Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts, 17366-17368 [2023-06002]
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Federal Register / Vol. 88, No. 56 / Thursday, March 23, 2023 / Rules and Regulations
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Area of Application. Survey area plus:
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Survey Area
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ddrumheller on DSK120RN23PROD with RULES1
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16:18 Mar 22, 2023
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[FR Doc. 2023–05816 Filed 3–22–23; 8:45 am]
BILLING CODE 6325–39–P
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Chapter X
Bulletin 2023–01: Unfair Billing and
Collection Practices After Bankruptcy
Discharges of Certain Student Loan
Debts
Bureau of Consumer Financial
Protection.
ACTION: Compliance bulletin and policy
guidance.
AGENCY:
The Consumer Financial
Protection Bureau (CFPB) is issuing this
Compliance Bulletin and Policy
Guidance (Bulletin) to address the
treatment of certain private student
SUMMARY:
E:\FR\FM\23MRR1.SGM
23MRR1
Federal Register / Vol. 88, No. 56 / Thursday, March 23, 2023 / Rules and Regulations
loans (student loans) following
bankruptcy discharge. In order to secure
a discharge of ‘‘qualified education
loans’’ in bankruptcy, borrowers must
demonstrate that the loans would
impose an undue hardship if not
discharged. Student loans that are not
‘‘qualified education loans’’ (nonqualified student loans), however, are
discharged under standard bankruptcy
discharge orders. In recent supervisory
work, CFPB examiners identified
servicers that did not determine
whether education loans were qualified
or non-qualified. As a result, servicers
improperly returned non-qualified
education loans to repayment after a
bankruptcy concluded and continued to
bill and collect payments on the loans,
even though the borrowers’ bankruptcy
discharges released them from these
debts. This conduct violated the
Consumer Financial Protection Act’s
(CFPA’s) prohibition on unfair,
deceptive, or abusive acts or practices.
CFPB examiners directed the servicers
to cease collection of discharged loans
and take remedial action, which
includes conducting a multi-year
lookback and issuing refunds to affected
consumers. In its oversight, the CFPB
will pay particular attention to
servicers’ practices in connection with
student loans that are the subject of
bankruptcy discharge orders, including
whether discharged debts are being
collected contrary to bankruptcy court
orders.
This bulletin is applicable on
March 23, 2023.
FOR FURTHER INFORMATION CONTACT:
Miya Tandon, Counsel, Office of
Supervision Policy, at 202–695–4901;
Matt Liles, Senior Counsel, Office of
Supervision Policy, at 202–701–3828. If
you require this document in an
alternative electronic format, please
contact CFPB_Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
DATES:
ddrumheller on DSK120RN23PROD with RULES1
I. Background
After a debtor files for bankruptcy, a
judge issues an order of discharge that
releases a debtor from personal liability
for all debts unless they are exempted.
Some types of student loans are not
discharged by general orders of
discharge and receive special treatment
under section 523(a)(8) of the
Bankruptcy Code. Borrowers with these
obligations must prove the debt would
impose an undue hardship if not
discharged. The Bankruptcy Code
identifies these debts as:
a. Loans that are made, insured, or
guaranteed by a governmental unit, or
made under any program funded in
VerDate Sep<11>2014
16:18 Mar 22, 2023
Jkt 259001
whole or in part by a governmental unit
or nonprofit institution;
b. Loans that meet the definition of a
‘‘qualified education loan,’’ as defined
in section 221(d)(1) of the Internal
Revenue Code of 1986; 1 or
c. Obligations to repay funds received
as an educational benefit, scholarship,
or stipend.2
The Internal Revenue Code specifies
that qualified education loans are those
that are incurred:
1. Solely to pay for the cost of
attendance less scholarships or certain
other payments;
2. At institutions eligible to
participate in Federal student aid
programs under Title IV of the Higher
Education Act of 1965; and
3. While attending at least half-time.3
In practice, the majority of student
loans meet one of the criteria for special
treatment under the Bankruptcy Code,
and therefore, are not discharged by a
general order of discharge.4 Importantly,
however, some loans for educational
purposes that borrowers may think of as
‘‘private student loans’’ are not exempt
from the general order of discharge,5
including:
• Loans made to attend non-Title IV
schools (that is, schools that are not
permitted to process U.S. Federal
student aid, such as unaccredited
schools and foreign schools); 6
• Loans made to cover fees and living
expenses incurred while studying for
the bar exam or other professional
exams; 7
• Loans made to cover fees, living
expenses, and moving costs associated
with medical or dental residency;
• Loans made in amounts in excess of
the cost of attendance; 8
1 11
U.S.C. 523(a)(8).
