Consumer Financial Protection Bureau (CFPB)

On June 6, the Consumer Advisory Board’s twenty-two members were informed that they would no longer serve on the CAB and could not reapply for their former positions.

Through June 5, the Consumer Financial Protection Bureau had four advisory bodies: the Academic Research Council, the Community Bank Advisory Council, the Credit Union Advisory Council, and the Consumer Advisory Board. By law, the CFPB must meet twice a year with the CAB to discuss trends in the financial industry, regulations, and the impact of financial products and practices on consumers. Tellingly, the CFPB’s acting director, Mick Mulvaney, has canceled several meetings between the CFPB and its advisory groups during his short tenure.

For the CAB’s former members, the coup de grace came on June 6 when, in an afternoon call, Anthony Welcher, the Bureau’s recently hired Policy Associate Director for External Affairs, informed them that they were terminated. This move came after several members criticized Mulvaney’s leadership and implored him to keep this week’s scheduled—and just cancelled—meeting on the books.

“We’re going to start the advisory groups with sort of a new membership, to bring in these new perspectives for these new dialogues,” Welcher said on the call. “We’re going to be using the current application cycle to populate these memberships in the new groups. So we’re going to be transitioning these current advisory groups over the next few months.”

In the memo announcing the members’ terminations, the CFPB defended this “[r]evamping” as necessary to “increase high quality feedback” and mentioned plans to hold more town halls and roundtable discussions and reduce the new CAB’s ranks. As a later released statement argued, “[b]y both right-sizing its advisory councils and ramping up outreach to external groups, the Bureau will enhance its ability to hear from consumer, civil rights, and industry groups on a more regular basis.” In response to press queries, a CFPB spokesman not only denied the members’ characterization of the agency’s action—“The Bureau has not fired anyone”—but also accused these “outspoken” officials of “seem[ing] more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

On May 21, President Donald Trump signed a bill repealing the Consumer Financial Protection Bureau’s Bulletin 2013-02, a controversial bulletin addressing auto finance.  As we reported here, the House passed a resolution officially disapproving of the Bulletin in early May, following in the footsteps of the Senate, which passed the same resolution a few weeks earlier.

Bulletin 2013-02 set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in indirect automobile lending.  The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate at which an indirect lender is willing to purchase the consumer’s retail installment contract.  The Bureau expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination against protected groups, including women, African-Americans, and Hispanics.  Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to hold an indirect auto lender liable for allowing prohibited pricing differences created by a dealer’s conduct.

In March 2017, Senator Pat Toomey (R-Pa.) asked the Government Accountability Office, Congress’ investigative wing, to determine whether the Bulletin qualified as a “rule.”  The GAO concluded that the guidance did qualify as a rule, even though Bulletin 2013-02 was not legally binding.  Senators Toomey and Jerry Moran (R-Kan.) introduced a resolution to overturn the Bulletin in March 2018, a resolution which passed narrowly along party lines.  The bill fared better in the House of Representatives, passing 234 to 175.

House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) attended the signing ceremony at the White House and issued a statement hailing the measure:  “Thanks to the hard work of Republicans in Congress, today is a good day for American consumers, who would have had to pay more for their auto loans under the Bureau’s flawed guidance, and the rule of law.  Gone are the days of a rogue Bureau using its unchecked powers to sidestep due process and harm the very consumers it is charged with protecting.  I look forward to continuing to work with President Trump, Acting Director Mulvaney, and my colleagues in Congress to ensure the Bureau, as well as all other federal regulatory agencies, are held accountable for their actions and act in a transparent manner.”

On May 8, the U.S. House of Representatives passed a resolution officially disapproving Bulletin 2013-02, issued by the Consumer Financial Protection Bureau in early 2013.  The Senate passed a similar measure on April 18, meaning the resolution moves to President Trump’s desk for signature.  Though the Senate resolution passed narrowly in a party-line vote, the bill found bipartisan support in the House, passing 234 to 175.  The bill is the latest in a line of agency guidance invalidated under the Congressional Review Act (“CRA”).

