Alston & Bird Consumer Finance Blog

student loan servicing

CFPB Issues Special Edition of Supervisory Highlights Focusing on Junk Fees

A&B ABstract:

In the 29nd edition of its Supervisory Highlights, the Consumer Financial Protection Bureau (“CFPB”) focused on the impact of so-called “junk” fees in the mortgage servicing, auto servicing, and student loan servicing industries, among others.

CFPB Issues New Edition of Supervisory Highlights:

On March 8, the CFPB published a special edition of its Supervisory Highlights, addressing supervisory observations with respect to the imposition of junk fees in the mortgage servicing and auto servicing markets – as well as for deposits, payday and small-dollar lending, and student loan servicing.  The observations cover examinations of participants in these industries that the CFPB conducted between July 1, 2022 and February 1, 2023.

Auto Servicing

With respect to auto servicing, the CFPB noted three principal categories of findings the Bureau claims constitute acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”).

First, examiners asserted that auto servicers engaged in unfair acts or practices by assessing late fees: (a) that exceeded the maximum amount stated in consumers’ contracts; or (b) after consumers’ vehicles had been repossessed and the full balances were due.  With respect to the latter, the acceleration of the contract balance upon repossession extinguished not only the customers’ contractual obligation to make further periodic payments, but also the servicers’ contractual right to charge late fees on such periodic payments. The report notes that in response to the findings, the servicers ceased their assessment practices, and provided refunds to affected consumers.

Second, examiners alleged that auto servicers engaged in unfair acts or practices by charging estimated repossession fees that were significantly higher than the average repossession cost.  Although servicers returned excess amounts to consumers after being invoiced for the actual costs, the CFPB found that the assessment of the materially higher estimated fees caused or was likely to cause concrete monetary harm – and, thus, “substantial injury” as identified in unfair, deceptive, and abusive acts and practices (“UDAAP”) supervisory guidance – to consumers.  Further, consumers could have suffered injury in the form of loss of their vehicles to the extent that they did not want – or could not afford – to pay the higher estimated repossession fees if they sought to reinstate or redeem the vehicle.  Examiners found that such injuries: (a) were not reasonably avoidable by consumers, who could not control the servicers’ fee practices; and (b) were not outweighed by a countervailing benefit to consumers or competition.  The report notes that in response to the findings, the servicers ceased the practice of charging estimated repossession fees that were significantly higher than average actual costs, and also provided refunds to consumers affected by the practice.

Third, examiners claimed that auto servicers engaged in unfair and abusive acts or practices by assessing payment processing fees that exceeded the servicers’ actual costs for processing payments.  CFPB examiners noted that servicers offered consumers two free methods of payment: (a) pre-authorized recurring ACH debits; and (b) mailed checks.  Only consumers with bank accounts can utilize those methods; all those without a bank account, or who chose to use a different payment method, incurred a processing fee.  The CFPB reported that as a result of “pay-to-pay” fees, servicers received millions of dollars in incentive payments totaling approximately half of the total amount of payment processing fees collected by the third party payment processors.

Mortgage Servicing

In examining mortgage servicers, CFPB examiners noted five principal categories of findings that related to the assessment of junk fees, which were alleged to constitute UDAAPs and/or violate Regulation Z.

First, CFPB examiners found that servicers assessed borrowers late fees in excess of the amounts permitted by loan agreements, often by neglecting to input the maximum fee permitted by agreement into their operating systems.   The examiners found that by instead charging the maximum late fees permitted under state laws, servicers engaged in unfair acts or practices.  Further, servicers violated Regulation Z by issuing periodic statements that reflected the charging of fees in excess of those permitted by borrowers’ loan agreements. In response to these findings, servicers took corrective action including: (a) waiving or refunding late fees that were in excess of those permitted under borrowers’ loan agreements; and (b) corrected borrower’s periodic statements to reflect correct late fee amounts.

Second, CFPB examiners found that servicers engaged in unfair acts and practices by repeatedly charged consumers for unnecessary property inspections (such as repeat property preservation visits to known bad addresses). In response to the finding, servicers revised their policies to preclude multiple charges to a known bad address, and waived or refunded the fees that had been assessed to borrowers.

