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Chapter 13 of the United States Code’s eleventh title (“Bankruptcy Code” or “Code”) “permits any individual with regular income to propose and have approved a reasonable plan for debt repayment based on that individual’s exact circumstances,” explaining why a Chapter 13 plan is commonly known as “a wage earner’s plan.”  In general, upon winning approval of such a plan by a bankruptcy court, a debtor is obligated to pay any post-petition disposable income in sufficient quantity to guarantee every unsecured creditor at least what would have been received in a bankruptcy proceeding under the Code’s seventh chapter. In exchange, the debtor gains unconstrained control of every asset subsumed into the bankruptcy estate upon the date that he, she, or they filed for bankruptcy relief. Even after the passage of the 2005 bankruptcy reform law, a Chapter 13 discharge still eliminates types of debts not dischargeable via Chapter 7, including civil fines and penalties, divorce decree debts, and welfare repayment obligations.

To be eligible for Chapter 13 and thus for this expanded discharge, however, a debtor must satisfy the eligibility criteria in § 109(e): “Only an individual with regular income that owes . . . noncontingent, liquidated, unsecured debts of less than [$394,725] . . . may be a debtor under chapter 13.” Over the past year, a question that could affect lenders’ ability to collect on outstanding student loans debts—whether a debtor whose student loan debt pushes them above this statutory maximum forfeits their eligibility for relief under Chapter 13—has resulted in inconsistent rulings by several bankruptcy courts.

Conflicting Cases

The latest case—In re Fishel, No. 17-14180-13, 2018 Bankr. LEXIS 965, 2018 WL 1870368 (Bankr. W.D. Wis. Mar. 30, 2018)—is from Madison, Wisconsin.

On December 18, 2017, Victoria Sue Fishel, a consumer debtor with a car loan, tax debt, credit card and charge account debt, and a small amount of medical bills, filed a bankruptcy petition listing some $150,000 in unsecured, nonpriority debt, including about $16,000 in student loans, as well as other student loans of an unknown size. Filed with her petition, Fishel’s repayment plan proposed to devote all disposable income for five years toward payment of her creditors. While the Chapter 13 trustee tabulated only $132,000 of student loan debt, the United States Department of Education (“DOE”) filed a claim for more than $340,000. Noting that Fishel’s debt totaled more than $394,725 using the latter figure, the trustee objected to her plan and consequently filed a motion to dismiss based on § 109(e).

In articulating her decision, Judge Catherine J. Furay made several points. Legally, regardless of the fact that a lack of § 109(e) eligibility, though not identified as a basis for mandatory dismissal in § 1307, had been treated as a valid reason for dismissal by some courts, the decision to convert or to dismiss a Chapter 13 case always remains “a matter of discretion for the bankruptcy court.” “It should be made,” she added, “on a case-by-case basis considering the best interest of creditors and the bankruptcy estate.” Factually, it was “undisputed the Debtor can make the proposed [p]lan payments,” “[t]he only real roadblock to confirmation of Debtor’s [p]lan . . . [being] the alleged amount of her student loans which, in any case, will not be discharged in her bankruptcy.” Lastly, she stressed the policy considerations set forth in In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. 2017), that she held weighed in favor of permitting Fishel’s case to proceed.

As Judge Furay herself acknowledged, multiple courts have rejected the approach to student loans and § 109(e) favored by Fishel and Pratola, including In re Petty, No. 18-40258, 2018 Bankr. LEXIS 1231, 2018 WL 1956187 (Bankr. E.D. Tex. Apr. 24, 2018); In re Bailey-Pfeiffer, No. 1-17-13506-bhl, 2018 WL 1896307 (Bankr. W.D. Wis. Mar. 23, 2018); and In re Mendenhall, No. 17-40592-JDP, 2017 Bankr. LEXIS 3600, 2017 WL 4684999 (Bankr. D. Idaho Oct. 17, 2017).

Troutman Sanders LLP will continue to monitor these developments and the intersection of bankruptcy law with student loans.

