CFPB to begin reviewing colleges’ internal lending practices – Consumer Protection

On January 20, 2022, the United States Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced that it would begin reviewing the internal lending operations of colleges and universities. As part of this announcement, the CFPB also released its updated Student Loan Review Procedures Manual with a new section on student loans issued by educational institutions. This announcement undoubtedly increases regulatory scrutiny of post-secondary schools that offer internal student loans.

1. ORIGINS

Many colleges and universities provide some form of funding directly to students. These “internal” private student loans are generally granted in two circumstances. First, schools provide internal loans to students to help them cover the gap between the total estimated cost of student attendance and the maximum amount a student can borrow under the federal student loan program. . In other words, these loans cover gaps in government student loan funding so a student can afford to attend a particular school (and are often called “gap loans”). Second, schools provide internal loans as a form of financial aid. These loans are sometimes subsidized (meaning they do not accrue interest while the student is in school) or come with an interest rate below the market rate. The two scenarios can – and often do – overlap.

Although many schools view in-house loans as a form of financial aid that helps students, the CFPB noted past abuses by for-profit schools that operated such loan programs. For example, the CFPB alleged that a school used misleading advertisements about job prospects and career service offers to trick students into taking out private student loans internally. As noted above, the CFPB also alleged that certain student loans offered by a for-profit college violated the CFPB’s prohibition on abusive acts and practices because they had high default rates and above-market interest and fees and were part of a “sham” arrangement designed to ensure that the school continued to have access to the federal student loan program.

Notably, private student loans from colleges and universities are exempt from many of the laws that apply to other student lenders. For example, these loans are generally not subject to state consumer loan licensing laws. They are also exempt from the provisions of Regulation Z regarding private education loans if (a) the credit is extended for 90 days or less or (b) an interest rate will not be applied to the credit balance when the term is less than one year. However, internal student loans that do not fall into these categories are still subject to the Truth in Lending Act and Regulation Z, and they are still subject to the Equal Credit Opportunity Act and the anti-discrimination provisions of Regulation B (among others), the Fair Debt Collection Practices Act (FDCPA), and the prohibitions against unfair, deceptive, and abusive acts and practices. It seems that the CFPB plans to concentrate its control activities on these laws and regulations.

2. FIELDS OF INTERVENTION

The CFPB announcement appears to focus on four main areas of concern.

a. Power imbalances between students and their schools

First, the CFPB announcement appears to be directing exam resources to areas where there is a clear power imbalance between students and their educational institutions. For example, CFPB reviewers will consider whether schools:

  • Preventing students who are in arrears with their loan payments from enrolling or taking courses, which could delay their graduation and prevent them from finding a job. This conduct may require students to take out additional student loans. They may also find it difficult to repay the loans they have already taken out.
  • Withholding transcripts from students who are indebted to the school, as this would prevent students from using their transcripts to demonstrate their level of education in the job market.
  • Include acceleration clauses in their loan agreements whereby loan repayment is accelerated when a student withdraws from an educational program.
  • Charge additional fees or tuition fees due to borrowers defaulting on internal loans.

In each of these scenarios, the CFPB suggests that a school would use its power over a student regarding academics, job and career prospects, or tuition reimbursement to compel the student to reimburse the internal student loan. Depending on how schools engage in such collection attempts, they may violate the Prohibition of Unfair, Deceptive, or Abusive Acts and Practices and the FDCPA’s Prohibition on Using Unfair or Unfair Collection Practices.

b. For-profit schools

Although the CFPB press release regarding the new exam program does not explicitly state that the Bureau will focus on for-profit schools, the release seems to imply that it will. When the release refers to “past abuses” by schools offering internal student loans, it cites two previous CFPB enforcement actions involving for-profit schools. The introductory sentence of the press release also notes that the reviews will cover for-profit colleges, but the rest of the press release does not mention non-profit colleges.

In particular, the CFPB has never taken legal action against a non-profit school regarding the internal loans offered by these schools. However, the Bureau has taken legal action against for-profit schools alleging they engaged in some of the types of conduct highlighted for reviewers in the new iteration of education loan review procedures. of the CFPB with respect to their internal lending programs.

New CFPB Director Rohit Chopra has also been a strong advocate for the marketing practices employed by for-profit schools and even led efforts to resurrect the Federal Trade Commission (FTC) Penalty Offense Authority so it could be used against for-profit schools. while he was commissioner at the FTC. Given this context, it seems that much of the CFPB’s focus with respect to internal reviews of the student loan program will likely be placed on for-profit schools.

vs. Partner lenders

The CFPB press release also notes that the Bureau will focus on improper lending relationships between schools and partner lenders. Specifically, the CFPB noted that schools that have preferential relationships with certain lenders may pose risks to students, as students may end up paying more for a loan with a partner lender. It is relatively common for schools to have relationships with partner lenders, so this is likely to be a major source of compliance risk for schools.

D. Revenue sharing agreements

The updated Student Loan Review Manual indicates that the Office considers Revenue Sharing Agreements (ISAs) to be within its authority. This follows the CFPB’s recent enforcement action against an ISA provider where the Bureau alleged that the ISA provider falsely stated that ISAs are not loans and failed to provide the loan disclosures required under federal law. Although the enforcement measure involved ISAs offered by a non-school private entity, some schools offer in-house ISA programs. It seems likely that the Bureau will review these programs to ensure that schools treat these ISAs as a credit and provide borrowers with required disclosures, where applicable.

3. CONCLUSION

It will be interesting to see how aggressively the CFPB reviews colleges and universities that offer internal loans and whether CFPB reviews will target nonprofit schools offering such loans. Colleges and universities that offer internal loans will want to ensure that they maintain a compliance management system that meets CFPB expectations; avoid engaging in behavior that the Bureau considers to be unfair, deceptive or abusive; and comply with the provisions of Regulation Z regarding private education loans, as applicable. Failure to meet CFPB compliance expectations could result in a “matter requiring attention” on review or, potentially, an enforcement action posing a significant reputational risk.

Visit us at mayerbrown.com

Mayer Brown is a global provider of legal services comprised of law firms that are separate entities (the “Mayer Brown Firms”). The Mayer Brown firms are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, two limited liability companies established in Illinois in the United States; Mayer Brown International LLP, a limited company incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales under number OC 303359); Mayer Brown, a SELAS based in France; Mayer Brown JSM, a partnership of Hong Kong and its associated entities in Asia; and Tauil & Checker Advogados, a Brazilian legal partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are registered trademarks of Mayer Brown law firms in their respective jurisdictions.

© Copyright 2020. Mayer Brown Practices. All rights reserved.

This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.

Comments are closed.