What Institutional Student Lenders Need to Know About Changes to the CFPB Exam Handbook | McGlinchey Stafford

ByRichard C. Sloan

Jan 26, 2022

The Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) direct supervisory authority over any institution that engages in private education lending, whether the lender is a depository institution or a non-depository institution. custodian, or the size of the lender. The CFPB also has direct supervisory authority over “large participants” in the student loan servicing market, as such institutions are defined in 12 USC § 1090.106.

The CFPB’s supervisory authority over a person means that the CFPB can review that person to ensure that they comply with applicable consumer financial protection laws that the CFPB administers. In addition, the CFPB will examine the service providers of establishments directly subject to the jurisdiction of the CFPB, even if these service providers do not come directly under the supervisory authority of the CFPB. Therefore, service providers who, for example, are not significant players in the student loan servicing market can expect to be contacted by the CFPB as part of a lender’s review of the private education.

To facilitate its supervisory examinations, the CFPB has published a series of examination manuals, each of which focuses on a topic or market within its supervisory jurisdiction. On January 20, 2022, the CFPB published an updated version of its Student Loan Review Manual (The Manual). Although technically post-secondary schools that offered their students credit extensions were still subject to the oversight jurisdiction of the CFPB, the CFPB had not publicly addressed this jurisdiction. In light of this and the fact that the CFPB had not indicated that it intended to revise the manual, the publication of the manual was unexpected. Further, the CFPB clarified in the press release accompanying the handbook that the changes to student loan review procedures were primarily intended to facilitate its review of the operations of post-secondary schools, such as for-profit colleges, which provide private loans directly to students (Institutional Lenders).

Overview of changes made by the manual

Although the main purpose of the Handbook was to clarify that educational funding programs offered by post-secondary schools are subject to its scope, the CFPB also made a number of less significant changes to the edition. previous to the Manual. These changes correct typos, update references and legal or regulatory requirements that result from other actions taken by the CFPB or other agencies, or reflect changed circumstances outside the jurisdiction of the CFPB, such as the upcoming shutdown of LIBOR. These changes are not, however, significant for lenders who were previously subject to the supervisory jurisdiction of the CFPB. For institutional lenders, however, the handbook warns them that the CFPB will review them to ensure compliance with the wide range of consumer protection issues covered by the handbook. Despite the press release’s emphasis on for-profit colleges, which were already identified in the previous version of the Handbook, the updated explanation from the CFPB’s governing authority expressly includes not-for-profit schools. .

CFPB focuses on institutional lenders

In a section titled “The Role of Educational Entities in Funding Higher Education,” the CFPB stated:

Many schools offer their students the opportunity to fund their post-secondary education expenses through various types of in-house or co-branded programs and products. These programs may include private student loans, payment plans, temporary credits, revenue sharing agreements, and other agreements.

The supervisory authority of the CFPB extends to these schools and their affiliates when they grant loans to private education. Similarly, the CFPB’s supervisory power extends to certain entities that act as third-party service providers to establishments that initiate private education loans and are themselves subject to the Bureau’s supervisory power.

Note that this language suggests that the CFPB will consider all types of education financing offered by institutional lenders, not just conventional private education loans as that term is defined in Regulation Z. The CFPB also emphasized that certain third-party service providers to institutional lenders may be subject to review. Institutional lenders and their service providers should therefore consider how any credit extension they offer may be considered during a CFPB review.

CFPB Examination Scope for Institutional Lenders

Institutional lenders should review the manual in detail to prepare for a potential CFPB review. Most of the manual is concerned with reviewing a lender’s compliance with common consumer financial protection laws and regulations, such as Regulations Z, B, and E, loan servicing, borrower complaints, collections and credit reporting, as well as information sharing and confidentiality. The manual says reviewers will now request any co-marketing or co-branding agreements as part of any advertising review. As stated in the manual, the purpose of the review is to assess the reviewed entity’s compliance risk management system, including internal controls, policies and procedures, and to identify any breaches. potential of federal consumer finance law. Note that these violations of federal law may include unfair, deceptive, or abusive acts or practices that arise from violations of state law.

In addition to these compliance issues, the CFPB specifically stated in its Press release announcing the release of the handbook that it would review institutional lenders with respect to the following issues:

  • Place registration restrictions: Students who are behind on their loan payments may be prevented from enrolling or attending classes, which could delay their graduation and prevent them from finding a job.
  • Withholding of transcripts: When a school withholds the transcripts of students who owe it debt, it prevents students from using their transcripts to demonstrate their level of education in the job market.
  • Improperly Accelerated Payments: Schools that use acceleration clauses in their loans when a student withdraws from the program could impose a heavy financial burden on the student by making the loan immediately due and collectible.
  • Do not issue refunds: If a borrower withdraws from a program early, they may be entitled to certain reimbursements by the school.
  • Maintaining inappropriate loan relationships: Schools that have special relationships with certain lenders may pose risks to students because, for example, they may end up paying more for their loan.

The manual contains several exam questions that address these issues. The CFPB does not explicitly state that any of the listed practices are not permitted or justified, but the CFPB’s emphasis on these issues suggests that it expects institutional lenders to engage in disloyal, misleading or abusive with respect to these matters, even the Institutional lenders act in accordance with the applicable law.

Practical Considerations

Many post-secondary schools offer some kind of student credit, such as 0% interest payment plans, even if they don’t offer actual private education loans. Taken at face value, the manual would suggest that all of these schools may be subject to CFPB review. Given the large number of schools likely to be reviewed, however, it seems unlikely that the CFPB really expects to review them all. The CFPB is more likely to review for-profit schools than private or public non-profit schools. Nevertheless, the number of for-profit schools that are institutional lenders is still significant. As such, it is unclear how the CFPB will deploy and prioritize its reviewers with respect to these institutional lenders, other than to assume that it will focus on institutional lenders with large programs or whose CFPB has reason to to believe that they have engaged in problematic transactions. activity.