 In Echlin v. PeaceHealth, the U.S. Court of Appeals for the Ninth Circuit held that a debt collection agency meaningfully participated in collection efforts even if it did not have authority to settle the account, did not receive payments, and was not involved in collection beyond sending two collection letters.  Accordingly, the collection agency did not violate the Fair Debt Collection Practices Act by sending the letters on its own letterhead. 

Michelle Echlin incurred a debt in the form of medical bills owed to PeaceHealth.  After Echlin ignored multiple requests for payment, PeaceHealth referred her account to ComputerCredit, Inc. (“CCI”).  CCI sent Echlin two collection letters on its letterhead but Echlin did not respond.  In accordance with its agreement with PeaceHealth, CCI returned the account back to PeaceHealth.  Echlin later filed a purported class action alleging that CCI’s letters created a false or misleading belief that CCI was meaningfully involved in the collection of her debt—a practice known as flat-rating.  CCI and PeaceHealth moved for summary judgment.  The district court granted PeaceHealth’s and CCI’s motions for summary judgment, and Echlin appealed. 

The Ninth Circuit found that CCI had meaningfully participated in collection of Echlin’s debt because it controlled the content of collection letters it sent and did not seek PeaceHealth’s approval prior to mailing.  While CCI did not have authority to process or negotiate payments from PeaceHealth, CCI handled correspondence and phone inquiries from debtors.  In addition, CCI personnel returned consumers’ calls if requested.  In rejecting Echlin’s claims that CCI could not have meaningfully participated if it had not handled payments or taken further action in collecting on the account, the Court noted that “[m]eaningful participation in the debt-collection process may take a variety of forms,” as shown by a long, non-exhaustive list of factors considered by courts across the country.   

Notably, the Ninth Circuit distinguished cases that addressed the meaningful involvement by attorneys because those cases reflect concerns regarding the “unique sort of participation that is implied by letters that indicate the creditor has retained an attorney to collect its debts.”  The higher standard of involvement required of attorneys and law firms collecting a debt did not apply to non-attorneys.  

In a short, straightforward opinion, the Eighth Circuit Court of Appeals joined its sister circuits that have applied a materiality standard to consumer claims of falsity and deception under the Fair Debt Collection Practices Act.

Consumer Paul Hill incurred a medical debt, and the creditor hired Accounts Receivable Services, LLC to collect the debt.  In the collections process, Accounts Receivable unsuccessfully filed a lawsuit against Hill to recover the debt.  The state court ruled that Accounts Receivable was not entitled to prevail in the collection lawsuit because it had not established that the documents purporting to show the assignment of debt were authentic.  Hill then sued Accounts Receivable under the FDCPA, claiming false and misleading representations in violation of 15 U.S.C. § 1692e, including threats “to take any action that cannot legally be taken … .”  15 U.S.C. § 1692e(5).  The United States District Court for the District of Minnesota dismissed Hill’s claims and he appealed, arguing that the Court erred in applying a materiality standard to these provisions.

To decide whether a materiality threshold applies, the Eighth Circuit Court of Appeals examined decisions from its sister circuits on the issue, found their reasoning persuasive, and adopted the view that a violation requires a showing of materiality.  The FDCPA was enacted to require that debt collectors provide information which helps consumers choose intelligently their actions with respect to their debts.  As the Seventh Circuit had explained, “immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect).”  An immaterial statement cannot mislead and, therefore, even if technically false, it is not actionable.

Applying the materiality requirement, the Eighth Circuit concluded that, even if Accounts Receivable had misrepresented authenticity of the debt assignment documents, such misrepresentations were immaterial because Hill did not deny that he incurred the debt and owed it.  Just because the debt collection lawsuit was unsuccessful does not automatically establish a violation of the FDCPA, as the Court previously held in Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 820 (8th Cir. 2012).  “Accounts Receivable’s inadequate documentation of the assignment did not constitute a materially false representation, and the other alleged inaccuracies in the exhibits are not material.”

The Eighth Circuit’s decision is a welcome addition to the growing line of cases adopting the materiality threshold.

In the fall of 2017, the New York Times documented the existence of laws in nineteen jurisdictions which allow for the revocation of government-issued professional licenses if a holder defaults on a student loan. Pleas for reform soon swamped states.

