On April 18, the CFPB announced a field hearing about student loan issues, to be held in Miami-Dade County on May 8, 2013. The CFPB has not yet announced witnesses but has stated the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. In the past, the CFPB has made policy announcements in connection with field hearings. On April 8, the comment period closed on a CFPB notice and request for information regarding policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.” The CFPB also recently proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The comment period for that proposal does not close until May 28, 2013.
On May 8, the CFPB issued a report regarding student loan affordability and related policy issues. The report summarizes and analyzes public responses to the CFPB’s request for information and discusses policy options for addressing these issues. In particular, the paper explores policy options for restructuring student loans, including, for example, allowing distressed private loan borrowers to convert their obligations into federal student loans, which would allow them to accesses certain income-based repayment and other benefits available to federal loan borrowers, and options for a public-private loan restructuring program. The paper also identifies multiple policy options for jumpstarting the refinance market, including creating a “centralized source on private student loans[, which] could create the conditions and data standards for the emergence of an auction-like marketplace for refinance activity.” The paper states that compliance with existing laws on origination, servicing, and collection of student loans is also critical. On the same day the report was issued, the CFPB held a field hearing at which CFPB Director Richard Cordray, other CFPB officials, and industry and consumer groups discussed many of the issues presented by the CFPB information request and report, including the effects of student debt burdens on individuals and the broader economy, and potential debt relief policy options.
On April 11, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, held that a national bank could compel arbitration of a dispute involving student loans. Kilgore v. KeyBank, Nat’l Ass’n, No. 09-16703, 2013 WL 1458876 (9th Cir. Apr. 11, 2013). Former students of a failed flight-training school filed a class action in state court seeking broad injunctive relief against the bank that originated their student loans and the loan servicer. However, each of the students had executed a promissory note containing a provision requiring arbitration and prohibiting arbitration of claims on a class action basis. The bank removed the action to federal district court and moved to compel arbitration. The district court denied the motion and subsequently granted the bank’s motion to dismiss the claims. On appeal, the Ninth Circuit held that the arbitration provision was enforceable under the Federal Arbitration Act and that it was not substantively or procedurally unconscionable under state law. The court further held that the plaintiffs’ claims were not exempt from the FAA under the “public injunction” exception because the bank’s alleged statutory violations already ceased, the class affected by the alleged practices is small, and there is no real prospective benefit to the public at large from the relief sought. The court vacated the district court’s dismissal of the students’ claims, reversed the denial of the bank’s motion to compel arbitration, and remanded with instructions to the district court to compel arbitration.
On March 28, the CFPB released tens of thousands of consumer complaints related to mortgages, student loans, bank accounts and services, other consumer loans, and credit cards. Credit reporting complaints, will be released in the near future. The expanded database is a live database that is updated daily. It includes one million data points, covering approximately 450 companies, and allows users to track, sort, search, and download information. The CFPB has made the data available in formats that allow developers to build applications, conduct analyses, and perform research, and the database includes functionality to let users build their own visualizations, charts and graphs, and embed the data on other websites or share it through social media. The CFPB is encouraging consumers, analysts, developers, data scientists, civic hackers, and companies that serve consumers, to analyze, augment, and build on the public database to develop ways for consumers to access the complaint data or “mash it up” with other public data sets. The CFPB also released a fact sheet about the database, which provides some summary analysis of the data, as well as a “snapshot” report that provides information about the CFPB’s complaint handling process and additional summary presentation of the data. The CFPB also held a field hearing to review the complaint database and solicit public feedback. Consumer groups participating in the event repeatedly stressed the need for more specific data, including the full narrative description of complaints submitted by consumers, while industry representatives continued to caution the regulator about risks associated with unverified data.
On March 14, the CFPB proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The CFPB has authority to supervise, regardless of size, nonbanks that originate private education loans, and can define and supervise larger participants in other markets for consumer financial products or services. The CFPB proposes to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers. The CFPB’s test to determine volume would consider the number of accounts serviced, whether for federal or private loans, for which an entity and its affiliated companies were responsible as of December 31 of the prior calendar year. After designation, a servicer would remain a larger participant until two years after the first day of the tax year in which the servicer last met the account volume test. The CFPB would use its existing student loan examination procedures to review larger participants’ “student loan servicing,” which the proposed rule defines as: (i) collecting and processing loan payments on behalf of holders of promissory notes, (ii) maintaining account records and communicating with borrowers on behalf of loan holders during deferment periods, and (iii) interacting with borrowers to facilitate collection and processing of loan payments. An entity notified that the CFPB intends to undertake supervisory activity would have an opportunity to challenge the larger participant determination. The CFPB is accepting comments on the proposal for 60 days following publication in the Federal Register.
