The CFPB has announced that it will begin examining post-secondary schools, such as for-profit colleges, that extend private loans directly to students and/or parents to fund undergraduate, graduate, and other forms of postsecondary education. The announcement was accompanied by the CFPB’s issuance of an update to its Education Loan Examination Procedures manual. The update includes a new section on credit extended by schools directly to students and/or parents, which the manual refers to as “institutional loans.” even though they may actually be installment sales transactions. A redline showing changes to the February 2020 version of the manual is available here.
The Dodd-Frank Act gave the CFPB supervisory authority over entities that originate private education loans. It also gave the CFPB supervisory authority over the servicing of student loans by large banks. In 2013, the CFPB issued a “larger participant rule” that allows it to supervise any nonbank servicer of federal or private student loans if the servicer’s account volume, as defined by the rule, exceeds one million accounts.
According to the CFPB’s press release, the decision to begin examining schools making direct loans stems from the CFPB’s “concern about the borrower experience with institutional loans because of past abuses at schools, like those operated by Corinthian and ITT, where students were subjected to high interest rates and strong-arm debt collection practices.” The CFPB notes that “[s]chools have not historically been subject to the same servicing and origination oversight as traditional lenders.”
The update is intended to require CFPB examiners, “in addition to looking at general lending issues, [to] review the facts around certain actions only schools can take against their students.” Specifically, the update adds a new section titled “Additional Concerns for Institutional Lenders” that directs examiners to determine the following when examining schools:
- Whether the school calculates fees and tuition in connection with the credit product and if so, calculates these items in accordance with the terms of the program the borrower attends
- Whether the school accurately and timely credits account transactions, including calculations of account balances following the distribution or return of aid
- Whether the school uses payment plans or temporary credits for all or any portion of its programs
- How the school calculates and issues refunds to borrowers who withdraw from the school or a program before completing the program or term for which the loans were taken out
- Whether and under what circumstances the school withholds transcripts from or otherwise refuses to certify program completion for students who owe a debt
- Whether and under what circumstances the school imposes any enrollment restrictions on institutional loan borrowers based on their repayment status
- Whether and under what circumstances the school imposes additional fees or increases tuition on institutional loan borrowers based on their repayment status
- Whether the school uses acceleration clauses with its institutional loans in situations where a borrower who withdraws from the school or a program owes more than the proportional cost of the time they were enrolled in the program (and if the school uses such clauses, to compare the schools policies to those for the return of unused federal funds for similar programs)
- Whether a loan product is a private education loan as defined by Regulation Z and if so whether the school complies with the TILA prohibition on the use of prepayment penalties for such loans
The press release includes a reference to “kickback arrangements that gave schools the incentive to steer students into certain loans” that received attention from regulators in the mid-2000s and includes “maintaining improper lending relationships” as one of the issues CFPB examiners will be looking at when examining schools. This is not a new line of inquiry for CFPB examiners, however. Prior to the update, the manual already directed examiners to determine whether a lender making private student loans had established “a partnership, referral relationship, or preferred lender agreement with any educational institution regarding the [lender’s] private education lending programs” and, if so, to make certain assessments.