Notice2024-30758
Supervisory Highlights: Special Edition Student Lending
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
December 26, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is issuing its thirty sixth edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 89 Issue 247 (Thursday, December 26, 2024)</title>
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[Federal Register Volume 89, Number 247 (Thursday, December 26, 2024)]
[Notices]
[Pages 105013-105019]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-30758]
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CONSUMER FINANCIAL PROTECTION BUREAU
Supervisory Highlights: Special Edition Student Lending
AGENCY: Consumer Financial Protection Bureau.
ACTION: Supervisory highlights.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
issuing its thirty sixth edition of Supervisory Highlights.
DATES: The findings in this edition of Supervisory Highlights focus
significant findings across the entire student loan market and cover
select examinations that were generally completed in 2024.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at
(202) 435-7449. If you require this document in an alternative
electronic format, please contact <a href="/cdn-cgi/l/email-protection#55161305170a1436363026263c373c393c212c15363325377b323a23"><span class="__cf_email__" data-cfemail="c6858096849987a5a5a3b5b5afa4afaaafb2bf86a5a0b6a4e8a1a9b0">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
Student loans represent the second-largest form of U.S. consumer
debt at around $1.77 trillion in total outstanding balances. While
Federal student loans comprise the vast majority of the student lending
market, private student loans present notable risks. The refinance
market, for example, may offer certain benefits, but refinancing or
consolidating Federal loans through a private lender results in the
loss of important Federal protections. And institutional lending
products--private loans made by the borrower's school directly to the
student--warrant special attention because of the uniquely close
relationship between student and school. Additionally, the terms of
private student loans are not standardized, and examiners have found
certain loan terms problematic for consumers. Because of these
substantial risks, the Consumer Financial Protection Bureau (CFPB) is
actively engaged in vigorous oversight of all areas of the student loan
market to ensure that entities comply with Federal consumer financial
laws, including the Consumer Financial Protection Act (CFPA),\1\ the
Electronic Fund Transfer Act and its implementing regulation,
Regulation E,\2\ and the Truth in Lending Act and its implementing
regulation, Regulation Z.\3\
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\1\ 12 U.S.C. 5481 et seq.
\2\ 15 U.S.C. 1693, et seq.; 12 CFR part 1005, et seq.
\3\ 15 U.S.C. 1601, et seq.; 12 CFR part 1026, et seq.
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This edition of Supervisory Highlights focuses on significant
findings across the entire student loan market. The first group of
findings relates to the refinance market. Examiners identified abusive
misleading statements regarding loss of Federal benefits as well as
regulatory violations in connection with the refinancing and
consolidation of loans. The second group involves the offering by
private lenders of illusory benefits, including unemployment and
disability protections as well as rate reductions for autopay. The
third group involves noteholder liability for claims of school
misconduct. Examiners identified violations related to private student
loan servicers' treatment of borrowers whose loan contracts have
provisions allowing them to assert any claims and defenses they have
against their school, such as for fraud, against the subsequent
noteholder. The fourth group of findings involves illegal collection
tactics, such as contract provisions allowing schools
[[Page 105014]]
to withhold academic transcripts of delinquent borrowers.
The fifth and last group of findings relate to the servicing of
Federal student loans. For over three years, payments on these loans
were paused due to the COVID-19 pandemic. During that time,
approximately 20 million borrower accounts were transferred to
different Federal student loan servicers. In September 2023, interest
began accruing on nearly $1.5 trillion in federally owned loans owed by
approximately 43 million consumers.
In October 2023, loan payment obligations resumed for around 28
million borrowers--including more than 6 million entering repayment for
the first time. Many of these borrowers applied for income-driven
repayment (IDR) plans to reduce their monthly payment amounts. Our
recent supervisory work identified significant and pervasive violations
related to servicers' handling of the return to repayment. These
violations include failing to provide appropriate avenues for consumers
to communicate with their servicers, sending deceptive billing
statements, withdrawing excess amounts from borrowers' deposit
accounts, and numerous problems related to processing of IDR
applications.
To maintain the anonymity of the supervised institutions discussed
in Supervisory Highlights, references to institutions generally are in
the plural and the related findings may pertain to one or more
institutions.\4\ We invite readers with questions or comments about
Supervisory Highlights to contact us at <a href="/cdn-cgi/l/email-protection#1d5e5b4d5f424e686d786f6b746e7472735d7e7b6d7f337a726b"><span class="__cf_email__" data-cfemail="32717462706d6147425740445b415b5d5c72515442501c555d44">[email protected]</span></a>.
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\4\ If a supervisory matter is referred to the Office of
Enforcement, Enforcement may cite additional violations based on
these facts or uncover additional information that could impact the
conclusion as to what violations may exist.
