Student loan servicing was the focus of recent CFPB attention in the form of a blog post, “Busting myths about bankruptcy and private student loans,” and a report (labeled a “special issue brief”) titled “Student Loan Borrowers Potentially At-Risk when Payment Suspension Ends.” Both items raise areas of compliance risk for student loan servicers.
Blog post. The CFPB’s blog post is intended to dispel “the perception that student loans cannot be discharged in bankruptcy.” The blog post first notes that discharge is still possible even for those private student loans that are subject to an “undue hardship” standard and require an adversary proceeding to be filed. It then discusses the availability of discharge for certain private loans for educational purposes which, according to the CFPB, “can be discharged in a normal bankruptcy proceeding, just like most other consumer debts,” and provides examples of such loans.
The blog post next turns its sights on “the practices of private student loan owners, lenders, servicers, and collectors and their handling of bankruptcy discharges.” The CFPB observes that while consumers may have difficulty understanding “the details” of which private loans for educational purposes are dischargeable, such details “should be understood and reflected in the policies and procedures of loan owners, lenders, servicers, and collectors.” The blog post quotes from several consumer complaints that, according to the CFPB, “suggest that some of these companies might be making false statements to borrowers about the protections bankruptcy offers—or worse, even collecting on debts that have already been discharged by a bankruptcy judge.” The CFPB warns that “[c]ollecting on debts that have been discharged through bankruptcy might not only violate the Consumer Financial Protection Act’s prohibition on unfair, deceptive, and abusive practices—it could also violate the order of a United States bankruptcy judge.
With the CFPB having used the blog post to raise its concerns about the handling of bankruptcy discharges, servicers of private student loans servicers, as well as loan owners, lenders, and collectors, should be prepared for their practices related to bankruptcy discharges to receive CFPB scrutiny.
Report. In anticipation of the end of the suspension of payments on federal student loans mandated by the CARES Act and subsequent administrative actions, the report focuses on the financial readiness of student loan borrowers to resume payments.
Using data from the CFPB’s Consumer Credit Panel, the report identifies the types of borrowers most likely to face difficulty in resuming payments based on five potential risk factors: pre-pandemic delinquencies on student loans, pre-pandemic payment assistance on student loans, multiple student loan servicers, delinquencies on other credit products since the start of the pandemic, and new third-party collections during the pandemic. The CFPB found that about 15 million borrowers have at least one of these potential risk factors, over 5 million borrowers have at least two risk factors, and borrowers with multiple risk factors are more likely to live in low-income or high-minority census tracts.
The report also looks at delinquency status and payments on non-student-loan debts “to understand borrowers’ pre-pandemic credit situations more fully, and to provide context for borrowers’ current situations.” The CFPB found that delinquency rates on non-student-loan debts increased in the second half of 2021 and that as of February 2022, non-student-loan delinquencies had nearly returned to pre-pandemic levels. In a blog post about the report, the CFPB states that “[t]his figure presages potential financial turmoil for federal student loan borrowers when their loans go back into repayment” because “the continued rise in non-student-loan delinquencies even while the pause on student loan payments is still in effect [means that] once [student loan] payments again come due, borrowers who are already increasingly experiencing hardship will face additional financial strain.”
In the blog post (but not the report), the CFPB also notes that “CFPB work has shown that student loan servicers have erected barriers to borrowers’ access to lower payments under income-driven repayment plans and loan forgiveness under income-driven repayment and Public Service Loan Forgiveness (PSLF)” and references its enforcement action against EdFinancial for allegedly making misrepresentations to borrowers with Federal Family Education Loan Program loans about their eligibility for PSLF. The CFPB states that “[a]s we look ahead to the resumption of payments, it is vital that borrowers are able to access these existing programs that provide lower payments and cancellation.”
Also in the blog post (but not the report), the CFPB raises the specter of errors arising from servicing transfers. It indicates that it “will continue to monitor the activities of student loan servicers as they conduct transfers and begin communicating with student loan borrowers.”
The report leaves little question but that the CFPB intends to closely scrutinize how servicers handle the resumption of payments and to take action against servicers for missteps, including in connection with providing borrowers information about income-driven repayment plans and loan forgiveness and servicing transfers. In addition, in highlighting the report’s findings regarding the higher incidence of risk factors among borrowers living in low-income or high-minority census tracts, the CFPB appears to be signaling that it will be looking for potential discriminatory practices by servicers.