The bill was initially introduced by Senator Jerry Moran (R-Kan.) in an effort to overturn Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in indirect automobile lending.  The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate at which an indirect lender is willing to purchase the consumer’s retail installment contract.  The Bureau expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination against protected groups, including women, African-Americans, and Hispanics.  Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to hold an indirect auto lender liable for allowing prohibited pricing differences created by a dealer’s conduct.

The resolution’s passage marks the likely end of the Bulletin’s checkered history.  In March 2017, Senator Pat Toomey (R-Pa.) asked the Government Accountability Office, Congress’ investigative wing, to determine whether the Bulletin qualified as a “rule.” The GAO concluded that the guidance did qualify as a rule, even though Bulletin 2013-02 is not legally binding. Specifically, the GAO found that:

The Bulletin provides information on the manner in which the CFPB plans to exercise its discretionary enforcement power. It expresses the agency’s views that certain indirect auto lending activities may trigger liability under ECOA. For example, it states that an indirect auto lender’s own markup and compensation policies may trigger liability under ECOA if they result in credit pricing disparities on a prohibited basis, such as race or national origin. It also informs indirect auto lenders that they may be liable under ECOA if a dealer’s practices result in unexplained pricing disparities on prohibited bases where the lender may have known or had reasonable notice of a dealer’s discriminatory conduct. In sum, the Bulletin advised the public prospectively of the manner in which the CFPB proposes to exercise its discretionary enforcement power and fits squarely within the Supreme Court’s definition of a statement of policy.

In conclusion, the GAO found that the Bulletin was subject to the requirements of the CRA because it served as “a general statement of policy designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies.”  Because the CFPB did not present the Bulletin for Congressional review, it was, effectively, a nullity.

President Trump is almost certain to sign the bill into law when it reaches his desk, putting the final nail into the coffin of Bulletin 2013-02.

Troutman Sanders routinely advises clients on the compliance risks posed by direct and indirect auto lending. We will continue to monitor these regulatory developments.

In a 51-47 vote on April 18, the U.S. Senate voted in favor of invalidating 2013 guidance from the Consumer Financial Protection Bureau that targeted purported discrimination in the automobile finance market.  The resolution passed on party lines, with Senator Joe Manchin (D-W.Va.) the lone Democrat to join Republicans in voting to overturn the guidance. 

As we reported here, Senator Jerry Moran (R-Kan.) introduced a resolution in March to overturn the CFPB’s highly controversial Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (ECOA) as applied to pricing in indirect automobile lending.  The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate at which an indirect lender is willing to purchase the consumer’s retail installment contract.  The Bureau expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination against protected groups, including women, AfricanAmericans, and Hispanics.  Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to hold an indirect auto lender liable for allowing prohibited pricing differences created by a dealer’s conduct. 

In March 2017, Senator Pat Toomey (R-Penn.) asked the Government Accountability Office whether the Bulletin qualified as a rule subject to Congressional review.  The GAO concluded that the Bulletin was indeed a rule and, as a result, should have been subject to Congressional review.  Based on the decision, Toomey co-sponsored with Moran the resolution to kill the guidance. 

The resolution moves now to the House of Representatives for a vote.

Under prior director Richard Cordray, the Consumer Financial Protection Bureau earned a reputation as an extremely aggressive regulator. However, since acting director Mick Mulvaney took office more than four months ago, the agency has not brought a single enforcement action.

Mulvaney has said that, in general, the CFPB will only go after egregious cases of consumer abuses. “Good cases are being brought. The bad cases are not,” he said at an event in Washington this month.

To that end, Reuters is reporting that the CFPB has decided not to file a lawsuit against a collection agency that collects on payday loans, despite the agency apparently getting the green light to move forward from former director Richard Cordray before he resigned. Cases against three other payday lending operations for engaging in illegal collection activities are also reportedly on the chopping block.

