Student Lending

Subscribe to Student Lending

On January 3, 49 state attorneys general announced a settlement with Career Education Corporation (“CEC”), a for-profit education company, to resolve claims that CEC engaged in unfair and deceptive practices.  The settlement requires CEC to forgo any collection efforts against $493.7 million in outstanding loan debt held by nearly 180,000 former students.  It also imposes a $5 million fine on the company.  California was the only state not participating.

CEC operates online courses through American InterContinental University and Colorado Technical University.  CEC’s other brands include Briarcliffe College, Brooks Institute, Brown College, Harrington College of Design, International Academy of Design & Technology, Le Cordon Bleu, Missouri College, and Sanford-Brown.  According to the attorneys general, CEC used “emotionally-charged language” emphasizing the pain in prospective students’ lives to encourage them to enroll in CEC’s schools, deceived students regarding the total costs of enrollment, misled students about the transferability of their earned credits, misrepresented job prospects for graduates, and deceived prospective students about post-graduation employment rates.  The attorneys general contended that students who enrolled in CEC classes incurred substantial debts that they could not repay or discharge, when they otherwise would not have done so absent the misrepresentations.  CEC denied the allegations, but entered into the settlement agreement to resolve the AGs’ claims.

The settlement agreement requires CEC to make improved disclosures to students, including anticipated total direct costs, median debt for completion of CEC’s programs, program default rates, program completion rates, transferability of credits, median earnings for graduates, and job placement rates.  CEC must also improve students’ ability to cancel their enrollment, allowing students no fewer than seven days to cancel and receive a full refund, and up to 21 days for students with fewer than 24 credits from online programs.  In addition, the AGs are requiring CEC to inform all qualifying former students that they no longer owe money to CEC.

The investigation was led by the Maryland Attorney General’s Office.  “CEC’s unscrupulous recruitment and enrollment practices caused considerable harm to Maryland students,” said Maryland Attorney General Brian Frosh.  “The company misled students.  It claimed that students would get better jobs and earn more money, but its substandard programs failed to deliver on those promises.  The school encouraged these students to obtain millions of dollars in loans, placing them at great financial risk.  Now CEC will have to change its practices and forgo collection on those loans.”

A copy of the settlement agreement is available here

In December, Judge Robert D. Mariani denied Navient’s motion to dismiss a lawsuit filed by the Commonwealth of Pennsylvania, ruling that the suit is not pre-empted by a similar case filed against the company by the Consumer Financial Protection Bureau.  In the suit, the Commonwealth seeks to hold Navient liable for student loan collection activity that allegedly harmed borrowers both in Pennsylvania and nationwide.

Specifically, the Commonwealth alleges that Navient committed a variety of abusive practices in violation of the Consumer Financial Protection Act (“CFPA”) and Pennsylvania’s unfair trade practices and consumer protection law (“CPL”).  The Commonwealth’s case is similar to a parallel action pending in the same court involving the CFPB.  The motion to dismiss claimed that the Commonwealth’s complaint is “essentially cut and pasted from the CFPB’s long ago filed complaint.” But the judge, in denying the motion, rejected Navient’s argument that the Commonwealth’s action is merely a “copycat” of the CFPB suit that “unnecessarily burden[s] the courts and parties, and would risk generating inconsistent rulings across the country.”

“While Navient’s arguments are creative, they do not convince the Court that the CFPA prohibits concurrent state enforcement actions,” wrote Judge Mariani.  “Following Navient’s position would require the Court to accept an amalgam of tenuous postulates regarding several provisions of the CFPA and a strained reading of the plain text of the statute.”  Because concurrent enforcement actions are barred in other areas of the CFPA, but not in the section relevant to this particular case, “applying the canon of statutory interpretation [holding that where Congress includes language in one section but omits it in another, it is presumed Congress acts intentionally] is particularly appropriate.”  The Court also ruled that other federal statutes – the Truth in Lending Act and Higher Education Act – do not pre-empt the Commonwealth’s claims.