In Texas, whose next regular legislative session will begin on January 8, 2019, promises were issued from some of its most conservative legislators. “Next session the Legislature needs to address this issue head on and ensure that Texans who can’t pay student loans aren’t further crippled by government actions,” the conservative House Freedom Caucus, chaired by Rep. Matt Schaefer (R-Tex.) from Tyler, said in a statement released on April 4.

Meanwhile, in Tennessee, two modest reforms were passed (and one signed) in April. Approved by the Tennessee Senate and House on March 19 and April 2, respectively, and signed by the Governor on April 18, the first creates a medical hardship exemption for certain licensed professionals who are late or default on their student loan payments. The second, passed by both houses as of April 24, reduces the fee (from $350 to $180) to expunge the public record of defendants who had charges dismissed due to completing a pretrial diversion program.

Not surprisingly, considering its passage of a Student Loan Bill of Rights in November 2017 (over the governor’s veto), another state—Illinois—appears to have made the most concrete progress in recent days. In particular, a specific proposal, embodied in Senate Bill 2439, filed on January 30 by Sen. Scott M. Bennett (D-Ill.) of Champaign, gained traction in the spring of 2018. Sponsored by Democrats and Republicans, this bill would eliminate language from the Civil Administrative Code of Illinois requiring the Illinois Department of Professional Regulation to deny licenses or renewals to “any person who has defaulted on an educational loan” unless that person is performing satisfactorily under a repayment plan. Via further textual extirpation, it would abrogate IDPR’s power to suspend or revoke a license for failure to make satisfactory repayments on delinquent or defaulted loans. If enacted, it would stop regulatory directives and referrals between the IDPR, the Illinois Student Assistance Commission (“ISAC”), and other licensing agencies and boards with respect to student loan delinquencies and defaults.

In a recent ruling, the Seventh Circuit Court of Appeals held that plaintiffs stated a viable claim under the Fair Debt Collection Practices Act by alleging that a collection letter which included the safe harbor language set forth in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, LLC, 214 F.3d 872 (7th Cir. 2000), was false and misleading.  In reversing the lower’s court decision on which we previously reported, the Court of Appeals concluded that the letter’s reference to late and other charges was inaccurate, even though it came directly from the Miller safe harbor language, since the defendant could not lawfully impose such charges.  A link to the Seventh Circuit’s decision can be found here.

The letter at issue was an attempt to collect medical debts.  It recited verbatim the safe harbor language, including the statement of the amount of debt and a disclosure that “interest, late charges, and other charges … may vary from day to day … .”  The plaintiffs filed a class action asserting that the letter was misleading because the collector could not lawfully or contractually impose “late charges or other charges.”  In response, the collector argued that it was permitted to charge interest and that reference to late and other charges was not materially misleading.  The trial court agreed because “the central purpose of Miller’s safe harbor formula is to provide debt collectors with a way to notify debtors that the amounts they owe may ultimately vary.”  On appeal, the Seventh Circuit reversed dismissal of the plaintiffs’ claims.

In performing materiality analysis, the Court explained that, while debtors always have some incentive to pay variable debts quickly, the source of variability matters.  The letter did not specify how much the “late charges” are or what “other charge” may apply, “so consumers are left to guess about the economic consequences of failing to pay immediately.”  Because these additional fees and charges may be “a factor in [plaintiffs’] decision-making process,” the plaintiffs plausibly alleged that the letter was materially false or misleading.

The Court also found that the collector was not entitled to safe harbor protection because the Miller language was inaccurate under the circumstances in that the collector could not lawfully impose “late charges and other charges.”  The Court rejected the collector’s reliance on the Court’s earlier decision in Chuway v. Nat’l Action Fin. Servs., 362 F.3d 944 (7th Cir. 2004), wherein the Court instructed collectors to use the safe harbor language if “the debt collector is trying to collect the listed balance plus the interest running on it or other charges.”  Despite the apparent applicability of Chuway, the Court found that it was not persuasive because Chuway dealt with a fixed debt; therefore, the statement was arguably made in dicta.  The Court further stated that “in any event, our judicial interpretations cannot override the statute itself, which clearly prohibits debt collectors from [making] false or misleading misrepresentations.”  In support, the Court cited its recent controversial decision in Oliva v. Blatt, Hasenmiller, Leibsker & Moore LLC, 864 F.3d 492 (7th Cir. 2017), that effectively rejected the collector’s reliance on controlling law and found that the bona fide error defense did not apply.