U.S.C. 523(a)(8)(A)(ii).
3 26 U.S.C. 221(d)(1).
4 For example, the majority of student loans are
Federal loans made or insured under title IV of the
Higher Education Act. See Report of the CFPB
Education Loan Ombudsman, https://
files.consumerfinance.gov/f/documents/cfpb_
education-loan-ombudsman_report_2022-10.pdf
(Oct. 2022), pp. 7–8.
5 See, e.g., In re McDaniel, 590 B.R. 537, 545
(Bankr. D. Colo. 2018) (noting that merely labeling
a product a ‘‘student loan’’ does not subject it to the
undue hardship standard); Homaidan v. Sallie Mae,
Inc., 3 F.4th 595, 605 (2d Cir. 2021); In re McDaniel,
973 F.3d 1083, 1092 (10th Cir. 2020); In re Crocker,
941 F.3d 206 (5th Cir. 2019), as revised (Oct. 22,
2019).
6 See Crocker, 941 F.3d at 217–18 (noting that
qualified educational expenses must be used to
attend an ‘‘eligible educational institution,’’ which
section 25A(f)(2) of the Internal Revenue Code
defines as eligible to participate in Title IV
programs).
7 Id. (bar study loan subject to standard
bankruptcy discharge); see also In re Campbell, 547
B.R. 49, 61 (Bankr. E.D.N.Y. 2016).
8 26 U.S.C. 221(d)(2) (limiting a qualified
educational expense to ‘‘the cost of attendance’’);
2 11
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17367
• Loans to students attending school
less than half-time; 9 and
• Other loans made for non-qualified
higher education expenses.10
Any private loans in these categories
are discharged by standard bankruptcy
discharge orders, just like most other
unsecured consumer debts.11 In
addition to not fitting the definition of
‘‘qualified education loan,’’ these loans
are not made, insured, or guaranteed by
a governmental unit, and are not
educational benefits, scholarships, or
stipends. The obligations at issue here
are originated as loans requiring
repayment; educational benefits,
scholarships, and stipends, in contrast,
are grants, where repayment is only
triggered if the student fails to meet a
condition of the grant. Indeed, the
Second, Fifth, and Tenth Circuits—the
only circuits to analyze the issue fully—
have held that the educational benefit
exclusion does not apply to student
loans.12
II. Unfair Acts or Practices in Handling
Student Loans Post-Bankruptcy
The CFPB has authority to conduct
oversight of student loan servicing,
including by citing servicers for unfair,
deceptive, or abusive acts or practices.13
Congress defined an unfair act or
practice as one that:
(A) Causes or is likely to cause
substantial injury to consumers which is
not reasonably avoidable, and
(B) Such substantial injury is not
outweighed by countervailing benefits
to consumers or to competition.14
Through its supervisory activities,
CFPB examiners found that servicers of
various types of student loans failed to
maintain policies or procedures for
distinguishing between loan types that
are discharged in the regular course of
a bankruptcy proceeding (generally,
non-qualified education loans) and loan
types that require consumers to initiate
see, e.g., Homaidan, 3 F.4th at 599 (affirming
discharge of loans made in excess of the cost of
attendance).
9 See 26 U.S.C. 221(d)(1)(C) (defining a ‘‘qualified
education loan’’ as a loan made to an ‘‘eligible
student’’); 20 U.S.C. 1091(b)(3) (defining ‘‘eligible
student’’ as someone attending at least half-time).
10 26 U.S.C. 221(d)(1) (requiring a qualified
education loan only be used to pay ‘‘qualified
higher education expenses’’).