The opinion marks the latest development in a years-long battle among the federal government, states, and student loan companies over whether and how states can regulate the firms, which are also contractors of the Department of Education.  Navient, a Delaware-based student loan management company and formerly a part of Sallie Mae, is facing similar suits in other states, including Illinois, California, Mississippi, and Washington.  Navient’s motion to dismiss the Illinois Attorney General’s suit (based on the same preemption argument) was denied in July.

In early 2018, Secretary of Education Betsy DeVos issued a memo backing student loan servicers.  In the memo, the Department maintains that state rules and regulations aimed at greater consumer protection undermine the federal government’s goal of a single streamlined federal loan program.  State attorneys general have accused the Department of Education of rolling back protections for borrowers for some time now—a coalition of thirty attorneys general recently formed in opposition to portions of the Higher Education Act reauthorization, also known as the PROSPER Act.  States likely will continue to pursue similar claims against Navient in light of the recent rulings against preemption in this context.

A wave of lawsuits filed under the Fair Debt Collection Practices Act, especially in the Second Circuit, continues regarding disclosures of interest and fees in collection letters.  Consumers have complained about failure to warn of interest and fees continuing to accrue, as well as failure to disclose that interest and fees did not accrue.  The Second Circuit addressed these issues three times in the past two years in Avila, Taylor, and Derosa.  However, this has not deterred the consumer bar from bringing new claims over even the most careful disclosures.

In this most recent unsuccessful putative class action, consumer plaintiff Andrew Gissendaner sued Enhanced Recovery Company over a letter that listed interest and fees as “N/A.”  The letter also explained that “upon receipt of [Gissendaner’s] payment and clearance of funds in the amount of $2,562, [his] account will be considered paid in full.”

Gissendaner posited that “N/A” for interest and fees was misleading because “every debt accrues interest” and listing “N/A” for interest could lead a least sophisticated consumer to think that interest never accrued on his debt.  Enhanced Recovery argued in response that the statements were true because no interest or fees accrued since the debt was placed with Enhanced Recovery for collection.  Enhanced Recovery also emphasized that Gissendaner was ignoring the part of the letter which stated that if he paid a specific amount by a certain date, his debt would be satisfied.

In its opinion granting Enhanced Recovery’s cross-motion for judgment on the pleadings, the Western District of New York did not have any difficulty concluding that the Second Circuit’s decision in Taylor governed.  To be sure, Gissendaner admitted that no interest or fees were accruing and “supplied no convincing reason why the Court should find Taylor distinguishable.”  Accordingly, the Court held that the letter was not confusing and that Gissendaner’s claim lacked merit.

Continued development of favorable precedent, such as this case, is vital in helping to deter meritless “current balance” or “reverse-Avila” claims.

Last month, Troutman Sanders reported on the proposed TRACED Act which would instruct the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.  FCC Chairman Ajit Pai tweeted his approval for the bill, but the FCC is not waiting on Congress to fight robocalls.  On November 21, it released its final report and order on creating a reassigned numbers database.

According to the FCC’s press release, the final draft of the report and order would create a comprehensive database to enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number, thereby helping to protect consumers with reassigned numbers from receiving unwanted robocalls.

More specifically, this proposal changes the existing federal regulatory scheme by:

  • Establishing a single, comprehensive reassigned numbers database that will enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number;
  • Establishing a minimum aging period of 45 days before permanently disconnected telephone numbers can be reassigned;
  • Requiring that voice providers that receive North American Numbering Plan numbers and the Toll Free Numbering Administrator report on a monthly basis information regarding permanently disconnected numbers; and
  • Selecting an independent third-party administrator, using a competitive bidding process, to manage the reassigned numbers database.

Pai announced the items tentatively included on the agenda for the December Open Commission Meeting scheduled for Wednesday, December 12. Considering that robocalls are the number one basis of complaints filed with the FCC and the speed in which the issue has been addressed, it will come as no surprise if the proposal is passed at the meeting.

