CFPB to begin reviewing post-secondary schools that lend directly to students | Ballard Spahr LLP


The CFPB has announced that it will begin reviewing post-secondary schools, such as for-profit colleges, that provide private loans directly to students and/or parents to fund undergraduate, graduate, and other forms of education. post-secondary education. The announcement was accompanied by the issuance by the CFPB of a an update to its Student Loan Review Procedures Manual. The update includes a new section on credits given by schools directly to students and/or parents, which the handbook calls “institutional loans.”.” even though it may actually be an installment sale transaction.

The Dodd-Frank Act gave the CFPB supervisory power over entities that issue private education loans. It also gave the CFPB oversight authority over the servicing of student loans by major banks. In 2013, the CFPB issued a “large participant rule” that allows it to oversee any non-bank federal or private student loan servicer if the servicer’s account volume, as defined by the rule, exceeds one million accounts.

According to CFPB press releasedecision to start reviewing schools doing direct lending stems from “CFPB concern[] on the borrower’s experience with institutional loans due to past abuse in schools, such as those run by Corinthian and ITT, where students were subjected to high interest rates and heavy-handed debt collection practices. The CFPB notes that “[s]Schools have not historically been subject to the same service and origination oversight as traditional lenders.

The update aims to require CFPB reviewers, “in addition to reviewing general loan issues, [to] examine the facts about some actions that only schools can take against their students. Specifically, the update adds a new section titled “Additional Concerns for Institutional Lenders” that asks reviewers to consider the following when reviewing schools:

  • Whether the school calculates fees and tuition in connection with the credit product and, if applicable, calculates these items in accordance with the terms of the program in which the borrower is participating
  • Whether the school accurately and timely credits account transactions, including calculations of account balances after aid is distributed or returned
  • Whether the school uses payment plans or temporary credits for all or part of its programs
  • How the school calculates and issues repayments to borrowers who withdraw from school or a program before completing the program or term for which the loans were taken
  • If and under what circumstances the school withholds transcripts or otherwise refuses to certify program completion for students who have debt
  • If and under what circumstances the school imposes enrollment restrictions on institutional borrowers based on their repayment status
  • If and under what circumstances the school imposes additional fees or raises tuition fees for institutional borrowers based on their repayment status
  • If the school uses acceleration clauses with its institutional loans in situations where a borrower who withdraws from the school or a program owes more than the proportionate cost of the time they were enrolled in the program (and if the school uses such clauses, to compare the schools’ policies to those for the reimbursement of unused federal funds for similar programs)
  • Whether a loan product is a private education loan as defined by Regulation Z and, if so, whether the school complies with the TILA prohibition on using prepayment penalties for such loans

The press release includes a reference to “kickback arrangements that induced schools to direct students into certain loans” that caught the attention of regulators in the mid-2000s and include “the maintenance of lending” as one of the issues that CFPB reviewers will be looking at. when reviewing schools. However, this is not a new line of inquiry for CFPB examiners. Prior to the update, the manual already asked examiners to determine whether a private student loan lender had established “a partnership, referral relationship, or preferred lender agreement with an educational institution regarding the [lender’s] private education loan programs” and, where appropriate, to carry out certain evaluations.

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