11 See, e.g., Homaidan, 3 F.4th at 605; McDaniel,
973 F.3d at 1092; Crocker, 941 F.3d at 206.
12 See Homaidan, 3 F.4th at 604–05; McDaniel,
973 F.3d at 1092; Crocker, 941 F.3d at 224.
13 See title X of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law
111–203, 124 Stat. 1376 (2010) (establishing the
CFPB’s authority). Under the Dodd-Frank Act, all
covered persons or service providers are prohibited
from committing unfair, deceptive, or abusive acts
or practices in violation of the Act.
14 12 U.S.C. 5531(c)(1).
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Federal Register / Vol. 88, No. 56 / Thursday, March 23, 2023 / Rules and Regulations
ddrumheller on DSK120RN23PROD with RULES1
an adversarial proceeding and meet the
‘‘undue hardship’’ standard to receive
bankruptcy relief. Some servicers relied
entirely on loan holders to distinguish
among the loans and did not determine
whether holders had in fact done so.
Nor did they take any other steps to
evaluate whether or not the loans were
qualified education loans.
Consequently, examiners identified
accounts where servicers, following a
bankruptcy involving non-qualified
education loans, resumed collecting on
loans that had been discharged by
bankruptcy courts.
CFPB examiners determined that
student loan servicers engaged in an
unfair act or practice, in violation of the
Dodd-Frank Act, when they resumed
collection of debts that were discharged
by bankruptcy courts.15 The conduct
caused or was likely to cause substantial
injury to consumers because the
representations made to consumers in
billing statements and other collection
attempts were likely to result in
consumers making payments they did
not owe. In fact, CFPB examiners also
observed that after exiting bankruptcy
and being presented with bills from
their student loan servicers, most
borrowers made payments toward the
debts, sometimes paying thousands of
dollars on discharged debts. Since the
consumers could not control the
servicers’ actions, consumers could not
reasonably avoid the injury. Lastly, the
substantial injury was not outweighed
by countervailing benefits to consumers
or competition, as there was no value to
consumers or competition in servicers
collecting debts that had already been
discharged by operation of bankruptcy
court orders.
In addition to directing the servicers
to revise their policies and procedures
to prevent the collection of discharged
loans, CFPB examiners directed them to
do a multi-year lookback resulting in
refunds to affected borrowers.16
15 Depending on the facts and circumstances,
returning consumers to repayment status on debts
discharged in bankruptcy may also implicate
deceptive or abusive acts or practices, or other
unfair acts or practices under the CFPA, sections
1031, 1036; 12 U.S.C. 5531, 5536.
16 In addition, CFPB examiners have separately
cited student loan servicers for deceptive conduct
that violates the CFPA when the servicers
misrepresented to consumers that student loans are
never dischargeable in bankruptcy or conveyed to
consumers that their loans are not dischargeable
because those consumers have completed
bankruptcy. Supervisory Highlights, Fall 2014,
section 2.5.5, https://files.consumerfinance.gov/f/
201410_cfpb_supervisory-highlights_fall-2014.pdf
and Supervisory Highlights, Fall 2015, section 2.5.3,
https://files.consumerfinance.gov/f/201510_cfpb_
supervisory-highlights.pdf.
VerDate Sep<11>2014
16:18 Mar 22, 2023
Jkt 259001
III. Supervision and Enforcement
The CFPB’s supervisory observations
and consumer complaints show that
servicers continued to make collection
attempts on student loans that were
discharged through bankruptcy in many
instances. This conduct violates Federal
consumer financial law.17 The CFPB
expects servicers to proactively identify
student loans that are discharged
without an undue hardship showing
and permanently cease collections
following a standard bankruptcy
discharge order. The CFPB is
prioritizing student loan servicing
oversight work in deploying its
supervision and enforcement resources
in the coming year, including a focus on
evaluating whether lenders and
servicers cease collection of student
loans once they have been discharged.18
In its student loan servicing oversight
work, the CFPB plans to pay particular
attention to:
a. Whether student loan servicers
continue to collect on loans that are
discharged by a bankruptcy discharge
order;
b. Whether servicers and loan holders
have adequate policies and procedures
to identify loans that are discharged by
a bankruptcy discharge order and loans
that require the borrower to go through
an adversarial proceeding to
demonstrate that they meet the undue
hardship standard; and
c. Whether servicers provide accurate
information to borrowers about the
status of their loans and the protections
that bankruptcy offers.19
In exercising its supervisory and
enforcement discretion, the CFPB will
consider the extent to which entities
engage in proactive review and
remediation. For example, where
servicers or loan holders identify errors,
they can expand their analysis to
include a review of all accounts exiting
bankruptcy going back to their earliest
available data and provide full
remediation where they wrongfully
collected from any borrower. In
addition, servicers can proactively
categorize loans based on whether they
can be discharged, so their policies and
procedures do not require individual
17 Practices of this kind might also violate State
laws, including State prohibitions on unfair or
deceptive practices and State student loan servicing
statutes.
