Consumer Finance Insights
August 31, 2015

No Summer Vacation for Student Lending Companies as Enforcement Activity Continues

Student lending continues to remain in the crosshairs of federal and state consumer finance regulators during the summer months, with over five enforcement actions and investigations in recent weeks.  As covered in both LenderLaw Watch (LLW) and Consumer Finance Enforcement Watch (CFEW), this is a small part of a larger trend over the past eighteen months, during which regulators—led by the Consumer Financial Protection Bureau (CFPB) and the New York Department of Financial Services (NYDFS)—have brought over two dozen enforcement actions, investigations and lawsuits against for-profit schools, student lenders, student debt services and student debt relief companies.  The targets of those actions have been both big and small players in student lending, with some of the most recent enforcement actions by the CFPB targeting larger financial institutions and national banks.  The continued activity comes as no surprise as regulators gave advance notice that student lending was an area of high concern and likely enforcement activity.

The CFPB’s Supervisory Highlights published last fall noted its examiners’ findings of potentially unlawful practices in connection with student loans, including among other practices:  allocating payments to maximize late fees; misrepresenting to borrowers the amount of the minimum payment due; charging illegal late fees; failing to provide accurate tax information; and making illegal and unfair debt collection calls.  The New York Attorney General and NYDFS likewise put student lenders and servicers on notice when in early 2014, they announced the creation of a new Student Protection Unit.  Concurrently with that announcement, the agencies revealed that they had issued over a dozen subpoenas to student debt relief companies to investigate concerns that student borrowers were being charged high and illegal upfront fees and that the companies were using false or misleading advertising.  True to their warnings, in the months that followed both agencies followed with a number of investigations, settlements and consent orders, and active litigation.  Joined by state regulators from Illinois, Washington and other states, the resulting enforcement activity in student lending has focused on a number of practices that consumer finance companies with student lending operations should be aware of when calculating their risk of facing a federal or state enforcement action.

Loan Consolidation, Modification and Debt Services:  A number of enforcement actions targeted student loan companies that were charging consumers fees for loan consolidation and modification services.  Routine targets of enforcement actions were companies advertising that they could assist in “reducing” or “lowering” monthly payments by offering loan consolidation services in exchange for a set fee.  This was often a red flag to regulators because the federal government, through the U.S. Department of Education, offers the same student loan consolidation services for free.  Some student debt relief companies allegedly charged such fees in exchange for the company simply completing the free applications for students without disclosing that the forms were available to the students online at no cost.  In addition, state regulators targeted companies providing loan modification services that were charging fees in excess of legal limits under state law, and for failing to provide statutorily required disclosures to consumers regarding their loan modification.

Debt Collection PracticesDebt collection practices drawing the ire of the CFPB and other regulators included practices traditionally deemed unlawful, such as debt collection calls to borrowers threatening potential legal action, barring students delinquent on their payments from attending classes or receiving course materials.  In addition, regulators cited entities for failing to provide borrowers with the necessary details concerning the source and amount of debt owed on their loans, and for failing to inform students of their right to dispute the validity of the debt.  The CFPB also targeted other practices that are not plainly as unlawful, but which the CFPB considered “unfair” and within their authority to regulate for Unfair, Deceptive and Abusive Acts and Practices (UDAAP).  This included debt collectors calling consumers early or late in the day, which the CFPB considered “inconvenient” times.

False and Misleading Advertisements:  Private for-profit colleges and their student lending arms faced scrutiny and sanction for their allegedly false and misleading advertisements.  Such practices included misrepresenting job placement statistics, misrepresenting the extent of career service offerings and pressuring students to accept high-cost loans in order to entice students to enroll.  Student debt service providers likewise were subject to enforcement action for false advertisements, including for falsely promising borrowers complete loan forgiveness, removal of tax liens, improving credit scores or reduction in monthly payments.

Misrepresenting Amounts Owed & Charging Unlawful Fees:  Student debt servicers were targeted for failing to provide accurate debt and billing information.  Among other things, this included overstating the minimum amount due for certain borrowers and including deferred interest amounts on current statements.  Companies were also targeted for failing to provide notice of the exact amount of interest paid on the debt, thereby depriving borrowers of information necessary to obtain federal tax deductions.  Other targeted activity included charging recurring subscription services to consumers in connection with federal loan assistance, and charging other servicing fees without obtaining proper consumer consent.

In calendar year 2015 alone, regulators (again, led by the CFPB) collected in excess of $500 million in consumer relief, restitution and penalties from consumer finance companies engaged in student lending.  This activity was highlighted by enforcement activity in connection with Corinthian College, which accounted for most of the consumer relief obtained to date.  Significantly, some of the more recent activity has been brought against large financial institutions, including a consent order between the CFPB and a leading student lender, an ongoing investigation into a national bank concerning student loan servicing practices, and the CFPB’s issuance of a Notice of Opportunity to Respond and Advise (NORA) letter to student loan servicer.

The tide of enforcement activity for the industry, however, has likely not yet begun to ebb.  The recent uptick of enforcement actions against student lending companies during the summer months, the consent order and investigation against three of the larger financial institutions involved in student lending, and the CFPB’s increasingly more aggressive stance of what constitutes “unfair” and, therefore, unlawful practices in connection with student loans, suggests that more activity will continue as students head back to school.

The enforcement actions will likely continue against smaller student lending companies and are likely to concern practices traditionally subject to enforcement activity, as described above.  Yet, it is less likely that the actions taken against large institutions that were revealed over the past month are a bellwether of a new wave of activity against similarly large institutions.  Such actions likely arose because of the size of those institutions and the fact that they are higher profile targets for regulators, rather than because those entities engaged in widespread activity traditionally deemed unlawful.  Thus, while it is probable there will be several more large institutions subject to investigation or enforcement activity, it is unlikely that the floodgates are opening.  Finally, a large factor in the number of future student lending enforcement actions will be how expansive of an interpretation the CFPB takes regarding what is unfair, deceptive and abusive in connection with student loans.  The more aggressive the CFPB gets in its interpretations—and it has been aggressive—the more likely there will be an increase in enforcement activity by the CFPB.  LenderLaw Watch and Consumer Finance Enforcement Watch will continue to monitor and report on developments in student lending activity.