Boucher highlights the need for customized compliance review of collection letters within the context of specific debts.  Such review must take into account not only whether the amount of debt is static or variable but also the sources of variability to help avoid claims of confusion and deception.

In a still-incomplete provocative piece whose conclusions were presented at this year’s American Economic Association (“AEA”) meeting in Philadelphia in January 2018 and highlighted by the American Bankruptcy Institute on March 29, 2018, three economists—Gene Amromin, Vice President and Director of Financial Research at the Federal Reserve Bank of Chicago; Janice C. Eberly, Professor of Finance at Northwestern University’s Kellogg School of Management; and John Mondragon, Assistant Professor of Finance at Kellogg—pinpoint a new potential culprit behind the nation’s student loan crisis.

As reported by the Federal Reserve Bank of New York, since the recession began in 2008, federally-owned student debt has grown from around 5% of all household debt to around 11.2%, and from $619.32 billion to $1.49 trillion. The report to the AEA discounts two commonly-cited factors for this increase: a growing number of students and soaring tuition costs. Simply put, with undergraduate enrollment only increasing by 4% from 2008 to 2015, the average growth in net tuition and fees from the 2007-08 to the 2017-18 school year cannot explain the dramatic increase in student debt seen over the last decade.

The numbers as to this latter area are debatable. According to some sources, the increase was 3.2%, 2.8%, and 2.4% at public four-year, public two-year, and private non-profit four-year universities, respectively. According to others, however, it was 37%. Importantly, not even the latter and larger figure would account for the explosion in student debt.

Instead, these scholars posit another possibility: the collapse of housing prices. They reason that many people tend to borrow money against their houses to fund their children’s educations (on average, a household with a child in college will extract $3,000 more in home equity than those without). Thus, when housing values collapsed from 2006 through 2012, thereby causing a credit crisis which greatly contributed to America’s Great Recession, the spigot for these funds closed. As home equity financing thusly dried up, many students faced two options: either dropping out of school or relying on education loans to meet their bills. Naturally enough in a nation in which higher education remains the surest apparent path to long-term prosperity, many students opted to incur greater debt. Ultimately, at least according to Amromin, Eberly, and Mondragon, a $1 drop in home equity loans due to a drop in a house’s value corresponded with 40 to 60 cents more in student borrowing.

Fittingly, the problem of student debt potentially linked to declining home values may be coming full circle. The National Association of Realtors reports that 83% of adults aged 22 to 35 with student debt who have yet to buy a house blame their lack of homeownership on student loans. Lending credence to these survey results, the Federal Reserve Board has found that for every 10% in student loan debt a person holds, their chance of home ownership drops 1-2% during their first five years after school.

For hard data regarding America’s consumer debt, one can consult the website of the Federal Reserve Bank of New York.

Psychologists say that adolescents and young adults take more risks than any other age group. Perhaps this is why about one in five (21.2%) college students receiving financial aid to pay for their education have invested these loans in a cryptocurrency, according to a recent survey by The Student Loan Report, a website for student loan information.

Some Basics Facts About Today’s Popular Cryptocurrencies

According to numerous financial metrics, cryptocurrencies constituted one of the hottest investments of 2017, especially for young Americans. In the summer of 2017, these digital assets reached a combined market capitalization of $100 billion, split among bitcoin ($45 billion, or 40.1%), ethereum ($31 billion, or 28.3%), ripple ($12 billion, or 11.04%), litecoin ($2 billion, or 2.2%), ethereum classic ($2 billion, or 1.71%), nem ($1.7 billion, or 1.5), Dash ($1.3 billion, or 1.2%), and over 800 other currencies with market caps ranging from $1,000 to $800,000. Created in 2009, bitcoin was the first decentralized cryptocurrency and remains the most well-known. As these numbers reveal, however, countless variants, frequently called “altcoins,” (short for “alternative coins”), now exist.

