[Federal Register Volume 88, Number 56 (Thursday, March 23, 2023)]
[Rules and Regulations]
[Pages 17366-17368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06002]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Chapter X


Bulletin 2023-01: Unfair Billing and Collection Practices After 
Bankruptcy Discharges of Certain Student Loan Debts

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Compliance bulletin and policy guidance.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is issuing 
this Compliance Bulletin and Policy Guidance (Bulletin) to address the 
treatment of certain private student

[[Page 17367]]

loans (student loans) following bankruptcy discharge. In order to 
secure a discharge of ``qualified education loans'' in bankruptcy, 
borrowers must demonstrate that the loans would impose an undue 
hardship if not discharged. Student loans that are not ``qualified 
education loans'' (non-qualified student loans), however, are 
discharged under standard bankruptcy discharge orders. In recent 
supervisory work, CFPB examiners identified servicers that did not 
determine whether education loans were qualified or non-qualified. As a 
result, servicers improperly returned non-qualified education loans to 
repayment after a bankruptcy concluded and continued to bill and 
collect payments on the loans, even though the borrowers' bankruptcy 
discharges released them from these debts. This conduct violated the 
Consumer Financial Protection Act's (CFPA's) prohibition on unfair, 
deceptive, or abusive acts or practices. CFPB examiners directed the 
servicers to cease collection of discharged loans and take remedial 
action, which includes conducting a multi-year lookback and issuing 
refunds to affected consumers. In its oversight, the CFPB will pay 
particular attention to servicers' practices in connection with student 
loans that are the subject of bankruptcy discharge orders, including 
whether discharged debts are being collected contrary to bankruptcy 
court orders.

DATES: This bulletin is applicable on March 23, 2023.

FOR FURTHER INFORMATION CONTACT: Miya Tandon, Counsel, Office of 
Supervision Policy, at 202-695-4901; Matt Liles, Senior Counsel, Office 
of Supervision Policy, at 202-701-3828. If you require this document in 
an alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    After a debtor files for bankruptcy, a judge issues an order of 
discharge that releases a debtor from personal liability for all debts 
unless they are exempted. Some types of student loans are not 
discharged by general orders of discharge and receive special treatment 
under section 523(a)(8) of the Bankruptcy Code. Borrowers with these 
obligations must prove the debt would impose an undue hardship if not 
discharged. The Bankruptcy Code identifies these debts as:
    a. Loans that are made, insured, or guaranteed by a governmental 
unit, or made under any program funded in whole or in part by a 
governmental unit or nonprofit institution;
    b. Loans that meet the definition of a ``qualified education 
loan,'' as defined in section 221(d)(1) of the Internal Revenue Code of 
1986; \1\ or
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    \1\ 11 U.S.C. 523(a)(8).
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    c. Obligations to repay funds received as an educational benefit, 
scholarship, or stipend.\2\
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    \2\ 11 U.S.C. 523(a)(8)(A)(ii).
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    The Internal Revenue Code specifies that qualified education loans 
are those that are incurred:
    1. Solely to pay for the cost of attendance less scholarships or 
certain other payments;
    2. At institutions eligible to participate in Federal student aid 
programs under Title IV of the Higher Education Act of 1965; and
    3. While attending at least half-time.\3\
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    \3\ 26 U.S.C. 221(d)(1).
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    In practice, the majority of student loans meet one of the criteria 
for special treatment under the Bankruptcy Code, and therefore, are not 
discharged by a general order of discharge.\4\ Importantly, however, 
some loans for educational purposes that borrowers may think of as 
``private student loans'' are not exempt from the general order of 
discharge,\5\ including:
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    \4\ For example, the majority of student loans are Federal loans 
made or insured under title IV of the Higher Education Act. See 
Report of the CFPB Education Loan Ombudsman, https://files.consumerfinance.gov/f/documents/cfpb_education-loan-ombudsman_report_2022-10.pdf (Oct. 2022), pp. 7-8.
    \5\ See, e.g., In re McDaniel, 590 B.R. 537, 545 (Bankr. D. 
Colo. 2018) (noting that merely labeling a product a ``student 
loan'' does not subject it to the undue hardship standard); Homaidan 
v. Sallie Mae, Inc., 3 F.4th 595, 605 (2d Cir. 2021); In re 
McDaniel, 973 F.3d 1083, 1092 (10th Cir. 2020); In re Crocker, 941 
F.3d 206 (5th Cir. 2019), as revised (Oct. 22, 2019).
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     Loans made to attend non-Title IV schools (that is, 
schools that are not permitted to process U.S. Federal student aid, 
such as unaccredited schools and foreign schools); \6\
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    \6\ See Crocker, 941 F.3d at 217-18 (noting that qualified 
educational expenses must be used to attend an ``eligible 
educational institution,'' which section 25A(f)(2) of the Internal 
Revenue Code defines as eligible to participate in Title IV 
programs).
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     Loans made to cover fees and living expenses incurred 
while studying for the bar exam or other professional exams; \7\
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    \7\ Id. (bar study loan subject to standard bankruptcy 
discharge); see also In re Campbell, 547 B.R. 49, 61 (Bankr. 
E.D.N.Y. 2016).
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     Loans made to cover fees, living expenses, and moving 
costs associated with medical or dental residency;
     Loans made in amounts in excess of the cost of attendance; 
\8\
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    \8\ 26 U.S.C. 221(d)(2) (limiting a qualified educational 
expense to ``the cost of attendance''); see, e.g., Homaidan, 3 F.4th 
at 599 (affirming discharge of loans made in excess of the cost of 
attendance).
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     Loans to students attending school less than half-time; 
\9\ and
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    \9\ See 26 U.S.C. 221(d)(1)(C) (defining a ``qualified education 
loan'' as a loan made to an ``eligible student''); 20 U.S.C. 
1091(b)(3) (defining ``eligible student'' as someone attending at 
least half-time).
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     Other loans made for non-qualified higher education 
expenses.\10\
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    \10\ 26 U.S.C. 221(d)(1) (requiring a qualified education loan 
only be used to pay ``qualified higher education expenses'').
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    Any private loans in these categories are discharged by standard 
bankruptcy discharge orders, just like most other unsecured consumer 
debts.\11\ In addition to not fitting the definition of ``qualified 
education loan,'' these loans are not made, insured, or guaranteed by a 
governmental unit, and are not educational benefits, scholarships, or 
stipends. The obligations at issue here are originated as loans 
requiring repayment; educational benefits, scholarships, and stipends, 
in contrast, are grants, where repayment is only triggered if the 
student fails to meet a condition of the grant. Indeed, the Second, 
Fifth, and Tenth Circuits--the only circuits to analyze the issue 
fully--have held that the educational benefit exclusion does not apply 
to student loans.\12\
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    \11\ See, e.g., Homaidan, 3 F.4th at 605; McDaniel, 973 F.3d at 
1092; Crocker, 941 F.3d at 206.
    \12\ See Homaidan, 3 F.4th at 604-05; McDaniel, 973 F.3d at 
1092; Crocker, 941 F.3d at 224.
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II. Unfair Acts or Practices in Handling Student Loans Post-Bankruptcy

