Alston & Bird Consumer Finance Blog

Student Loans

CFPB Seeks Permanent Enforcement – Will this Further its Repeat Offender Agenda?

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What Happened?

On May 31, 2024, the Consumer Financial Protection Bureau (CFPB) sued student loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA) for illegally collecting on student loans that have been discharged in bankruptcy and sending false information about consumers to credit reporting companies, in violation of the Consumer Financial Protection Act (CFPA) and the Fair Credit Reporting Act. As a result of PHEAA’s alleged practices, borrowers are forced to either pay debt they do not owe or risk being hit with negative information on their credit reports and default due to the purported non-payment. The CFPB’s lawsuit asks the court to order PHEAA to stop its illegal conduct, provide redress to borrowers it has harmed, and pay a civil penalty.

Notably, this lawsuit follows a prior complaint and proposed stipulated judgments filed by the CFPB against PHEAA and National Collegiate Student Loan Trusts (the Trusts) just 25 days earlier. The stipulated judgments filed by the CFPB on May 6, 2024, if approved (briefing to continue until at least June 28, 2024), would require the PHEAA and the Trusts to pay more than $5 million for student loan servicing failures, including failing to provide accurate information to borrowers and incorrectly denying forbearance requests. In addition to certain affirmative obligations, the Trusts are prohibited from directly or indirectly violating sections 1031 (prohibiting unfair, deceptive, abusive acts and practices) and 1036 (prohibiting violating a federal consumer financial law) of the CFPA with respect to certain borrower requests.

Why Is It Important?

The proposed stipulated judgments conspicuously lack one important feature – they do not provide for a termination date. While certain administrative provisions contain time limits (such as 5-year notification and recordkeeping requirements), the stipulated judgments effectively act as a permanent injunction against PHEAA and the Trusts. In other words, if, at any point in the future, PHEAA were to violate the Consumer Financial Protection Act, then PHEAA would be liable for violating the stipulated judgment – and, subsequently, at risk of being branded a “repeat offender” by the CFPB. Conveniently, just last week, the CFPB finalized a rule to establish a registry to detect and deter corporate offenders that have broken consumer laws and are subject to federal, state, or local government or court orders.

What Do I Need to Do?

Institutions within the CFPB’s jurisdiction should be aware of the CFPB’s actions and present any applicable legal defenses as to why an indefinite contract may be deemed unenforceable in court. Further, institutions should enhance their compliance management systems to mitigate risk and ensure they do not end up on the CFPB’s repeat offender list.

New Proposed Registration Requirements for Covered Financial Products and Services Under the California Consumer Financial Protection Law

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Last year, California passed the California Consumer Financial Protection Law (“CCFPL”), which renamed the Department of Business Oversight as the Department of Financial Protection and Innovation (“DFPI”) and expanded the authority of the department, including increased regulatory authority related to certain financial products. Under that widened purview, the DFPI has now proposed regulations requiring registration for certain financial product providers, including education financing and wage-based advances.

The CCFPL as Enacted

Under the statute, certain regulatory burdens apply to “covered persons” and “service providers” that broadly encompass entities offering extensions of credit and other consumer financial services and products, with certain exceptions and exemptions. With respect to the currently proposed regulations, the CCFPL allows the DFPI, with certain exemptions, to prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service. The CCFPL also states, however, that registration will not be required for any covered person licensed by the department under another law and who is providing a financial product or service within the scope of that license. The DFPI has sought comments regarding the proposed regulations including specifically “to clarify whether and when the registration requirements apply to Department licensees and licensees and registrants of other state agencies.” Comments on this and other potential issues with the proposed regulations may be submitted by December 20.

The Proposed Regulations

The proposed regulations, if finalized, would require registration for “subject products,” including for covered persons providing wage-based advances or education financing. Waged-based advances are defined in the proposed regulations as “funds paid to workers by a provider other than an obligor that are based on wages or compensation that a worker or the worker’s obligor has represented, and that a provider has reasonably determined, have been earned but have not, at the time of the advance, been paid to the worker for work performed for or on behalf of an obligor or obligors.” Education financing is defined to include any credit “extended for the purpose of funding postsecondary education and costs of attendance at a postsecondary institution, including, but not limited to, tuition, fees, books and supplies, room and board, transportation, and miscellaneous personal expenses.”