“Cryptocurrencies represent an entirely new asset class and financial sector,” opined Ashe Whitener, a cryptocurrency enthusiast who formerly worked in business development for Euro Pacific Bank. Drew Cloud, Student Loan Report’s founder, told The Boston Globe: “Younger Americans are certainly the most enthusiastic about cryptocurrency; they are the most active investors and want to get involved in the space in any way possible.” Colleges today offer courses on these digital tokens, while a company called Campus Coin is attempting to establish cryptocurrencies as a medium of exchange at colleges throughout the country. At the same time, others have called the enthusiasm around cryptocurrencies “speculative mania.”

This objection is not an idle one, as dramatic and inexplicable swings regularly wrack this market. For example, on January 1, 2017, a single bitcoin held a value of only $968; in December 2017, it was worth $19,783. By January 2018, bitcoin posted its worst monthly performance in three years: slipping below $6,000, it lost 70% of its value. Although it jumped to approximately $10,000 by February 15, 2018, it plummeted by 23.11% to $7,688.68 on March 14, 2018, with the announcement of a partial ban on online cryptocurrency advertising. Bitcoin slightly recovered to $8,600 by March 22 and fell to $8,490 by March 23.

Subject to a similar rollercoaster ride, Ethereum, the market’s second most-valuable cryptocurrency, was valued at over $1,400 in January 2017 but has since slumped to $520.

Less popular and smaller digital coins have proven even more volatile. Tron (TRX), for instance, reached a high of 30 cents on January 4, 2018, before nosediving to 4 cents within thirty days.

The dangers of investing in cryptocurrencies thus replicate the perils of investing in very small capital stocks. As one expert put it, “You can see big swings in a short period of time. There’s still a lot of price discovery going on.”

Financial and Legal Risks of Investing Student Loan Funds in Cryptocurrencies

Because investing in cryptocurrencies carries risk – and because student loans are intended for use in funding higher education, not speculating on the cryptocurrency market – student loan experts have been surprised by borrowers’ willingness to invest nearly non-dischargeable sums in this newest market.

“Investing from a . . . [student] loan is a terrible idea as these assets are extremely risky and volatile,” pointed out Christian Catalini, an assistant professor at the Massachusetts Institute of Technology who researches blockchain technology and cryptocurrencies. Others agree. “If you invest the student loans in cryptocurrency and lose money, you will still owe the student loans,” observed Mark Kantrowitz, a student loan expert. “And, where will you get the money to pay for college costs?”

For its part, the United States Department of Education has warned, “Federal student aid funds are to be used only to help meet the costs of attending an eligible institution of higher education. Investing is not considered an appropriate use of federal student aid funds.”

Trend Worth Watching 

For the sake of their bottom line, every participant in the student loan market, including loan providers and servicers, would be wise to monitor student borrowers’ investment of loan proceeds, particularly in innovative but volatile financial instruments.

As newspaper articles, academic studies, and politicians’ speeches have repeated, statistics suggest that a student loan crisis may be building. The share of students graduating with more than $50,000 in student loan debt has more than tripled since 2000, increasing from 5% in 2000 to 17% in 2014. As a result, this group of “large-balance borrowers” now holds the majority (58%) of the outstanding student debt owed to the federal government, approximately $790 billion of the $1.4 trillion accumulated by December 31, 2017. 

In recent days, the idea of “risk-sharing plans,” commonly referred to as “RSPs,” has gathered momentum. In general, these arrangements compel educational institutions to repay taxpayers for some of the loans taken out by their defaulting graduates. One iteration, created by Tiffany Chou from the Office of Economic Policy at the Department of Treasury, Adam Looney from the Brookings Institution, and Tara Watson of Williams College and endorsed by Brookings itself, uses a purportedly hard-to-manipulate repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to contribute. These scholars currently propose a rate of 20%. Thus, if the repayment rate falls below 20%, the college would be required to pay part of the difference to the federal government, with differing obligations as the rate decreases. According to its defenders, such an RSP would correct for the distortion in the student loan market created by federal guarantees of student loans. 