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2. Supervisory Observations
2.1 Refining Student Loans
Refinancing student loans poses risks for borrowers, including loss
of benefits tied to Federal student loans. In addition to other
benefits, Federal student loans offer access to various forgiveness
programs. For example, under the Public Service Loan Forgiveness
program, eligible borrowers can have their remaining loan balance
forgiven after making 120 qualifying loan payments on an IDR plan,
while working for a qualifying public service employer. Under the
Teacher Loan Forgiveness program, teachers may be eligible to have a
portion of their loans forgiven after working for five years in low-
income public schools. When borrowers refinance or consolidate these
loans through a private lender, they lose these benefits and
protections.
2.1.1 Deceptive Representations About Eligibility for Forgiveness Upon
Refinancing Federal Student Loans
Examiners found that private lenders offering to refinance Federal
student loans engaged in deceptive acts or practices where their
marketing and disclosure materials give a misleading net impression
that refinancing Federal loans might not result in forfeiting access to
Federal forgiveness programs, when, in fact, it was a certainty. A
representation, omission, act, or practice is deceptive when: (1) the
representation, omission, act, or practice misleads or is likely to
mislead the consumer; (2) the consumer's interpretation of the
representation, omission, act or practice is reasonable under the
circumstances; and (3) the misleading representation, omission, act or
practice is material.\5\
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\5\ 12 U.S.C. 5531.
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Examiners observed that the lenders repeatedly disclosed some of
the benefits borrowers would lose access to if they refinanced their
Federal loans into private loans, but omitted the fact that borrowers
would lose access to forgiveness plans. In one instance, the lenders
said borrowers ``may'' lose access to Federal benefits, despite it
being a certainty. In phone calls about refinancing Federal loans, the
lenders scripted responses to direct questions about loan forgiveness
that omitted the loss of forgiveness benefits upon refinance.
These statements were misleading because they created the net
impression that borrowers could refinance their loans with the lenders
without losing access to forgiveness programs, which is false. The
borrowers' interpretation of the representations was reasonable, as
borrowers are entitled to accept statements on the lenders' website and
the lenders' responses to direct questions in assessing the pros and
cons of refinancing Federal student loans. The representations are
material as they may affect borrowers' decisions regarding whether to
refinance their Federal loans.
2.1.2 Abusive Practices in Connection With the Loss of Forgiveness
Benefits Upon Refinancing Federal Student Loans
Examiners also found instances of abusive acts or practices by
private lenders in connection with misleading statements about Federal
forgiveness in connection with refinancing Federal loans by private
lenders. An abusive act or practice: (1) materially interferes with the
ability of a consumer to understand a term or condition of a consumer
financial product or service; or (2) takes unreasonable advantage of: a
lack of understanding on the part of the consumer of the material
risks, costs or conditions of the product or service; the ability of
the consumer to protect the interest of the consumer in selecting or
using a financial product or service; or the reasonable reliance by the
consumer on a covered person to act in the interest of the consumer.\6\
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\6\ 12 U.S.C. 5535(a)(1)(B). See also CFPB, Policy Statement on
Abusive Acts or Practices (Apr. 3, 2023), <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/#1">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/#1</a>.
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Examiners found that the lenders engaged in abusive acts or
practices by taking unreasonable advantage of a lack of understanding
on the part of borrowers regarding the material risks, costs, or
conditions of refinancing Federal loans into private loans. The lenders
took unreasonable advantage of borrowers where their representations
misled borrowers about the Federal benefits at risk when borrowers
refinance their student loans. Here, the lenders created the impression
that refinancing Federal loans may not result in forfeiting access to
Federal forgiveness programs.
The lenders profited from borrowers paying the full amount of their
loans, when the borrowers otherwise potentially could have had some or
all of those loans forgiven. They also gained customers who might not
otherwise refinance their loans with the lenders, expanding their
market share. And they increased loan amounts when borrowers
consolidated Federal loans with private loans, which increased their
revenue from interest on the loans. Borrower complaints evidenced a
lack of understanding about the impact on eligibility for loan
forgiveness and confusion based on the lenders' representations.
