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[Federal Register Volume 89, Number 247 (Thursday, December 26, 2024)]
[Notices]
[Pages 105013-105019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30758]

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CONSUMER FINANCIAL PROTECTION BUREAU

Supervisory Highlights: Special Edition Student Lending

AGENCY: Consumer Financial Protection Bureau.

ACTION: Supervisory highlights.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is 
issuing its thirty sixth edition of Supervisory Highlights.

DATES: The findings in this edition of Supervisory Highlights focus 
significant findings across the entire student loan market and cover 
select examinations that were generally completed in 2024.

FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at 
(202) 435-7449. If you require this document in an alternative 
electronic format, please contact [email protected].

SUPPLEMENTARY INFORMATION:

1. Introduction

    Student loans represent the second-largest form of U.S. consumer 
debt at around $1.77 trillion in total outstanding balances. While 
Federal student loans comprise the vast majority of the student lending 
market, private student loans present notable risks. The refinance 
market, for example, may offer certain benefits, but refinancing or 
consolidating Federal loans through a private lender results in the 
loss of important Federal protections. And institutional lending 
products--private loans made by the borrower's school directly to the 
student--warrant special attention because of the uniquely close 
relationship between student and school. Additionally, the terms of 
private student loans are not standardized, and examiners have found 
certain loan terms problematic for consumers. Because of these 
substantial risks, the Consumer Financial Protection Bureau (CFPB) is 
actively engaged in vigorous oversight of all areas of the student loan 
market to ensure that entities comply with Federal consumer financial 
laws, including the Consumer Financial Protection Act (CFPA),\1\ the 
Electronic Fund Transfer Act and its implementing regulation, 
Regulation E,\2\ and the Truth in Lending Act and its implementing 
regulation, Regulation Z.\3\
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    \1\ 12 U.S.C. 5481 et seq.
    \2\ 15 U.S.C. 1693, et seq.; 12 CFR part 1005, et seq.
    \3\ 15 U.S.C. 1601, et seq.; 12 CFR part 1026, et seq.
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    This edition of Supervisory Highlights focuses on significant 
findings across the entire student loan market. The first group of 
findings relates to the refinance market. Examiners identified abusive 
misleading statements regarding loss of Federal benefits as well as 
regulatory violations in connection with the refinancing and 
consolidation of loans. The second group involves the offering by 
private lenders of illusory benefits, including unemployment and 
disability protections as well as rate reductions for autopay. The 
third group involves noteholder liability for claims of school 
misconduct. Examiners identified violations related to private student 
loan servicers' treatment of borrowers whose loan contracts have 
provisions allowing them to assert any claims and defenses they have 
against their school, such as for fraud, against the subsequent 
noteholder. The fourth group of findings involves illegal collection 
tactics, such as contract provisions allowing schools

[[Page 105014]]

to withhold academic transcripts of delinquent borrowers.
    The fifth and last group of findings relate to the servicing of 
Federal student loans. For over three years, payments on these loans 
were paused due to the COVID-19 pandemic. During that time, 
approximately 20 million borrower accounts were transferred to 
different Federal student loan servicers. In September 2023, interest 
began accruing on nearly $1.5 trillion in federally owned loans owed by 
approximately 43 million consumers.
    In October 2023, loan payment obligations resumed for around 28 
million borrowers--including more than 6 million entering repayment for 
the first time. Many of these borrowers applied for income-driven 
repayment (IDR) plans to reduce their monthly payment amounts. Our 
recent supervisory work identified significant and pervasive violations 
related to servicers' handling of the return to repayment. These 
violations include failing to provide appropriate avenues for consumers 
to communicate with their servicers, sending deceptive billing 
statements, withdrawing excess amounts from borrowers' deposit 
accounts, and numerous problems related to processing of IDR 
applications.
    To maintain the anonymity of the supervised institutions discussed 
in Supervisory Highlights, references to institutions generally are in 
the plural and the related findings may pertain to one or more 
institutions.\4\ We invite readers with questions or comments about 
Supervisory Highlights to contact us at [email protected].
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    \4\ If a supervisory matter is referred to the Office of 
Enforcement, Enforcement may cite additional violations based on 
these facts or uncover additional information that could impact the 
conclusion as to what violations may exist.
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2. Supervisory Observations