On February 20, in remarks during the public portion of the CFPB’s Consumer Advisory Board meeting, CFPB Director Richard Cordray identified four “classes of problems” the CFPB will seek to address in the future. Mr. Cordray stated that the CFPB will focus on (i) deceptive and misleading marketing of consumer financial products and services; (ii) financial products that trigger a cycle of debt; (iii) certain markets – such as debt collection, loan servicing, and credit reporting – where consumers are unable to choose their provider; and (iv) discrimination. While the CFPB has already taken a number of enforcement actions to address the first set of problems, Mr. Cordray noted that with respect to the second class of problems the CFPB is still assessing how to deploy its various tools to best protect consumers while preserving access to responsible credit. Mr. Cordray also noted that loan servicing practices remain a concern, and again drew parallels between the mortgage servicing market and the student loan servicing market, noting that the CFPB is looking to take steps that may address the same kinds of problems faced by student loan borrowers. With respect to discrimination, Mr. Cordray argued that African-Americans and Hispanics have unequal access to responsible credit and pay more for mortgages and auto loans, and reiterated the CFPB’s commitment to utilizing the disparate impact theory of discrimination when pursuing enforcement actions.
On February 21, the CFPB Student Loan Ombudsman issued a notice and request for information regarding policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.” The Ombudsman poses 16 questions related to student loan servicing and the broader impact of borrower hardship on other industries, including questions regarding: (i) scope of borrower hardship, (ii) current options for borrowers with hardship, (iii) modification programs for other types of debt, (iv) servicing infrastructure, (v) consumer reporting and credit scoring, (vi) lender participation, (vii) borrower awareness, and (viii) spillover impacts, including impacts on the auto market. The notice, which is based on recommendations contained in the Ombudsman’s October 2012 annual report and an Office of Financial Research report identifying student loan debt as a risk—though not systemic—to the broader economy, clarifies that the CFPB is not seeking feedback on changes to the treatment of private student loans in bankruptcy. Responses to the CFPB request are due April 8, 2013.
On December 17, the CFPB released its Student Lending Examination Procedures, which are an extension of the CFPB’s General Supervision and Examination Manual and will be used as a field guide by CFPB examiners to review student lender compliance with federal consumer financial laws. The Student Lending Examination Procedures are organized in seven modules: (i) Advertising, Marketing, and Lead Generation, (ii) Application, Qualification, Loan Origination, and Disbursement, (iii) Loan Repayment, Account Maintenance, Payoff Processing, and Payment Plans, (iv) Customer Inquiries and Complaints, (v) Collections, Accounts in Default, and Credit Reporting, (vi) Information Sharing and Privacy, and (vii) Examination Conclusion and Wrap-up. Under the first module, for example, CFPB examiners will assess whether a lender’s advertising and marketing practices are deceptive, misleading, or discriminatory by sampling all of the lender’s marketing and advertising materials, including print, electronic and other media, such as the Internet, email and text messages, telephone solicitation scripts, agreements and disclosures. With regard to borrower complaints, examiners will assess, among other things, the systems, procedures, and policies used by a lender for tracking, handling, investigating, and resolving consumer inquiries, disputes, and complaints. The CFPB has the authority to supervise large bank and nonbank student lenders, and, as with its other procedures, the CFPB will use the same examination procedures across both types of institutions.
On October 16, CFPB Student Loan Ombudsman Rohit Chopra published the first annual report on student loans, as required by the Dodd-Frank Act. According to the report, the CFPB has received nearly 3,000 complaints regarding private student loans since it began accepting such complaints in March 2012. Based on the complaints and other data obtained by the CFPB, the report describes issues in the student loan market as similar to those seen in the mortgage servicing market including (i) improper application of payments, (ii) untimeliness in error resolution, and (iii) inability to contact appropriate personnel when facing economic hardship. Further, the report notes problems reported in the application of the Servicemembers Civil Relief Act, including obstacles to obtaining the available interest rate cap. The CFPB Student Loan Ombudsman recommends that the Treasury Secretary, the CFPB Director, and the Education Secretary assess whether efforts to remedy problems in mortgage servicing can be applied to improve student loan servicing. The Ombudsman also invites lenders to develop creative programs to help borrowers restructure debt, and recommends that the relevant Senate and House committees identify opportunities to spur the availability of loan modification and refinance opportunities. Additionally, on October 18, the CFPB released a report that expands on the servicemember-related issues presented in the Ombudsman’s annual report.
On September 17, the U.S. District Court for the District of Washington approved a settlement entered into between a student lender and a class of borrowers who alleged that the lender violated the Telephone Consumer Protection Act (TCPA) by employing an automated dialing system to place collection calls to borrowers’ cell phones. The lender and its affiliated companies agreed to pay $24 million to resolve the case and avoid the costs of further proceedings, but the lender continues to vigorously deny the allegations. According to counsel for the class, the settlement, which the parties have been negotiating since 2010, is the largest settlement to date under the TCPA.