The CFPB’s new direction regarding enforcement actions was foreshadowed in January when Mulvaney, in a letter to Fed Chairwoman Janet Yellen, requested no funding for the CFPB’s second fiscal quarter budget. Mulvaney noted that the agency already had $177.1 million in its coffers — more than enough funds to cover the agency’s expenses. “Simply put, I have been assured that the funds currently in the bureau fund are sufficient for the bureau to carry out its statutory mandates for the next fiscal quarter while striving to be efficient, effective and accountable,” Mulvaney wrote in the letter. The excess funds were part of a “reserve fund” formerly maintained by Cordray. Mulvaney said he did not see a reason for the fund since the Federal Reserve has regularly supplied the money the agency needs.

Troutman Sanders LLP will continue to monitor developments regarding CFPB funding and enforcement activity.

The Supreme Court recently held that civil actions consolidated under Rule 42(a) retain their separate identities, so that a final decision in one action is immediately appealable by the losing party, even if other actions in the consolidated proceeding remain.

Consumer litigation often lends itself to consolidation under Federal Rule of Civil Procedure 42 because defendants tend to see multiple lawsuits – often filed by the same opposing counsel – on the same issue. Although it didn’t arise from a consumer lawsuit, Hall v. Hall addresses an important issue regarding finality and appeal of consolidated civil actions in federal court.

The case arises from a family dispute that found its way into the courts. Although the facts are interesting, the procedural posture of underlying case is at issue. At bottom, two cases involving a family dispute were consolidated in the United States District Court of the Virgin Islands. One of the consolidated cases reached final judgment while the other was still going through post-trial motions. The losing party immediately filed an appeal after the first final judgment order only to have the United States Court of Appeals for the Third Circuit immediately dismiss the appeal under the theory that the court lacked jurisdiction while the other case was still pending.

On further appeal, the Supreme Court reversed the Third Circuit.  Chief Justice Roberts, writing for the unanimous court, began with the premise that had the actions not been consolidated, there would be no question that the plaintiff could have appealed the ruling, which ended the litigation and triggered the entry of judgment. According to Chief Justice Roberts, the question was whether the consolidation of the cases merged them into a single case, so that the judgment in one case was interlocutory because work remained to be done in the other case.  Rejecting this notion, the Court held that consolidated cases retain their separate identities, so that a final decision in one action is immediately appealable by the losing party, even if other actions in the consolidated proceeding remain.

The court did allow that a district court could consolidate cases for “all purposes” in appropriate circumstances. However, all-purpose consolidation likely does not create a unified action, at least as it relates to a losing party being able to immediately appeal an adverse judgment.

Senator Jerry Moran (R-Kan.) recently introduced a resolution to overturn guidance promulgated by the Consumer Financial Protection Bureau in 2013. The resolution seeks to invalidate the Bureau’s guidance under the Congressional Review Act, the same statute that permitted Congress to overturn the arbitration rule. 

The guidance at issue is the CFPB’s highly controversial Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in the indirect automobile lending space. The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer’s retail installment contract. The Bureau specifically expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination. Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to examine an indirect auto lender’s ECOA liability for prohibited pricing differences created by a dealer’s pricing strategies. 

This is not the first time Bulletin 2013-02 has come under fire. In March 2017, Senator Pat Toomey (R-Pa.) asked the Government Accountability Office whether the Bulletin qualified as a rule. The GAO concluded that the Bulletin was indeed a rule and, as a result, should have been subject to Congressional review. While this likely was the death knell for the Bulletin, a formal invalidation of the guidance could occur if Moran’s resolution, co-sponsored by Toomey, is successful. 

Troutman Sanders routinely advises clients on the compliance risks posed by direct and indirect auto lending. We will continue to monitor these regulatory developments.

On June 9, 2017, under the leadership of its former director, the Consumer Financial Protection Bureau issued a modified civil investigative demand, or “CID,” containing the following Notification of Purpose: 

The purpose of this investigation is to determine whether a [sic] student-loan servicers or other persons, in connection with servicing of student loans, including processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting, have engaged in unfair, deceptive or abusive acts or practices in violation of §§ 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536; or have engaged in conduct that violates the Fair Credit Reporting Act, 15 U.SC. §§ 1681, et seq., and its implementing Regulation V, 12 C.F.R. Part 1022. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest. 

