Rule2023-06002
Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 23, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) is issuing this Compliance Bulletin and Policy Guidance (Bulletin) to address the treatment of certain private student loans (student loans) following bankruptcy discharge. In order to secure a discharge of "qualified education loans" in bankruptcy, borrowers must demonstrate that the loans would impose an undue hardship if not discharged. Student loans that are not "qualified education loans" (non-qualified student loans), however, are discharged under standard bankruptcy discharge orders. In recent supervisory work, CFPB examiners identified servicers that did not determine whether education loans were qualified or non-qualified. As a result, servicers improperly returned non-qualified education loans to repayment after a bankruptcy concluded and continued to bill and collect payments on the loans, even though the borrowers' bankruptcy discharges released them from these debts. This conduct violated the Consumer Financial Protection Act's (CFPA's) prohibition on unfair, deceptive, or abusive acts or practices. CFPB examiners directed the servicers to cease collection of discharged loans and take remedial action, which includes conducting a multi-year lookback and issuing refunds to affected consumers. In its oversight, the CFPB will pay particular attention to servicers' practices in connection with student loans that are the subject of bankruptcy discharge orders, including whether discharged debts are being collected contrary to bankruptcy court orders.
Full Text
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<title>Federal Register, Volume 88 Issue 56 (Thursday, March 23, 2023)</title>
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[Federal Register Volume 88, Number 56 (Thursday, March 23, 2023)]
[Rules and Regulations]
[Pages 17366-17368]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-06002]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Chapter X
Bulletin 2023-01: Unfair Billing and Collection Practices After
Bankruptcy Discharges of Certain Student Loan Debts
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Compliance bulletin and policy guidance.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is issuing
this Compliance Bulletin and Policy Guidance (Bulletin) to address the
treatment of certain private student
[[Page 17367]]
loans (student loans) following bankruptcy discharge. In order to
secure a discharge of ``qualified education loans'' in bankruptcy,
borrowers must demonstrate that the loans would impose an undue
hardship if not discharged. Student loans that are not ``qualified
education loans'' (non-qualified student loans), however, are
discharged under standard bankruptcy discharge orders. In recent
supervisory work, CFPB examiners identified servicers that did not
determine whether education loans were qualified or non-qualified. As a
result, servicers improperly returned non-qualified education loans to
repayment after a bankruptcy concluded and continued to bill and
collect payments on the loans, even though the borrowers' bankruptcy
discharges released them from these debts. This conduct violated the
Consumer Financial Protection Act's (CFPA's) prohibition on unfair,
deceptive, or abusive acts or practices. CFPB examiners directed the
servicers to cease collection of discharged loans and take remedial
action, which includes conducting a multi-year lookback and issuing
refunds to affected consumers. In its oversight, the CFPB will pay
particular attention to servicers' practices in connection with student
loans that are the subject of bankruptcy discharge orders, including
whether discharged debts are being collected contrary to bankruptcy
court orders.
DATES: This bulletin is applicable on March 23, 2023.
FOR FURTHER INFORMATION CONTACT: Miya Tandon, Counsel, Office of
Supervision Policy, at 202-695-4901; Matt Liles, Senior Counsel, Office
of Supervision Policy, at 202-701-3828. If you require this document in
an alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#6625203624392705050315150f040f0a0f121f260500160448010910"><span class="__cf_email__" data-cfemail="04474254465b4567676177776d666d686d707d44676274662a636b72">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background
After a debtor files for bankruptcy, a judge issues an order of
discharge that releases a debtor from personal liability for all debts
unless they are exempted. Some types of student loans are not
discharged by general orders of discharge and receive special treatment
under section 523(a)(8) of the Bankruptcy Code. Borrowers with these
obligations must prove the debt would impose an undue hardship if not
discharged. The Bankruptcy Code identifies these debts as:
a. Loans that are made, insured, or guaranteed by a governmental
unit, or made under any program funded in whole or in part by a
governmental unit or nonprofit institution;
b. Loans that meet the definition of a ``qualified education
loan,'' as defined in section 221(d)(1) of the Internal Revenue Code of
1986; \1\ or
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\1\ 11 U.S.C. 523(a)(8).
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c. Obligations to repay funds received as an educational benefit,
scholarship, or stipend.\2\
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\2\ 11 U.S.C. 523(a)(8)(A)(ii).
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The Internal Revenue Code specifies that qualified education loans
are those that are incurred:
1. Solely to pay for the cost of attendance less scholarships or
certain other payments;
2. At institutions eligible to participate in Federal student aid
programs under Title IV of the Higher Education Act of 1965; and
3. While attending at least half-time.\3\
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\3\ 26 U.S.C. 221(d)(1).
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In practice, the majority of student loans meet one of the criteria
for special treatment under the Bankruptcy Code, and therefore, are not
discharged by a general order of discharge.\4\ Importantly, however,
some loans for educational purposes that borrowers may think of as
``private student loans'' are not exempt from the general order of
discharge,\5\ including:
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\4\ For example, the majority of student loans are Federal loans
made or insured under title IV of the Higher Education Act. See
Report of the CFPB Education Loan Ombudsman, <a href="https://files.consumerfinance.gov/f/documents/cfpb_education-loan-ombudsman_report_2022-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb_education-loan-ombudsman_report_2022-10.pdf</a> (Oct. 2022), pp. 7-8.