2.1 Refining Student Loans

    Refinancing student loans poses risks for borrowers, including loss 
of benefits tied to Federal student loans. In addition to other 
benefits, Federal student loans offer access to various forgiveness 
programs. For example, under the Public Service Loan Forgiveness 
program, eligible borrowers can have their remaining loan balance 
forgiven after making 120 qualifying loan payments on an IDR plan, 
while working for a qualifying public service employer. Under the 
Teacher Loan Forgiveness program, teachers may be eligible to have a 
portion of their loans forgiven after working for five years in low-
income public schools. When borrowers refinance or consolidate these 
loans through a private lender, they lose these benefits and 
protections.
2.1.1 Deceptive Representations About Eligibility for Forgiveness Upon 
Refinancing Federal Student Loans
    Examiners found that private lenders offering to refinance Federal 
student loans engaged in deceptive acts or practices where their 
marketing and disclosure materials give a misleading net impression 
that refinancing Federal loans might not result in forfeiting access to 
Federal forgiveness programs, when, in fact, it was a certainty. A 
representation, omission, act, or practice is deceptive when: (1) the 
representation, omission, act, or practice misleads or is likely to 
mislead the consumer; (2) the consumer's interpretation of the 
representation, omission, act or practice is reasonable under the 
circumstances; and (3) the misleading representation, omission, act or 
practice is material.\5\
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    \5\ 12 U.S.C. 5531.
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    Examiners observed that the lenders repeatedly disclosed some of 
the benefits borrowers would lose access to if they refinanced their 
Federal loans into private loans, but omitted the fact that borrowers 
would lose access to forgiveness plans. In one instance, the lenders 
said borrowers ``may'' lose access to Federal benefits, despite it 
being a certainty. In phone calls about refinancing Federal loans, the 
lenders scripted responses to direct questions about loan forgiveness 
that omitted the loss of forgiveness benefits upon refinance.
    These statements were misleading because they created the net 
impression that borrowers could refinance their loans with the lenders 
without losing access to forgiveness programs, which is false. The 
borrowers' interpretation of the representations was reasonable, as 
borrowers are entitled to accept statements on the lenders' website and 
the lenders' responses to direct questions in assessing the pros and 
cons of refinancing Federal student loans. The representations are 
material as they may affect borrowers' decisions regarding whether to 
refinance their Federal loans.
2.1.2 Abusive Practices in Connection With the Loss of Forgiveness 
Benefits Upon Refinancing Federal Student Loans
    Examiners also found instances of abusive acts or practices by 
private lenders in connection with misleading statements about Federal 
forgiveness in connection with refinancing Federal loans by private 
lenders. An abusive act or practice: (1) materially interferes with the 
ability of a consumer to understand a term or condition of a consumer 
financial product or service; or (2) takes unreasonable advantage of: a 
lack of understanding on the part of the consumer of the material 
risks, costs or conditions of the product or service; the ability of 
the consumer to protect the interest of the consumer in selecting or 
using a financial product or service; or the reasonable reliance by the 
consumer on a covered person to act in the interest of the consumer.\6\
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    \6\ 12 U.S.C. 5535(a)(1)(B). See also CFPB, Policy Statement on 
Abusive Acts or Practices (Apr. 3, 2023), https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/#1.
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    Examiners found that the lenders engaged in abusive acts or 
practices by taking unreasonable advantage of a lack of understanding 
on the part of borrowers regarding the material risks, costs, or 
conditions of refinancing Federal loans into private loans. The lenders 
took unreasonable advantage of borrowers where their representations 
misled borrowers about the Federal benefits at risk when borrowers 
refinance their student loans. Here, the lenders created the impression 
that refinancing Federal loans may not result in forfeiting access to 
Federal forgiveness programs.
    The lenders profited from borrowers paying the full amount of their 
loans, when the borrowers otherwise potentially could have had some or 
all of those loans forgiven. They also gained customers who might not 
otherwise refinance their loans with the lenders, expanding their 
market share. And they increased loan amounts when borrowers 
consolidated Federal loans with private loans, which increased their 
revenue from interest on the loans. Borrower complaints evidenced a 
lack of understanding about the impact on eligibility for loan 
forgiveness and confusion based on the lenders' representations.
2.1.3 Failure To Re-Amortize Consolidated Loans After Borrowers' 
Requests To Exclude Certain Loans
    Examiners found that student loan originators engaged in unfair 
acts or practices by failing to re-amortize or offer to re-amortize a 
consolidated refinanced student loan when the borrower requested a 
modification to the loan package to exclude certain loans during the 
three-day cancellation period. An act or practice is unfair when: (1) 
it causes or is likely to cause substantial injury to consumers; (2) 
the injury is not reasonably avoidable by