The recipient of this CID was Heartland Campus Solutions ECSI, a division of Heartland Campus Solutions and a large servicer of student loans. Within twenty-one days, Heartland filed a petition to set aside or modify this request in the United States District Court for the Western District of Pennsylvania. The District Court rejected the petition. 

Background 

Statutory Framework  

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)—the Consumer Financial Protection Act (CFPA)—established the CFPB to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to implement and . . . enforce Federal consumer financial law.” One of the CFPB’s “primary functions” is to “supervis[e] covered persons for compliance with Federal consumer financial law, and tak[e] appropriate enforcement action to address violations of Federal consumer financial law[.]” For years, the CFPB has investigated for-profit colleges for allegedly deceptive practices in connection with their student-lending activities. 

Pursuant to its investigative authority, the CFPB may issue CIDs so as to investigate and collect information “before the institution of any proceeding.” These demands may require the production of documents and oral testimony from “any person” that it believes may be in possession of “any documentary material or tangible things, or may have any information, relevant to a violation” of the sundry laws over which it enjoys jurisdiction. Statutorily, each CID must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” As CIDs are not self-enforcing, a recipient’s refusal compels the CFPB to file a petition in federal court to secure compliance.  

D.C. Circuit’s Test 

In Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools, 854 F.3d 683 (D.C. Cir. 2017) (ACICS), the D.C. Circuit formulated the test now used for analyzing the enforceability of a CID. In that case, the CID’s Notification of Purpose declared:  

The purpose of this investigation is to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536, or any other Federal consumer financial protection law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest. 

Affirming the district court’s decision that this CID was unenforceableother than noting that an agency may define the scope of its investigation in general terms, the Bureau wholly fails to address the perfunctory nature of its Notification of Purpose”the D.C. Circuit summarized its guiding principles. “[R]eal limits on any agency’s subpoena power” exist, it warned, and “the deference courts afford agencies does not ‘eviscerate the independent role which the federal courts play in subpoena enforcement proceeding.’” Instead, “[t]he statutory power to enforce CIDs in the district courts . . . [implicitly] entrusts courts with the authority and duty not to rubber-stamp the . . . [CFPB’s] CIDs, but to adjudge their legitimacy.” Simply put, “[a]gencies are also not afforded ‘unfettered authority to cast about for potential wrongdoing.’” Therefore, “[b]ecause the validity of a CID is measured by the purposes stated in the notification of purpose,” courts must carefully assess “the adequacy of the notification of purpose,” a critically “important statutory requirement.” In general, no court should “enforce a CID when the investigation’s subject matter is outside the agency’s jurisdiction” or honor a demand “where there is too much indefiniteness or breadth in the items requested.” 

Guided by these precepts, ACICS gave content to CIDs’ minimal “adequacy” requirement. “A notification of purpose may use broad terms to articulate an investigation’s purpose.” However, to satisfy the statute, that notice must still provide a recipient “with sufficient notice as to the nature of the conduct and the alleged violation under investigation.” 

The D.C. Circuit applied this standard—and found the CFPB’s CID to be inadequate. While the Notification of Purpose defined “the relevant conduct as ‘unlawful acts and practices in connection with accrediting for-profit colleges,’” it “never explain[ed] what the broad and non-specific term ‘unlawful acts and practices’ means in this investigation.” Reasonably read, the CFPB’s explanation of its investigative purpose provided “no description whatsoever of the conduct the CFPB is interested in investigating” or “sa[id] nothing” at all about any potential link between the relevant conduct and the alleged violation. The D.C. Circuit concluded, “[W]ere we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.” 

Case at Hand

Application of ACICS’ Standard 

Heartland “relie[d] almost exclusively” upon the test fashioned and utilized in ACICS. Although the District Court agreed that ACICS sets forth the correct legal test for analyzing the enforceability of a CID, it rejected Heartland’s central argument: that the CID issued to it by the CFPB was just as vague because it “merely categorize[s] all aspects of a student loan servicing operation.” 