2.1.3 Failure To Re-Amortize Consolidated Loans After Borrowers'
Requests To Exclude Certain Loans
Examiners found that student loan originators engaged in unfair
acts or practices by failing to re-amortize or offer to re-amortize a
consolidated refinanced student loan when the borrower requested a
modification to the loan package to exclude certain loans during the
three-day cancellation period. An act or practice is unfair when: (1)
it causes or is likely to cause substantial injury to consumers; (2)
the injury is not reasonably avoidable by
[[Page 105015]]
consumers; and (3) the injury is not outweighed by countervailing
benefits to consumers or to competition.\7\ When seeking to refinance
private student loans, borrowers noticed that lenders erroneously
included Federal student loans in the refinance package and requested,
within the applicable three-day cancellation period, to have the
Federal loans excluded. Lenders failed to exclude the loans from the
refinance package before the new loan funded and the lenders had paid
off the Federal loans. Upon realizing that they should not have
included the Federal loans in the package, the lenders subsequently
removed the Federal loans and recouped the payoff amounts. But rather
than re-amortizing or offering to re-amortize the refinanced loan, they
merely reduced the principal. This tactic lowered the amount owed and
shortened the loan term but did not change the monthly payment.
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\7\ 12 U.S.C. 5531 and 5536.
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This practice was unfair because it caused or was likely to cause
substantial injury to borrowers because they were charged monthly
payments larger than what they would have been charged had the Federal
loans not been included and not given a choice about how to allocate
their funds. Borrowers could not reasonably avoid the injuries because
they could not control lenders' decisions not to re-amortize or offer
to re-amortize the loans. The injuries outweighed any countervailing
benefits to consumers or competition.
2.1.4 Failure To Cancel Loans During Three-Day Cancelation Period
Examiners found that student loan originators violated Regulation Z
\8\ by not allowing borrowers to cancel private education loans without
penalty before midnight of the third business day following the date on
which the borrower received the disclosures as required.\9\
Specifically, lenders violated the regulation by failing to cancel the
refinancing of Federal loans as requested by borrowers within the
three-day cancellation period.
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\8\ 12 CFR 1026.48(d).
\9\ 12 CFR 1026.47(c).
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2.2 Illusory Benefits Offered by Private Lenders
2.2.1 Unfair Denial of Disability Benefits
Examiners found that lenders engaged in unfair acts or practices by
denying borrowers' applications for discharge based on Total and
Permanent Disability for reasons other than those identified in the
loan note where they otherwise satisfied the criteria for discharge
based on Total and Permanent Disability.
Examiners observed that borrowers' loan notes provided for Total
and Permanent Disability discharge based on the criterion that
borrowers were unable to engage in any substantial gainful activity due
to a physical or mental impairment of a certain type. The lenders
denied applications for Total and Permanent Disability discharges based
on criteria not included in the loan note.
This practice caused substantial injury because borrowers were
required to continue to make loan payments on loans that should have
been discharged according to the contract terms. Borrowers may be
required to pay down loan balances of thousands of dollars each. The
injury is not reasonably avoidable because borrowers have no way to
prevent the lenders from applying additional criteria to their
discharge applications. The injury does not outweigh any countervailing
benefits to consumers or competition.
2.2.2 Deceptive Misrepresentations Regarding Autopay Discount
Examiners found that private student lenders engaged in deceptive
acts or practices by inaccurately representing that their autopay
discount was not available to borrowers with certain types of loans
when in fact they were eligible.
The lenders had policies providing qualifying borrowers with a
discount of 0.25% on their student loan interest rate if they sign up
for autopay. On their online borrower portals, the lenders represented
that certain types of loans did not qualify for an autopay rate
reduction, just before a link to enroll in autopay. However, these
types of loans had become eligible for the autopay discount five years
earlier.
This representation misled or was likely to mislead borrowers, as
it misstated that certain borrowers were not eligible for the autopay
discount when they were, in fact, eligible. Borrowers' interpretation
of the representation was reasonable, as it is reasonable for borrowers
to take at face value an express claim on their lender's portal
regarding its policies for autopay eligibility. The representation is
material, as borrowers often enroll in autopay to receive the discount
on their student loan interest rate. Some borrowers who believe they
are ineligible for the autopay rate reduction because they accepted the
lenders' misleading misrepresentations may not sign up for autopay, and
they may pay more in interest than they would have otherwise.
2.2.3 Illusory Unemployment Benefits
Private student loan originators advertised on their websites and
on phone calls with borrowers that private student loan borrowers could
suspend their loan payments if they lost their job. Examiners found
that the lenders continued to advertise this as an attribute of their
private student loans, even after the lenders unilaterally replaced the
unemployment program with a less generous one that only allowed
borrowers to reduce their payments during unemployment, but only if the
borrower met new ability-to-pay eligibility criteria.
Examiners identified two law violations related to advertising this
unemployment program, unilaterally eliminating the benefit, and then
failing to honor it.
Examiners found that entities offering private student loans
engaged in deceptive acts or practices by falsely advertising that
private student loan borrowers could suspend their payments for short
periods of unemployment when, in fact, the lenders no longer allowed
borrowers to do so.
