The Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) direct supervisory authority over any institution that engages in private education lending, regardless of whether the lender is a depository institution or a non-depository institution, or the size of the lender. The CFPB also has direct supervisory authority over “larger participants” in the student loan servicing market, as those institutions are defined in 12 USC § 1090.106.
The CFPB’s supervisory authority over a person means that the CFPB can examine that person for compliance with the applicable consumer financial protection laws that the CFPB administers. In addition, the CFPB will examine service providers to institutions that are directly subject to the CFPB’s jurisdiction, even if those service providers are not directly within the scope of the CFPB’s supervisory authority. Consequently, service providers who, for example, are not larger participants in the student loan servicing market can expect to be contacted by the CFPB in connection with the examination of a private education lender.
To facilitate its supervisory examinations, the CFPB has published a series of examination manuals that each focus on a topic or market that is within the scope of its supervisory jurisdiction. On January 20, 2022, the CFPB published an updated version of its Education Loan Examination Manual (the Manual). Although as a technical matter, post-secondary schools that offered their students extensions of credit were always subject to the CFPB’s supervisory jurisdiction, the CFPB had not publically addressed that jurisdiction. In light of that and the fact that the CFPB had not indicated that it intended to revise the Manual, the publication of the Manual was unexpected. Moreover, the CFPB made clear in the press release accompanying the Manual that the changes to the education loan examination procedures were primarily intended to facilitate its examination of the operations of post-secondary schools, such as for-profit colleges, that extend private loans directly to students (Institutional Lenders).
Overview of Changes Made by the Manual
While clarifying that education financing programs offered by post-secondary schools are subject to its supervisory scope was the main purpose of the Manual, the CFPB also made a number of less significant changes to the prior edition of the Manual. Those changes correct typos, update statutory or regulatory references and requirements that result from other actions taken by the CFPB or other agencies, or reflect changed circumstances outside the jurisdiction of the CFPB, such as the forthcoming discontinuance of LIBOR. These changes are not, however, material for lenders who were previously subject to the CFPB’s supervisory jurisdiction. For Institutional Lenders, however, the Manual places them on notice that the CFPB will examine them for compliance with the wide range of consumer protection matters covered by the Manual. Despite the press release’s focus on for-profit colleges, which were already identified in the prior version of the Manual, the updated explanation of the CFPB’s supervisory authority expressly includes non-profit schools.
CFPB Focus on Institutional Lenders
In a section entitled “The Role of Educational Entities in Higher Education Finance,” the CFPB stated:
Many schools offer their students the opportunity to finance their post-secondary educational expenses through various types of internal or co-branded programs and products. These programs may include private student loans, payment plans, temporary credits, income-share agreements, and other agreements.
The CFPB’s supervisory authority extends to these school entities and their affiliates when they originate private education loans. Similarly, the CFPB’s supervisory authority extends to some entities that act as third-party service providers to institutions that originate private education loans and are themselves subject to the Bureau’s supervisory authority.
Note that this language suggests that the CFPB will examine all types of education financing offered by Institutional Lenders, not just conventional private education loans as that term is defined in Regulation Z. The CFPB also emphasized that some third-party service providers to the Institutional Lenders may be subject to examination. Institutional Lenders and their service providers should therefore consider how any extension of credit that they offer may be viewed during a CFPB examination.
CFPB Examination Scope for Institutional Lenders
Institutional Lenders should review the Manual in detail in order to prepare for a potential CFPB examination. Most of the Manual is concerned with examining a lender’s compliance with the usual consumer financial protection laws and regulations, such as Regulations, Z, B and E, loan servicing, borrower complaints, collections and credit reporting, and information sharing and privacy. The Manual indicates that examiners will now request all co-marketing or co-branding agreements as part of any advertising review. As the Manual states, the purpose of the examination is to assess the examined entity’s compliance risk management system, including internal controls, policies, and procedures, as well as to identify any potential violations of federal consumer financial law. Note that such violations of federal law may include unfair, deceptive, or abusive acts or practices that derive from violations of state law.
In addition to those compliance issues, however, the CFPB specifically stated in its press release announcing the publication of the Manual that it would examine Institutional Lenders with respect to the following issues:
- Placing enrollment restrictions: Students who are late on their loan payments may be restricted from enrolling in or attending classes, which could delay their graduation and prevent them from finding employment.
- Withholding transcripts: When a school withholds academic transcripts from students who owe the school a debt, this prevents students from using their transcripts to demonstrate their education levels in the job market.
- Improperly accelerating payments: Schools that use acceleration clauses in their loans when a student withdraws from the program could be putting a heavy financial burden on the student by making the loan immediately due and collectible.
- Failing to issue refunds: If a borrower withdraws from a program early, they may be entitled to some refunds by the school.
- Maintaining improper lending relationships: Schools that have preferential relationships with certain lenders may pose risks to students because, for example, they may end up paying more for their loan.
The Manual contains several examination questions that address those issues. The CFPB does not explicitly state that any of the listed practices are not permitted or justified, but the CFPB’s focus on these issues suggests that it expects to find Institutional Lenders engaging in unfair, deceptive, or abusive practices with respect to these issues, even the Institutional Lenders are acting in compliance with applicable law.
Many post-secondary schools offer some sort of credit to students, such as 0% interest payment plans, even if they don’t offer true private education loans. Taken on its face, the Manual would suggest that all such schools may be subject to a CFPB examination. Given the large number of schools that may be examined, however, it seems unlikely that the CFPB truly expects to examine them all. It is more likely that the CFPB will examine for-profit schools than private or public non-profit schools. Nonetheless, the number of for-profit schools who are Institutional Lenders is still large. As such, it is difficult to determine how the CFPB will deploy and prioritize its examiners with respect to those Institutional Lenders, other than to assume that it will focus on Institutional Lenders with large programs or whom the CFPB has reason to believe have engaged in problematic activity.