Third, CFPB examiners noted two sets of findings related to private mortgage insurance (“PMI”).  When a loan is originated with lender-paid PMI, PMI premiums should not be billed directly to consumers.  In certain cases, the CFPB found that servicers engaged in deceptive acts or practices by mispresenting to consumers – including on periodic statements and escrow disclosures – that they owed PMI premiums, when in fact the borrowers’ loans had lender-paid PMI.  These misrepresentations led to borrowers’ overpayments reflecting the PMI premiums; in response to the findings, servicers refunded any such overpayments. Similarly, CFPB examiners found that servicers violated the Homeowners Protection Act by failing to terminate PMI on the date that the principal balance of a current loan was scheduled to read a 78 percent LTV ratio, and continuing to accept borrowers’ payments for PMI after that date.  In response to these findings, servicers both issued refunds of excess PMI payments and implemented compliance controls to enhance their PMI handling.

Fourth, CFPB examiners found that servicers engaged in unfair acts or practices by failing to waive charges (including late fees and penalties) accrued outside of forbearance periods for federally backed mortgages subject to the protections of the CARES Act.  The CARES Act generally prohibits the accrual of fees, penalties, or additional interest beyond scheduled monthly payment amounts during a forbearance period; however, the law does not address fees and charges accrued during periods when loans are not in forbearance.  Under certain circumstances, HUD required servicers of FHA-insured mortgages to waive fees and penalties accrued outside of forbearance periods for borrowers exiting forbearances and  entering permanent loss mitigation options.  CFPB examiners found that servicers sometimes failed to complete the required fee waivers, constituting an unfair act or practice under the CFA.

Finally, CFPB examiners found that servicers engaged in deceptive acts and practices by sending consumers in their last month of forbearance periodic statements that incorrectly listed a $0 late fee for the next month’s payment, when a full late fee would be charged if such payment were late.  In response to the finding, servicers updated their periodic statements and either waived or refunded late fees incurred in the referenced payments.

Deposits

The CFPB determined that two overdraft-related practices constitute unfair acts or practices: (i) authorizing transactions when a deposit’s balance was positive but settled negative (APSN fees); and (ii) assessing multiple non-sufficient funds (NSF) fees when merchants present a payment against a customer’s account multiple times despite the lack of sufficient funds in the account.  The CFPB has criticized both fees before in Consumer Financial Protection Circular 2022-06, Unanticipated Overdraft Fee Assessment Practices.

According to the report, tens of millions of dollars in related customer injury are attributable to APSN fee practices, and redress is already underway to more than 170,000 customers.  Many financial institutions have abandoned the practice, but the CFPB noted that even some such institutions had not ceased the practice and were accordingly issued matters requiring attention to correct the problems.  As for NSF fees, the CFPB found millions of dollars of consumer harm to tens of thousands of customers.  It also determined that “virtually all” institutions interacting with the CFPB on the issue have abandoned the practice.

Student Loan Servicing

Turning to student loan servicing, the CFPB found that servicers engaged in unfair acts or practices prohibited by the CFPA where: (a) customer service representative errors delayed consumers from making valid payments on their accounts, and (b) those delays led to consumers owing additional late fees and interest associated with the delinquency.  Contrary to servicers’ state policies against the acceptance of credit cards, customer service representatives accepted and processed credit card payments from consumers over the phone.  The servicers initially processed the credit card payments, but then reversed those payments when the error in payment method was identified.

Payday and Small Dollar Lending

The CFPB determined that lenders, in connection with payday, installment, title, and line-of-credit loans, engaged in a number of unfair acts or practices.  The first conclusion they made was that lenders simultaneously or near-simultaneously re-presented split payments from customers’ accounts without obtaining proper authorization, resulting in multiple overdraft fees, indirect follow-on fees, unauthorized loss of funds, and inability to prioritize payment decisions. The second such conclusion concerned charges to borrowers to retrieve personal property from repossessed vehicles, servicer charges, and withholding subject personal property and vehicles until fees were paid.  The third such determination related to stopping vehicle repossessions before title loan payments were due as previously agreed, and then withholding the vehicles until consumers paid repossession-related fees and refinanced their debts.

