Protection Act (CFPA). While the defendants argued that they used subservicers to collect debt and therefore did not “engage in” providing services listed in the CFPA, the court stated that the trusts were still “engaged” in their business and the alleged misconduct even though they contracted it out.
However, the court now certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit. The first question centers on whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority. The court concluded that another court may rule differently on this “novel” issue. “I was the first judge to decide whether the Bureau may bring enforcement actions against creditors like the Trusts who contract out debt collection and loan servicing,” the judge wrote, noting that the judge previously assigned to the case had also “expressed ‘some doubt’ that the Trusts are covered persons.” The second question addresses the Bureau’s efforts to continue the case after Seila. The defendants argued that the suit should be dismissed because the initial filing was invalid due to the director’s unconstitutional insulation and was not ratified within the statute of limitations. In December the court had held that the Bureau did not need to ratify the suit because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The court now acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”
Senators urge CFPB to investigate student lenders’ bankruptcy compliance
On February 10, several U.S. senators sent a letter to CFPB Director Rohit Chopra claiming private student loan companies and servicers have “intentionally misrepresented to borrowers” their ability to discharge certain private student loans in bankruptcy. Citing a report from the Student Borrower Protection Center, the senators claimed that these private lenders “have intentionally perpetuated the false narrative that all student loans, including all private student loans, are nondischargeable in bankruptcy except in cases where borrowers meet a standard of ‘undue hardship.’” The letter stated, however, that rules related to the dischargeability of private student loans apply only to qualified education loans whereas private lenders and servicers “have long peddled a variety of private student loans that do not meet the definition of qualified education loans.” Citing a figure that estimated approximately $50 billion in private student loan debt held by some 2.6 million borrowers fell into this category, the senators stated that lenders included misleading language in their promissory notes while misrepresenting that students could not discharge their loans in bankruptcy, and collected debts that could have been legally discharged, including through the use of abusive measures such as pursuing legal action and making negative reports to credit bureaus. The senators urged the Bureau to investigate the report’s findings and take action to ensure private lenders and servicers comply with bankruptcy law.
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
CFPB is monitoring for PSLF waiver compliance
On January 26, the CFPB encouraged consumers to take advantage of the Public Service Loan Forgiveness (PSLF) limited waiver program before the October 31 application deadline. As previously covered by InfoBytes, last October the Department of Education announced several changes to its PSLF program, including a time-limited PSLF waiver for qualifying borrowers, which allows all payments to count towards PSLF regardless of loan program, payment plan, or whether the payment was made in full or on-time. However, the Bureau noted that consumers are complaining of servicers not providing the support they need to get the full benefit of the PSLF limited waiver. The Bureau stated that it is monitoring servicers for illegal practices to ensure public service employees are able to access PSLF relief. Consumers who experience issues with servicers providing the necessary information, support, and processing are encouraged to submit a complaint to the Bureau.
FTC settles with remaining student debt relief defendants
On January 26, the FTC announced settlements with the remaining participants in a student loan debt relief operation. As previously covered by InfoBytes, the FTC filed a complaint against the defendants for allegedly using telemarketing calls, as well as media advertisements, to enroll consumers in student debt relief services in violation of the FTC Act and the Telemarketing Sales Rule (TSR). The defendants allegedly misrepresented that they were affiliated with the U.S. Department of Education and misrepresented “material aspects of their debt relief services,” including by promising to enroll consumers in repayment programs to reduce or eliminate payments and balances. Additionally, the defendants allegedly charged illegal upfront fees, and often placed the consumers’ loans into temporary forbearance or deferments with their student loan servicers, without the consumer’s authorization. A $43 million settlement was reached in 2020 with certain of the defendants that was partially suspended conditioned upon the surrender of at least $835,000, as well as additional assets.
The FTC entered two settlements against the remaining defendants. The first settlement imposes a roughly $7.5 million monetary judgment, which is partially suspended after the individual defendant pays $743,386. The second settlement includes a $22 million monetary judgment, which is also partially suspended based on the defendants’ inability to pay. The settlement also requires the defendants to forfeit all frozen funds held by the receiver. Monies recovered in the action will go towards consumer refunds. Additionally, the defendants are banned from providing any debt relief products and services in the future, and are prohibited from making misrepresentations in connection with the sale of any products or services or from making any unsubstantiated claims. Defendants are also enjoined from violating the TSR.
