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District Court orders student loan debt-relief defendant to pay $20 million
On September 23, the U.S. District Court for the Central District of California entered a judgment in favor of the CFPB against an individual defendant in an action taken by the Bureau against a lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). As previously covered by InfoBytes, the CFPB filed a complaint in 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products. However, the Bureau alleged that the defendants instead resold or provided the reports to numerous companies, including companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services, and violated both the TSR and CFPA by placing telemarketing sales calls and sending direct mail to encourage consumers to consolidate their loans, while falsely representing that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and allow borrowers to change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here, here, and here).
In August the court granted the Bureau’s motion for summary judgment against the individual defendant after determining that undisputed evidence showed that the individual defendant, among other things, “obtained and later used prescreened lists from [a consumer reporting agency] without a permissible purpose” in order to send direct mail solicitations from the businesses that he controlled to consumers on the lists as opposed to firm offers of credit or insurance. (Covered by InfoBytes here.) At the time, the court found that injunctive relief, restitution, and a civil money penalty were appropriate remedies. While the individual defendant objected to the proposed judgment, the court ultimately ordered that the Bureau is entitled to a judgment for monetary relief of over $19 million as redress for fees paid by affected consumers. This restitution is owed jointly and severally with the student loan debt relief company defendants in the amounts imposed in default judgments entered against each of them (covered by InfoBytes here). Additionally, the court determined that the individual defendant “recklessly” violated the CFPA, TSR, and FCRA, warranting a $20 million civil money penalty. The individual defendant is also permanently banned from participating in telemarketing activities or from using or obtaining prescreened consumer reports.
Student loan servicer agrees to produce requested records
On September 28, the Colorado attorney general announced that a Pennsylvania-based student loan servicer responsible for handling the federal Public Service Loan Forgiveness (PSLF) program has agreed to comply with a state law requiring consumer protection oversight. As previously covered by InfoBytes, the AG sued the servicer in May for allegedly failing to comply with state law when asked to provide certain documentation 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. Under the terms of the assurance of discontinuance, the servicer (while denying any liability) has agreed to produce the requested records in compliance with the Colorado Student Loan Equity Act.
DOJ settles SCRA violations with New Jersey student lending authority
On September 20, the DOJ announced a settlement with a New Jersey’s student lending authority, resolving allegations that the authority obtained unlawful court judgments in violation of the Servicemembers Civil Relief Act (SCRA) against two military servicemembers who co-signed student loans . According to the press release, the DOJ launched an investigation into the authority after receiving a report from the Coast Guard that the authority obtained a default judgment in 2019 against a Coast Guard petty officer who co-signed on behalf of the two student loans. The complaint, filed by the DOJ in the U.S. District Court for the District of New Jersey, states that the authority “obtained default judgments against two SCRA-protected servicemembers” by failing “to file true and accurate affidavits indicating the military status of [the two service servicemembers].” According to the DOJ, lenders can verify an individual’s military status by utilizing a defense data center’s free and public website, or by reviewing their files to confirm military status. The authority allegedly filed affidavits in state court that inaccurately stated that the servicemembers were not in military service, even though the authority had conducted searches in the defense data center’s website that confirmed that the individuals were active military servicemembers.
The settlement notes that the authority must pay $15,000 each to the two servicemembers who had default judgments entered against them, and must pay a $20,000 civil penalty. Among other things, the settlement also requires the authority to provide compliance training to its employees and to develop new policies and procedures consistent with the SCRA. The settlement also notes that the authority, since the opening of the investigation, has been fully cooperative and has “taken steps to improve its compliance with the SCRA.”