18 To the extent that continued attempts to collect
result in improper accrual and collection of interest
on discharged education loans, such practices may
result in the provision of any report of examination
or related information identifying possible tax law
noncompliance to the Commissioner of Internal
Revenue, per 12 U.S.C. 5514(b)(6).
19 This list is not exhaustive. The CFPB may also
scrutinize additional practices related to discharged
student loans.
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Frm 00004
Fmt 4700
Sfmt 9990
determinations at the time of
bankruptcy. In future supervisory and
enforcement work, the CFPB will assess
servicers’ processes and determine
whether necessary remediation was
adequate to compensate borrowers for
the errors.
IV. Conclusion
The CFPB will continue to review
closely the practices of student loan
servicers for potential unfair, deceptive,
or abusive acts or practices. Examiners
will determine whether servicers of
private student loans return loans to
repayment status after a standard
bankruptcy discharge has released the
borrowers from these debts. The CFPB
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.
V. Regulatory Requirements
This is a general statement of policy
under the Administrative Procedure Act
(APA). It is intended to provide
information regarding the CFPB’s
general plans to exercise its supervisory
and enforcement discretion for
institutions under its jurisdiction and
does not impose any legal requirements
on external parties, nor does it create or
confer any substantive rights on external
parties that could be enforceable in any
administrative or civil proceeding.
Because no notice of proposed
rulemaking is required in issuing the
Bulletin, the Regulatory Flexibility Act
also does not require an initial or final
regulatory flexibility analysis. The CFPB
has also determined that the issuance of
the Bulletin does not impose any new
or revise any existing recordkeeping,
reporting, or disclosure requirements on
covered entities or members of the
public that would be collections of
information requiring approval by the
Office of Management and Budget under
the Paperwork Reduction Act.
Rohit Chopra,
Director, Consumer Financial Protection
Bureau.
[FR Doc. 2023–06002 Filed 3–22–23; 8:45 am]
BILLING CODE 4810–AM–P
E:\FR\FM\23MRR1.SGM
23MRR1
Agencies
[Federal Register Volume 88, Number 56 (Thursday, March 23, 2023)]
[Rules and Regulations]
[Pages 17366-17368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06002]
=======================================================================
-----------------------------------------------------------------------
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Chapter X
Bulletin 2023-01: Unfair Billing and Collection Practices After
Bankruptcy Discharges of Certain Student Loan Debts
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Compliance bulletin and policy guidance.
-----------------------------------------------------------------------
SUMMARY: The Consumer Financial Protection Bureau (CFPB) is issuing
this Compliance Bulletin and Policy Guidance (Bulletin) to address the
treatment of certain private student
[[Page 17367]]
loans (student loans) following bankruptcy discharge. In order to
secure a discharge of ``qualified education loans'' in bankruptcy,
borrowers must demonstrate that the loans would impose an undue
hardship if not discharged. Student loans that are not ``qualified
education loans'' (non-qualified student loans), however, are
discharged under standard bankruptcy discharge orders. In recent
supervisory work, CFPB examiners identified servicers that did not
determine whether education loans were qualified or non-qualified. As a
result, servicers improperly returned non-qualified education loans to
repayment after a bankruptcy concluded and continued to bill and
collect payments on the loans, even though the borrowers' bankruptcy
discharges released them from these debts. This conduct violated the
Consumer Financial Protection Act's (CFPA's) prohibition on unfair,
deceptive, or abusive acts or practices. CFPB examiners directed the
servicers to cease collection of discharged loans and take remedial
action, which includes conducting a multi-year lookback and issuing
refunds to affected consumers. In its oversight, the CFPB will pay
particular attention to servicers' practices in connection with student
loans that are the subject of bankruptcy discharge orders, including
whether discharged debts are being collected contrary to bankruptcy
court orders.