Takeaways

The CFPB’s focus on “junk” fees is not new – it follows on an announcement last January that the agency would be focused on the fairness of fees that various industries impose on consumers.  (We have previously discussed how the CFPB’s actions could impact mortgage servicing fee structures.)  Similarly, the Federal Trade Commission has previously considered the issue of “junk fees” in connection with auto finance transactions.

By focusing specifically on the issue in a special edition of the Supervisory Highlights, the CFPB is drawing special attention to the issue of these fees in the servicing context.  Mortgage, auto, and student loan servicers might use this as an opportunity to review their current practices and see how they stack up against the CFPB’s findings.

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

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 York Proposes Student Loan Servicing Rules

A&B ABstract

Amid growing concerns over the federal government’s “hands off” approach to regulating the student loan business, New York Governor Andrew Cuomo released 3 NYCRR 409, a proposed regulation aimed at providing significant consumer protections for New York student loan borrowers, to the public for comment. The deadline for comment on the regulation is September 29.

Proposal of Part 409

Governor Andrew M. Cuomo released for public comment a new regulation (“Part 409”) aimed at providing significant consumer protections for New York student loan borrowers. The proposed rules, promulgated pursuant to Section 718 of the New York Banking Law (effective October 9, 2019), are of little surprise, given that Governor Cuomo and the Superintendent of the New York Department of Financial Services (“NYDFS”), Linda Lacewell, have been quite outspoken about their increasing concerns about the state of the student loan market in New York.

Activities within the Scope of Part 409

To further the NYDFS’ mission, Part 409 provides that, except as otherwise provided in New York laws and regulations, “every person engaged in the business of servicing student loans owed must be licensed by the [NYDFS] as a student loan servicer.”

For purposes of Part 409, “student loan servicer” means “a person engaged in the business of servicing student loans owed by one or more borrowers.” Further, Part 409 defines the term “student loan” as “any loan to a borrower to finance postsecondary education or expenses related to postsecondary education.”

An entity is deemed to be “servicing” if it is:

  • receiving any payment from a borrower pursuant to the terms of any student loan;
  • applying any payment to the borrower’s account pursuant to the terms of a student loan or the contract governing the servicing of any such loan;
  • during a period where a borrower is not required to make a payment on a student loan, maintaining account records for the student loan and communicating with the borrower regarding the student loan on behalf of the owner of the student loan promissory note; or
  • in conjunction with the activities described [above] (a) providing any notification of amounts owed on a student loan by or on account of any borrower; (b) performing other administrative services with respect to a borrower’s student loan; or (c) interacting with a borrower with respect to or regarding any attempt to avoid default on the borrower’s student loan and facilitating the [receipt or application of payments].

Notably, “servicing” excludes “collecting, or attempting to collect, on a defaulted student loan for which no payment has been received for 270 days or more.”

Other Requirements and Restrictions

Part 409 requires entities that “service” New York student loans to:

  • Provide clear and complete information concerning fees, payments due, and terms and conditions of loans;
  • Apply payments in borrowers’ best interest, rather than in ways that maximize servicer fees;
  • Inform borrowers of income-based repayment and loan forgiveness options;
  • Maintain and provide to consumers a detailed history of their account;
  • When a borrower’s loan is transferred to a new servicer, ensure that all necessary servicing information is transferred with the loan so the borrower’s repayment is not disrupted;
  • Provide accurate information to credit reporting agencies;
  • Provide timely and substantive responses to consumer complaints; and
  • Refrain from defrauding or misleading borrowers, engaging in any unfair, deceptive, abusive or predatory act or practice, or misapplying borrowers’ payments.

What’s Next?

Part 409 is open for comment until September 29, 2019. Given the messaging from Governor Cuomo and the NYDFS surrounding the regulation of the New York student loan market and the fact that the NYDFS made its New York Student Loan Servicer license application available to entities engaging in “student loan servicing” through the Nationwide Multistate Licensing System & Registry on August 1, 2019, this may only be New York’s first step into regulating student loan servicers.

UPDATE: As a complement to its regulatory efforts, the DFS is also increasing its staffing on student loan servicing issues.  Since our initial post, Superintendent Lacewell has announced: the appointment of Mr. Winston Berkman-Breen as the DFS’s first-ever Student Advocate and Director of Consumer Advocacy; and (2) the formation of the Student Debt Advisory Board. Both appointments, part of the DFS “Step Up for Students” initiative, highlight that safeguarding student loan borrowers is a priority for both Governor Cuomo and Superintendent Lacewell.