[[Page 105015]]

consumers; and (3) the injury is not outweighed by countervailing 
benefits to consumers or to competition.\7\ When seeking to refinance 
private student loans, borrowers noticed that lenders erroneously 
included Federal student loans in the refinance package and requested, 
within the applicable three-day cancellation period, to have the 
Federal loans excluded. Lenders failed to exclude the loans from the 
refinance package before the new loan funded and the lenders had paid 
off the Federal loans. Upon realizing that they should not have 
included the Federal loans in the package, the lenders subsequently 
removed the Federal loans and recouped the payoff amounts. But rather 
than re-amortizing or offering to re-amortize the refinanced loan, they 
merely reduced the principal. This tactic lowered the amount owed and 
shortened the loan term but did not change the monthly payment.
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    \7\ 12 U.S.C. 5531 and 5536.
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    This practice was unfair because it caused or was likely to cause 
substantial injury to borrowers because they were charged monthly 
payments larger than what they would have been charged had the Federal 
loans not been included and not given a choice about how to allocate 
their funds. Borrowers could not reasonably avoid the injuries because 
they could not control lenders' decisions not to re-amortize or offer 
to re-amortize the loans. The injuries outweighed any countervailing 
benefits to consumers or competition.
2.1.4 Failure To Cancel Loans During Three-Day Cancelation Period
    Examiners found that student loan originators violated Regulation Z 
\8\ by not allowing borrowers to cancel private education loans without 
penalty before midnight of the third business day following the date on 
which the borrower received the disclosures as required.\9\ 
Specifically, lenders violated the regulation by failing to cancel the 
refinancing of Federal loans as requested by borrowers within the 
three-day cancellation period.
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    \8\ 12 CFR 1026.48(d).
    \9\ 12 CFR 1026.47(c).
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2.2 Illusory Benefits Offered by Private Lenders

2.2.1 Unfair Denial of Disability Benefits
    Examiners found that lenders engaged in unfair acts or practices by 
denying borrowers' applications for discharge based on Total and 
Permanent Disability for reasons other than those identified in the 
loan note where they otherwise satisfied the criteria for discharge 
based on Total and Permanent Disability.
    Examiners observed that borrowers' loan notes provided for Total 
and Permanent Disability discharge based on the criterion that 
borrowers were unable to engage in any substantial gainful activity due 
to a physical or mental impairment of a certain type. The lenders 
denied applications for Total and Permanent Disability discharges based 
on criteria not included in the loan note.
    This practice caused substantial injury because borrowers were 
required to continue to make loan payments on loans that should have 
been discharged according to the contract terms. Borrowers may be 
required to pay down loan balances of thousands of dollars each. The 
injury is not reasonably avoidable because borrowers have no way to 
prevent the lenders from applying additional criteria to their 
discharge applications. The injury does not outweigh any countervailing 
benefits to consumers or competition.
2.2.2 Deceptive Misrepresentations Regarding Autopay Discount
    Examiners found that private student lenders engaged in deceptive 
acts or practices by inaccurately representing that their autopay 
discount was not available to borrowers with certain types of loans 
when in fact they were eligible.
    The lenders had policies providing qualifying borrowers with a 
discount of 0.25% on their student loan interest rate if they sign up 
for autopay. On their online borrower portals, the lenders represented 
that certain types of loans did not qualify for an autopay rate 
reduction, just before a link to enroll in autopay. However, these 
types of loans had become eligible for the autopay discount five years 
earlier.
    This representation misled or was likely to mislead borrowers, as 
it misstated that certain borrowers were not eligible for the autopay 
discount when they were, in fact, eligible. Borrowers' interpretation 
of the representation was reasonable, as it is reasonable for borrowers 
to take at face value an express claim on their lender's portal 
regarding its policies for autopay eligibility. The representation is 
material, as borrowers often enroll in autopay to receive the discount 
on their student loan interest rate. Some borrowers who believe they 
are ineligible for the autopay rate reduction because they accepted the 
lenders' misleading misrepresentations may not sign up for autopay, and 
they may pay more in interest than they would have otherwise.
2.2.3 Illusory Unemployment Benefits
    Private student loan originators advertised on their websites and 
on phone calls with borrowers that private student loan borrowers could 
suspend their loan payments if they lost their job. Examiners found 
that the lenders continued to advertise this as an attribute of their 
private student loans, even after the lenders unilaterally replaced the 
unemployment program with a less generous one that only allowed 
borrowers to reduce their payments during unemployment, but only if the 
borrower met new ability-to-pay eligibility criteria.
    Examiners identified two law violations related to advertising this 
unemployment program, unilaterally eliminating the benefit, and then 
failing to honor it.
    Examiners found that entities offering private student loans 
engaged in deceptive acts or practices by falsely advertising that 
private student loan borrowers could suspend their payments for short 
periods of unemployment when, in fact, the lenders no longer allowed 
borrowers to do so.
    The statements were likely to mislead reasonable borrowers into 
believing that suspension of the payments would be available if they 
lost their job. In fact, after a point, the lenders no longer offered 
this benefit. Borrowers may reasonably take the websites and lenders' 
statements at face value regarding the ability to suspend their 
payments during unemployment. These representations were material 
because they were likely to affect borrowers' choice to originate or 
refinance their student loans based on the availability of the 
advertised benefit.
    Examiners also found that private student loan originators engaged 
in abusive acts or practices by taking unreasonable advantage of 
borrowers' inability to protect their own interest in selecting or 
using a consumer financial product or service by prominently 
advertising unemployment protections and then eliminating or not 
providing those protections after the borrower had already elected the 
loans.
    Lenders took unreasonable advantage of borrowers by promoting the 
ability to suspend payments for periods of unemployment to attract 
borrowers, and then reducing costs by significantly rolling back the 
unemployment protections. Some private student loan borrowers were 
unable to protect their interests because the lenders did not eliminate 
the unemployment benefit until after the borrower had taken out the 
loan. Once they were unemployed,