DATES: This bulletin is applicable on March 23, 2023.
FOR FURTHER INFORMATION CONTACT: Miya Tandon, Counsel, Office of
Supervision Policy, at 202-695-4901; Matt Liles, Senior Counsel, Office
of Supervision Policy, at 202-701-3828. If you require this document in
an alternative electronic format, please contact
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background
After a debtor files for bankruptcy, a judge issues an order of
discharge that releases a debtor from personal liability for all debts
unless they are exempted. Some types of student loans are not
discharged by general orders of discharge and receive special treatment
under section 523(a)(8) of the Bankruptcy Code. Borrowers with these
obligations must prove the debt would impose an undue hardship if not
discharged. The Bankruptcy Code identifies these debts as:
a. Loans that are made, insured, or guaranteed by a governmental
unit, or made under any program funded in whole or in part by a
governmental unit or nonprofit institution;
b. Loans that meet the definition of a ``qualified education
loan,'' as defined in section 221(d)(1) of the Internal Revenue Code of
1986; \1\ or
---------------------------------------------------------------------------
\1\ 11 U.S.C. 523(a)(8).
---------------------------------------------------------------------------
c. Obligations to repay funds received as an educational benefit,
scholarship, or stipend.\2\
---------------------------------------------------------------------------
\2\ 11 U.S.C. 523(a)(8)(A)(ii).
---------------------------------------------------------------------------
The Internal Revenue Code specifies that qualified education loans
are those that are incurred:
1. Solely to pay for the cost of attendance less scholarships or
certain other payments;
2. At institutions eligible to participate in Federal student aid
programs under Title IV of the Higher Education Act of 1965; and
3. While attending at least half-time.\3\
---------------------------------------------------------------------------
\3\ 26 U.S.C. 221(d)(1).
---------------------------------------------------------------------------
In practice, the majority of student loans meet one of the criteria
for special treatment under the Bankruptcy Code, and therefore, are not
discharged by a general order of discharge.\4\ Importantly, however,
some loans for educational purposes that borrowers may think of as
``private student loans'' are not exempt from the general order of
discharge,\5\ including:
---------------------------------------------------------------------------
\4\ For example, the majority of student loans are Federal loans
made or insured under title IV of the Higher Education Act. See
Report of the CFPB Education Loan Ombudsman, https://files.consumerfinance.gov/f/documents/cfpb_education-loan-ombudsman_report_2022-10.pdf (Oct. 2022), pp. 7-8.
\5\ See, e.g., In re McDaniel, 590 B.R. 537, 545 (Bankr. D.
Colo. 2018) (noting that merely labeling a product a ``student
loan'' does not subject it to the undue hardship standard); Homaidan
v. Sallie Mae, Inc., 3 F.4th 595, 605 (2d Cir. 2021); In re
McDaniel, 973 F.3d 1083, 1092 (10th Cir. 2020); In re Crocker, 941
F.3d 206 (5th Cir. 2019), as revised (Oct. 22, 2019).
---------------------------------------------------------------------------
Loans made to attend non-Title IV schools (that is,
schools that are not permitted to process U.S. Federal student aid,
such as unaccredited schools and foreign schools); \6\
---------------------------------------------------------------------------
\6\ See Crocker, 941 F.3d at 217-18 (noting that qualified
educational expenses must be used to attend an ``eligible
educational institution,'' which section 25A(f)(2) of the Internal
Revenue Code defines as eligible to participate in Title IV
programs).
---------------------------------------------------------------------------
Loans made to cover fees and living expenses incurred
while studying for the bar exam or other professional exams; \7\
---------------------------------------------------------------------------
\7\ Id. (bar study loan subject to standard bankruptcy
discharge); see also In re Campbell, 547 B.R. 49, 61 (Bankr.
E.D.N.Y. 2016).
---------------------------------------------------------------------------
Loans made to cover fees, living expenses, and moving
costs associated with medical or dental residency;
Loans made in amounts in excess of the cost of attendance;
\8\
---------------------------------------------------------------------------
\8\ 26 U.S.C. 221(d)(2) (limiting a qualified educational
expense to ``the cost of attendance''); see, e.g., Homaidan, 3 F.4th
at 599 (affirming discharge of loans made in excess of the cost of
attendance).
