WASHINGTON—The Consumer Financial Protection Bureau has released a bulletin warning servicers of their obligation to halt “unlawful” conduct with respect to private student loans that have been discharged by bankruptcy courts.
The bulletin details recent findings by CFPB examiners that certain loan servicers were “illegally” returning loans to collections after bankruptcy courts had discharged the loans, the Bureau said.
“The CFPB is directing these servicers to return illegally collected payments to affected consumers and immediately cease these unlawful collection tactics,” the Bureau stated. “The bulletin also makes clear that the CFPB will continue to examine student loan servicers’ handling of these loans to detect whether these illegal practices persist at other companies,” the CFPB said.
‘Ignoring Orders’
CFPB Director Rohit Chopra said when courts order a discharge of a loan, lenders and servicers “should not treat this as a suggestion.”
According to Chopra, “The CFPB has found that some servicers are ignoring bankruptcy court orders. The student loan servicing industry should ensure that their collection practices are compliant with the law.”
The bulletin details unfair practices the CFPB said its examiners have observed in reviews of the way certain student loan servicers handled private loan accounts when consumers received loan discharges through bankruptcy court orders.
Additional Examination
In addition, the bulletin also makes clear the CFPB will continue to examine servicer handling of such loans, with the Bureau saying it is “putting the servicing industry on notice that the CFPB intends to take action where it finds that servicers are collecting on debts that have been discharged.”
“Although many student loans are subject to an ‘undue hardship’ standard and require a separate proceeding to be discharged in bankruptcy, some private student loans can be discharged in a standard bankruptcy proceeding, just like most other unsecured consumer debts,” the CFPB said. “For this subset of private student loans, a bankruptcy discharge order eliminates the consumer’s debt,” the Bureau explained.
Examples Cited
According to the CFPB, some examples of student loans eligible for standard bankruptcy discharge include:
- Loans made to attend schools that are not eligible to receive U.S. federal student aid, such as unaccredited schools and foreign schools (“non-Title IV schools”)
- Loans to students attending school less than half-time
- Loans made in amounts in excess of the cost of attendance, which are often disbursed directly to the borrower, instead of the school
- Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams
- Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency
- Other loans made for non-qualified higher education expenses
A Failure to Distinguish
“CFPB examiners identified student loan servicers who failed to distinguish between education loans that are discharged in a standard bankruptcy proceeding and loans that are not,” the Bureau said. “As a result, servicers improperly sought to collect on loans that had been discharged by bankruptcy courts. The CFPB found that, when faced with continued collection activities in violation of bankruptcy court orders, many borrowers continued to make payments, sometimes paying thousands of dollars on debts that they no longer owed.”
The CFPB said the supervisory findings build on previous work from 2014 when it found student loan servicers deceptively told borrowers that their loans were not dischargeable in bankruptcy even though the Bankruptcy Code does allow for discharge.
The CFPB added that it intends to continue to hold industry accountable for these illegal collection practices.
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