On August 30, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s representation to a debtor that her student loans were “ineligible” for bankruptcy discharge is a “false, misleading, or deceptive” debt collection practice in violation of the FDCPA. Easterling v. Collecto, Inc., No. 11-3209, 2012 WL 3734389 (2nd Cir. Aug. 30, 2012). The debt collector sent a collection letter to the debtor with a notice that the account was ineligible for bankruptcy discharge. The debtor sued the collector on her own behalf and on behalf of nearly 200 borrowers who also received such notices. The district court granted summary judgment in favor of the debt collector, concluding that because the debtor had previously filed for bankruptcy without seeking to discharge her student loan debt, and because student loan debt is presumptively non-dischargeable, her debt was, in fact, not eligible to be discharged. The appeals court disagreed and held that the district court erred in focusing on the borrower’s circumstances instead of applying the “least sophisticated consumer” standard. In applying that standard on appeal, the court reasoned that while the bar for bankruptcy discharge is high, it is not impossible and the “least sophisticated consumer” might not seek the advice of counsel for pursuing discharge through bankruptcy after receiving the debt collector’s inaccurate notice. The court held that the debt collector’s notice did violate the FDCPA and reversed and remanded the case for further proceedings.
On August 29, the CFPB released an updated and corrected report on private student loans. Although the updated report provides the same findings and recommendations as the original report, the revised report attempts to address concerns about some of the study’s methodologies. The CFPB’s summary of updates states that the new report includes revised methodologies for determining the extent to which private student loan borrowers exhausted their Federal Stafford Loan options before taking on a private student loan and the extent to which private student loans were originated without certification of borrower need by the institution of higher education. Specifically, the revised report provides updated results showing a higher percentage of students who took out a private loan without exhausting the individual Stafford maximum, and a higher level of school certification of private loans.
On August 8, the FDIC announced consent orders with a debit card issuer and vendor to resolve allegations that the entities operated an allegedly unfair and deceptive student debit card account program that (i) charged student account holders multiple nonsufficient fund (NSF) fees from a single transaction, (ii) allowed accounts to remain in overdrawn status while NSF fees accrued, and (iii) collected fees from subsequent deposits to the accounts. Collectively the settling companies will provide $11 million in restitution and agreed to pay civil money penalties totaling $282,000. The orders also require that the companies enhance their compliance programs and take specific steps to alter their NSF practices. On August 9, the CFPB issued a consumer advisory in which it reminds students that they (i) cannot be required to use a specific bank or card, (ii) should select bank account before arriving at school, and (iii) should opt for direct deposit as soon as it is offered.
On July 20, the CFPB released a report on private student loans, prepared in conjunction with the Department of Education. Pursuant to Section 1077 of the Dodd-Frank Act, the report covers (i) the evolution and current state of the private lending market, (ii) the characteristics of consumers of private student loans, (iii) consumer protections, including recent changes and possible gaps, (iv) fair lending compliance information currently available and its implications, and (v) statutory or legislative recommendations to improve consumer protections. The report includes a series of recommendations from the CFPB and the Department of Education. The CFPB recommends that Congress require lenders to obtain a certification of the student’s financial need from the educational institution before disbursing private student loan funds. The CFPB also recommends that Congress examine the impact that the 2005 amendments to the bankruptcy code that made private student loans non-dischargeable in bankruptcy absent a showing of undue hardship, have had on young borrowers. On July 24, the CFPB’s Student Loan Ombudsman appeared before the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection to discuss the report and the CFPB’s recommendations. The hearing also included testimony from consumer groups and one private student lender.
On June 13, the CFPB issued a Notice of Request for Information seeking information on existing private student loan complaints collected by state agencies, institutions of higher education, consumer and legal advocates, and lenders. In addition to its general solicitation, the CFPB specifically invited the participation of state attorneys general, schools, and advocacy groups. The responses received by the CFPB will be incorporated into the student loan ombudsman’s report it provides to Congress pursuant to the Dodd-Frank Act. In conjunction with its general solicitation, the CFPB also published the nearly 2,000 comments it received in response to a Notice and Request for Information on private student loans that it issued on November 17, 2011. The CFPB identified the following common themes from the data collected to date in connection with its earlier solicitation: (i) many borrowers report relying on school financial aid offices for information and guidance on which loan products to use, (ii) many borrowers struggling in today’s economy are finding their private student loan debt to be unmanageable, and (iii) many borrowers report finding it difficult to navigate the repayment process.