Education Dept. announces new TPD discharge measures for student borrowers
On August 19, the U.S. Department of Education announced that more than 323,000 student loan borrowers who have a total and permanent disability (TPD) will receive automatic discharges totaling over $5.8 billion. Under the final regulations, applicable borrowers will be identified through an existing data match with the Social Security Administration starting with the September quarterly match to allow “the Department to provide automatic TPD discharges for borrowers who are identified through administrative data matching by removing the requirement for these borrowers to fill out an application before receiving relief.” Borrowers matched with the Department of Veterans Affairs have already been able to take advantage of the TPD discharge data match since 2019. Two additional TPD-related policy items were also announced: (i) the Department will indefinitely extend a previously announced policy to stop asking borrowers to provide earnings information beyond the end of the national emergency (“a process that results in the reinstatement of loans if and when borrowers do not respond”); and (ii) the Department will propose eliminating the currently required three-year income monitoring period during a negotiated rulemaking that will begin in October.
District Court grants summary judgment against student loan debt-relief defendant
On August 10, the U.S. District Court for the Central District of California granted summary judgment against an individual defendant in an action by the CFPB against a lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). As previously covered by InfoBytes, the CFPB filed a complaint in 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products. However, the Bureau alleged that the defendants instead resold or provided the reports to numerous companies, including companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services, and violated both the TSR and CFPA by placing telemarketing sales calls and sending direct mail to encourage consumers to consolidate their loans, while falsely representing that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and allow borrowers to change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here, here and here).
Responding to the Bureau’s motion for summary judgment against the individual defendant, the court, among other things, held that undisputed evidence showed that the individual defendant “obtained and later used prescreened lists from [a consumer reporting agency] without a permissible purpose” in order to send direct mail solicitations from the businesses that he controlled to consumers on the lists as opposed to firm offers of credit or insurance. The court also found that the individual defendant violated the TSR by mispresenting material aspects of the debt relief services and violated the CFPA by making false statements to induce consumers to pay advance fees for these services. Furthermore, the court rejected the individual defendant’s arguments involving boilerplate evidentiary objections and Fifth Amendment and statute of limitation claims. Because the individual defendant “was heavily involved in and controlled much of the [student loan debt relief businesses’] activities,” the court found that he acted recklessly and granted the Bureau’s motion for summary judgment, finding that injunctive relief, restitution, and a civil money penalty are appropriate remedies.
DFPI grants license to ISA servicer
On August 5, the California Department of Financial Protection and Innovation (DFPI) announced an agreement to issue a license to a New York-based company that partners with educational institutions to offer Income Share Agreements (ISAs) to students to finance their post-secondary education and training. The agreement reflects DFPI’s decision to “treat these private financing products as student loans” for purposes of the California Student Loan Servicing Act (SLSA)” and represents “a significant first step toward providing greater oversight of the ISA industry.” As previously covered by InfoBytes, in 2018, the California governor approved AB 38 to amend the state’s Student Loan Servicing Act, which provides for the licensure, regulation, and oversight of student loan servicers by the California Department of Business Oversight (now DFPI). The agreement is the first of its kind to subject an ISA servicer to state licensing and regulation. In the agreement, DFPI explains that the SLSA defines a “student loan” “by the purposes for which financing is used,” and includes an “extension of credit” that is “solely for use to finance post-secondary education.” The SLSA expressly excludes certain types of credit, but does not exclude contingent debt or ISAs. Therefore, the agreement concludes, “the Commissioner finds that ISAs made solely for use to finance a postsecondary education are ‘student loans’ for the purposes of the SLSA.”
As part of the agreement, the company, among other things: (i) must submit all audited financial statements; (ii) must report any ISAs it services as “student loans” for purposes of the SLSA; and (iii) “shall not service any ISAs or other forms of credit extended to California consumers that have been determined or declared unenforceable or void by the DFPI or any regulatory agency that licenses, charters, registers, or otherwise approves the issuer of the ISA.” In addition, DFPI will issue the company a regular, unconditional California SLSA license “within 5 business days of the Commissioner’s approval of [the company’s] Audited Financials.” According to DFPI, “some ISA issuers have contended that state and federal lending laws are inapplicable to ISAs, and students who finance education under ISAs did not enjoy the same regulatory protections as other borrowers,” and DFPI “expects to clarify requirements for ISA providers and servicers through future rulemaking.”