The proposal contemplates registration through the Nationwide Multistate Licensing System (NMLS), including use of uniform forms (“MU1”). Applicants are not required to complete Section 10 (“Bank Account Information”) or Section 17 (“Qualifying Individuals”) of Form MU1. With respect to described business activities, in addition to any other relevant activities, education financers would need to designate “private student loan lending,” while those providing wage-based advances fall into the category of “other – consumer finance” on the form. Registrants would also need to disclose other trade names, designate contact employees, provide organizational charts (including indirect owners), management charts, and detailed business descriptions. Registrants would also need identify certain individuals, including principal officers, directors, managing members, general partners, individuals controlling (directly or indirectly) 10% or more, and responsible individuals. Identified individuals do not need to complete fingerprinting. Branch offices would also be registered, including identification of branch managers, separately using form MU3. Changes in information submitted would also be updated in NMLS. Annual financial reporting and disclosures, as well as fees are proposed too.

Outside of NMLS, the regulations, if finalized as proposed, would require an applicant for registration to submit directly to DFPI supplemental information including sample forms. Education financers would need to include copies of third-party contracts and agreements as well as marketing material and additional sample documents. With respect to those providing wage-based advances, the supplemental application would also include additional sample contracts and agreements used to provide the service as well as additional information regarding the product cycle.

Conclusion  

The registration requirements are not effective until DFPI completes the comment period and other rulemaking procedures. It is unclear what the effective date of any future finalized regulations would be. It is also not clear if current industry participants will be able to continue to operate while registrations are pending once the rules are finalized. We will continue to monitor the situation as the regulations proceed.

New CFPB Chief Rohit Chopra Confirmed by Senate and Takes Immediate Action Against Big Tech Firms

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A&B Abstract:

On September 30, 2021, the Senate confirmed Rohit Chopra to serve as director of the Consumer Financial Protection Bureau (CFPB) in a 50-48 vote along party lines. He had been serving as a member of the Federal Trade Commission (FTC) where he had been a vocal critic of big tech companies and advocated for increased restitution for consumers. He previously served as the CFPB’s private education loan ombudsman under former CFPB Director Richard Cordray. Prior to that, he had worked closely with Sen. Elizabeth Warren on the CFPB’s establishment. Consistent with his past practices, Chopra’s CFPB has now ordered six Big Tech companies to turn over information regarding their payment platforms.

Expectations for Chopra’s CFPB

President-elect Biden announced Chopra as his choice to lead the CFPB before Inauguration Day, and the Biden Administration subsequently referred his nomination to the Senate in February. Chopra succeeds Kathy Kraninger, who became Director in December 2018 after having served as a senior official at the Office of Management and Budget. She led the CFPB for two years before the incoming Biden Administration demanded her resignation on January 20. It is expected that Chopra will aggressively lead the CFPB and unleash an industry crack down. The October 21, 2021 order issued to Big Tech regarding payment products appears to be the first step in that plan. Additionally, credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage servicers are among the financial institutions expected to face scrutiny from Chopra’s CFPB. Prior to the Big Tech inquiry, the CFPB, under interim leadership, had already taken initial steps to implement pandemic-era regulations and to advance the Biden administration’s priorities. It is also expected that the enforcement practices under former-Director Cordray will be revived under a Chopra-led CFPB.

After his confirmation, Chopra stated an intent to focus on safeguarding household financial stability, echoing prior statements regarding his commitment to ensuring those under foreclosure or eviction protections during the pandemic are able to regain housing security. He has also declared an intent to closely scrutinize the ways that banks use online advertising, as well as take a hard look at data-collection practices at banks. In his remarks related to the market-monitoring order issued to Big Tech, Chopra was critical of the way companies may collect data and his concern that it may be used to “profit from behavioral targeting, particularly around advertising and e-commerce.”

Just one week later, Chopra delivered remarks in his first congressional hearing as Consumer Financial Protection Bureau director. In his prepared statements before both the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, he cited mortgage and rent payments, small business continuity, auto debt, and upcoming CARES Act forbearance expirations as problems he plans to address. He also stated an intent to closely monitor the mortgage market and scrutinize foreclosure activity. And, echoing his action from a week earlier, Chopra reiterated an intent to closely look at Big Tech and emerging payment processing trends. Chopra also noted a lack of competition in the mortgage refinance market and stated an intent to promote competition within the market.

Although appointed to a five year term, the CFPB director serves at the pleasure of the president after a landmark decision last year from the Supreme Court.