Troutman Sanders will continue to monitor this and related FCC’s rulemaking decisions.

The next generation of federal student loan servicing is scheduled to debut in 2019. The Department of Education’s new platform, called Next Generation Financial Services Environment (or “NextGen”), aims to integrate the entire student-loan process—from submitting the Free Application for Federal Student Aid (“FAFSA”) through payment, processing, and service—into a single website. But NextGen is more than just a technological change. The program is an effort by the Department to “significantly enhance its engagement” with borrowers and “reduce the volume of borrowers that default, improve customer service to delinquent borrowers, and lower overall delinquency levels.” Here’s what you need to know about NextGen. 

Brief Background 

In 2009, the Department entered into a five-year contract with 17 large and five small Private Collection Agencies (“PCAs”). By 2014, the Department shifted its debt collection contract to 11 small companies, eventually adding 7 large firms in 2016. However, after years of protests and lawsuits against various student loan servicers, the Department cancelled its defaulted student loan contract as part of its restructuring of federal student loans. 

In August 2017, the Department announced NextGen—an initiative to transform the processing and servicing environment to improve customer service, enhance borrower protections, achieve operational efficiencies, and utilize state-of-the-art technologies. The Department recently completed the first phase of its Business Process Operations solicitation, selecting nine companies to submit bids for Phase II: Edfinancial Services, LLC; General Dynamics Information Technology, Inc.; Missouri Higher Education Loan Authority; Nelnet Diversified Solutions, LLC; Oklahoma Student Loan Authority; Pennsylvania Higher Education Assistance Agency; Teleperformance; Trellis Company; and Utah Higher Education Assistance Authority. 

Moving Forward 

Whichever companies are selected to provide default servicing will need to be prepared to handle the more than 42 million student-loan borrowers with some $1.3 trillion in outstanding loans. To correct past issues, the Department wants servicers that will provide a “world-class customer experience,” not just cost efficiencies. Specifically, the Department has noted that companies must “provide tailored customer assistance throughout the life of the loan to ensure that no borrower ever becomes a defaulted borrower, to the maximum extent practicable.” Among other things, this will require “making targeted outbound calls to assist customers with resolving loan management/payment issues” and resolving any credit bureau disputes filed by customers or initiated by the credit bureau. 

Through the Consolidated Appropriations Act of 2018, Congress mandated that the Department use “common metrics” to judge the performance of servicers. Because all servicers interact with borrowers through the same online platform, NextGen promises to provide the Department with all the information it needs to decide which services to award federal student loan contracts. 

Any company hoping to secure a Business Process Operations contract as a part of the Department’s NextGen program will need expertise with the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Telephone Consumer Protection Act, and a variety of other state and federal regulations. Troutman Sanders will continue to monitor the Department’s NextGen program for federal student loans and related legislative proposals.

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency – of 90 or more days – rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”

On November 16, Sen. John Thune (R-S.D.), the current chairman of the Senate Commerce Committee, and Ed Markey (D-Mass.), a member of the committee and the author of the Telephone Consumer Protection Act, unveiled the Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (“TRACED Act”). Among other things, this bill would require carriers to eventually implement “an appropriate and effective call authentication framework” and instructs the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.

According to its proponents, an “ever increasing number … of robocall scams” prompted this bill. Indeed, one report touted by Markey estimated the number of spam calls will grow from 29% of all phone calls this year to 45% of all calls next year.

In its current form, the TRACED Act gives regulators more time to find scammers, increases civil forfeiture penalties for those caught, promotes call authentication and blocking adoption, and brings relevant federal agencies and state attorneys general together to address impediments to criminal prosecution of robocallers who intentionally flout laws.