New Jersey Joins Other States Regulating Student Loan Servicers

A&B Abstract

New Jersey recently enacted its own version of a Student Loan Bill of Rights, which requires the licensing of any person acting “directly or indirectly” as a student loan servicer. In light of the growing number of states enacting similar language to regulate the student loan industry, what might this mean for the future for passive, secondary market investors in student loan debt?

Background

On July 30, 2019, acting New Jersey Governor Sheila Oliver signed into law Senate Bill 1149 (2019 N.J. Laws 200), New Jersey’s “Student Loan Bill of Rights.” Following suit with other states regulating student loan servicers, this legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the state.

Effective November 27, 2019 (120 days after enactment), SB 1149 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”).  The measure also creates the office of a student loan ombudsman.

SB 1149 bears many similarities to the efforts of other states (including Maine and Maryland) to regulate the student loan servicing industry. Like the regulators in other states, DOBI has not yet released formal guidance regarding the applicability of SB 1149’s licensing obligations to passive, secondary market investors in New Jersey student loan debt.  However, the language of the new law appears to be broad enough to allow DOBI to regulate such persons upon a recommendation from the student loan ombudsman.  It also raises the question of whether DOBI will require such investors to be licensed or registered to invest in New Jersey student education loans.

Responsibilities of the Student Loan Ombudsman

Effective November 27, 2019, the measure requires Commissioner of DOBI to designate an “Ombudsman.” The Ombudsman’s responsibilities are to:

  • Receive, review, and attempt to resolve any complaints from student loan borrowers, including, but not limited to, attempts to resolve those complains in collaboration with institutions of higher education, student loan servicers, and any other participants in student education loan lending;
  • Compile and analyze data on student loan borrower complaints as further described in the amended laws;
  • Assist student loan borrowers to understand their rights and responsibilities under the terms of student education loans;
  • Provide information to the public, agencies, legislators, and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
  • Analyze and monitor the development and implementation of federal, State, and local laws, regulations, and policies relating to student loan borrowers and recommend any changes the student loan ombudsman deems necessary;
  • Review the complete student education loan history for any student loan borrower who ahs provided written consent for review;
  • Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, including disseminating the information to institutions of higher education, student loan servicers, and any other participant in student education loan lending, with any student loan servicing concerns; and
  • Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in the amended laws.

Moreover, the Ombudsman must report to the Commissioner of DOBI and the Secretary of Higher Education on the statute’s implementation, the overall effectiveness of the student loan ombudsman position, and any additional steps that need to be taken for DOBI to gain regulatory control over the licensing and enforcement of student loan servicers.

SB 1149 grants the Ombudsman broad authority to regulate New Jersey’s student loan industry, particularly with respect to those that are deemed to “service” New Jersey student education loans. With respect to the bolded language above, it appears that the Ombudsman has the authority to recommend changes to New Jersey’s regulation of such persons, including recommending that passive, secondary market investors in New Jersey student education loans be licensed as New Jersey Student Loan Servicers, which is further supported by the new student loan servicer licensing requirements in SB 1149.

Licensing of Student Loan Servicers

SB 1149 provides that “[n]o person shall act as a student loan servicer, directly or indirectly, without first obtaining a license” from DOBI, unless specifically exempt. (Emphasis added.)  The term “student loan servicer” means “any person, wherever located, responsible for the servicing of any student education loan to any student loan borrower.” Similarly, “servicing” means:

  • receiving any scheduled periodic payments from a student loan borrower or notification of such payments, and applying payments to the borrower’s account pursuant to the terms of the student education loan or the contract governing the servicing of the loan;
  • during a period when no payment is required on the student education loan, maintaining account records for the loan and communicating with the student loan borrower regarding the loan, on behalf of the holder of the loan; or
  • interacting with a student loan borrower to facilitate the loan servicing as described in [the amended laws], including activities to help prevent loan default on obligations arising from a student education loan.

Importantly, the only entities exempt from licensing are: (1) a State or federally chartered bank, savings bank, savings and loan association, or credit union; (2) a wholly owned subsidiary of a 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.”