Takeaway

Industry participants, including credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage lenders and servicers can anticipate additional scrutiny in the coming months and years from the CFPB. As Chopra gets settled into his new role, we will be keenly watching where he turns his attention to next.

New Jersey Releases Application Procedures for Student Loan Servicers

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A&B ABstract: As we have previously discussed, effective November 27, 2019, Senate Bill 1149 (2019 N.J. Laws 200) (the “Act”), creates New Jersey’s “Student Loan Bill of Rights” and prohibits any person from “act[ing] as a student loan servicer, directly or indirectly, without first obtaining a license” from the Department of Banking and Insurance (“DOBI”).

Although the Act became effective in 2019, the DOBI did not provide an application or an application mechanism to apply for a New Jersey student loan servicer license in 2019. The DOBI recently released guidance on the application process and operational requirements for those wishing to service student loans in New Jersey.

Background:

On September 1, 2020, the DOBI released Bulletin No. 20-31 (the “Bulletin”), which provides application procedures to apply for a license. The DOBI will begin to accept license submissions from all persons on September 15, 2020. The application must be submitted through the Nationwide Mortgage Licensing System (“NMLS”).

Persons that are currently acting as student loan servicers in the state that submit license forms prior to the close of business on December 31, 2020 may continue to operate as student loan servicers, pending DOBI’s approval of the license forms. All student loan servicers that are not exempt from licensure must submit all requirements for a license by December 31, 2020.

License Types

The Act creates two separate license types. The New Jersey Student Loan Servicer license is required for persons servicing student loans other than Federal Contract Student Loans (“FCSLs”). A Federal Contract Student Loan license is required for persons servicing student loans pursuant to a contract awarded by the United States Secretary of Education under 20 U.S.C.S. 1087f.

Persons servicing FCSLs will be automatically issued a limited, irrevocable license, upon adequately demonstrating their eligibility. Those servicing FCLSs and student loans other than FCLSs are required to obtain a both a Federal Contract Student Loan license and a New Jersey Student Loan Servicer license, and must comply with all requirements applicable to both license types.

Exemptions

As we previously noted, the Act’s licensure requirement does not apply to: (1) any state or federally chartered bank, savings bank, savings and loan association or credit union; (2) any wholly owned subsidiary of any bank or credit union; and (3) any operating subsidiary where each owner of the operating subsidiary is wholly owned by the same bank or credit union.

New Jersey Student Loan Servicer Application

Persons seeking to obtain a New Jersey Student Loan Servicer license must complete a license application through the NMLS. Amongst other application requirements, applicants must submit:

  • A nonrefundable license fee of $5,000;
  • A nonrefundable investigation fee of $500;
  • A surety bond in the amount of $30,000 plus an additional $30,000 per branch;
  • A financial statement demonstrating net worth of $250,000 prepared by a CPA or public account dated within 90 days of the applicant’s fiscal year end;
  • A business plan; and
  • An ownership chart.

Beginning in 2021, all student loan servicer licenses will expire at the close of business on December 31 each year. Renewals will be processed through the NMLS.

Federal Contract Student Loan Servicer License Application

As noted, applicants that service FCSLs must apply for a license to engage in student loan servicing pursuant to a contract awarded by the Secretary of Education. Applicants must complete a license form and submit the form through the NMLS. Applicants must submit:

  • A nonrefundable license fee of $5,000;
  • A certification indicating that the person is servicing student loans pursuant to a contract awarded by the Secretary of Education. The certification must be signed and sworn to under oath before a notary public;
  • For those solely servicing federal contract student loans, a surety bond in the amount of $30,000, plus an additional $30,000 for each branch office. Those servicing both federal contract student loans and student loans of any other type seeking both license types, is only required to obtain one surety bond in the amount of $30,000.

Operational Requirements and Penalties

The Bulletin discusses operational requirements for all student loan servicers. Among other operational requirements, all student loan servicers (regardless of license status) must: (1) maintain records; (2) file a report with the DOBI annually, setting forth information concerning business conducted in the previous calendar year; and (3) comply with all DOBI investigations and examinations.

The Bulletin notes that the Commissioner of the DOBI may suspend, revoke, or refuse to review the license of licensees who violate the Act.  Further, the Commissioner is empowered to bring a civil action against any person who violates the Act, and may seek a monetary penalty of note more than $10,000 for the first violation, and $20,000 for the second and each subsequent offense.