More specifically, this act makes the following changes to the existing federal regulatory scheme:

  • Broadens the authority of the FCC to levy civil penalties of up to $10,000 per call for those who intentionally violate telemarketing restrictions.
  • Extends the window for the FCC to catch and take civil enforcement action against intentional violations to three years after a robocall is placed. Under current law, the FCC has only one year to do so. The FCC has told the committee that “even a one-year longer statute of limitations for enforcement” would improve enforcement against willful violators.
  • Brings together the Department of Justice, FCC, Federal Trade Commission, Department of Commerce, Department of State, Department of Homeland Security, the Consumer Financial Protection Bureau, and other relevant federal agencies, as well as state attorneys general and other non-federal entities, to identify and report to Congress on improving deterrence and criminal prosecution at the federal and state level of robocall scams.
  • Requires providers of voice services to adopt call authentication technologies, enabling a telephone carrier to authenticate consumers’ phone numbers prior to initiating any call.
  • Directs the FCC to initiate a rulemaking to help protect subscribers from receiving unwanted calls or texts from callers using unauthenticated numbers.

Announcing the TRACED Act, neither senator minced their words. “The TRACED Act targets robocall scams and other intentional violations of telemarketing laws so that when authorities do catch violators, they can be held accountable,” Thune said in a statement. He continued: “Existing civil penalty rules were designed to impose penalties on lawful telemarketers who make mistakes. This enforcement regime is totally inadequate for scam artists and we need do more to separate enforcement of carelessness and other mistakes from more sinister actors.” Markey added: “As the scourge of spoofed calls and robocalls reaches epidemic levels, the bipartisan TRACED Act will provide every person with a phone much needed relief. It’s a simple formula: call authentication, blocking, and enforcement, and this bill achieves all three.”

Troutman Sanders will continue to monitor this and related legislative proposals.

The states of most complaint, you ask?  – California, Florida, Texas, New York, and Georgia.

In October, the Consumer Financial Protection Bureau released its Complaint Snapshot, which supplements the Consumer Response Annual Report and provides an overview of trends in consumer complaints received by the Bureau.

The Snapshot revealed that the CFPB has received 1.5 million complaints since January 1, 2015.  Of those complaints, the most come from consumers in California, Florida, Texas, New York, and Georgia.  Conversely, the CFPB received the fewest number of complaints from consumers in Wyoming.

In general, U.S. consumers complain more to the CFPB about credit or consumer reporting (i.e., that there is incorrect information on the report) and debt collection (i.e., that there are attempts to collect on debt allegedly not owed) than any other issues.  The top complaints in the top states are as follows:

State Top Complaint
Georgia Credit or consumer reporting
Florida Credit or consumer reporting
Texas Debt collection
California Credit or consumer reporting
New York Credit or consumer reporting

The report also highlights the financial products that result in the largest number of complaints to the CFPB.  They include student loans, money transfers or services, virtual currency, prepaid cards, payday loans, and credit repair.

Click here to download the full report.

We will continue to monitor and report on developments in this area of consumer financial services and compliance.

Alarm.com has agreed to pay $28 million to settle a TCPA class action, which involves allegations that it sent unlawful telemarketing communications to more than 1.2 million consumers.  The parties filed a motion for preliminary approval of the class settlement, which is set for hearing on November 27.  The case, pending in the Northern District of California, is Abante Rooter and Plumbing, Inc. v. Alarm.com Inc., No. 4:15-cv-06314.

The proposed settlement requires Alarm.com to pay $28 million into a settlement fund, which would be used to pay the timely and valid claims submitted by class members.  The settlement fund is non-reversionary, so if any funds remain after the deadline for cashing checks, the administrator will issue a second distribution to class members, with any remaining balance to be disbursed cy pres to the National Consumer Law Center.  The parties estimate that the proposed settlement allows for each class member to receive a payment of between $95 and $143.