The statements were likely to mislead reasonable borrowers into
believing that suspension of the payments would be available if they
lost their job. In fact, after a point, the lenders no longer offered
this benefit. Borrowers may reasonably take the websites and lenders'
statements at face value regarding the ability to suspend their
payments during unemployment. These representations were material
because they were likely to affect borrowers' choice to originate or
refinance their student loans based on the availability of the
advertised benefit.
Examiners also found that private student loan originators engaged
in abusive acts or practices by taking unreasonable advantage of
borrowers' inability to protect their own interest in selecting or
using a consumer financial product or service by prominently
advertising unemployment protections and then eliminating or not
providing those protections after the borrower had already elected the
loans.
Lenders took unreasonable advantage of borrowers by promoting the
ability to suspend payments for periods of unemployment to attract
borrowers, and then reducing costs by significantly rolling back the
unemployment protections. Some private student loan borrowers were
unable to protect their interests because the lenders did not eliminate
the unemployment benefit until after the borrower had taken out the
loan. Once they were unemployed,
[[Page 105016]]
borrowers also had few options to refinance their private loans with
another lender. And the borrowers had no control over the lenders'
decision to discontinue the protections.
2.3 Noteholder Liability Related to Claims of School Misconduct
Student loan borrowers sometimes allege their schools fraudulently
induced them to enroll and to secure private student loans to finance
their education. These borrowers may be able to discharge certain loans
due to their school's misconduct under numerous State and Federal laws
and protections. For example, the Borrower-Defense-to-Repayment
regulation, 34 CFR 685.400 et seq, allows borrowers to challenge the
validity of Federal loans that they believe were originated due to
school misconduct. If the borrower is successful, the borrowers'
Federal student loans are completely expunged and any amounts they paid
on those loans refunded. As of May 1, 2024, the U.S. Department of
Education (DOE) had discharged $28.7 billion dollars for 1.6 million
borrowers who were cheated by their schools, saw their institutions
precipitously close, or are covered by related court settlements.\10\
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\10\ Press Release, DOE, Biden-Harris Administration Approves
$6.1 Billion Group Student Loan Discharge for 317,000 Borrowers Who
Attended The Art Institutes (May 1, 2024), (<a href="https://www.ed.gov/about/news/press-release/biden-harris-administration-approves-61-billion-group-student-loan">https://www.ed.gov/about/news/press-release/biden-harris-administration-approves-61-billion-group-student-loan</a>).
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The Borrower-Defense-to-Repayment regulation does not apply to
private student loans. However, other legal protections may allow
borrowers to seek to have their private student loans discharged based
on school misconduct. Many private student loans include a contractual
guarantee in the promissory note--which may be required by the Federal
Trade Commission's Holder-in-Due-Course Rule \11\--that the borrower
can assert against any subsequent loan holder any claim the borrower
has against their school. In other words, provisions in borrowers'
private student loan contracts often ensure that a borrower can assert
school misconduct as a basis for loan discharge regardless of who holds
the loan.
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\11\ 16 CFR 433.2.
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Examiners identified two violations related to private student loan
servicers' treatment of borrowers whose loan contracts have provisions
allowing them to challenge their loans against subsequent noteholders
and who allege misconduct by their schools.
2.3.1 Misleading Borrowers About Their Contractual Rights To Challenge
Fraudulent Loans
Examiners reviewed private student loan servicers' practices in
connection with borrower contracts that contained language stating that
any holder of the contract is subject to all claims and defenses that
the borrower would have been able to assert against their school. They
found that the servicers engaged in deceptive acts or practices when
they implied to these borrowers that they could not challenge their
loans using claims or defenses they could have had against their
schools. In email responses to borrower complaints (both those made
directly to servicers and to complaints referred by the CFPB),
servicers stated that there was no discharge program available to these
borrowers. In fact, provisions in their loan notes guaranteed their
right to allege fraud by their schools as a claim or defense against
repayment.
This statement was likely to mislead borrowers by implying that
they could not challenge their loans using claims or defenses they
could have had against their school. The borrowers' interpretation of
the statement to mean that they had no avenues for challenging their
private loans based on their school's conduct is reasonable under the
circumstances, as they are entitled to accept that their servicers are
providing accurate information about the borrower's rights. The
servicers' representations were material because they likely affected
the borrowers' decisions regarding whether to pursue their claims.
2.3.2 Failure To Consider Borrowers' Allegations of Fraud in
Contravention of Contract
Examiners found that private student loan servicers engaged in an
unfair act or practice by failing to consider most borrowers'
challenges to their loans related to school misconduct, using claims or
defenses they could have had against their schools. The servicers
lacked policies and procedures to effectively consider most borrowers'
challenges regarding their schools and failed to do so even though
provisions in the borrowers' loan notes guaranteed the borrowers' right
to assert such challenges. Servicers considered borrowers' claims
against their schools only if the borrowers retained attorneys.