CFPB to examine college lending
On January 20, the CFPB announced its plans to examine the operations of post-secondary schools that extend private loans directly to students and update its exam procedures, including a new section on institutional student loans. The Bureau noted that it is “concerned about the borrower experience with institutional loans because of past abuses at schools,” high interest rates, and strong-arm debt collection practices. When examining institutions offering private education loans, in addition to examining general lending issues, the Bureau noted that examiners will review certain actions only schools can take against their students, which include, among other things: (i) placing enrollment restrictions; (ii) withholding transcripts; (iii) improperly accelerating payments; (iv) failing to issue refunds; and (v) maintaining improper lending relationships. The education loan exam procedures manual is intended for use by Bureau examiners, and is available as a resource to those subject to its exams. These procedures will be incorporated into the Bureau’s general supervision and examination manual.
DOJ announces $7.9 million FCA settlement with student loan contractor
On January 14, the DOJ announced a $7.9 million settlement with a contractor that serviced student loans for lenders under the Federal Family Education Loan Program to resolve allegations that it violated the False Claims Act by submitting or causing the submission of false claims to the Department of Education. According to the settlement agreement, from 2006 to 2016, the contractor allegedly knowingly failed to make required financial adjustments to borrower accounts and improperly treated some borrowers as eligible for military deferments, which resulted in incorrect reporting to the Department of Education and losses to the United States. The settlement press release noted that the contractor paid $1.4 million to the Department of Education under a remediation plan to partially resolve the allegations and received a credit for that payment under the settlement agreement.
States reach $1.85 billion settlement with student loan servicer
On January 13, a coalition of attorneys general from 38 states and the District of Columbia reached a $1.85 billion settlement with one of the nation’s largest student loan servicers, resolving allegations that it engaged in misconduct when servicing student loans. The settlement, subject to court approval, brings to an end multistate litigation and investigations into the allegations that the servicer steered borrowers into costly forbearances and expensive repayment plans rather than helping borrowers find affordable income-driven repayment (IDR) plans. The servicer denies violating any consumer financial laws or causing borrower harm, as stated in a separate press release, but has agreed to maintain servicing practices to support borrower success.
Under the terms of the settlement, the servicer has agreed to cancel more than $1.7 billion in private student loan balances owed by roughly 66,000 borrowers. An additional $95 million in restitution payments of about $260 each will also be sent to approximately 357,000 federal student loan borrowers, and the servicer will also pay approximately $142.5 million to the signatory AGs. The settlement also requires the servicer to make several reforms, including explaining the benefits of IDR plans and offering estimated income-driven payment options to borrowers prior to placing them into deferment or discretionary forbearance. The servicer is also required to notify borrowers about the Department of Education’s Public Service Loan Forgiveness limited waiver opportunity (covered by InfoBytes here), implement changes to its payment-processing procedures to limit certain fees for late payments or entering forbearance status, and improve communications informing borrowers of their rights and obligations.
Education Dept. extends student loan moratorium
On December 22, the Department of Education announced a 90-day extended pause on student loan repayment, interest, and collections through May 1, 2022, which will allow the Biden Administration “to assess the impacts of the Omicron variant on student borrowers and provide additional time for borrowers to plan for the resumption of payments and reduce the risk of delinquency and defaults after restart.” As previously covered by InfoBytes, in August 2021, President Biden announced the extension of the moratorium on collecting student loans until January 31, 2022. According to the Department, the extended pause will assist 41 million borrowers in saving $5 billion per month and “[b]orrowers are encouraged to use the additional time to ensure their contact information is up to date and to consider enrolling in electronic debit and income-driven repayment plans to support a smooth transition to repayment.”
New York establishes task force for private student loan refinance
On December 22, the New York governor signed SB 2767, which established a private student loan refinance task force. Among other things, the bill created the task force to study and report on ways lending institutions offering private student loans to graduates of institutions of higher education can be encouraged to create student loan refinancing programs. According to the bill, the private student loan refinance task force is instructed to issue a report of its findings and recommendations to the New York governor, the temporary president of the senate, and the speaker of the assembly. The bill is effective immediately and will expire on January 1, 2023.