March 16, 2023

CFPB: Agency Heightens Scrutiny on Unlawful Collection of Payments on Discharged Student Loans

CFPB examiners found servicers engaging in unfair practices in trying to collect on loans discharged in bankruptcy

Today, the Consumer Financial Protection Bureau (CFPB) released a bulletin warning servicers of their obligation to halt unlawful conduct with respect to private student loans that have been discharged by bankruptcy courts. The bulletin details recent findings by CFPB examiners that certain loan servicers were illegally returning loans to collections after bankruptcy courts had discharged the loans. The CFPB is directing these servicers to return illegally collected payments to affected consumers and immediately cease these unlawful collection tactics. The bulletin also makes clear that the CFPB will continue to examine student loan servicers’ handling of these loans to detect whether these illegal practices persist at other companies.

“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.”

Warning Servicers Against Collecting Discharged Debt

The bulletin details unfair practices observed by CFPB examiners in reviews of the way certain student loan servicers handled private loan accounts when consumers received loan discharges through bankruptcy court orders. The bulletin also makes clear that the CFPB will continue to examine servicer handling of these loans, and puts the servicing industry on notice that the CFPB intends to take action where it finds that servicers are collecting on debts that have been discharged.

Although many student loans are subject to an “undue hardship” standard and require a separate proceeding to be discharged in bankruptcy, some private student loans can be discharged in a standard bankruptcy proceeding, just like most other unsecured consumer debts. For this subset of private student loans, a bankruptcy discharge order eliminates the consumer’s debt.

Some examples of student loans eligible for standard bankruptcy discharge include:

Unfair Practices in Collecting Discharged Student Loans

CFPB examiners identified student loan servicers who failed to distinguish between education loans that are discharged in a standard bankruptcy proceeding and loans that are not. As a result, servicers improperly sought to collect on loans that had been discharged by bankruptcy courts. The CFPB found that, when faced with continued collection activities in violation of bankruptcy court orders, many borrowers continued to make payments, sometimes paying thousands of dollars on debts that they no longer owed. These supervisory findings build on previous work from 2014, when the CFPB found that student loan servicers deceptively told borrowers that their loans were not dischargeable in bankruptcy even though the Bankruptcy Code does allow for discharge.

The CFPB intends to continue to hold industry accountable for these illegal collection practices. The CFPB expects servicers to proactively identify student loans that are discharged via standard bankruptcy orders, permanently cease collections, and refund any consumers who have been affected by unlawful collections in the past.

Read today’s bulletin, Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debt.

Consumers having an issue with a consumer financial product or service can submit a complaint with the CFPB online or by calling (855) 411-CFPB (2372).

This post was originally published here.