In the latest student lending happenings, a group of state attorneys general wrote to the Department of Education seeking confirmation of student loan discharge relief to thousands of borrowers, while a consumer group filed suit against the Consumer Financial Protection Bureau (CFPB) alleging lax oversight of student loan servicers.
These actions demonstrate continued focus by state regulators and non-governmental watchdog groups as federal oversight has waned in recent years.
AGs demand answers from education department - what happened
After facing lawsuits from the CFPB and student borrowers for allegedly engaging in predatory lending, for-profit college chain ITT Educational Services closed its doors in September 2016.
Federal regulations require the Department to automatically discharge federal student loans of borrowers who were enrolled when a school is closed and who do not continue their education elsewhere within three years.
Pointing to this requirement, 22 state attorneys general asked the Department to confirm that all eligible ITT students received the closed-school discharge relief to which they are entitled. As of May 16, 2019, the Department estimated that more than 52,000 former ITT students are eligible for almost $833 million in closed-school discharge relief, but only one-third of those students had applied for and received their discharge, the attorneys general wrote.
With the three-year anniversary of ITT’s closure recently having passed, “the Department is required to immediately and automatically issue a full loan discharge to every eligible former ITT student,” the attorneys general of California, Colorado, Connecticut, Delaware, Illinois, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Vermont, Virginia and Washington reminded the Department.
“We ask that the Department clarify whether all eligible ITT students are now receiving the automatic discharges to which they are entitled,” the regulators said. “Further, we ask the Department to provide information sufficient to confirm that deserving ITT students have not been excluded from the automatic discharge program.”
The letter further requested specifics such as how many ITT borrowers the Department has identified as eligible for the closed-school discharge and the criteria it used to make that determination, as well as how many borrowers were denied the discharge, reasons for rejection and how many rejections were later overturned.
When ITT borrowers receive automatic closed-school discharges, are they always receiving a discharge of all federal loans taken to attend ITT, the attorneys general wondered, and when will the Department instruct servicers and credit reporting agencies to remove information relating to discharged loans from the credit reports of ITT borrowers?
The attorneys general requested a response within 30 days.
CFPB sued by consumer group - what happened
In a new lawsuit, Democracy Forward accused the CFPB of abandoning its statutory obligation to supervise larger student loan servicers on behalf of nonprofit organization Student Debt Crisis.
The Dodd-Frank Wall Street Reform and Consumer Protection Act vested the CFPB with supervisory authority over private student lending by nonbank lenders. In addition, both the statute and CFPB regulations provide the CFPB with authority over nonbank “larger participant[s] in the student loan servicing market,” including those servicing federally held student loans, according to the California federal court complaint.
Despite this mandate, the CFPB has informally adopted a different, more relaxed interpretation of its supervisory role, the organization alleged, limiting itself to oversight of student loans owned by private creditors. This more limited approach has allowed abuses in the student lending and servicing industries to flourish, Democracy Forward said.
Dodd-Frank also requires the CFPB to enter into a memorandum of understanding with the Department. While the agencies did have an agreement in place, the Department rescinded it in August 2017. Despite criticism of the move by consumer groups and members of Congress, a new agreement has yet to be reached, a further violation of the CFPB’s mandate to police student lending, the plaintiff alleged.
The group asked the court to declare that the CFPB’s supervisory authority includes the supervision of larger participants in the student loan servicing market—including large servicers engaged in the servicing of federally held student loans—and order the CFPB to resume its supervision accordingly.
To read the letter from the attorneys general, click here.
To read the complaint in Student Debt Crisis v. CFPB, click here.
Why it matters
With the change of administration in 2017, oversight of student loan servicers has receded from federal regulators such as the CFPB and the Department of Education, and the role of state regulators and now even activist groups has become more prominent. The attorneys general are attempting to fill a perceived enforcement void, and public interest groups are filing lawsuits demanding that courts require the CFPB to fill the void. Expect similar developments throughout 2020.