[[Page 105016]]

borrowers also had few options to refinance their private loans with 
another lender. And the borrowers had no control over the lenders' 
decision to discontinue the protections.

2.3 Noteholder Liability Related to Claims of School Misconduct

    Student loan borrowers sometimes allege their schools fraudulently 
induced them to enroll and to secure private student loans to finance 
their education. These borrowers may be able to discharge certain loans 
due to their school's misconduct under numerous State and Federal laws 
and protections. For example, the Borrower-Defense-to-Repayment 
regulation, 34 CFR 685.400 et seq, allows borrowers to challenge the 
validity of Federal loans that they believe were originated due to 
school misconduct. If the borrower is successful, the borrowers' 
Federal student loans are completely expunged and any amounts they paid 
on those loans refunded. As of May 1, 2024, the U.S. Department of 
Education (DOE) had discharged $28.7 billion dollars for 1.6 million 
borrowers who were cheated by their schools, saw their institutions 
precipitously close, or are covered by related court settlements.\10\
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    \10\ Press Release, DOE, Biden-Harris Administration Approves 
$6.1 Billion Group Student Loan Discharge for 317,000 Borrowers Who 
Attended The Art Institutes (May 1, 2024), (https://www.ed.gov/about/news/press-release/biden-harris-administration-approves-61-billion-group-student-loan).
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    The Borrower-Defense-to-Repayment regulation does not apply to 
private student loans. However, other legal protections may allow 
borrowers to seek to have their private student loans discharged based 
on school misconduct. Many private student loans include a contractual 
guarantee in the promissory note--which may be required by the Federal 
Trade Commission's Holder-in-Due-Course Rule \11\--that the borrower 
can assert against any subsequent loan holder any claim the borrower 
has against their school. In other words, provisions in borrowers' 
private student loan contracts often ensure that a borrower can assert 
school misconduct as a basis for loan discharge regardless of who holds 
the loan.
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    \11\ 16 CFR 433.2.
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    Examiners identified two violations related to private student loan 
servicers' treatment of borrowers whose loan contracts have provisions 
allowing them to challenge their loans against subsequent noteholders 
and who allege misconduct by their schools.
2.3.1 Misleading Borrowers About Their Contractual Rights To Challenge 
Fraudulent Loans
    Examiners reviewed private student loan servicers' practices in 
connection with borrower contracts that contained language stating that 
any holder of the contract is subject to all claims and defenses that 
the borrower would have been able to assert against their school. They 
found that the servicers engaged in deceptive acts or practices when 
they implied to these borrowers that they could not challenge their 
loans using claims or defenses they could have had against their 
schools. In email responses to borrower complaints (both those made 
directly to servicers and to complaints referred by the CFPB), 
servicers stated that there was no discharge program available to these 
borrowers. In fact, provisions in their loan notes guaranteed their 
right to allege fraud by their schools as a claim or defense against 
repayment.
    This statement was likely to mislead borrowers by implying that 
they could not challenge their loans using claims or defenses they 
could have had against their school. The borrowers' interpretation of 
the statement to mean that they had no avenues for challenging their 
private loans based on their school's conduct is reasonable under the 
circumstances, as they are entitled to accept that their servicers are 
providing accurate information about the borrower's rights. The 
servicers' representations were material because they likely affected 
the borrowers' decisions regarding whether to pursue their claims.
2.3.2 Failure To Consider Borrowers' Allegations of Fraud in 
Contravention of Contract
    Examiners found that private student loan servicers engaged in an 
unfair act or practice by failing to consider most borrowers' 
challenges to their loans related to school misconduct, using claims or 
defenses they could have had against their schools. The servicers 
lacked policies and procedures to effectively consider most borrowers' 
challenges regarding their schools and failed to do so even though 
provisions in the borrowers' loan notes guaranteed the borrowers' right 
to assert such challenges. Servicers considered borrowers' claims 
against their schools only if the borrowers retained attorneys.
    This practice resulted in substantial injury to consumers because 
it caused borrowers to forgo further attempts to challenge their loans 
or required them to incur the costs necessary to obtain an attorney. 
Borrowers could not reasonably avoid the injury because they could not 
know that the servicer would disregard contractual provisions in their 
loan notes providing that any holder of the contract is subject to all 
claims and defenses that the borrower would have been able to assert 
against the seller. The injury is not outweighed by any countervailing 
benefits to consumers or competition.
2.3.3 Corrective Actions--Process for Considering Borrower Claims of 
School Misconduct
    To address these UDAAPs related to noteholder liability, 
Supervision directed the private student loan lenders and servicers to 
maintain and publicize a robust process to consider borrower claims of 
misconduct by their school. More specifically, Supervision directed the 
entities to implement a claims-review process that is not unduly 
burdensome for the borrowers and gives due deference to findings of the 
DOE or courts regarding claims of misconduct, fraud, or 
misrepresentation by a borrower's school; that is public and easily 
accessible; and that ensures any denials are individualized and 
detailed. With respect to private student loans where the entity had 
actual notice that the DOE or a court had made a finding of fraud, 
misconduct, or misrepresentation by the school that resulted in 
discharge of loans to attend that school, Supervision further directed 
the entities to suspend collections until they provided the borrower 
with a detailed reason why their private loans were not the result of 
similar misconduct.