This practice resulted in substantial injury to consumers because
it caused borrowers to forgo further attempts to challenge their loans
or required them to incur the costs necessary to obtain an attorney.
Borrowers could not reasonably avoid the injury because they could not
know that the servicer would disregard contractual provisions in their
loan notes providing that any holder of the contract is subject to all
claims and defenses that the borrower would have been able to assert
against the seller. The injury is not outweighed by any countervailing
benefits to consumers or competition.
2.3.3 Corrective Actions--Process for Considering Borrower Claims of
School Misconduct
To address these UDAAPs related to noteholder liability,
Supervision directed the private student loan lenders and servicers to
maintain and publicize a robust process to consider borrower claims of
misconduct by their school. More specifically, Supervision directed the
entities to implement a claims-review process that is not unduly
burdensome for the borrowers and gives due deference to findings of the
DOE or courts regarding claims of misconduct, fraud, or
misrepresentation by a borrower's school; that is public and easily
accessible; and that ensures any denials are individualized and
detailed. With respect to private student loans where the entity had
actual notice that the DOE or a court had made a finding of fraud,
misconduct, or misrepresentation by the school that resulted in
discharge of loans to attend that school, Supervision further directed
the entities to suspend collections until they provided the borrower
with a detailed reason why their private loans were not the result of
similar misconduct.
2.4 Illegal Loan Collection Tactics
2.4.1 False Threat of Legal Action
Examiners found that private student loan servicers engaged in
deceptive acts or practices when they included language in collection
letters that gave the misleading impression that the servicers would
take legal action against borrowers who fell behind on loan payments.
Servicers sent letters to borrowers that included language about
enforcing collection of debts and adding legal costs to borrowers'
debts if the borrowers did not pay. In fact, the servicers had no
practice of bringing legal actions and incurred no legal costs
associated with pursuing past due amounts during the exam period.
Instead, the servicers returned severely delinquent accounts back to
the noteholder.
This act or practice was likely to mislead borrowers because they
could reasonably understand the letters to mean that the servicer may
bring legal
[[Page 105017]]
action against borrowers when, in fact, the servicer had no policy of
bringing legal actions. This understanding is reasonable because
borrowers have no way of knowing that the servicers do not bring legal
actions to collect debts as a matter of policy. The representation is
material because it is likely to affect borrowers' decisions regarding
making payments on their debts.
In response to these findings, servicers removed the language
referencing legal actions from their letters.
2.4.2 Withholding Transcripts as a Remedy for Default
Academic transcripts are certified records of a student over their
course of study. They provide information about courses taken, courses
completed, grades, credits earned, certain credentials like majors or
minors, and graduation status. Transcripts provide essential
documentation of consumers' post-secondary education histories. When
requested, institutions provide, or authorize third parties to provide,
official transcripts to prospective employers, State licensing or
credentialing agencies, and other post-secondary institutions.
Employers or licensing agencies require official transcripts for a
range of reasons. For example, some employers may require transcripts
to confirm the accuracy of applicants' resumes, and licensing
authorities use them to demonstrate that applicants obtained the
requisite training.
Consumers also need transcripts when applying to other post-
secondary institutions as transfer students or for higher level degrees
or credentials. Students may need to demonstrate their completed
coursework to obtain credit for that education and progress toward a
terminal degree or credential. Moreover, even when consumers do not
need or wish to receive credit for any prior education, some post-
secondary institutions still require the consumer to provide official
transcripts prior to enrollment.
During examinations of entities that created and distributed model
retail installment contracts to schools, examiners identified contracts
that contained language that allowed for the withholding of transcripts
in situations where student borrowers were in default on their
education loans. The model contracts contained language allowing
educational institutions, as a remedy for default, to ``withhold [the
student]'s transcripts [or] course completion certificates.'' Schools
used these model contracts to originate institutional loans and
reassigned the loans back to the entities for servicing.
Examiners found that the entities risked engaging in an abusive act
or practice by taking unreasonable advantage of consumers' inability to
protect their interests when they created and distributed to their
clients' contracts for institutional student loans that contained
language allowing, as a remedy for default, unconditional withholding
of official transcripts as a blanket policy.\12\ The entities risked
gaining unreasonable advantage from the act or practice of creating
contracts that permitted educational institutions to engage in blanket
withholding of transcripts. Even though the entities did not directly
benefit from the contract provision, the provision enabled their
partner schools to engage in strong-arm collection tactics and could
provide them with an advantage by boosting their market share or
revenue. Borrowers were unable to protect their interests because at
the time they needed an official transcript for a job, credential, or
access to continued education, they were unable to protect themselves
by seeking another education elsewhere or seeking credit elsewhere,
since other lenders were unlikely to provide credit to borrowers of
these schools who are in this position. Nor could the borrowers have
protected themselves by choosing an alternative provider at the time of
origination of the loan, as they cannot bargain over transcript
withholding provisions, and borrowers are unlikely to select a school
or loan based on these provisions, as opposed to factors relating to
the education itself.