Potential Impact on Investors

The “directly or indirectly” language in the licensing obligation may raise concerns for entities that invest: (1) in student loan debt, or (2) in stand-alone master servicing rights in various types of debt.  Other state laws with similarly broad language have given state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in that type of debt without the passage of new laws or regulations. For example, state mortgage regulators may utilize such language to regulate entities that passively invest in whole residential mortgage loans on a servicing-released basis or the stand-alone mortgage servicing rights (“MSRs”) in such loans. Such regulators use this language to impose state mortgage servicer licensing obligations on persons that passively invest in that type of debt, and they are able to do so without any further legislative or regulatory action.

Applying this logic to SB 1149, DOBI could require passive, secondary market investors in New Jersey student education loans to be licensed as New Jersey Student Loan Servicers without any further legislative or regulatory action.  SB 1149 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan; further, the licensing obligation extends to those “indirectly” acting as a student loan servicer.  Both provisions could be read to require licensure for persons that passively invest in New Jersey student education loans and hire appropriately-licensed or exempt third-party subservicers to handle the servicing of such loans and all borrower-facing interactions.

Expectations for Future Regulation of Investors in New Jersey Student Loan Debt

As noted above, neither DOBI nor the New Jersey legislature appears to have released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt.  However, a growing number of states are regulating the student loan industry amid growing fears that there is waning federal regulation and oversight of the industry under the Trump administration.  As a result, it would not be surprising to see the Ombudsman or the Commissioner of DOBI release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in New Jersey student loan debt, in the months to come.

Student Loan Servicers Remain Liable Under State Law for Affirmative Misrepresentations to Borrowers

A&B Abstract: 

The Seventh Circuit recently held that the federal Higher Education Act does not preempt state law consumer protection and tort claims where student loan servicers made affirmative misrepresentations to borrowers regarding repayment options. As such, student loan servicers should be aware that representations they make to borrowers may be subject to state consumer protection laws.

Background

The Seventh Circuit, in Nelson v. Great Lakes Educational Loan Services Inc., No. 18-1531 (7th Cir. June 27, 2019), reversed the dismissal of a class action brought by student loan borrowers alleging that their loan servicer misled them regarding their repayment options.  The plaintiff, Nelson, alleged that her loan servicer—which communicated with borrowers about the repayment of their loans and assisted borrowers with alternative repayment plans—steered borrowers away from income-driven repayment plans and towards more burdensome options like forbearance.

When Nelson contacted Great Lakes about alternative repayment plans, a Great Lakes representative did not inform her of income-driven repayment plans that were available, and instead steered her towards forbearance.  Nelson argued that forbearance was not appropriate for borrowers experiencing long‑term financial difficulties like those she was facing, and that Great Lakes intentionally steered her away from other plans that would have been more appropriate for her situation.

Procedural History

Nelson brought claims for violations of Illinois’s Consumer Fraud and Deceptive Business Practices Act, as well as claims for fraud and negligent misrepresentation under Illinois common law.  The district court granted dismissal in favor of Great Lakes, finding that each of Nelson’s claims were premised on Great Lakes allegedly failing to disclose certain information to her, and were thus preempted by the federal Higher Education Act (“HEA”) because the HEA expressly provides that student loan servicers are “not [] subject to any disclosure requirements of any State Law.” (See 20 U.S.C. § 1098g.)

The Seventh Circuit, however, held that the district court’s ruling was overly broad, and drew a distinction between a failure to disclose and an affirmative misrepresentation.

When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information.  Those are affirmative misrepresentations, not failures to disclose.

As such, the court held that the HEA does not preempt the state law consumer protection and tort claims of a borrower who reasonably relied on a loan servicer’s representations.

Takeaway

As a result of this ruling, student loan servicers should be aware going forward that representations they make to borrowers regarding alternative repayment plans may very well be subject to state consumer protection laws.  The Seventh Circuit’s ruling suggests that just because a representation by a student loan servicer involves the disclosure of information, it does not necessarily fall under the preemptive protections of the HEA which shield student loan servicers from complying with state disclosure requirements. Rather, in contrast to merely failing to make a disclosure that would otherwise have been required under state law, student loan servicers remain liable for affirmative misrepresentations.