2.4 Illegal Loan Collection Tactics

2.4.1 False Threat of Legal Action
    Examiners found that private student loan servicers engaged in 
deceptive acts or practices when they included language in collection 
letters that gave the misleading impression that the servicers would 
take legal action against borrowers who fell behind on loan payments. 
Servicers sent letters to borrowers that included language about 
enforcing collection of debts and adding legal costs to borrowers' 
debts if the borrowers did not pay. In fact, the servicers had no 
practice of bringing legal actions and incurred no legal costs 
associated with pursuing past due amounts during the exam period. 
Instead, the servicers returned severely delinquent accounts back to 
the noteholder.
    This act or practice was likely to mislead borrowers because they 
could reasonably understand the letters to mean that the servicer may 
bring legal

[[Page 105017]]

action against borrowers when, in fact, the servicer had no policy of 
bringing legal actions. This understanding is reasonable because 
borrowers have no way of knowing that the servicers do not bring legal 
actions to collect debts as a matter of policy. The representation is 
material because it is likely to affect borrowers' decisions regarding 
making payments on their debts.
    In response to these findings, servicers removed the language 
referencing legal actions from their letters.
2.4.2 Withholding Transcripts as a Remedy for Default
    Academic transcripts are certified records of a student over their 
course of study. They provide information about courses taken, courses 
completed, grades, credits earned, certain credentials like majors or 
minors, and graduation status. Transcripts provide essential 
documentation of consumers' post-secondary education histories. When 
requested, institutions provide, or authorize third parties to provide, 
official transcripts to prospective employers, State licensing or 
credentialing agencies, and other post-secondary institutions.
    Employers or licensing agencies require official transcripts for a 
range of reasons. For example, some employers may require transcripts 
to confirm the accuracy of applicants' resumes, and licensing 
authorities use them to demonstrate that applicants obtained the 
requisite training.
    Consumers also need transcripts when applying to other post-
secondary institutions as transfer students or for higher level degrees 
or credentials. Students may need to demonstrate their completed 
coursework to obtain credit for that education and progress toward a 
terminal degree or credential. Moreover, even when consumers do not 
need or wish to receive credit for any prior education, some post-
secondary institutions still require the consumer to provide official 
transcripts prior to enrollment.
    During examinations of entities that created and distributed model 
retail installment contracts to schools, examiners identified contracts 
that contained language that allowed for the withholding of transcripts 
in situations where student borrowers were in default on their 
education loans. The model contracts contained language allowing 
educational institutions, as a remedy for default, to ``withhold [the 
student]'s transcripts [or] course completion certificates.'' Schools 
used these model contracts to originate institutional loans and 
reassigned the loans back to the entities for servicing.
    Examiners found that the entities risked engaging in an abusive act 
or practice by taking unreasonable advantage of consumers' inability to 
protect their interests when they created and distributed to their 
clients' contracts for institutional student loans that contained 
language allowing, as a remedy for default, unconditional withholding 
of official transcripts as a blanket policy.\12\ The entities risked 
gaining unreasonable advantage from the act or practice of creating 
contracts that permitted educational institutions to engage in blanket 
withholding of transcripts. Even though the entities did not directly 
benefit from the contract provision, the provision enabled their 
partner schools to engage in strong-arm collection tactics and could 
provide them with an advantage by boosting their market share or 
revenue. Borrowers were unable to protect their interests because at 
the time they needed an official transcript for a job, credential, or 
access to continued education, they were unable to protect themselves 
by seeking another education elsewhere or seeking credit elsewhere, 
since other lenders were unlikely to provide credit to borrowers of 
these schools who are in this position. Nor could the borrowers have 
protected themselves by choosing an alternative provider at the time of 
origination of the loan, as they cannot bargain over transcript 
withholding provisions, and borrowers are unlikely to select a school 
or loan based on these provisions, as opposed to factors relating to 
the education itself.
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    \12\ Examiners previously found that institutions engaged in 
abusive acts or practices by withholding official transcripts as a 
blanket policy in conjunction with the extension so credit. See 
CFPB, Supervisory Highlights, Issue 27 (Fall 2022), https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf.
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    In response to these findings, the entities removed the contract 
language and advised their client schools to cease utilizing the 
contract provision.
2.4.3 Preventing Access to Education as a Remedy of Default
    Examiners conducted reviews of entities that created and 
distributed model retail installment contracts to schools who then 
originated institutional loans and then assigned the loans to the 
entities for servicing. The model contracts required repayment during 
the in-school period and contained language allowing, as a remedy for 
default, educational institutions to ``deny Buyer access to classes, 
computers, final exams, and other education services at the School, 
terminate or suspend Buyer's enrollment, deny or cancel Buyer's 
registration for additional classes, . . . and take other similar 
actions affecting Buyer's status as a student at the School.''
    Examiners found that entities risked engaging in unfair acts or 
practices by distributing to their clients' contracts for institutional 
student loans which required repayment during the in-school period that 
contain language stating that a remedy for default is to deny students 
access to classes or other services related to ongoing education. This 
language created a risk of injury to consumers because if they 
defaulted, then schools could deny them access to education programs 
that consumers had already paid for, including potentially with other 
loans or savings. Additionally, since jobs that require advanced 
education generally pay more, this practice reduces the chances that 
consumers can earn their degree, and in turn reduces consumers' 
potential earnings, making repayment of the underlying debt more 
difficult. Borrowers are unlikely to select a school or loan based on 
these provisions, as opposed to factors relating to the education 
itself. Consumers generally do not expect to default, do not consider 
consequences of default when making product decisions, and cannot 
bargain over contractual terms. Once the consumer defaults, there is no 
way to avoid the injury of missing classes and other education benefits 
because the school controls access to classes. The injury caused by the 
practices were not outweighed by countervailing benefits to consumers 
or competition.
    In response to these findings, the entities removed the contract 
language and advised their client schools to cease utilizing the 
contract provision.
2.4.4 Debiting Funds Early
    Many student-loan borrowers make payments through auto debits, 
known as electronic fund transfers. Under Regulation E, the servicer, 
or designated payee, must obtain written authorization before 
transferring funds from consumers' accounts.\13\ The written 
authorization specifies the date the payment will be withdrawn. 
Examiners found that servicers violated this provision when they 
obtained written authorizations to withdraw funds on a specified date 
but instead withdrew the amounts one to three days prior to the date in 
the written authorization. Because the funds were

