InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Massachusetts Division of Banks issues guidance to debt collectors and student loan servicers
Recently, the Massachusetts Division of Banks published guidance related to the conduct of debt collectors, student loan servicers, and third-party loan servicers. 209 CMR 18.00 defines unfair or deceptive acts or practices for entities servicing loans or collecting debts within the commonwealth, and provides licensing, registration, and supervision procedures. Those provisions of the regulation that govern fair debt collection and third party loan servicing practices apply both to licensed entities, and entities exempt from licensure. Additionally, the regulation specifies that licensed debt collectors are not required to register as third party loan servicers but must still comply with all relevant state and federal laws and regulations that govern third party loan servicers when acting in that capacity. Student loan servicers engaged in third party loan servicing activities or debt collection activities within the scope of student loan servicing activities described within Massachusetts’ law are also required to comply with all applicable state and federal laws and regulations governing third party loan servicers and debt collectors when acting in such capacity. Additionally, 209 CMR 18.00 outlines, among other things, (i) licensing application requirements; (ii) licensing standards; (iii) registration procedures and standards; (iv) notice, reporting, and recordkeeping requirements; (v) collection practices and consumer communication restrictions; (vi) prohibitions related to harassment or abuse, false or misleading representations, and unfair, deceptive, or unconscionable practices; (vii) debt validation requirements; (viii) mortgage loan servicing practices; (ix) student loan servicing practices; and (x) confidentiality provisions. The regulation took effect July 1.
2nd Circuit says private student loans not explicitly exempt from bankruptcy discharge
On July 15, the U.S. Court of Appeals for the Second Circuit held that private student loans are not explicitly exempt from the discharge of debt granted to debtors in a Chapter 7 bankruptcy. According to the opinion, the plaintiff filed for Chapter 7, which led to an ambiguous discharge order as to how it applied to his roughly $12,000 direct-to-consumer student loans. After the plaintiff received the discharge in 2009, the student loan servicer started collection efforts. Because the plaintiff did not know whether the discharge applied to his student loans, he repaid the loans in full. In 2017, the plaintiff moved to reopen his bankruptcy case and filed an adversary proceeding against the student loan servicer and the servicer’s predecessor (collectively, “defendants”), seeking a determination that his student loans were in fact discharged during the original proceeding. The servicer moved for dismissal claiming the loans were exempt under 11 U.S.C. § 523(a)(8)(A)(ii), but the bankruptcy judge denied the motion, ruling that the bankruptcy code “does not sweep in all education-related debt.” The district court subsequently certified the bankruptcy court’s order for interlocutory appeal.
On appeal, the 2nd Circuit reviewed whether the plaintiff’s private student loans could be discharged under bankruptcy. Under § 523(a)(8), the following types of student loans are exempt from discharge: (i) government or nonprofit institution student loans; (ii) obligations “to repay funds received as an educational benefit, scholarship, or stipend”; and (iii) qualified education loans. The defendants argued that the plaintiff’s loans fell into the “educational benefit” category, but the appellate court disagreed, concluding that § 523(a)(8) does not provide a blanket exception to the applicability of bankruptcy discharge to private student loans. In affirming the bankruptcy court’s ruling, the appellate court wrote, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.” The 2nd Circuit further added that “[i]nterpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that. . .do not usually require repayment,’. . .would improperly broaden § 523(a)(8)(A)(ii)’s scope.”
Colorado expands student loan servicer provisions
On June 29, the Colorado governor signed SB21-057, which expands the Colorado Student Loan Servicers Act by adding new provisions covering private lenders, creditors, and collection agencies connected to postsecondary non-federal student loans. The act adds “Part 2” to the Colorado Revised Statutes, which, among other things, provides new definitions and stipulates that on or after September 1, lenders may not offer or make a private education loan to a state resident without first registering with the administrator and then annually providing specific loan data and contact information. Additionally, the act (i) outlines cosigner disclosure requirements and specifies that private education lenders are required to grant a release to cosigners provided certain conditions are met; (ii) provides that if a cosigner dies, the lender will not attempt to collect against the cosigner’s estate except for payment default; (iii) expands disability discharge requirements so that a borrower or cosigner may be released from payment obligations if permanently disabled; (iv) requires lenders to provide additional disclosures related to loans that will be used to refinance an existing loan; (v) outlines prohibited conduct concerning unfair, deceptive, or abusive acts or practices, such as placing a loan into default or accelerating a loan while a borrower is seeking a loan modification or enrolling in a flexible repayment plan; (vi) discusses debt collection prerequisites; and (vii) allows borrowers to bring a private right of action, including a counterclaim, against a lender or collection agency to recover or obtain actual damages or $500 (whichever is greater), restitution, punitive damages, injunctive relief, credit report corrections, attorney fees and costs, among others. Additionally, if it is proven that a lender or a collection agency has provided false information, the court will award the borrower the greater of treble damages or $1,500. Moreover, a violation of Part 2 is defined as a deceptive trade practice. Lenders or collection agencies that fail to comply with the outlined provisions will be liable for, among other things, actual damages sustained by a borrower or cosigner, as well as a monetary award equal to three times the total amount collected from the borrower in violation of Part 2. The act takes effect immediately.
