Last week, the CFPB issued a “Student Loan Servicing Special Edition” of Supervisory Highlights.  In this blog post, we highlight a stealth expansion of supervisory jurisdiction and focus on the CFPB’s findings in two key areas:

• Transcript withholding policies at institutional lenders (e.g. for-profit colleges that make private loans directly to student); and
• Administration by servicers of Public Service Loan Forgiveness (PSLF), Income-Driven Repayment (IDR), and Teacher Loan Forgiveness (TLF).

Supervisory jurisdiction.  The CFPB indicated that simultaneously with issuing the Special Edition, but after apparently having already conducted exams based on its interpretation of Dodd Frank, it had updated its Education Loan Examination Procedures regarding the definition of “private education loans” for purposes of its authority to supervise nonbanks.  A previous version of these procedures referenced the Regulation Z definition of “private education loans” which differs from the Truth in Lending Act  definition.  The updated procedures reference the TILA definition, meaning that the Bureau can supervise an institution that extends credit expressly for postsecondary educational expenses so long as the credit is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965, and is not an open-end consumer credit plan, or secured by real property or a dwelling.

Transcript withholding.  The CFPB observed that some postsecondary schools withhold official transcripts from students who are delinquent on a debt owed to the school.  The CFPB reported that one school would not release transcripts to borrowers in default that had entered into new payment agreements but had not yet paid their balances in full and that some schools collected payments for transcripts but did not provide the transcript if a student was delinquent on a debt.  The CFPB determined that blanket policies to withhold transcripts in connection with an extension of credit are abusive and directed schools to stop this practice.  (Earlier this year, the CFPB published a blog post in which it endorsed a call from Department of Education Secretary for schools to end the practice of transcript withholding in order to promote equity and diversity.  In 2019, California enacted a law that prohibits postsecondary schools from withholding transcripts as a debt collection tool.)

Administration of forgiveness programs. 

TLF.  Examiners found servicers engaged in unfair acts or practices when they wrongfully denied TLF applications in the following circumstances: (1) where consumers had already completed five years of teaching, (2) where the school was a qualifying school on the Teacher Cancellation Low Income Directory, or (3) when the consumer formatted specified dates as MM-DD-YY instead of MM-DD-YYYY, despite meeting all other eligibility requirements.  The servicers were directed to review all TLF applications denied since 2014 to identify improperly denied applications and remediate harmed consumers to ensure they received the full benefits to which they were entitled, including any refunds for excess payments or accrued interest.

PSLF. Examiners found servicers engaged in deceptive acts or practices by:

• Implicitly representing to consumers that to be eligible for PSLF they must continue to make payments during the COVID-19 payment suspension until the effective date of forgiveness by sending standard PSLF communications or letters informing consumers that the estimated eligibility date was based on making on-time monthly payment.
• Before ED announced the PSLF waiver in October 2021, explicitly or implicitly misrepresenting that borrowers were only eligible for PSLF if they made payments under an IDR plan, when in fact those borrowers might be eligible for the Temporary Expanded PSLF announced in 2018.

Examiners found servicers engaged in unfair acts or practices by:

• Wrongfully denying or approving PSLF applications or Employer Certification Forms and providing miscalculated total qualifying payments or estimated eligibility dates for reaching the 120 payments required for PSLF.
• Excessively delaying the processing of PSLF forms.

In addition to any remediation that borrowers were entitled to receive through the PSLF waiver or the one-time payment count adjustment for IDR forgiveness announced by ED, remediation steps that the CFPB directed servicers to take include completing reviews of PSLF determinations to identify consumers impacted by the PSLF violations and providing monetary relief to consumers who continue to face financial injuries from the violations.

IDR.  Examiners found servicers engaged in unfair acts or practices by:

• Improperly processing consumers’ IDR requests resulting in erroneous denials or inflated IDR payment amounts.  The Bureau listed various types of errors that servicers made in processing applications. 
• Failing to sufficiently inform consumers about the need to provide additional income documentation for prior gap periods  when reentering a Revised Pay As You Earn (REPAYE) plan (i.e. for the period following a consumer’s removal from REPAYE).

Examiners found servicers engaged in deceptive acts or practices by:

• Providing consumers with a misleading denial reason after submitting an IDR recertification application when in fact servicers had denied the applications because the consumers’ income had increased.
• Representing to consumers with parent PLUS loans that they were not eligible for IDR or PSLF when in fact such loans may be eligible for IDR or PSLF if consolidated into a Direct Consolidation Loan.  (With respect to this practice, servicers were directed to improve policies and procedures, enhance training, and improve monitoring to prevent future violations.)

In its introduction to the Special Edition, the Bureau cautioned that the findings in the report impact servicers’ entire portfolios, including commercially-owned Federal Family Education Loan Programs loans, and encouraged servicers to address the issues across their portfolios.  In its conclusion, the Bureau recommended that servicers, originators, and loan holders review the findings and implement changes in their operations to ensure that the risks identified are thoroughly addressed.  It advised market participants that it expects them to incorporate measures to avoid these violations and similar consumer risks into internal monitoring  and audit practices and notes that evidence of strong compliance programs that take these risks into account is a factor in the Bureau’s decisions on whether or not to open up follow-up investigations.  The Bureau also stated that it expects institutions to self-identify violations and compliance risks, proactively provide complete remediation to consumers, and report those actions to the Bureau.

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