The CFPB has issued a new bulletin (2023-01) titled “Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts.” The bulletin warns servicers that they risk engaging in a UDAAP violation by resuming collection of student loans that were discharged through the regular course of a borrower’s bankruptcy. It is applicable on the date of its publication in the Federal Register.
In the bulletin, the CFPB describes the types of student loans that are discharged by a general order of discharge in a bankruptcy case and those that can only be discharged if the borrower initiates an adversary proceeding and is able to prove that the debt would impose an undue hardship if not discharged, suggesting that these issues have been addressed and resolved uniformly in cases all around the country when they have not. The CFPB indicates that its examiners “found” that servicers had failed to maintain policies for distinguishing been the types of student loans that are discharged through the regular course of bankruptcy and loan types that require consumers to initiate an adversary proceeding to obtain a discharge. Some servicers relied entirely on the loan holders to make that distinction and did not determine whether the holders had in fact done so. No other steps were taken by these servicers to evaluate whether or not the loans were excluded from discharge in the regular course.
Apparently, however, no other steps were taken by the CFPB’s examiners to determine the law that would be applicable to the borrowers in question. The CFPB’s examiners “determined” that the servicers engaged in an unfair act or practice when they resumed collection of loans discharged in the regular course. In addition to directing these servicers to revise their policies and procedures to prevent the collection of such loans, examiners directed the servicers to do a multi-year look back and make refunds.
The CFPB indicates in the bulletin that it is prioritizing student loan servicing supervision in the coming year, which will include a focus on evaluating whether lenders and servicers cease collection of discharged loans. In its student loan supervision, the CFPB plans to pay particular attention to:
- Whether servicers continue to collect on loans discharged through a bankruptcy discharge order;
- Whether servicers and loan holders have adequate policies and procedures to identify student loans that have been discharged through the regular course of bankruptcy and loan types that require the borrower to initiate an adversary proceeding to obtain a discharge; and
- Whether servicers provide accurate information to borrowers about the status of their loans and the protections that bankruptcy offers.
The CFPB indicates that in exercising its supervisory and enforcement discretion, it will look at the extent to which entities engage in proactive review and remediation, including whether any remediation was adequate to compensate borrowers for errors. The CFPB suggests that servicers or loan holders that identify errors should “expand their analysis to include a review of all accounts exiting bankruptcy going back to the earliest available data and provide full remediation where they wrongfully collected from any borrower.” It also suggests that servicers “proactively categorize loans based on whether they can be discharged, so their policies and procedures do not require individual determinations at the time of bankruptcy.”
The CFPB concludes the bulletin with the warning that it “will use all appropriate tools, including its supervisory authority, enforcement authority, and referrals to State and other Federal authorities where appropriate to hold entities accountable if they engage in unfair, deceptive, or abusive acts or practices in connection with these bankruptcy-related practices.”