WASHINGTON—The CFPB has sued student loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA), which does business as American Education Services (AES), alleging it has been illegally collecting on student loans that have been discharged in bankruptcy and sending false information about consumers to credit reporting companies.
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.
PHEAA is a student loan servicer with its principal office in Harrisburg, Penn. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly $17.8 billion.
No Fresh Start
In filing suit, the CFPB said the United States Bankruptcy Code provides consumers a financial fresh start by discharging debts and prohibiting creditors from collecting on discharged debts.
“Many student loans, both federal and private, can be discharged in bankruptcy only if a borrower initiates a separate proceeding and meets a more stringent legal standard than is applied to other debts,” the CFPB said. “However, certain private student loans are discharged in normal bankruptcy proceedings like other unsecured consumer debt.”
What’s Included
The Bureau said these “non-qualified” private student loans include:
- Money borrowed to pay for tuition at schools that do not qualify for federal Title IV funding, such as unaccredited trade or K-12 schools
- Loans for medical and dental residency, loans to students attending school less than half-time, or loans where the loan amount was higher than the cost of attendance (which can occur when a loan is disbursed directly to a consumer).
According to the CFPB, AES services a range of private student loans, including those that have strict discharge requirements in bankruptcy and non-qualified loans that are routinely discharged.
“Nevertheless, when a consumer with private student loans serviced by AES receives a bankruptcy discharge, the company’s practice is to treat all of that consumer’s education-related loans as not discharged, unless it receives an explicit court order or other express direction from the loan owner,” the CFPB said.
Bulletin Issued
As CUToday.info reported earlier, in March 2023, the CFPB issued a bulletin warning the industry about this issue, detailing how supervisory examinations had found some student loan servicers illegally returning loans to collections after bankruptcy courts had discharged the loans.
The CFPB is alleging that PHEAA’s practices violate the Consumer Financial Protection Act and the Fair Credit Reporting Act’s implementing regulation.
“As a result of PHEAA’s 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 said.
The Specifics
Specifically, the CFPB is alleging PHEAA harms consumers by:
- Failing to maintain policies and procedures to identify when loans are discharged by bankruptcy
- Illegally collecting on and furnishing inaccurate information about discharged loans. “Between 2017 and 2021, AES collected or attempted to collect on approximately 7,934 private student loans after a bankruptcy proceeding,” the CFPB said. “Although discovery in litigation will reveal the total scope of PHEAA’s unlawful collection activity, at least 177 were loans eligible for discharge in bankruptcy. Borrowers were thus subjected to illegal collections on loans they did not owe.
“AES also furnishes inaccurate information to credit reporting companies regarding borrowers’ outstanding debt, which causes financial harm to consumers and may make it harder to qualify for other credit in the future,” the CFPB added.
- Falsely telling borrowers they still owe payments on discharged loans
Enforcement Action
The CFPB’s lawsuit against PHEAA seeks a stop to alleged unlawful conduct, redress for affected consumers, the imposition of a civil money penalty paid into the CFPB’s victims relief fund, and other relief.