Last week, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools and colleges that directly lend to students. Here are three things you should know.
Transcript Withholding Practices Are Considered Abusive Acts or Practices
The Bureau found that post-secondary institutions that withhold official transcripts from student borrowers who are delinquent on a debt to the school are engaging in abusive acts or practices prohibited under the Consumer Financial Protection Act. The Bureau found that one school refused to release a student’s official transcripts even after the student entered a new payment arrangement, instead waiting until the student paid their entire balance in full. In other cases, colleges collected payments for transcripts but did not deliver them if the borrower was behind on their debt. The Bureau’s actions follow an April 2022 blog post where it, along with the Department of Education, criticized transcript withholding practices.
The Bureau’s theory here is that transcripts are uniquely valuable to students because they are needed to obtain employment, the university is the sole provider of transcripts and that students may not have a meaningful choice to enter into the loan from their school. While transcript withholding may be bad policy (and is now illegal in several states), the Bureau’s justification appears less than convincing, especially when compared to other generally accepted consumer remedies such as auto repossession.
Heightened Scrutiny Over How Forgiveness Programs Are Administered
Following a February 2022 compliance bulletin, the Bureau is once again notifying student loan servicers that it intends to thoroughly review how loan forgiveness programs are administered. The Bureau found instances where servicers failed to provide borrowers with access to payment relief programs for which they were eligible, or misrepresenting the number of payments a borrower needed to qualify for relief, citing those failures as unfair or deceptive acts or practices. In some instances, borrowers were wrongfully approved for relief when they had ineligible employment or had loans that were ineligible, leading consumers to falsely believe they were accruing credit for forgiveness when they were not. In addition to asking servicers to ensure that these types of problems are identified and remediated, the Bureau requested market participants strengthen their compliance systems to avoid similar violations. More notably, the Bureau stated that when compliance failures were discovered, that institution self-identify violations. This call to self-report compliance failures has only gotten louder in recent months and should be something market participants keep an eye on.
The Bureau Is Still Concerned About Income Share Agreements
While not a central focus of this edition of Supervisory Highlights, the Bureau once again turned its attention to Income Share Agreement (ISA) providers. While discussing how colleges sometimes directly lend to students, the Bureau stated in a footnote that the repayment process for ISAs, where students pledge a certain percentage of their future income over a set time, “may result in consumers realizing very large APRs or prepayment penalties that may be illegal under the Truth In Lending Act or State usury caps.” This is the Bureau’s most recent statement on ISAs since its settlement in fall 2021 with an ISA provider where the Bureau made clear that it viewed these products as loans. Moreover, the Bureau’s reference to usury caps, an area where they have limited jurisdiction, is likely a signal to state regulators to increase their focus and potentially enforcement resources to this issue.
In addition to these highlighted issues, the CFPB noted its work overseeing the transfer of nine million borrower accounts to different servicers after two student loan servicers ended their contracts with the Department of Education. The review, which the Bureau conducted in conjunction with the Department of Education and state regulators, identified certain risks due to the transferring of borrower accounts.
The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of the institution type. Market participants—student loan servicers, originators, lending institutions and loan holders—are encouraged to review the findings and implement relevant changes to ensure that these risks are thoroughly addressed.
For more information, please contact any of the authors or the Manatt professional with whom you work.