[[Page 105018]]

not withdrawn on the date in the written authorization, the payee did 
not have written authorization for the transfers and violated 
Regulation E. In response to these findings, servicers are revising 
their policies and developing a remediation plan.
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    \13\ 12 CFR 1005.10(b).
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2.4.5 Failing To Notify Consumers of Changed Preauthorized Electronic 
Funds Transfer Amounts
    Examiners continue to identify issues with failures to notify 
consumers of preauthorized electronic fund transfers that vary in 
amount.\14\ Consumers entered into agreements to withdraw the monthly 
payment amount, and the servicer took the monthly payment amount, but 
did not inform consumers when that amount had changed from the previous 
month. Regulation E requires the designated payee of a preauthorized 
electronic fund transfer from a consumer's account to provide the 
consumer with written notice of the amount and date of the transfer at 
least 10 days before the scheduled transfer date if the amount will 
vary from the previous transfer under the same authorization or from 
the preauthorized amount.\15\ Examiners found that servicers violated 
this provision when they did not provide written notices to consumers 
before withdrawing an amount that exceeded the previous transfer under 
the same authorization. In response to these findings, servicers are 
revising their policies and developing a remediation plan.
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    \14\ CFPB, Supervisory Highlights, Issue 34 Summer 2024,https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-34-summer-2024/.
    \15\ 12 CFR 1005.10(d)(1).
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2.5 Federal Student Loan Servicing During the Return to Repayment