District Court approves $35 million settlement in student debt-relief action
On July 14, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against the named defendant in a 2019 action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, which had alleged a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. A second amended complaint also included claims for avoidance of fraudulent transfers under the FDCPA and California’s Uniform Voidable Transactions Act.
In 2019, the named defendant filed a voluntary petition for Chapter 11 relief, which was later converted to a Chapter 7 case. As the defendant is a Chapter 7 debtor and no longer conducting business, the Bureau did not seek its standard compliance and reporting requirements. Instead, the finalized settlement prohibits the defendant from resuming operations, disclosing or using customer information obtained during the course of offering or providing debt relief services, or attempting “to collect, sell, assign, or otherwise transfer any right to collect payment” from any consumers who purchased or agreed to purchase debt relief services. The defendant is also required to pay more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states.
The court previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants (covered by InfoBytes here, here, here, and here).
Connecticut adds additional protections for student loans
On July 13, the Connecticut governor signed SB 716 to provide additional protections for student loan borrowers and impose new requirements on student loan servicers. Among other things, the act requires servicers to provide certain information to borrowers and cosigners regarding their rights and responsibilities, including cosigner release eligibility and the cosigner release application process. The law also prohibits a student loan servicer from engaging in an abusive act or practice when servicing a student loan and expands the definition of “servicing” in state student loan servicer law. The law provides a list of exempt persons, which includes banks and credit unions and their wholly-owned subsidiaries. The act states it took effect July 1.
FTC settles with payment processors in student loan debt relief scam
On July 12, the FTC announced a settlement with two Florida-based payment processing companies and their CEO (collectively, “defendants”) accused of participating in a student loan debt relief scam. As previously covered by InfoBytes, in 2018, the FTC alleged the student loan debt relief operation violated the FTC Act and the Telemarketing Sales Rule (TSR) by, among other things, falsely claiming borrowers had pre-qualified for federal loan assistance programs that would reduce their monthly debt payments or result in total loan forgiveness and accepting monthly payments that were not applied towards student loans. A settlement was reached last December (covered by InfoBytes here). According to the FTC’s most recent complaint, the defendants allegedly “applied for and obtained merchant accounts for the [scam] by knowingly and repeatedly providing false information to payment processors about the [operation’s] three companies.” The defendants’ payment processing applications, the FTC contended, concealed the fraudulent activity, denied that the operation was offering consumers prohibited debt relief services, and repeatedly ignored warnings and direct evidence that the operation was defrauding consumers.
Under the terms of the settlement order, the defendants are permanently banned from payment processing or acting as an independent sales organization or sales agency. The defendants are also prohibited from assisting and facilitating any unfair and deceptive trade practice, including to obtain payment processing services. In addition, the order imposes a $28.6 million judgment against the defendants, which is partially suspended following the payment of $20,493, due to the defendants’ inability to pay the full amount.
CFPB examines reported assistance trends on consumers’ credit records
On July 13, the CFPB released findings regarding trends in reported assistance on consumers’ credit records. The post—the second in a series documenting trends in consumer credit outcomes during the Covid-19 pandemic (the first covered by InfoBytes here)—examines consumer month-to-month transitions into and out of assistance from January 2020 to April 2021. As previously covered by InfoBytes, last August, the Bureau issued a report examining trends through June 2020 in delinquency rates, payment assistance, credit access, and account balance measures, which showed that generally there was an overall decrease in delinquency rates since the start of the pandemic for auto loans, first-lien mortgages, student loans, and credit cards. According to the Bureau’s recent findings, as of March 2021, auto loans and credit card accounts with assistance were slightly above pre-pandemic levels, and the share of mortgages and student loans on assistance continued to be significantly higher than pre-pandemic levels. Researchers also found that some communities have been disproportionately affected by the health and economic shocks of the pandemic: “majority Black census tracts, majority Hispanic census tracts, older borrowers and borrowers in counties hit hardest by COVID cases and layoffs were most likely to receive assistance in the early months of the pandemic.” Additionally, consumers in majority Hispanic census tracts were “more likely to exit assistance, but consumers in majority Black census tracts were somewhat less likely to exit assistance than their counterparts in majority white census tracts.”