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\12\ Examiners previously found that institutions engaged in
abusive acts or practices by withholding official transcripts as a
blanket policy in conjunction with the extension so credit. See
CFPB, Supervisory Highlights, Issue 27 (Fall 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf</a>.
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In response to these findings, the entities removed the contract
language and advised their client schools to cease utilizing the
contract provision.
2.4.3 Preventing Access to Education as a Remedy of Default
Examiners conducted reviews of entities that created and
distributed model retail installment contracts to schools who then
originated institutional loans and then assigned the loans to the
entities for servicing. The model contracts required repayment during
the in-school period and contained language allowing, as a remedy for
default, educational institutions to ``deny Buyer access to classes,
computers, final exams, and other education services at the School,
terminate or suspend Buyer's enrollment, deny or cancel Buyer's
registration for additional classes, . . . and take other similar
actions affecting Buyer's status as a student at the School.''
Examiners found that entities risked engaging in unfair acts or
practices by distributing to their clients' contracts for institutional
student loans which required repayment during the in-school period that
contain language stating that a remedy for default is to deny students
access to classes or other services related to ongoing education. This
language created a risk of injury to consumers because if they
defaulted, then schools could deny them access to education programs
that consumers had already paid for, including potentially with other
loans or savings. Additionally, since jobs that require advanced
education generally pay more, this practice reduces the chances that
consumers can earn their degree, and in turn reduces consumers'
potential earnings, making repayment of the underlying debt more
difficult. Borrowers are unlikely to select a school or loan based on
these provisions, as opposed to factors relating to the education
itself. Consumers generally do not expect to default, do not consider
consequences of default when making product decisions, and cannot
bargain over contractual terms. Once the consumer defaults, there is no
way to avoid the injury of missing classes and other education benefits
because the school controls access to classes. The injury caused by the
practices were not outweighed by countervailing benefits to consumers
or competition.
In response to these findings, the entities removed the contract
language and advised their client schools to cease utilizing the
contract provision.
2.4.4 Debiting Funds Early
Many student-loan borrowers make payments through auto debits,
known as electronic fund transfers. Under Regulation E, the servicer,
or designated payee, must obtain written authorization before
transferring funds from consumers' accounts.\13\ The written
authorization specifies the date the payment will be withdrawn.
Examiners found that servicers violated this provision when they
obtained written authorizations to withdraw funds on a specified date
but instead withdrew the amounts one to three days prior to the date in
the written authorization. Because the funds were
[[Page 105018]]
not withdrawn on the date in the written authorization, the payee did
not have written authorization for the transfers and violated
Regulation E. In response to these findings, servicers are revising
their policies and developing a remediation plan.
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\13\ 12 CFR 1005.10(b).
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2.4.5 Failing To Notify Consumers of Changed Preauthorized Electronic
Funds Transfer Amounts
Examiners continue to identify issues with failures to notify
consumers of preauthorized electronic fund transfers that vary in
amount.\14\ Consumers entered into agreements to withdraw the monthly
payment amount, and the servicer took the monthly payment amount, but
did not inform consumers when that amount had changed from the previous
month. Regulation E requires the designated payee of a preauthorized
electronic fund transfer from a consumer's account to provide the
consumer with written notice of the amount and date of the transfer at
least 10 days before the scheduled transfer date if the amount will
vary from the previous transfer under the same authorization or from
the preauthorized amount.\15\ Examiners found that servicers violated
this provision when they did not provide written notices to consumers
before withdrawing an amount that exceeded the previous transfer under
the same authorization. In response to these findings, servicers are
revising their policies and developing a remediation plan.
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\14\ CFPB, Supervisory Highlights, Issue 34 Summer 2024,<a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-34-summer-2024/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-34-summer-2024/</a>.
\15\ 12 CFR 1005.10(d)(1).
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2.5 Federal Student Loan Servicing During the Return to Repayment
2.5.1 Extended Failure To Provide Adequate Avenues for Borrowers To
Manage Key Loan Issues by Phone
Federal student loan servicers operate call centers through which
they offer borrowers various services to address key loan issues by
phone. These issues include resolving disputes, inquiring about account
status, enrolling in Federal repayment programs, and making loan
payments. Despite purporting to offer the ability to address key loan
issues by phone, servicers failed to provide, for extended time
periods, adequate avenues for borrowers to manage key aspects of their
loans over the phone.