---------------------------------------------------------------------------
Loans to students attending school less than half-time;
\9\ and
---------------------------------------------------------------------------
\9\ See 26 U.S.C. 221(d)(1)(C) (defining a ``qualified education
loan'' as a loan made to an ``eligible student''); 20 U.S.C.
1091(b)(3) (defining ``eligible student'' as someone attending at
least half-time).
---------------------------------------------------------------------------
Other loans made for non-qualified higher education
expenses.\10\
---------------------------------------------------------------------------
\10\ 26 U.S.C. 221(d)(1) (requiring a qualified education loan
only be used to pay ``qualified higher education expenses'').
---------------------------------------------------------------------------
Any private loans in these categories are discharged by standard
bankruptcy discharge orders, just like most other unsecured consumer
debts.\11\ In addition to not fitting the definition of ``qualified
education loan,'' these loans are not made, insured, or guaranteed by a
governmental unit, and are not educational benefits, scholarships, or
stipends. The obligations at issue here are originated as loans
requiring repayment; educational benefits, scholarships, and stipends,
in contrast, are grants, where repayment is only triggered if the
student fails to meet a condition of the grant. Indeed, the Second,
Fifth, and Tenth Circuits--the only circuits to analyze the issue
fully--have held that the educational benefit exclusion does not apply
to student loans.\12\
---------------------------------------------------------------------------
\11\ See, e.g., Homaidan, 3 F.4th at 605; McDaniel, 973 F.3d at
1092; Crocker, 941 F.3d at 206.
\12\ See Homaidan, 3 F.4th at 604-05; McDaniel, 973 F.3d at
1092; Crocker, 941 F.3d at 224.
---------------------------------------------------------------------------
II. Unfair Acts or Practices in Handling Student Loans Post-Bankruptcy
The CFPB has authority to conduct oversight of student loan
servicing, including by citing servicers for unfair, deceptive, or
abusive acts or practices.\13\ Congress defined an unfair act or
practice as one that:
---------------------------------------------------------------------------
\13\ See title X of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010)
(establishing the CFPB's authority). Under the Dodd-Frank Act, all
covered persons or service providers are prohibited from committing
unfair, deceptive, or abusive acts or practices in violation of the
Act.
---------------------------------------------------------------------------
(A) Causes or is likely to cause substantial injury to consumers
which is not reasonably avoidable, and
(B) Such substantial injury is not outweighed by countervailing
benefits to consumers or to competition.\14\
---------------------------------------------------------------------------
\14\ 12 U.S.C. 5531(c)(1).
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Through its supervisory activities, CFPB examiners found that
servicers of various types of student loans failed to maintain policies
or procedures for distinguishing between loan types that are discharged
in the regular course of a bankruptcy proceeding (generally, non-
qualified education loans) and loan types that require consumers to
initiate
[[Page 17368]]
an adversarial proceeding and meet the ``undue hardship'' standard to
receive bankruptcy relief. Some servicers relied entirely on loan
holders to distinguish among the loans and did not determine whether
holders had in fact done so. Nor did they take any other steps to
evaluate whether or not the loans were qualified education loans.
Consequently, examiners identified accounts where servicers, following
a bankruptcy involving non-qualified education loans, resumed
collecting on loans that had been discharged by bankruptcy courts.
CFPB examiners determined that student loan servicers engaged in an
unfair act or practice, in violation of the Dodd-Frank Act, when they
resumed collection of debts that were discharged by bankruptcy
courts.\15\ The conduct caused or was likely to cause substantial
injury to consumers because the representations made to consumers in
billing statements and other collection attempts were likely to result
in consumers making payments they did not owe. In fact, CFPB examiners
also observed that after exiting bankruptcy and being presented with
bills from their student loan servicers, most borrowers made payments
toward the debts, sometimes paying thousands of dollars on discharged
debts. Since the consumers could not control the servicers' actions,
consumers could not reasonably avoid the injury. Lastly, the
substantial injury was not outweighed by countervailing benefits to
consumers or competition, as there was no value to consumers or
competition in servicers collecting debts that had already been
discharged by operation of bankruptcy court orders.