Groups ask Education Dept. to stop preempting states on student lending
On July 7, the Conference of State Bank Supervisors (CSBS) and the North American Collection Agency Regulatory Association (NACARA) sent a letter to Department of Education Secretary Miguel Cardona urging the Department to rescind recent policies “claiming preemption or otherwise impairing state regulation of federal student loan servicers and debt collectors.” The letter acknowledges steps taken by the Department to facilitate coordination and collaboration with state financial regulators but notes that additional action is required to accomplish a shared mission of protecting student borrowers. Among other things, the letter discusses several Department actions taken over the years, including the Department’s 2018 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 letter urges the Department “to rescind the 2018 preemption notice and formally recognize that state oversight and regulation is fully applicable to federal student loan servicers and debt collectors, entirely appropriate, and not in conflict with the purpose of the [Higher Education Act].” The letter also discusses revised guidance issued in May concerning the handling of outside requests for Department records and data. As previously covered by InfoBytes, the revised guidance supersedes the Department’s 2017 guidance and creates a “streamlined and expedited process” for reviewing information requests made by any state or federal authority for information pertaining to companies engaged in student loan lending or collections. However, CSBS and NACARA emphasize that the Department should “recognize that state financial regulators are independently authorized to access records in possession of the federal student loan servicers and debt collectors subject to state regulation.” Additionally, the letter requests, among other things, that the Department take additional action deemed necessary to “fully return” to a policy of collaboration for protecting student loan borrowers, pointing out that timing is important as most federal student loan repayments resume in October.
District Court approves $6.02 million settlement in student debt-relief action
On July 1, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against two defendants in a 2019 action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, which alleged a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint alleged that the defendants violated the Consumer Financial Protection Act, the Telemarketing Sales Rule, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. In addition, the complaint asserted the defendants engaged in deceptive practices by misrepresenting (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness; and (iii) their ability to actually lower borrowers’ monthly payments.
The finalized settlement issued against the two relief defendants, who neither admit nor deny the allegations except as specifically stated, requires the payment of $3.98 million by one defendant and $2.04 million by the other. However, based on the defendant’s inability to pay, full payment of the $2.04 million will be suspended. The finalized settlement also ordered the paying relief defendant to disgorge any funds held in accounts in excess of the $3.98 million, “including any income such as interest, dividends, and capital gains, as of the date the funds are transferred.” Moreover, both relief defendants are required to grant all rights and claims of identified assets to the Bureau, as well as any assets “currently in the possession, custody, or control of the Receiver.”
The court previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants (covered by InfoBytes here, here, and here). Orders have yet to be entered against the remaining defendants.
Minnesota enacts student loan servicer, debt buyer provisions
On June 26, the Minnesota governor signed omnibus bill HF 6, which, among other things, creates a Student Loan Bill of Rights and outlines new provisions for student loan servicers. The act provides new definitions and, subject to exemptions, requires entities servicing student loans in the state to be licensed. The act outlines servicer duties and responsibilities, including those related to responding to borrower communications, applying overpayments and partial payments, handling student loan transfers, providing income-driven repayment program options, and maintaining records. Additionally, servicers are prohibited from (i) misleading borrowers; (ii) engaging in any unfair or deceptive practices or misrepresenting or omitting information related to a borrower’s student loan obligations; (iii) misapplying payments; (iv) knowingly or negligently providing inaccurate information; (v) failing to provide both favorable and unfavorable payment history to consumer reporting agencies; (vi) refusing to communicate with a borrower’s authorized representative; (vii) making false statements or omitting material facts connected “with any application, information, or reports filed with the commissioner or any other federal, state, or local government agency”; (viii) violating any federal, state, or local law; (ix) providing incorrect information regarding the availability of student loan forgiveness; and (x) failing to comply with outlined duties and obligations. Furthermore, the state commissioner has authority to conduct examinations; deny, suspend, or revoke licenses; censure servicers; and impose civil penalties.
Additionally, as part of the omnibus bill, the definition of “collection agency” now includes a “debt buyer,” which is defined as a “business engaged in the purchase of any charged-off account, bill, or other indebtedness for collection purposes, whether the business collects the account, bill, or other indebtedness, hires a third party for collection, or hires an attorney for litigation related to the collection.” The act also defines an “affiliated company” as “a company that: (1) directly or indirectly controls, is controlled by, or is under common control with another company or companies; (2) has the same executive management team or owner that exerts control over the business operations of the company; (3) maintains a uniform network of corporate and compliance policies and procedures; and (4) does not engage in active collection of debts.” The commissioner is also required to allow affiliated companies to operate under a single license and be subject to a single examination provided all of the affiliated company names are listed on the license. Under the act, debt buyers are required to submit license applications no later than January 1, 2022; however, a debt buyer who has filed an application with the commissioner for a collection agency license before January 1, 2022, and has a pending application thereafter, “may continue to operate without a license until the commissioner approves or denies the application.”
The provisions take effect August 1.