On December 16, the Consumer Financial Protection Bureau (CFPB or Bureau) released a special edition of its Supervisory Highlights, detailing a range of activities identified by CFPB examiners across the student loan origination and servicing markets. According to the Bureau, student loans represent the second-largest form of U.S. consumer debt at more than $1.7 trillion in total outstanding balances. The Bureau has been heavily focused on student lending issues for the past several years, and this latest special edition of Supervisory Highlights underlines that focus.

Key Findings from the CFPB Report:

Student Loan Refinancing

  • Misleading Borrowers on Refinancing: Examiners found that some lenders misled borrowers about the loss of federal protections when refinancing federal loans through private lenders. This included deceptive representations about continued eligibility for loan forgiveness programs and failure to re-amortize consolidated loans upon borrower requests.
  • Failure to Cancel Loans During Three-Day Cancellation Period: Examiners found that some lenders violated Regulation Z 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 required disclosures.

Private Lending and Servicing

  • Unfair Denial of Disability Benefits: Examiners found that lenders engaged in unfair 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.
  • Deceptive Misrepresentations Regarding Autopay Discount: Some private student lenders inaccurately represented that their autopay discount was not available to borrowers with certain types of loans when, in fact, they were eligible. Specifically, the lenders had policies providing qualifying borrowers with a discount of 0.25% on their 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 when, in fact, these types of loans had become eligible for the autopay discount five years earlier.
  • Illusory Unemployment Protections: Some private student loan originators were found to have advertised that borrowers could suspend their loan payments if they lost their job, but later eliminated this benefit without informing borrowers.

Addressing School Misconduct Claims

  • Misleading Borrowers About Their Contractual Rights: Examiners found that servicers misled borrowers about their rights to challenge loans based on school misconduct, despite provisions in their loan notes guaranteeing this right (i.e., the FTC Holder Rule notice).
  • Failure to Consider Borrowers’ Allegations of Fraud: According to the Bureau, servicers failed to consider most borrowers’ challenges to their loans related to school misconduct, using claims or defenses they could have had against their schools. For example, in email responses to borrower complaints, certain servicers stated that there was no discharge program available to the borrowers when, in fact, provisions in their loan notes guaranteed the borrowers right to allege fraud by their schools as a claim or defense against repayment.
    • In response, 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 U.S. Department of Education 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.

Debt Collection Practices

  • False Threat of Legal Action: Some servicers included language in collection letters that gave the misleading impression that they would take legal action against borrowers who fell behind on loan payments, despite having no practice of doing so.
  • Withholding Transcripts as a Remedy for Default: Examiners found that some loan contracts allowed schools to withhold academic transcripts in case of default, which was deemed an abusive practice.
    • In response, the entities removed the contract language and advised their client schools to cease utilizing the contract provision.
  • Preventing Access to Education as a Remedy of Default: 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 and that contain language stating that a remedy for default is to deny students access to classes or other educational services.
    • In response, the entities removed the contract language and advised their client schools to cease utilizing the contract provision.

Federal Loan Servicing

  • Extended Failure to Provide Adequate Customer Service: Examiners found certain federal loan servicers failed to provide adequate avenues for borrowers to manage key loan issues by phone, resulting in long hold times and high call abandonment rates.
  • Deceptive Billing Statements: Examiners found some servicers provided borrowers with inaccurate payment amounts and due dates on billing statements and disclosures.
  • Debiting Unauthorized Amounts: Some servicers withdrew amounts that exceeded the written payment authorization, in violation of Regulation E.
  • Excessive Delays in Processing IDR Applications: Examiners found some servicers caused substantial injury to borrowers by excessively delaying the processing of income-driven repayment (IDR) plan applications.
  • Improper Denials of IDR Applications: Some servicers were found to have improperly denied IDR applications, causing borrowers to pay higher monthly payments.
  • Failure to Advise Consumers of Self-Certification Option: Examiners found some servicers failed to inform borrowers that they could self-certify their income when applying for IDR plans, leading to unnecessary denials.

Our Take:

A number of the themes in this edition of Supervisory Highlights are familiar from past CFPB communications — like transcript withholding or the loss of federal benefits when federal loans are refinanced into private loans. But there are a couple of newer themes here, principally in the announcement that private student loan servicers are seemingly required to implement policies to allow consumers to raise school misconduct as a defense to repayment of their loans, similar to the Department of Education’s Borrower Defense process for direct federal loans. This pronouncement seems to require private loan servicers to make discharge determinations that would normally be the subject of proof in a lawsuit, because the FTC Holder Rule does not create rights for borrowers by itself — it only provides that a borrower may raise claims or defenses against the school as a defense to repayment of the loan obligation (if the Holder Rule applies). This imposes a significant new burden on loan servicers, in our view.

We also note the finding about hold times on customer service telephone lines, and note the CFPB’s apparent view that when those hold times are lengthy, it constitutes a UDAAP violation by the servicer.