DFPI takes action against student debt-relief company
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a student loan debt relief company, resolving allegations that the company violated the California Consumer Financial Protection Law (CCFPL) by collecting illegal advance fees prohibited under the federal TSR. According to DFPI, the announcement follows a “wider crackdown” initiated in February against student loan debt-relief companies in violation of the CCFPL and the Student Loan Servicing Act (covered by InfoBytes here). The company allegedly advertised promises of reducing student debt in exchange for an initial payment as high as $899 and an ongoing monthly fee of $39. DFPI alleges that over 1,000 California student loan borrowers signed up and were charged illegal up-front fees prohibited under the federal telemarketing law. The consent order requires the company to refund California student loan borrowers the approximate $870,000 it collected in fees and to pay a $500,000 penalty to DFPI. The company also agreed to cease its illegal conduct, cancel all unlawful contracts with consumers, and refund consumers within 60 days.
Education Dept. rolls back state-law preemption on student loans
On August 9, the U.S. Department of Education published an interpretation, noting “that there is significant space for State laws and regulations relating to student loan servicing, to the extent that these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws.” The interpretation clarifies the Department’s position on the legality of state laws and regulations regarding certain aspects of federal student loan servicing, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. According to the interpretation, though federal law preempts state laws that conflict squarely on issues such as timelines, dispute resolution procedures, and collections, the Department believes that it does not preempt state laws regarding affirmative misrepresentations or other measures meant to address improper conduct that could occur in Federal Family Education Loan Program. The Department stated that “[s]tates may consider and adopt additional measures which protect borrowers and do not conflict with Federal law,” and that “such measures can be enforced by the States and the Department can and will work with State officials to root out all forms of fraud, falsehood, and improper conduct that may occur in the Federal student aid programs.” According to the Department, “[t]his action will help states enforce borrower bills of rights or other similar laws to address issues with servicing of federal student loans.” The new interpretation revokes and supersedes the interpretation published in March 2018, “Federal Preemption and State Regulation of the Department of Education’s Federal Student Loan Programs and Federal Student Loan Servicers” (covered by InfoBytes here). Comments are due 30 days after publication in the Federal Register.
President Biden extends student loan moratorium
On August 6, President Biden announced the final extension of the moratorium on collecting student loans until January 31, 2022, which will “give the Department of Education and borrowers more time and more certainty as they prepare to restart student loan payments,” and will “ensure a smoother transition that minimizes loan defaults and delinquencies that hurt families and undermine our economic recovery.” In a statement issued by the Department of Education, Secretary of Education Miguel Cardona stated that it is the “Department’s priority to support students and borrowers during this transition and ensure they have the resources they need to access affordable, high quality higher education.” The moratorium was scheduled to expire on September 30.
State AGs filed amicus brief in support of federal student loan borrowers
On July 29, a coalition of attorneys general from 20 states and the District of Columbia filed an amicus brief in the U.S. Court of Appeals for the Second Circuit against Secretary of Education Miguel Cardona and the Department of Education in support of an appeal challenging the Department’s 2019 rule governing student loan relief for defrauded borrowers (“2019 Rule”). As summarized in the brief, Congress created a statutory entitlement to loan relief for borrowers who are defrauded by their school—a process known as “borrower defense”—to “ensure that victimized students are not unfairly saddled with federal student loans.” The amici brief argues that the 2019 Rule “reject[ed] longstanding agency practice and positions going back 25 years to the first borrower defense rule” and “makes it all but impossible for defrauded borrowers to successfully obtain loan relief.” The states argue that the Department’s 2019 Rule is thus arbitrary and capricious under the Administrative Procedure Act and request that the Second Circuit reverse the district court’s holding to the contrary.
As previously covered by InfoBytes, in July 2020, 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, also asking the court to vacate the Department’s 2019 final rule.