2.5.1 Extended Failure To Provide Adequate Avenues for Borrowers To 
Manage Key Loan Issues by Phone
    Federal student loan servicers operate call centers through which 
they offer borrowers various services to address key loan issues by 
phone. These issues include resolving disputes, inquiring about account 
status, enrolling in Federal repayment programs, and making loan 
payments. Despite purporting to offer the ability to address key loan 
issues by phone, servicers failed to provide, for extended time 
periods, adequate avenues for borrowers to manage key aspects of their 
loans over the phone.
    During the return to repayment in the fall of 2023, examiners 
reviewed metrics the servicers provided on a biweekly basis regarding 
how they handled incoming calls from student loan borrowers. These 
metrics covered average call-hold time, abandonment rate, callback 
speed, and call-center staffing levels. In this period, borrowers 
calling their servicers faced key average call hold times of 40-58 
minutes. Average hold times exceeded 30 minutes during 57-91 percent of 
operating hours. And more than 41 percent of borrowers abandoned their 
calls before connecting with an agent. The periods of unavailability 
lasted multiple weeks.
    Examiners concluded that that a lack of oversight contributed to 
these failures. Servicers' boards did not provide for the appropriate 
staffing levels to handle the influx of calls generated from the 
Federal return to repayment process.
    Supervision found that the servicers' failures to provide, for an 
extended period, an adequate avenue for borrowers to timely resolve 
disputes, inquire about account status, or in enroll in Federal 
repayment programs, when they offered the option of addressing these 
issues by phone amounted to unfair acts or practices in violation of 12 
U.S.C. 5531 and 5536. The failures caused or were likely to cause 
borrowers substantial injury by wasting time, delaying information, and 
delaying their ability to apply for benefits, which can result in 
increased payment amounts or delayed loan forgiveness. Borrowers cannot 
avoid this injury because they do not choose their loan servicer and 
have no control over its level of service, and other methods of seeking 
assistance like online account access or callbacks were unavailable or 
ineffective. And they cannot resolve individualized issues through 
other channels such as online accounts. This injury is not outweighed 
by any countervailing benefits to borrowers or competition.
    Supervision also found that these failures violated the CFPA's 
prohibition against abusive acts or practices.\16\ The servicers took 
unreasonable advantage of the borrowers' inability to protect their own 
interests. Borrowers could not protect their own interests because they 
do not choose their loan servicer, nor can they control their 
servicer's level of service. The servicers' conduct prevented borrowers 
attempting to protect their own interests in timely resolving disputes 
or in accessing benefit programs by reaching out to their servicer--as 
instructed--from actually speaking to a representative who could help 
them. Many borrowers also could not protect their interests in avoiding 
extensive hold times because they could not resolve some of their 
individualized issues through alternative channels, such as online 
accounts. The servicers gained an unreasonable advantage as they saved 
on operational expenses, including from understaffing their call 
centers, which resulted in extensive wait times that many borrowers 
could not avoid.
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    \16\ 12 U.S.C. 5531 and 5536
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    In response to these findings, Supervision directed servicers to 
maintain adequate avenues for borrowers to timely resolve disputes, 
inquire about account status, and enroll in Federal repayment programs 
by phone (including by ensuring against unreasonably long average call-
hold times and unreasonably high call-drop rates for any extended 
period); develop and maintain plans to address reasonably foreseeable 
spikes in borrower communications demand to ensure that, regardless of 
demand, borrowers consistently have adequate avenues to manage their 
loans; identify the borrowers who attempted to call their servicers, 
waited more than an hour before abandoning their call, and within three 
months took significant action on their loan; and provide information 
on borrower remediation.
2.5.2 Deceptive Billing Statements
    Examiners found that Federal student loan servicers engaged in a 
deceptive act or practice by providing borrowers with inaccurate 
payment amounts and due dates on billing statements and disclosures.
    Federal student loan servicers provided borrowers inaccurate 
monthly payment amounts due to both system weaknesses and 
miscalculations. Some of the miscalculations were due to the servicers 
misapplying Federal poverty guidelines, using the wrong family size or 
income, or failing to include spousal debt. Examiners also reviewed 
billing statements or disclosures with incorrect payment due dates. 
These included providing borrowers incorrect due dates prior to October 
1, 2023, the end of the Federal student loan payment pause, and giving 
repayment dates to borrowers with pending and approved borrower defense 
applications. Borrowers with pending or approved borrower defense 
applications should have been in a forbearance until the discharge or 
decision process was completed.
    These misrepresentations were likely to mislead borrowers about the 
amount they owed and when their payment was due. Borrowers reasonably 
interpreted billing statements and disclosures from their Federal 
student loan servicers as an accurate and reliable source of