\5\ See, e.g., In re McDaniel, 590 B.R. 537, 545 (Bankr. D.
Colo. 2018) (noting that merely labeling a product a ``student
loan'' does not subject it to the undue hardship standard); Homaidan
v. Sallie Mae, Inc., 3 F.4th 595, 605 (2d Cir. 2021); In re
McDaniel, 973 F.3d 1083, 1092 (10th Cir. 2020); In re Crocker, 941
F.3d 206 (5th Cir. 2019), as revised (Oct. 22, 2019).
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<bullet> Loans made to attend non-Title IV schools (that is,
schools that are not permitted to process U.S. Federal student aid,
such as unaccredited schools and foreign schools); \6\
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\6\ See Crocker, 941 F.3d at 217-18 (noting that qualified
educational expenses must be used to attend an ``eligible
educational institution,'' which section 25A(f)(2) of the Internal
Revenue Code defines as eligible to participate in Title IV
programs).
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<bullet> Loans made to cover fees and living expenses incurred
while studying for the bar exam or other professional exams; \7\
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\7\ Id. (bar study loan subject to standard bankruptcy
discharge); see also In re Campbell, 547 B.R. 49, 61 (Bankr.
E.D.N.Y. 2016).
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<bullet> Loans made to cover fees, living expenses, and moving
costs associated with medical or dental residency;
<bullet> Loans made in amounts in excess of the cost of attendance;
\8\
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\8\ 26 U.S.C. 221(d)(2) (limiting a qualified educational
expense to ``the cost of attendance''); see, e.g., Homaidan, 3 F.4th
at 599 (affirming discharge of loans made in excess of the cost of
attendance).
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<bullet> Loans to students attending school less than half-time;
\9\ and
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\9\ See 26 U.S.C. 221(d)(1)(C) (defining a ``qualified education
loan'' as a loan made to an ``eligible student''); 20 U.S.C.
1091(b)(3) (defining ``eligible student'' as someone attending at
least half-time).
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<bullet> Other loans made for non-qualified higher education
expenses.\10\
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\10\ 26 U.S.C. 221(d)(1) (requiring a qualified education loan
only be used to pay ``qualified higher education expenses'').
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Any private loans in these categories are discharged by standard
bankruptcy discharge orders, just like most other unsecured consumer
debts.\11\ In addition to not fitting the definition of ``qualified
education loan,'' these loans are not made, insured, or guaranteed by a
governmental unit, and are not educational benefits, scholarships, or
stipends. The obligations at issue here are originated as loans
requiring repayment; educational benefits, scholarships, and stipends,
in contrast, are grants, where repayment is only triggered if the
student fails to meet a condition of the grant. Indeed, the Second,
Fifth, and Tenth Circuits--the only circuits to analyze the issue
fully--have held that the educational benefit exclusion does not apply
to student loans.\12\
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\11\ See, e.g., Homaidan, 3 F.4th at 605; McDaniel, 973 F.3d at
1092; Crocker, 941 F.3d at 206.
\12\ See Homaidan, 3 F.4th at 604-05; McDaniel, 973 F.3d at
1092; Crocker, 941 F.3d at 224.
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II. Unfair Acts or Practices in Handling Student Loans Post-Bankruptcy
The CFPB has authority to conduct oversight of student loan
servicing, including by citing servicers for unfair, deceptive, or
abusive acts or practices.\13\ Congress defined an unfair act or
practice as one that:
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\13\ See title X of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010)
(establishing the CFPB's authority). Under the Dodd-Frank Act, all
covered persons or service providers are prohibited from committing
unfair, deceptive, or abusive acts or practices in violation of the
Act.
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(A) Causes or is likely to cause substantial injury to consumers
which is not reasonably avoidable, and
(B) Such substantial injury is not outweighed by countervailing
benefits to consumers or to competition.\14\
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\14\ 12 U.S.C. 5531(c)(1).
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Through its supervisory activities, CFPB examiners found that
servicers of various types of student loans failed to maintain policies
or procedures for distinguishing between loan types that are discharged
in the regular course of a bankruptcy proceeding (generally, non-
qualified education loans) and loan types that require consumers to
initiate
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an adversarial proceeding and meet the ``undue hardship'' standard to
receive bankruptcy relief. Some servicers relied entirely on loan
holders to distinguish among the loans and did not determine whether
holders had in fact done so. Nor did they take any other steps to
evaluate whether or not the loans were qualified education loans.
Consequently, examiners identified accounts where servicers, following
a bankruptcy involving non-qualified education loans, resumed
collecting on loans that had been discharged by bankruptcy courts.