The Act also created a private right of action for borrowers who suffer ascertainable loss of money as a result of the use or employment by a student loan servicer of any method, act, or practice declared unlawful under the Act. Borrowers are eligible for terrible damages as well as attorney’s fees, filing fees, and reasonable costs of suit.

Takeaway:

Those currently servicing student loans in New Jersey should be prepared to submit a license application when the license application becomes active on September 15, 2020. All those currently engaged in student loan servicing in New Jersey must apply by December 31, 2020, or risk engaging in unlicensed activity after that date. Applicants should ensure that if they are servicing FCSLs that they apply for both license types.

Alston & Bird Hosts Calabria, Kraninger to Discuss COVID-19 Challenges

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A&B ABstract: On June 15, Alston & Bird partners Nanci Weissgold and Brian Johnson hosted Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency, and Kathy Kraninger, Director of the Consumer Financial Protection Bureau, to discuss federal regulatory responses to the COVID-19 pandemic and how they affect consumer lending and mortgage servicing.

The discussion was the inaugural event in Alston & Bird’s Financial Services Regulatory Speaker Series.

Pandemic Response

Directors Kraninger and Calabria first addressed their respective agencies’ efforts (individually and jointly) to respond to the effects of the pandemic.

Focusing on efforts relating to the GSEs, Dr. Calabria discussed the foreclosure moratorium (which he stated will soon be extended past June 30), and the focus on borrowers who are truly suffering a hardship.  He further indicated that approximately a quarter of borrowers in forbearance are continuing to make payments, which lead to the agency’s announcement in May that such borrowers will be treated as current for purposes of eligibility for refinancings or new purchases.

Director Kraninger expressed pride in the CFPB’s broad-based response to the crisis, and specifically mentioned efforts to educate consumers on their rights and expectations for relief, adjusting supervisory and enforcement processes to be more responsive to current needs and circumstances, and engaging all of the CFPB’s stakeholders in regulatory work (including the production of guidance relating to mortgages and consumer loans).

Market Prognosis

Asked for his assessment of the overall health of the residential mortgage market, Dr. Calabria compared current circumstances favorably to the 2008 financial crisis.  He specifically referenced the low number of GSE loans for which borrowers are underwater, indicating that borrowers with equity are less likely to walk away.  However, he anticipated that it will not be until the fourth quarter of the year that the true “wild card” – the number of loans in forbearance that will go into delinquency and foreclosure – will be known.

Coordinated Action

Director Kraninger stressed the importance of federal regulators acting in concert, and continuing conversations with the states to send a “clear signal across the regulatory landscape” of expectations for regulated institutions to accommodate their customers.  She stressed that the CFPB is using the examination process to conduct priority assessments as an opportunity to engage institutions, understanding how forbearance programs work and how they are engaging consumers.  Regulated institutions, she said, should expect the process to be iterative, rather than only a matter of identifying violations.

CARES Act and the Mortgage Servicing Rules

With respect to the interplay of the CARES Act and the Mortgage Servicing Rules, Director Kraninger addressed specific concerns regarding payment deferral.  Specifically, as to whether servicers are required to collect a complete loss mitigation application before approving a borrower for a payment deferral, she indicated that the CFPB is actively working with the FHFA on how best to provide options to consumers, and that the agencies expect to provide clarification on how the Mortgage Servicing Rules apply to CARES Act deferrals in the near term.  In the longer term, Director Kraninger suggested that the CFPB is considering new provisions  of the Rules applicable to national disasters (e.g., the COVID-19 pandemic, or severe weather).

Takeaways

Closing the discussion, Directors Calabria and Kraninger discussed overall perceptions of their agencies’ responses to the pandemic. Director Kraninger reiterated that the CFPB is committed to making clear its expectations for regulated entities.  By comparison to the financial crisis, the CFPB is focused on getting ahead of issues (e.g., with the credit reporting industry).

Dr. Calabria said that the greatest misunderstanding about the CARES Act relates to the scope of and eligibility for forbearance.  Borrowers are eligible for “up to” a year of forbearance – a ceiling, not a floor.  Additionally, to obtain an initial forbearance and the optional extension, a borrower must have suffered (and continue to suffer) economic hardship relating to the pandemic.  Thus, he indicated, initial estimates about the number of loans that would be in forbearance were too high.  Further, the number of borrowers with significant equity in their homes makes it more likely for the impact of the pandemic to be a liquidity event, not a solvency event.

Alston & Bird thanks Directors Calabria and Kraninger for sharing their insights with the hundreds of listeners in attendance. Stay tuned for more events in the series.