Instead, the District Court saw two pivotal distinctions between the two notices. First, “the CFPB has broad statutory authority to investigate student lending practices,” unlike the its questionable prerogative to investigate college accreditation in ACICS. Second, the CID issued to Heartland lacked any “catch-all” provision for “any other” consumer financial law violations, again distinguishing it from the capacious and virtually unlimited CID in ACICS. Indeed, the CID in Heartland referred to two violations—engaging in Unfair, Deceptive or Abusive Acts or Practices (UDAAP) and violation of the Fair Credit Reporting Act (FCRA)—that the CFBP is statutorily obliged to enforce. 

As to Heartland’s alternative argument—that the CID was improper because it covered all the operations of a student loan servicer’s business—the District Court deemed it a “red herring.” Heartland itself, it noted, had acknowledged the CFPB’s broad authority to investigate violations of consumer financial laws. Per Dodd-Frank, as long as oversight of each operation lies within the CFPB’s purview, a CID may reasonably cover a company’s every endeavor. As the District Court observed, Heartland had cited “no authority . . . holding that the CFPB is barred from investigating the totality of a company’s business operations, rather than a mere subset of its operations, when it has a legitimate reason to believe that violations have occurred.” For its part, the District Court could find not a shred of legal support for this assertion. 

Accordingly, as Heartland had “not argue[d] that the information requested in . . .  [the] CID is unreasonably broad or burdensome, only that the Notification of Purpose is inadequate,” the District Court deemed “the Notification of Purpose set out in the June 9 CID . . . [to be] sufficient to provide Respondent with fair notice of the CFPB’s investigation” under the ACICS standard. 

Two Take-Aways: Two Ways to Defeat CIDs and CFPB’s Unchanged Character   

Heartland holds several lessons for lenders, servicers, and their counsel. First, these opinions, if only because of the scarcity of any others, will likely set the rules for the cases to follow. Under ACICS and Heartland, firms and individuals receiving CIDs can object to them on two bases: (1) that the CID is beyond the scope of the CFPB’s authority to investigate, and (2) that the CID is not specific enough to put the recipient on notice of the alleged illegal conduct. Whether or not the CFPB responds with more thorough descriptions, both ACICS and Heartland point to two promising avenues for beating back an unduly capacious CID. 

Second, the Heartland case suggests a nuanced approach to the CFPB, even under its more pro-business director. Apparently, the CFPB is still willing to continue with its investigations and enforcement activity in the studentfinancing field. In addition, it appears prepared to pursue ongoing enforcement investigations and to sue to enforce CIDs where the activities implicated fall readily within its jurisdiction. 

How other courts make use of ACICS and Heartland in the years ahead is a story worth following.

On February 12, the White House released its budget proposal for Fiscal Year 2018, a document that calls for numerous changes to the repayment and forgiveness of federal student loans taken out after July 1, 2019. While Congress, of course, retains responsibility for any appropriations legislation, this document’s wish-list reflects the apparent priorities of the Trump Administration: the complete overhaul of the federal student loan program and cuts of $3.8 billion to the budget for the Department of Education.

Some prominent changes include:

  • Public Service Loan Forgiveness Program (“PSLFP”): The budget eliminates this program. As it is presently constituted, borrowers who are eligible for PSLFP can apply to receive loan forgiveness for working in certain types of public service jobs, after making 120 months of consecutive payments. Nearly two-thirds of student loan borrowers interested in PSLFP earn less than $50,000 a year.
  • Income-Drive Repayment (“IDR”) Plans: The federal government’s four income-driven repayment plans would be consolidated into one universal income-driven plan that caps payments at 12.5% of a borrower’s annual discretionary income. Under the new rules, undergraduate borrowers could win forgiveness after fifteen years of payments, while graduate students would need to make thirty years of consecutive payments before gaining such an opportunity. Presently, the DOE’s regulations allow borrowers to receive forgiveness after twenty years of payments for undergraduate school loans and twenty-five years for graduate school loans. In support of this change, the budget plan says: “[T]he numerous IDR plans currently offered to borrowers overly complicate choosing and enrolling in the right plan.”
  • Subsidized Student Loans: As with the PSLFP, the budget abolishes all subsidized federal student loans. These loans, which do not accumulate interest during a borrower’s schooling, were used by approximately 5.7 million students in the 2016-17 school year.
  • Pell Grant Program: If this budget is enacted, Pell Grants would be expanded to cover short-term, training programs. Currently, Pell Grants cannot be used for academic programs shorter than fifteen weeks or that include fewer than 600 hours of instruction.
  • Consequences of Delinquency: The budget would subject delinquent borrowers to far more stringent enforcement and calls for “streamlin[ing] the Department of Education’s ability to verify applicants’ income data held by the Internal Revenue Service.”
  • Elimination of Various Programs: Some 30 programs would also lose funding, including the Supporting Effective Instruction State Grants, 21st Century Community Learning Centers, and Federal Supplemental Educational Opportunity Grant programs.