During the return to repayment in the fall of 2023, examiners
reviewed metrics the servicers provided on a biweekly basis regarding
how they handled incoming calls from student loan borrowers. These
metrics covered average call-hold time, abandonment rate, callback
speed, and call-center staffing levels. In this period, borrowers
calling their servicers faced key average call hold times of 40-58
minutes. Average hold times exceeded 30 minutes during 57-91 percent of
operating hours. And more than 41 percent of borrowers abandoned their
calls before connecting with an agent. The periods of unavailability
lasted multiple weeks.
Examiners concluded that that a lack of oversight contributed to
these failures. Servicers' boards did not provide for the appropriate
staffing levels to handle the influx of calls generated from the
Federal return to repayment process.
Supervision found that the servicers' failures to provide, for an
extended period, an adequate avenue for borrowers to timely resolve
disputes, inquire about account status, or in enroll in Federal
repayment programs, when they offered the option of addressing these
issues by phone amounted to unfair acts or practices in violation of 12
U.S.C. 5531 and 5536. The failures caused or were likely to cause
borrowers substantial injury by wasting time, delaying information, and
delaying their ability to apply for benefits, which can result in
increased payment amounts or delayed loan forgiveness. Borrowers cannot
avoid this injury because they do not choose their loan servicer and
have no control over its level of service, and other methods of seeking
assistance like online account access or callbacks were unavailable or
ineffective. And they cannot resolve individualized issues through
other channels such as online accounts. This injury is not outweighed
by any countervailing benefits to borrowers or competition.
Supervision also found that these failures violated the CFPA's
prohibition against abusive acts or practices.\16\ The servicers took
unreasonable advantage of the borrowers' inability to protect their own
interests. Borrowers could not protect their own interests because they
do not choose their loan servicer, nor can they control their
servicer's level of service. The servicers' conduct prevented borrowers
attempting to protect their own interests in timely resolving disputes
or in accessing benefit programs by reaching out to their servicer--as
instructed--from actually speaking to a representative who could help
them. Many borrowers also could not protect their interests in avoiding
extensive hold times because they could not resolve some of their
individualized issues through alternative channels, such as online
accounts. The servicers gained an unreasonable advantage as they saved
on operational expenses, including from understaffing their call
centers, which resulted in extensive wait times that many borrowers
could not avoid.
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\16\ 12 U.S.C. 5531 and 5536
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In response to these findings, Supervision directed servicers to
maintain adequate avenues for borrowers to timely resolve disputes,
inquire about account status, and enroll in Federal repayment programs
by phone (including by ensuring against unreasonably long average call-
hold times and unreasonably high call-drop rates for any extended
period); develop and maintain plans to address reasonably foreseeable
spikes in borrower communications demand to ensure that, regardless of
demand, borrowers consistently have adequate avenues to manage their
loans; identify the borrowers who attempted to call their servicers,
waited more than an hour before abandoning their call, and within three
months took significant action on their loan; and provide information
on borrower remediation.
2.5.2 Deceptive Billing Statements
Examiners found that Federal student loan servicers engaged in a
deceptive act or practice by providing borrowers with inaccurate
payment amounts and due dates on billing statements and disclosures.
Federal student loan servicers provided borrowers inaccurate
monthly payment amounts due to both system weaknesses and
miscalculations. Some of the miscalculations were due to the servicers
misapplying Federal poverty guidelines, using the wrong family size or
income, or failing to include spousal debt. Examiners also reviewed
billing statements or disclosures with incorrect payment due dates.
These included providing borrowers incorrect due dates prior to October
1, 2023, the end of the Federal student loan payment pause, and giving
repayment dates to borrowers with pending and approved borrower defense
applications. Borrowers with pending or approved borrower defense
applications should have been in a forbearance until the discharge or
decision process was completed.
These misrepresentations were likely to mislead borrowers about the
amount they owed and when their payment was due. Borrowers reasonably
interpreted billing statements and disclosures from their Federal
student loan servicers as an accurate and reliable source of
[[Page 105019]]
information on the amount due and due date for their payments. Express
misrepresentations or misrepresentations regarding central
characteristics such as cost or payment due dates are material.
2.5.3 Debiting Unauthorized Amounts
Regulation E requires the designated payee to obtain written
authorization before transferring funds from consumers' accounts.\17\
Examiners observed that student loan servicers obtained authorizations
that allowed them to withdraw the monthly payment amount, but the
servicers then withdrew amounts that exceeded the written payment
amount, in some cases instead withdrawing the entire outstanding loan
balance. Because the authorizations allowed the servicers to withdraw
only the monthly payment amounts, the preauthorized electronic funds
transfers were not authorized in writing and therefore violated
Regulation E.