[[Page 105019]]

information on the amount due and due date for their payments. Express 
misrepresentations or misrepresentations regarding central 
characteristics such as cost or payment due dates are material.
2.5.3 Debiting Unauthorized Amounts
    Regulation E requires the designated payee to obtain written 
authorization before transferring funds from consumers' accounts.\17\ 
Examiners observed that student loan servicers obtained authorizations 
that allowed them to withdraw the monthly payment amount, but the 
servicers then withdrew amounts that exceeded the written payment 
amount, in some cases instead withdrawing the entire outstanding loan 
balance. Because the authorizations allowed the servicers to withdraw 
only the monthly payment amounts, the preauthorized electronic funds 
transfers were not authorized in writing and therefore violated 
Regulation E.
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    \17\ 12 CFR 1005.10(b).
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    In other instances, consumers signed authorizations that allowed 
servicers to withdraw monthly payment amounts for certain loans from 
one deposit account and monthly payment amounts for other loans from a 
different deposit account. The servicers then withdrew payments for all 
the loans from one of the two deposit accounts. Because the 
authorization only allowed the servicers to withdraw the monthly 
payment amounts for specific loans and they instead withdrew monthly 
payment amounts for other loans, the preauthorized electronic funds 
transfers were not authorized in writing and therefore violated 
Regulation E.
2.5.4 Excessive Delays in Processing of Applications for Income-Driven 
Repayment Plans
    Federal student loan borrowers are eligible for a number of 
repayment plans that base monthly payments on their income and family 
size; these plans are called IDR plans. To enroll in IDR plans, 
consumers must submit applications to their servicers who process the 
applications.
    Examiners found that servicers engaged in unfair acts or practices 
when they caused consumers to experience excessive delays in processing 
times for IDR applications. In many reviewed files, it took more than 
90 calendar days for servicers to process the IDR applications. These 
delays caused or were likely to cause substantial injury as interest 
continued to accrue while servicers processed IDR applications, so 
excessive delays likely resulted in unnecessary accrued interest. In 
addition, the delays may have prevented borrowers from making payments 
which count towards loan forgiveness. These delays also caused 
borrowers considerable frustration and wasted time as they repeatedly 
tried to obtain information from servicers about the status of their 
applications. Consumers could not reasonably avoid the injury because 
they do not choose their servicer and have no control of how long it 
takes servicers to review and evaluate borrowers' applications. The 
injury to consumers was not outweighed by countervailing benefits to 
consumers or to competition.
2.5.5 Improper Denials of Applications for Income-Driven Repayment
    Examiners found that servicers engaged in unfair acts or practices 
when they improperly denied consumers' IDR applications. Examiners 
found that servicers denied consumers' applications for failing to 
provide sufficient income documentation despite consumers providing 
sufficient documentation of income. Examiners also found that servicers 
denied consumers' applications because they had ineligible loan types, 
when in fact the consumers had eligible loans. These improper denials 
caused or were likely to cause substantial injury because consumers who 
are improperly denied paid or were at risk of paying higher monthly 
payments. Additionally, some consumers may have spent time and 
resources addressing the denials. Consumers could not reasonably avoid 
the injury because servicers are responsible for processing IDR 
applications in accordance with processing requirements and consumers 
do not choose their servicers. And the injury to consumers is not 
outweighed by countervailing benefits to consumers or competition.
2.5.6 Providing Inaccurate Denial Reasons in Response to Income-Driven-
Repayment Applications
    Examiners found that servicers engaged in deceptive acts or 
practices by providing inaccurate denial reasons to consumers who 
applied for IDR plans. The denial letters misled or were likely to 
mislead borrowers as the denial reasons were not accurate, and in 
multiple cases, erroneously denied eligible consumers. It is reasonable 
for borrowers to expect servicers to properly evaluate their 
eligibility for IDR plans and for denial letters to accurately explain 
the reasons why servicers denied their IDR applications. The misleading 
representations were material as the inaccurate denial reasons were 
likely to influence borrower choices with respect to applying for IDR 
plans by, for example, leading to borrowers' confusion about 
eligibility criteria and discouraging borrowers from re-applying for an 
IDR plan by telling them to find and provide unnecessary additional 
information in order to qualify.
2.5.7 Failure To Advise Consumers of the Option to Verbally Provide 
Income in Connection With Income-Driven-Repayment Applications
    During the COVID-19 pandemic and through February 29, 2024, the 
Department of Education allowed consumers to apply for IDR plans by 
providing an attestation of income over the phone or in writing, this 
process was referred to as self-certification.
    Examiners found that servicers engaged in unfair acts or practices 
by failing to advise consumers that they could self-certify their 
income when applying for an IDR plan. Consumers contacted their 
servicers to discuss their pending IDR applications that were delayed 
due to missing income documentation, but the servicer representatives 
did not advise consumers that they could provide the missing 
information by making an oral attestation during the call. These acts 
or practices caused or were likely to cause substantial injury because 
it caused servicers to deny consumers' applications, preventing lower 
payment amounts, potential interest subsidies, and credit towards loan 
forgiveness. Consumers could not avoid this injury because they do not 
choose their servicers and relied on the servicers to provide relevant 
information regarding IDR applications. The injury to consumers is not 
outweighed by countervailing benefits to consumers or competition.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-30758 Filed 12-23-24; 8:45 am]
BILLING CODE 4810-AM-P
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