Significantly, this idea received a boost from favorable mention in a white paper released on February 1 by the staff of the Senate’s Committee on Health, Education, Labor and Pensions (or “HELP Committee”), the very committee presently considering various reforms of the federal government’s student loan system. It even earned a reference on page 41 of the President’s Fiscal Year 2019 budget proposal. As of March 26, whether the HELP Committee will include such a program in a future bill and what form it would take remain unknown.

 

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 unenforceable – “other 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 student–financing 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.

While Washington debates various reforms to the federal government’s student loan framework, and other states adopt borrowers’ bills of rights to the consternation of the United States Department of Education, other proposals for dealing with the student debt crisis have cropped up in legislatures across the country. In recent weeks, two such efforts made headlines. 

Iowa 

In Iowa, graduates from the state’s three public universities—the University of Iowa, Iowa State University, and the University of Northern Iowa—left school with average student loan debt that ranged from $24,325 to $28,617 in 2017. Sixty-eight percent of Iowa college graduates in 2013-14 had an average student debt load of $29,732; for the class of 2015-16, the overall average stood at $29,801, the 19th highest in the nation. In 2015-16, the default rate surpassed 12.5%. On March 7, in an attempt to alleviate this problem, Iowa’s Senate resoundingly passed a three-part bill, setting it up for consideration by the Iowa House of Representatives. If passed by the latter and signed by the governor, this legislation would (1) require all students at Iowa’s three universities to take a financial literacy course; (2) compel regents to provide information to graduates about employment rates, likely starting pay, and the typical graduate’s average debt in their field of study; and (3) mandate that these same regents provide students with information on how to graduate in less than four years, particularly those students who arrive on campus with college credits. 

“I hear from a lot of parents about their concerns about their children’s student loan debt,” Iowa Senate Majority Leader Jack Whitver said. “They are looking to the Legislature for solutions … .” As to the bill’s first provision, Rachel Boon, the chief academic officer for Iowa State’s regent, opined: “Helping students find ways to better manage their living expenses can also help them keep down their debt loads.” In defense of the bill’s second provision, Whitver added, “We’re just trying to get parents and kids information so that they know if they choose a certain major, what the job options are and what they can expect to make.” As to the third, he continued, “We’re not saying they have to have every major graduated in three years but there’s a lot of majors they could do.” 

Maine 

Further north, Maine confronted the same problem. Sixty-eight percent of post-secondary education students graduated with student loan debt, and the average debt sat at $30,908 for borrowers who entered repayment in 2014. For 2015, the state’s default rate stood at 11%, fractionally less than the national average of 11.5%. At the same time, Maine faces an impending “demographic winter” as more of its workforce approaches retirement-age. “Our businesses need young people here to fill the jobs that will be coming available when people retire,” Governor Paul LePage warned members of the Legislature’s Appropriations and Financial Affairs Committee. “We need young people to settle here and have families. We need them to buy houses from those who retire and downsize, to keep our communities going. The longer we can have a young person here after graduation, the more likely they will make a long-term commitment to the state.” 

In response to these problems, on March 27, the legislature’s Taxation Committee commenced its consideration of a proposal, backed by LePage, intended to attract young people to the nation’s state with the oldest population by affording some student loan debt relief. In particular, the bill would create uniform rules for qualifying for the existing Educational Opportunity Tax Credit, denounced by critics as too complicated and underused by Maine employers. At present, the eligibility for this particular credit varies widely depending on an individual’s graduation year. In contrast, the expanded credit would apply to all eligible graduates with a degree from any accredited college or university after 2007 and would range from $1,000 for individuals with an associate degree to $3,000 for those with a graduate degree.  

In addition to this bill, LePage has urged lawmakers to approve $50 million in bonds to provide zero-interest student loans to Mainers attending school in-state while allowing others to refinance if they stay in Maine after college. As currently envisioned, this second bill would allow students with existing debt to consolidate loans or refinance to a lower interest rate if they agree to reside and work in Maine for at least five years. This bill represents LePage’s second such attempt: a similar bill, albeit one funded to the tune of $100 million in bonds, stalled last year largely because of Republican opposition. 

Bond measures must receive two-thirds support in Maine’s House of Representatives and Senate before they can be placed on the statewide ballot for voter consideration.