On March 16, 2023, the CFPB issued a bulletin warning servicers of their obligation to stop 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 reminds student loan servicers that some private student loans can be discharged in a standard bankruptcy proceeding and for this subset of private student loans, a bankruptcy discharge order eliminates the consumer’s debt. Examples of student loans eligible for standard bankruptcy discharge include the following:
Loans made to attend schools that are not eligible to receive U.S. Federal student aid, such as unaccredited schools and foreign schools (“non-Title IV schools”);
Loans to students attending school less than half-time;
Loans made in amounts in excess of the cost of attendance, which are often disbursed directly to the borrower, instead of the school;
Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams;
Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency; and
Other loans made for non-qualified higher education expenses
During its supervisory activities, CFPB examiners found that certain student loan servicers failed to distinguish between education loans that are discharged in a standard bankruptcy proceeding and loans that are not. This resulted in servicers improperly collecting on loans that had been discharged by bankruptcy courts. The CFPB noted that many borrowers continued to make payments when faced with continued collection activities in violation of bankruptcy court orders.
The CFPB stressed that it will continue to hold industry accountable for these illegal collection practices. The CFPB also 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 the CFPB’s press release here.
The Bulletin can be found here.