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\15\ Depending on the facts and circumstances, returning
consumers to repayment status on debts discharged in bankruptcy may
also implicate deceptive or abusive acts or practices, or other
unfair acts or practices under the CFPA, sections 1031, 1036; 12
U.S.C. 5531, 5536.
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In addition to directing the servicers to revise their policies and
procedures to prevent the collection of discharged loans, CFPB
examiners directed them to do a multi-year lookback resulting in
refunds to affected borrowers.\16\
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\16\ In addition, CFPB examiners have separately cited student
loan servicers for deceptive conduct that violates the CFPA when the
servicers misrepresented to consumers that student loans are never
dischargeable in bankruptcy or conveyed to consumers that their
loans are not dischargeable because those consumers have completed
bankruptcy. Supervisory Highlights, Fall 2014, section 2.5.5,
https://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf and Supervisory Highlights, Fall 2015,
section 2.5.3, https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf.
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III. Supervision and Enforcement
The CFPB's supervisory observations and consumer complaints show
that servicers continued to make collection attempts on student loans
that were discharged through bankruptcy in many instances. This conduct
violates Federal consumer financial law.\17\ The CFPB expects servicers
to proactively identify student loans that are discharged without an
undue hardship showing and permanently cease collections following a
standard bankruptcy discharge order. The CFPB is prioritizing student
loan servicing oversight work in deploying its supervision and
enforcement resources in the coming year, including a focus on
evaluating whether lenders and servicers cease collection of student
loans once they have been discharged.\18\
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\17\ Practices of this kind might also violate State laws,
including State prohibitions on unfair or deceptive practices and
State student loan servicing statutes.
\18\ To the extent that continued attempts to collect result in
improper accrual and collection of interest on discharged education
loans, such practices may result in the provision of any report of
examination or related information identifying possible tax law
noncompliance to the Commissioner of Internal Revenue, per 12 U.S.C.
5514(b)(6).
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In its student loan servicing oversight work, the CFPB plans to pay
particular attention to:
a. Whether student loan servicers continue to collect on loans that
are discharged by a bankruptcy discharge order;
b. Whether servicers and loan holders have adequate policies and
procedures to identify loans that are discharged by a bankruptcy
discharge order and loans that require the borrower to go through an
adversarial proceeding to demonstrate that they meet the undue hardship
standard; and
c. Whether servicers provide accurate information to borrowers
about the status of their loans and the protections that bankruptcy
offers.\19\
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\19\ This list is not exhaustive. The CFPB may also scrutinize
additional practices related to discharged student loans.
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In exercising its supervisory and enforcement discretion, the CFPB
will consider the extent to which entities engage in proactive review
and remediation. For example, where servicers or loan holders identify
errors, they can expand their analysis to include a review of all
accounts exiting bankruptcy going back to their earliest available data
and provide full remediation where they wrongfully collected from any
borrower. In addition, servicers can 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. In
future supervisory and enforcement work, the CFPB will assess
servicers' processes and determine whether necessary remediation was
adequate to compensate borrowers for the errors.
IV. Conclusion
The CFPB will continue to review closely the practices of student
loan servicers for potential unfair, deceptive, or abusive acts or
practices. Examiners will determine whether servicers of private
student loans return loans to repayment status after a standard
bankruptcy discharge has released the borrowers from these debts. The
CFPB 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.
V. Regulatory Requirements
This is a general statement of policy under the Administrative
Procedure Act (APA). It is intended to provide information regarding
the CFPB's general plans to exercise its supervisory and enforcement
discretion for institutions under its jurisdiction and does not impose
any legal requirements on external parties, nor does it create or
confer any substantive rights on external parties that could be
enforceable in any administrative or civil proceeding. Because no
notice of proposed rulemaking is required in issuing the Bulletin, the
Regulatory Flexibility Act also does not require an initial or final
regulatory flexibility analysis. The CFPB has also determined that the
issuance of the Bulletin does not impose any new or revise any existing
recordkeeping, reporting, or disclosure requirements on covered
entities or members of the public that would be collections of
information requiring approval by the Office of Management and Budget
under the Paperwork Reduction Act.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-06002 Filed 3-22-23; 8:45 am]
BILLING CODE 4810-AM-P