CFPB Focuses on Student Loans — Especially Those Made by Schools

On September 29, the Consumer Financial Protection Bureau (CFPB or Bureau) released a special edition of its Supervisory Highlights, focusing on student loan servicing. The report contained findings on federal student loan servicing that echo many recent public comments by the Bureau, but more notably, this edition of Supervisory Highlights also focused heavily on loans made by schools themselves, and the CFPB simultaneously announced that it was updating its examination manual and would be conducting examinations of schools that make their own loans to students.

The Supervisory Highlights follows the CFPB’s announcement earlier this year that it would examine the operations of post-secondary schools that extend private loans directly to students. CFPB Director Rohit Chopra explained the decision to undertake the review at the time by stating, “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future. It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

Among other findings from the report, the CFPB found:

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When higher education institutions extend credit, the dual role of lender and educator provides institutions with a range of collection tactics that leverage their unique relationship with the student.

Some postsecondary institutions employ the tactic of withholding transcripts for delinquent borrowers.
Students who cannot obtain transcripts can be locked out of future higher education and certain job opportunities. For these reasons, supervisors have determined this tactic to be abusive under the Consumer Financial Protection Act.

Income share agreements, which the Bureau unambiguously refers to as student loans, may result in borrowers realizing very large APRs or prepayment penalties that may be illegal under the Truth in Lending Act (TILA) or state usury laws.

Simultaneously with issuing the Supervisory Highlights, the CFPB updated its Education Loan Examination Procedures. The Bureau explained the need for the update as follows:

The Consumer Financial Protection Act provides it the authority to supervise nonbanks that offer private student loans, including post-secondary institutions.
To determine which institutions are subject to the CFPB’s authority, the Consumer Financial Protection Act references the definition found in Section 140 of TILA.
This TILA definition varies from the one used in Regulation Z, which was the definition referred to in the previous manual.
The new version has been updated to inform examiners that the Bureau will be using TILA’s statutory definition of private education loan for the purposes of exercising its authority.
Specifically, the new manual instructs examiners that the CFPB may exercise its supervisory authority over an institution that extends credit expressly for postsecondary educational expenses so long as that credit is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965, and is not an open-ended consumer credit plan or secured by real property.

For schools that have their own credit programs, including tuition-payment plans and other deferred-payment options that may fall under Regulation Z’s definition of “private education loans,” the CFPB is sending the clearest of signals that it intends to devote significant attention to those programs, including the collection practices associated with them. Now would definitely be an opportune time for schools to assess their institutional loan programs.