On January 20, 2022, the US Consumer Financial Protection Bureau ("CFPB" or "Bureau") announced that it would begin examining the in-house lending operations of colleges and universities. As part of this announcement, the CFPB also released its updated Education Loan Examination Procedures Manual with a new section on student loans originated by educational institutions. This announcement undoubtedly increases the regulatory scrutiny on postsecondary schools that offer in-house student loans.
Many colleges and universities extend some form of financing directly to students. Such "in-house" private student loans are typically extended in two circumstances. First, schools extend in-house loans to students in order to help them cover gaps between the student's estimated total cost of attendance and the maximum amount a student can borrow under the federal student loan program. In other words, these loans cover gaps in government student loan financing so that a student can afford to attend a particular school (and are often called "gap loans"). Second, schools extend in-house loans as a form of financial aid. Such loans are sometimes subsidized (i.e., interest will not accrue on them while a student is in school) or come at a below-market interest rate. Both scenarios can—and often do—overlap.
Although many schools view in-house loans as a form of financial aid that helps students, the CFPB has noted past abuses by for-profit schools that operated such loan programs. For instance, the CFPB has alleged that a school used deceptive advertisements regarding employment prospects and career services offerings to induce students to take out private, in-house student loans. As we have previously noted, the CFPB has also alleged that certain student loans offered by a for-profit college violated the CFPB's prohibition on abusive acts and practices because they featured high default rates and above-market interest rates and fees and were part of a "sham" arrangement designed to ensure that the school continued to have access to the federal student loan program.
Notably, private student loans originated by colleges and universities are exempt from many of the laws applicable to other student lenders. For instance, such loans are generally not subject to state consumer loan licensing laws. They are also exempt from Regulation Z's provisions with respect to private education loans if (a) credit is extended for 90 days or less or (b) an interest rate will not be applied to the credit balance where the term is for less than one year. However, in-house student loans that do not fall into these categories are still subject to the Truth-in-Lending Act and Regulation Z, and they are always subject to the Equal Credit Opportunity Act and Regulation B's antidiscrimination provisions (among others), the Fair Debt Collection Practices Act (FDCPA), and prohibitions on unfair, deceptive, and abusive acts and practices. It appears that the CFPB plans to focus its supervisory activities on these laws and regulations.
2. AREAS OF FOCUS
The CFPB's announcement appears to focus on four principal areas of concern.
a. Power Imbalances Between Students and Their Schools
First, the CFPB's announcement appears to direct examination resources to areas where there is a clear power imbalance between students and their educational institutions. For instance, CFPB examiners will be looking at whether schools:
- Restrict students who are late on their loan payments from enrolling in or attending classes, which could delay their graduation and prevent them from finding employment. As a result of this conduct, students might have to take out additional student loans. They might also struggle to repay the loans they have already taken out.
- Withhold academic transcripts from students who owe the school a debt, as this would prevent students from using their transcripts to demonstrate their education level in the job market.
- Include acceleration clauses in their loan agreements whereby loan repayment is accelerated when a student withdraws from an educational program.
- Charge additional fees or tuition as a result of borrowers' delinquency on in-house loans.
In any of these scenarios, the CFPB suggests a school would be using its power over a student with respect to academics, job and career prospects, or the refund of tuition to coerce the student into repaying the student's in-house loan. Depending on how schools engage in such collection attempts, they may run afoul of the prohibition on unfair, deceptive or abusive acts and practices and the FDCPA's prohibition on the use of abusive or unfair collection practices.
b. For-Profit Schools
Although the CFPB's press release regarding the new examination program does not explicitly state that the Bureau will focus on for-profit schools, the release appears to imply that this will be the case. When the release refers to "past abuses" by schools offering in-house student loans, it cites to two prior CFPB enforcement actions involving for-profit schools. The introductory sentence of the press release also notes that examinations will cover for-profit colleges, but the rest of the press release does not mention non-profit colleges.
The CFPB has notably never brought an enforcement action against a non-profit school with regard to in-house loans offered by such schools. However, the Bureau has brought enforcement actions against for-profit schools alleging that they have engaged in some of the types of conduct highlighted for examiners in the new iteration of the CFPB's Education Loan Examination Procedures with respect to their in-house loan programs.
The CFPB's new director, Rohit Chopra, has also been an outspoken advocate against marketing practices employed by for-profit schools and even led efforts to resurrect the Federal Trade Commission's (FTC) Penalty Offense Authority so that it could be used against for-profit schools while he was a commissioner at the FTC. Given this background, it appears that a substantial majority of the CFPB's focus with respect to in-house student loan program examinations will likely be placed on for-profit schools.
c. Partner Lenders
The CFPB's press release also notes that the Bureau will focus on improper lending relationships between schools and partner lenders. Specifically, the CFPB noted that schools that have preferential relationships with certain lenders may pose risks to students because students may end up paying more for a loan with a partner lender. It is relatively common for schools to maintain relationships with partner lenders, so this is likely to be a major source of compliance risk for schools.
d. Income Share Agreements
The updated Education Loan Examination Manual notes that the Bureau considers income share agreements (ISAs) to be within the scope of its authority. This tracks with the CFPB's recent enforcement action against an ISA provider where the Bureau alleged that the ISA provider falsely represented that ISAs are not loans and failed to provide loan disclosures required under federal law. Although the enforcement action involved ISAs offered by a private, non-school entity, some schools offer in-house ISA programs. It seems likely that the Bureau will examine such programs to ensure that schools treat such ISAs as credit and provide borrowers with required disclosures, where applicable.
It will be interesting to see how aggressively the CFPB examines colleges and universities that offer in-house loans and whether the CFPB's examinations will target any non-profit schools offering such loans. Colleges and universities that offer in-house loans will want to ensure that they maintain a compliance management system that meets CFPB expectations; avoid engaging in conduct that the Bureau views as unfair, deceptive or abusive; and comply with Regulation Z's provisions with respect to private education loans, where applicable. Failure to meet the CFPB's compliance expectations could result in a "matter requiring attention" during an examination or, potentially, an enforcement action posing significant reputational risk.
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