What Institutional Student Lenders Should Know About CFPB Exam Manual Changes

The Consumer Financial Protection Bureau (CFPB) was given direct supervisory jurisdiction over any institution that engages in private education lending Instant Payday Loans Ipass under the Dodd-Frank Act, irrespective of whether the lender is a depository organization or a non-depository institution or the size of the lender. The Consumer Financial Protection Bureau also has direct regulatory jurisdiction over “bigger participants” in the loans servicing industry, as defined under 12 USC 1090.106.

The CFPB’s supervisory jurisdiction over someone means that the CFPB can inspect that individual to see if they are complying with the CFPB’s consumer financial protection rules. 

In addition, even if providers to organizations that are immediately subject to the CFPB’s jurisdiction are not primarily within the purview of the CFPB’s supervisory authority, the CFPB will investigate them. As a result, service providers who aren’t major players in the student loan servicing industry should expect to be contacted by the CFPB in conjunction with a private education lender’s examination.

The Consumer Financial Protection Bureau (CFPB) has issued a series of examination publications that each concentrate on a topic or market that falls within its supervisory jurisdiction. The Consumer Financial Protection Bureau (CFPB) released an updated edition of its Education Loan Examination Manual on January 20, 2022. (the Manual). 

Although post-secondary schools that gave their students extensions of credit were always subject to the CFPB’s supervisory jurisdiction on a technical level, the CFPB had never addressed that authority publicly. 

Given this, as well as the fact that the CFPB had made no indication that it intended to alter the Manual, Manual’s release was unexpected. 

Furthermore, the CFPB stated in a press release accompanying the Manual that the changes to the education loan examination procedures were primarily designed to make it easier for it to examine the activities of post-secondary learning institutions, such as profit-making colleges, that extend private loans directly to students (Institutional Lenders).

A Summary of the Manual’s Changes

While the major goal of the Manual was to explain that education finance schemes offered by post-secondary schools are subject to the CFPB’s supervisory purview, the CFPB also made several minor revisions to the previous edition. 

These updates correct mistakes, update legislative or regulatory references and requirements as a result of prior measures taken by the CFPB or other agencies, or reflect new conditions outside the CFPB’s jurisdiction, such as LIBOR’s upcoming cessation. 

These modifications, on the other hand, have no bearing on creditors who were formerly subject to the CFPB’s supervision. The Manual, on the other hand, warns Institutional Lenders that the CFPB will inspect them for compliance with Manual’s range of consumer protection issues. 

The new description of the CFPB’s supervisory jurisdiction specifically includes non-profit schools, despite the press release’s focus on profit-making colleges already listed in the last version of the Manual.

The Consumer Financial Protection Bureau is concentrating its efforts on institutional lenders.

Many institutions provide their students the opportunity to finance their post-secondary school expenses via various forms of internal or co-branded programs and products, according to the CFPB in a section headed “The Role of Educational Entities in Higher Education Finance.” 

Payment plans, private student loans, income-share agreements, temporary credits, and other arrangements are examples of these programs.

When these school institutions and their affiliates create private education loans, the CFPB has supervisory power over them. Similarly, the CFPB’s supervisory authority extends to some third-party service providers to institutions that originate private education loans and are subject to the Bureau’s supervision.

It’s worth noting that this phrase implies that the CFPB will look into all sorts of education finance provided by Institutional Lenders, not simply traditional private school loans as described in Regulation Z. The Consumer Financial Protection Bureau also stated that some third-party service providers to Institutional Lenders may be investigated. 

As a result, Institutional Lenders and their service providers should think about how any credit extension they grant would be regarded during a CFPB inquiry.

Examining Institutional Lenders by the Consumer Financial Protection Bureau

To prepare for a possible CFPB examination, Institutional Lenders should thoroughly review the Manual. The majority of the Manual is devoted to determining if a lender complies with common consumer financial protection rules and regulations, such as Regulations Z, B, and E, borrower complaints, loan servicing, credit reporting and collection, and information sharing and privacy. 

Examiners will now require all co-branding or co-marketing agreements as part of any marketing assessment, according to the Manual. 

The goal of the inspection, according to the Manual, is to evaluate the inspected entity’s compliance risk management system, which includes internal controls, policies, and processes, as well as identify any potential violations of federal consumer financial legislation. It’s worth noting that federal law offenses might involve unfair, deceptive, or abusive activities or practices that stem from state law violations.

In addition to those compliance difficulties, the CFPB indicated in its news release announcing the publication of the Manual that it would investigate Institutional Lenders on the following topics:

Enrollment restrictions: 

Students who are behind on their loan payments may be barred from enrolling in or attending classes, thus delaying graduation and making it difficult for them to obtain work.

Withholding transcripts:

When a school refuses to release academic transcripts to students who owe the school money, they are unable to use their transcripts to demonstrate their educational levels in the job market.

Improperly accelerating payments: 

When a student withdraws from a program, schools that use acceleration clauses in their loans may be putting a tremendous financial strain on the student by making the loan immediately due and collected.

Failure to issue refunds: 

If a student drops out of a program early, the institution may be able to reimburse them.

Maintaining erroneous lending arrangements: 

Schools that have preferential lending relationships with select lenders may put students in danger since they may wind up paying more for their loan, for example.

Several examination questions in the Manual address these topics. 

Even if Institutional Lenders are acting in compliance with applicable law, the CFPB’s attention on these issues signals that it expects to find them engaging in unfair, deceptive, or abusive conduct concerning these issues.

Considerations in Practice

Even if they don’t offer actual private education loans, many post-secondary schools provide some form of credit to students, such as 0% interest payment plans. On the surface, the Manual appears to imply that all such institutions may be subject to a CFPB inspection. 

Given the vast number of schools that could be investigated, it’s unlikely that the CFPB will be able to do so. 

For-profit colleges are more likely to be investigated by the CFPB than private or public non-profit schools. Despite this, there are still a lot of for-profit schools that are Institutional Lenders. 

As a result, it’s difficult to predict how the CFPB would deploy and prioritize its examiners in relation to those Institutional Lenders, except to presume that it will concentrate on Institutional Lenders with substantial programs or whom the CFPB suspects of engaging in problematic activities.

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