A Winter of Servicer Discontent

Student loan forgiveness efforts are stalled, federal agencies are attacking educational legal issues from a variety of angles, and coordinated action among agencies and attorneys general are expected to increase.

With the Biden administration refocusing its efforts on regulatory oversight across various lending sectors, and recent stronger standards passed by the Department of Education (DOE) on issues such as performance, transparency, and accountability, student loan servicers should take note: This could be a season of discontent.

FTC Warns For-Profit Institutions

In October 2021, the Federal Trade Commission (FTC) sent a Notice of Penalty Offenses to 70 for-profit higher education institutions and vocational schools. In the Notice, the FTC outlined a number of practices and actions by for-profit education institutions that it had found to be unfair or deceptive in the past, including:

  • Misrepresenting industry demand or need for graduates in a particular field of study;
  • Misrepresenting the employment prospects available to graduates, including how easy it is to secure a job or the type or amount of opportunities in a field of study;
  • Misrepresenting the types of jobs available to graduates;
  • Misrepresenting the number of graduates who have secured jobs in a particular industry or from the institution as a whole;
  • Misrepresenting the salaries of graduates;
  • Misrepresenting the qualifications necessary to obtain employment in a particular field, including whether experience or additional education is required or advantageous; and
  • Misrepresenting the institution’s abilities to assist students or graduates in finding and securing employment.

Essentially, the Notice warns that false promises regarding graduates’ jobs and earning potential are subject to regulatory action by the FTC, including civil penalties.

With this action, the FTC revived its Penalty Offense Authority — a tool that had not been used by the FTC since the 1980s. The resurrection of the FTC’s Penalty Offense Authority seems to have been prompted in some capacity by the Supreme Court’s decision in AMG Capital Management, LLC v. FTC, in which the Court gutted the FTC’s authority to seek monetary relief under Section 13(b) of the FTC Act.

Usually, the FTC does not impose civil fines on companies when it is a first-time offender. However, if the FTC issues a cease-and-desist order to one company for an abuse or misrepresentation, other companies that engage in similar abuses or misrepresentations with knowledge of the FTC order can, under the Penalty Offense Authority, be slapped with major fines themselves. If a company or institution (1) knew the conduct was unfair or deceptive in violation of the FTC act and (2) knew that the FTC had already issued a written decision that the conduct in question is unfair or deceptive, the FTC can immediately take action.

The FTC is showing it will not back down and will find creative ways to pursue entities that act in a deceptive or misleading way.

DOE and Enforcement

Putting Richard Cordray, the former head of the CFPB and aggressive consumer advocate, in charge of the DOE’s office of Federal Student Aid (FSA) is another sign that things will not stay quiet.

He has recently restored the Office of Enforcement within the FSA, which will be led by a former CFPB enforcement official. This unit has promised to work with other agencies like the FTC on their efforts to address unfair and deceptive acts and practices by schools and work collaboratively with state officials. Cordray has spoken about both a focus on servicer accountability and schools.

Cordray will also have new tools for his efforts. Under new contract terms between the DOE and servicers, the Federal Student Aid office has been granted an increased ability to monitor servicers and address problems as they arise.

Due to take effect next year, the DOE’s standards will review servicers quarterly at how they are meeting certain performance goals that relate to borrowers. Servicers will be checked for how well customer service agents answer borrower questions, how they help borrowers navigate repayment options, and whether servicers process borrower requests accurately the first time. These issues have dogged some servicers in the past so it is little surprise they are top on the list of priorities. Servicers will also be required to report to the FSA more detailed information about their borrower interactions including borrower complaints.

In signing their contract extensions with the DOE, servicers agreed to comply with “federal, state, and local laws governing loan servicing and to respond to complaints filed with those authorities in a timely manner.”

CFPB Finding Its Footing

Rohit Chopra was only recently installed as the Director of the CFPB, but as the former student loan ombudsman at the CFPB, he is sure to have strong views on student loan issues. Even before he was confirmed as Director, the CFPB had already flagged in a 2021 report that servicers mishandled communications with borrowers over the Public Service Loan Forgiveness program.

Richard Cordray also has said he plans to work closely with Chopra and the CFPB. With limited resources at the FSA, these kind of agency collaborations will be critical.

Looking Ahead

All signs point to a multi-agency focus on educational lending and disclosures. With many student loans coming out of forbearance in 2022, there is an expectation that the volume of borrower/servicer interactions will rise. With that, the federal government will be keeping a close eye on these interactions and will find ways to take action if servicers do not do right by borrowers.

Nicole Serratore, an attorney in the Insolvency + Finance Practice Group, contributed to this post. Megan O’Malley, a member of the Insolvency + Finance Practice Group of Davis+Gilbert, assisted with this post.

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