CFPB Publishes Oversight Protocols for Institutional Student Lending
Today, the Consumer Financial Protection Bureau (CFPB) announced it will begin examining the operations of post-secondary schools, such as for-profit colleges, that extend private loans directly to students. The CFPB is issuing an update to its exam procedures including a new section on institutional student loans. As the CFPB begins its supervision, the exam procedures inform industry about practices that CFPB examiners will review, including placing enrollment restrictions, withholding transcripts, improperly accelerating payments, failing to issue refunds, and maintaining improper lending relationships.
“Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future,” said CFPB Director Rohit Chopra. “It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”
Private education loans are extensions of credit made to students or parents to fund undergraduate, graduate, and other forms of postsecondary education. Private education loans may be offered by banks, non-profits, nonbanks, credit unions, state-affiliated organizations, and institutions of higher education, including both for-profit schools and non-profit schools. These loans are typically not affiliated with federal student loan programs administered by the U.S. Department of Education. When the loans are made directly to students by the school they attend, they are often referred to as institutional student loans.
The CFPB is concerned about the borrower experience with institutional loans because of past abuses at schools, like those operated by Corinthian and ITT, where students were subjected to high interest rates and strong-arm debt collection practices. Schools have not historically been subject to the same servicing and origination oversight as traditional lenders.
In the mid-2000s, many lenders and institutions of higher education were caught engaging in kickback arrangements that gave schools the incentive to steer students into certain loans. Congress later enacted reforms to student loan disclosures and prohibited certain practices. Congress also gave the CFPB supervisory authority over entities that originate private education loans, including institutional loans. When examining institutions offering private education loans, in addition to looking at general lending issues, examiners will review the facts around certain actions only schools can take against their students. Specifically, CFPB examiners will be looking at:
- Placing enrollment restrictions: Students who are late on their loan payments may be restricted from enrolling in or attending classes, which could delay their graduation and prevent them from finding employment.
- Withholding transcripts: When a school withholds academic transcripts from students that owe the school a debt, this prevents students from using their transcripts to demonstrate their education levels in the job market.
- Improperly accelerating payments: Schools that use acceleration clauses in their loans when a student withdraws from the program could be putting a heavy financial burden on the student by making the loan immediately due and collectible.
- Failing to issue refunds: If a borrower withdraws from a program early, they may be entitled to some refunds by the school.
- Maintaining improper lending relationships: Schools that have preferential relationships with certain lenders may pose risks to students because, for example, they may end up paying more for their loan.
The Education Loan Exam Procedures manual is intended for use by CFPB examiners, and the Bureau makes it available to serve as a resource to anyone subject to its exams. These procedures will be incorporated into the CFPB’s general supervision and examination manual.
Students and their families can find help on how to tackle their student debt through the CFPB’s Paying for College suite of tools. Student loan borrowers experiencing problems related to repaying student loans or debt collection can also submit a complaint to the CFPB.
More information is available at consumerfinance.gov/students.