The Consumer Financial Protection Bureau (CFPB) today issued a bulletin reminding servicers of their duty to stop illegal behaviour with regard to private student loans that have been dismissed by bankruptcy courts and urging them to do so immediately. In a recent advisory, CFPB investigators discovered that certain loan servicers were improperly sending loans back to collections after bankruptcy courts had discharged them. The CFPB is asking these servicers to immediately stop using these illegal collection methods and restore any monies that were improperly collected to the affected customers. The advisory also states that the CFPB will keep track of how student loan servicers handle these debts in order to determine whether similar illegal actions are still being carried out by other businesses.
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Servicers are being cautioned not to collect discharged debt
In reviewing how specific student loan servicers handled private loan accounts when customers received debt discharges as a result of bankruptcy court orders, CFPB examiners found unfair practises. These practises are detailed in the bulletin. The advisory also makes it apparent that the CFPB will continue to look into how servicers are handling these loans, and it warns the servicing sector that the agency plans to take enforcement action if it discovers that servicers are trying to collect on debts that have already been discharged.
Certain private student loans can be cancelled in a typical bankruptcy case, just like most other unsecured consumer debts, even though many student loans are subject to a “undue hardship” threshold and demand a special proceeding to be wiped in bankruptcy. The consumer’s debt is discharged by a bankruptcy order for this subgroup of private student loans.
Student loans that qualify for the common bankruptcy discharge include the following:
- Loans taken out to attend institutions that are not eligible for federal student aid, such as unrecognised colleges and universities abroad (sometimes known as “non-Title IV schools”).
- loans for kids who aren’t enrolled full-time in school
- loans provided in excess of the cost of attendance, which are frequently paid out to the borrower directly rather than the school
- loans given to students to pay for fees and living costs while they prepare for the bar test or other professional exams
- loans provided to pay for residency-related fees, living expenditures, and moving charges
- Additional loans taken out to pay for unrecognised higher education costs
Improper Methods of Getting Paid for Discharged Student Debt
Examiners from the CFPB found student loan servicers that did not discriminate between loans that are and are not dismissed in a typical bankruptcy proceeding. As a result, servicers made improper attempts to collect on loans that bankruptcy courts had cancelled. The CFPB discovered that many borrowers continued to make payments, often forking over hundreds of dollars on debts they no longer owed, when confronted with ongoing collection efforts that violated bankruptcy court orders. These supervisory findings add to prior research from 2014, when the CFPB discovered that student loan servicers misled consumers into believing their debts could not be discharged in bankruptcy, despite the fact that the Bankruptcy Act permits such a discharge. The CFPB aims to keep holding the industry responsible for these unlawful collection methods. The CFPB anticipates that servicers will proactively identify student loans that are discharged through typical bankruptcy proceedings, permanently stop collection efforts, and reimburse any customers who have previously been subjected to unauthorised collections.
“When a court orders the discharge of a loan, lenders and servicers should not treat this as a suggestion,” said CFPB Director Rohit 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.”
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