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\17\ 12 CFR 1005.10(b).
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In other instances, consumers signed authorizations that allowed
servicers to withdraw monthly payment amounts for certain loans from
one deposit account and monthly payment amounts for other loans from a
different deposit account. The servicers then withdrew payments for all
the loans from one of the two deposit accounts. Because the
authorization only allowed the servicers to withdraw the monthly
payment amounts for specific loans and they instead withdrew monthly
payment amounts for other loans, the preauthorized electronic funds
transfers were not authorized in writing and therefore violated
Regulation E.
2.5.4 Excessive Delays in Processing of Applications for Income-Driven
Repayment Plans
Federal student loan borrowers are eligible for a number of
repayment plans that base monthly payments on their income and family
size; these plans are called IDR plans. To enroll in IDR plans,
consumers must submit applications to their servicers who process the
applications.
Examiners found that servicers engaged in unfair acts or practices
when they caused consumers to experience excessive delays in processing
times for IDR applications. In many reviewed files, it took more than
90 calendar days for servicers to process the IDR applications. These
delays caused or were likely to cause substantial injury as interest
continued to accrue while servicers processed IDR applications, so
excessive delays likely resulted in unnecessary accrued interest. In
addition, the delays may have prevented borrowers from making payments
which count towards loan forgiveness. These delays also caused
borrowers considerable frustration and wasted time as they repeatedly
tried to obtain information from servicers about the status of their
applications. Consumers could not reasonably avoid the injury because
they do not choose their servicer and have no control of how long it
takes servicers to review and evaluate borrowers' applications. The
injury to consumers was not outweighed by countervailing benefits to
consumers or to competition.
2.5.5 Improper Denials of Applications for Income-Driven Repayment
Examiners found that servicers engaged in unfair acts or practices
when they improperly denied consumers' IDR applications. Examiners
found that servicers denied consumers' applications for failing to
provide sufficient income documentation despite consumers providing
sufficient documentation of income. Examiners also found that servicers
denied consumers' applications because they had ineligible loan types,
when in fact the consumers had eligible loans. These improper denials
caused or were likely to cause substantial injury because consumers who
are improperly denied paid or were at risk of paying higher monthly
payments. Additionally, some consumers may have spent time and
resources addressing the denials. Consumers could not reasonably avoid
the injury because servicers are responsible for processing IDR
applications in accordance with processing requirements and consumers
do not choose their servicers. And the injury to consumers is not
outweighed by countervailing benefits to consumers or competition.
2.5.6 Providing Inaccurate Denial Reasons in Response to Income-Driven-
Repayment Applications
Examiners found that servicers engaged in deceptive acts or
practices by providing inaccurate denial reasons to consumers who
applied for IDR plans. The denial letters misled or were likely to
mislead borrowers as the denial reasons were not accurate, and in
multiple cases, erroneously denied eligible consumers. It is reasonable
for borrowers to expect servicers to properly evaluate their
eligibility for IDR plans and for denial letters to accurately explain
the reasons why servicers denied their IDR applications. The misleading
representations were material as the inaccurate denial reasons were
likely to influence borrower choices with respect to applying for IDR
plans by, for example, leading to borrowers' confusion about
eligibility criteria and discouraging borrowers from re-applying for an
IDR plan by telling them to find and provide unnecessary additional
information in order to qualify.
2.5.7 Failure To Advise Consumers of the Option to Verbally Provide
Income in Connection With Income-Driven-Repayment Applications
During the COVID-19 pandemic and through February 29, 2024, the
Department of Education allowed consumers to apply for IDR plans by
providing an attestation of income over the phone or in writing, this
process was referred to as self-certification.
Examiners found that servicers engaged in unfair acts or practices
by failing to advise consumers that they could self-certify their
income when applying for an IDR plan. Consumers contacted their
servicers to discuss their pending IDR applications that were delayed
due to missing income documentation, but the servicer representatives
did not advise consumers that they could provide the missing
information by making an oral attestation during the call. These acts
or practices caused or were likely to cause substantial injury because
it caused servicers to deny consumers' applications, preventing lower
payment amounts, potential interest subsidies, and credit towards loan
forgiveness. Consumers could not avoid this injury because they do not
choose their servicers and relied on the servicers to provide relevant
information regarding IDR applications. The injury to consumers is not
outweighed by countervailing benefits to consumers or competition.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-30758 Filed 12-23-24; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on December 26, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.