In support of these proposals, the Trump Administration stressed their potential to save $143 billion over the next decade. Secretary of Education Betsy DeVos stated that the budget “expands education freedom for America’s families while protecting our nation’s most vulnerable students” and “reflects our commitment to spending taxpayer dollars wisely and efficiently by consolidating and eliminating duplicative and ineffective federal programs that are better handled at the state or local level.” Notably, some of these suggestions appear in draft legislation already being considered by federal lawmakers.

As summarized in the March 2018 issue of the American Bankruptcy Institute Journal, ABI’s Consumer Bankruptcy Committee has recently issued several recommendations and made several observations regarding the treatment of student loans under the Bankruptcy Code, codified in Title 11 of the United States Code.

First, the Committee intends to fashion a program that would address possible ways of securing greater access for consumers owing student loans to the bankruptcy process and competent legal counsel. The Committee praised what they called consumer attorneys’ “very creative litigation to obtain relief for student loan debtors.” However, it noted that “[m]any debtors . . . cannot afford or have no access to attorneys who are willing and able to bring dischargeability [(i.e., elimination)] actions for student loan debt.”

Second, the Committee endorsed procedures, pioneered by the United States Bankruptcy Courts for the Middle District of North Carolina and the Western District of Texas (Austin Division), to allow for the repayment of student loans through a Chapter 13 plan. In general, a Chapter 13 bankruptcy is also called a “wage earner’s” plan and enables individuals with regular income to develop a plan to repay all or part of their debts. The prototype plans so far formulated are limited to loans paid through an income-based repayment plan and thus require debtors to apply for such a plan prior to filing for bankruptcy protection.

Third, the Committee expressed its support for the creation and adoption of court-sponsored student loan debt mediation programs. As currently envisioned, such a program would resemble many bankruptcy courts’ mortgage mediation programs, praised for their effectiveness and efficiency by debtors, creditors, and courts during the financial crisis of 2007-08. As the Committee observed, “a local rule requiring mandatory mediation for student loan dischargeability actions” would do better than the otherwise informal encouragement of such efforts voiced by many bankruptcy judges.

Fourth, the Committee endorsed statutory amendments to Code § 523(a)(8), which governs the discharge of student loans, and § 1322(b), which dictates the permissible content of a Chapter 13 plan.

With respect to § 523(a)(8), the Committee announced its opposition to any wholesale deletion of § 523(a)(8) as urged by some advocates. Instead, it recommends that the following statutory changes be enacted:

(1)   that its coverage of private student loans, a change made by Congress in 2005, be rolled back;

(2)    that “undue” be struck from this subsection’s “undue hardship” standard, thereby lowering the bar for securing a student loan’s nullification;

(3)    that Congress should adopt some guidance as to the appropriate construction of the term “hardship”; and

(4)    that the current test for “undue hardship” be replaced by the totality-of-circumstances test favored in the Eighth and First circuits (but not by a majority of bankruptcy courts).

The Committee favored “an amendment to the statute” because, in its words, “[i]t has become all too clear that . . . [Department of Education] policies can be changed with the stroke of a pen and a change in administrations.”

As to § 1322(b), the Committee favors a revision that would allow separate classification and treatment of student loan debt for a debtor enrolled in an income-driven repayment plan, as defined under the Higher Education Act of 1965.

“With the high default rate on this debt and the need to preserve this important resource for future students, it is time to explore options for dealing suc­cessfully with student loan debt in bankruptcy proceedings,” the Committee concluded.

More information on the Committee and its work can be found here.