CFPB examiners determined that student loan servicers engaged in an
unfair act or practice, in violation of the Dodd-Frank Act, when they
resumed collection of debts that were discharged by bankruptcy
courts.\15\ The conduct caused or was likely to cause substantial
injury to consumers because the representations made to consumers in
billing statements and other collection attempts were likely to result
in consumers making payments they did not owe. In fact, CFPB examiners
also observed that after exiting bankruptcy and being presented with
bills from their student loan servicers, most borrowers made payments
toward the debts, sometimes paying thousands of dollars on discharged
debts. Since the consumers could not control the servicers' actions,
consumers could not reasonably avoid the injury. Lastly, the
substantial injury was not outweighed by countervailing benefits to
consumers or competition, as there was no value to consumers or
competition in servicers collecting debts that had already been
discharged by operation of bankruptcy court orders.
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\15\ Depending on the facts and circumstances, returning
consumers to repayment status on debts discharged in bankruptcy may
also implicate deceptive or abusive acts or practices, or other
unfair acts or practices under the CFPA, sections 1031, 1036; 12
U.S.C. 5531, 5536.
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In addition to directing the servicers to revise their policies and
procedures to prevent the collection of discharged loans, CFPB
examiners directed them to do a multi-year lookback resulting in
refunds to affected borrowers.\16\
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\16\ In addition, CFPB examiners have separately cited student
loan servicers for deceptive conduct that violates the CFPA when the
servicers misrepresented to consumers that student loans are never
dischargeable in bankruptcy or conveyed to consumers that their
loans are not dischargeable because those consumers have completed
bankruptcy. Supervisory Highlights, Fall 2014, section 2.5.5,
<a href="https://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf">https://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf</a> and Supervisory Highlights, Fall 2015,
section 2.5.3, <a href="https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf">https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf</a>.
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III. Supervision and Enforcement
The CFPB's supervisory observations and consumer complaints show
that servicers continued to make collection attempts on student loans
that were discharged through bankruptcy in many instances. This conduct
violates Federal consumer financial law.\17\ The CFPB expects servicers
to proactively identify student loans that are discharged without an
undue hardship showing and permanently cease collections following a
standard bankruptcy discharge order. The CFPB is prioritizing student
loan servicing oversight work in deploying its supervision and
enforcement resources in the coming year, including a focus on
evaluating whether lenders and servicers cease collection of student
loans once they have been discharged.\18\
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\17\ Practices of this kind might also violate State laws,
including State prohibitions on unfair or deceptive practices and
State student loan servicing statutes.
\18\ To the extent that continued attempts to collect result in
improper accrual and collection of interest on discharged education
loans, such practices may result in the provision of any report of
examination or related information identifying possible tax law
noncompliance to the Commissioner of Internal Revenue, per 12 U.S.C.
5514(b)(6).
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In its student loan servicing oversight work, the CFPB plans to pay
particular attention to:
a. Whether student loan servicers continue to collect on loans that
are discharged by a bankruptcy discharge order;
b. Whether servicers and loan holders have adequate policies and
procedures to identify loans that are discharged by a bankruptcy
discharge order and loans that require the borrower to go through an
adversarial proceeding to demonstrate that they meet the undue hardship
standard; and
c. Whether servicers provide accurate information to borrowers
about the status of their loans and the protections that bankruptcy
offers.\19\
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\19\ This list is not exhaustive. The CFPB may also scrutinize
additional practices related to discharged student loans.
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In exercising its supervisory and enforcement discretion, the CFPB
will consider the extent to which entities engage in proactive review
and remediation. For example, where servicers or loan holders identify
errors, they can expand their analysis to include a review of all
accounts exiting bankruptcy going back to their earliest available data
and provide full remediation where they wrongfully collected from any
borrower. In addition, servicers can proactively categorize loans based
on whether they can be discharged, so their policies and procedures do
not require individual determinations at the time of bankruptcy. In
future supervisory and enforcement work, the CFPB will assess
servicers' processes and determine whether necessary remediation was
adequate to compensate borrowers for the errors.
IV. Conclusion
The CFPB will continue to review closely the practices of student
loan servicers for potential unfair, deceptive, or abusive acts or
practices. Examiners will determine whether servicers of private
student loans return loans to repayment status after a standard
bankruptcy discharge has released the borrowers from these debts. The
CFPB will use all appropriate tools, including its supervisory
authority, enforcement authority, and referrals to State and other
Federal authorities where appropriate to hold entities accountable if
they engage in unfair, deceptive, or abusive acts or practices in
connection with these bankruptcy-related practices.
V. Regulatory Requirements
This is a general statement of policy under the Administrative
Procedure Act (APA). It is intended to provide information regarding
the CFPB's general plans to exercise its supervisory and enforcement
discretion for institutions under its jurisdiction and does not impose
any legal requirements on external parties, nor does it create or
confer any substantive rights on external parties that could be
enforceable in any administrative or civil proceeding. Because no
notice of proposed rulemaking is required in issuing the Bulletin, the
Regulatory Flexibility Act also does not require an initial or final
regulatory flexibility analysis. The CFPB has also determined that the
issuance of the Bulletin does not impose any new or revise any existing
recordkeeping, reporting, or disclosure requirements on covered
entities or members of the public that would be collections of
information requiring approval by the Office of Management and Budget
under the Paperwork Reduction Act.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-06002 Filed 3-22-23; 8:45 am]
BILLING CODE 4810-AM-P
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