In support of the motion for preliminary approval of the class settlement, the parties argue that the settlement is fair given several considerations.  The parties maintain that:

  • The settlement is the result of an arm’s-length and non-collusive negotiation.
  • The relief provided by the settlement is adequate considering the strength of the plaintiffs’ case and the potential risks, costs, and delay of trial and appeal.  On this point, the parties note that if consumers prevailed at trial and on appeal, the trebled TCPA damages could exceed $1.8 billion, a judgment which would be difficult for any company to satisfy.  The parties also note that the agreed monetary payment is approximately equal to Alarm.com’s entire net income from 2017.
  • The settlement compares favorably to other TCPA class settlements and that the bargained-for injunctive relief will also benefit consumers.
  • Counsel are well informed of the strengths and weaknesses of the claims and defenses and that they support the settlement, which was only negotiated weeks before trial.
  • The settlement will be fairly distributed to settlement class members, given the simple and fair claims process and the reasonable service awards requested by the named class members.
  • Class counsel will request approval of a fair and reasonable fee to be paid from the settlement fund—up to 30% of the fund or $8.4 million—plus approximately $300,000 in costs incurred.

If approved, the settlement would resolve a class action that was filed in December 2015, which accuses the security system provider and its dealer of using autodialers and recorded messages to call millions of cellphones, residential lines, and consumers on the National Do Not Call Registry.  The suit noted that Alarm.com sells its software through authorized third-party security system dealers, which have a history of compliance issues with the TCPA and which have been the subject of enforcement actions by attorneys general in Pennsylvania and Kentucky, and by the Federal Trade Commission.  In May 2017, the case was certified as a class action, and in May 2018 the court denied Alarm.com’s motion for summary judgment.

Troutman Sanders LLP has unique industry-leading expertise with TCPA compliance, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding their compliance strategies.  We will continue to monitor this case along with regulatory and judicial interpretation of the TCPA to identify and advise on potential risks.

Despite two controlling decisions by the Second Circuit in Avila and Taylor, claims involving the “amount of debt” disclosure under the Fair Debt Collection Practices Act (“FDCPA”) continue to evolve thanks to the relentless efforts by the New York plaintiffs’ bar.  But these permutations of the “amount of debt” claims continue to be successfully pushed back by defendants.  In a recent ruling, the United States District Court for the Eastern District of New York granted summary judgment in a debt collector’s favor and held that the collector was not required to disclose that the balance could increase due to a prospective award of costs in a state court action.  A link to the decision can be found here.

Defendant Selip & Stylianou, LLP sent consumer plaintiff James Stewart a letter advising him that it was initiating a lawsuit in state court to collect an outstanding debt with a balance of $3,182.84.  The letter also advised Stewart that the legal documents had already been filed.  The complaint in the state court action sought costs associated with the lawsuit, but the letter did not disclose that the balance could increase due to such costs.  Stewart sued the debt collector, claiming that the letter was false and misleading since it failed to disclose the potentially increasing nature of the outstanding balance.

On summary judgment, Selip & Stylianou submitted an affidavit demonstrating that the amount of debt was static because no interest or fees accrued on the debt.  The affidavit further explained, “Only if legal action is commenced against a consumer does [creditor] seek actual disbursements incurred associated with any lawsuit, and even then only upon entry of judgment and only for the amount awarded in the judgment entered by the court.”  Despite this sworn explanation, Stewart still argued that, because Selip & Stylianou was seeking costs incurred in prosecuting the state court action, the payment of the full amount disclosed on the face of the letter would have not satisfied the debt and the balance was thus not static.  The Court disagreed and found that the balance remained static “even after the commencement of the [s]tate [c]ourt [a]ction because costs had not been awarded, and in fact, might never be awarded.”  The Court also pointed out that subsequent letters which stated the same balance further undermined Stewart’s claims and that summary judgment in Selip & Stylianou’s favor was appropriate.

“Amount of debt” claims remain risky because an outstanding balance is listed in every collection letter and periodic compliance review is crucial due to the rapidly evolving precedent.  Troutman Sanders will continue to monitor this line of cases.