    The CFPB has authority to conduct oversight of student loan 
servicing, including by citing servicers for unfair, deceptive, or 
abusive acts or practices.\13\ Congress defined an unfair act or 
practice as one that:
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    \13\ See title X of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) 
(establishing the CFPB's authority). Under the Dodd-Frank Act, all 
covered persons or service providers are prohibited from committing 
unfair, deceptive, or abusive acts or practices in violation of the 
Act.
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    (A) Causes or is likely to cause substantial injury to consumers 
which is not reasonably avoidable, and
    (B) Such substantial injury is not outweighed by countervailing 
benefits to consumers or to competition.\14\
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    \14\ 12 U.S.C. 5531(c)(1).
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    Through its supervisory activities, CFPB examiners found that 
servicers of various types of student loans failed to maintain policies 
or procedures for distinguishing between loan types that are discharged 
in the regular course of a bankruptcy proceeding (generally, non-
qualified education loans) and loan types that require consumers to 
initiate

[[Page 17368]]

an adversarial proceeding and meet the ``undue hardship'' standard to 
receive bankruptcy relief. Some servicers relied entirely on loan 
holders to distinguish among the loans and did not determine whether 
holders had in fact done so. Nor did they take any other steps to 
evaluate whether or not the loans were qualified education loans. 
Consequently, examiners identified accounts where servicers, following 
a bankruptcy involving non-qualified education loans, resumed 
collecting on loans that had been discharged by bankruptcy courts.
    CFPB examiners determined that student loan servicers engaged in an 
unfair act or practice, in violation of the Dodd-Frank Act, when they 
resumed collection of debts that were discharged by bankruptcy 
courts.\15\ The conduct caused or was likely to cause substantial 
injury to consumers because the representations made to consumers in 
billing statements and other collection attempts were likely to result 
in consumers making payments they did not owe. In fact, CFPB examiners 
also observed that after exiting bankruptcy and being presented with 
bills from their student loan servicers, most borrowers made payments 
toward the debts, sometimes paying thousands of dollars on discharged 
debts. Since the consumers could not control the servicers' actions, 
consumers could not reasonably avoid the injury. Lastly, the 
substantial injury was not outweighed by countervailing benefits to 
consumers or competition, as there was no value to consumers or 
competition in servicers collecting debts that had already been 
discharged by operation of bankruptcy court orders.
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    \15\ Depending on the facts and circumstances, returning 
consumers to repayment status on debts discharged in bankruptcy may 
also implicate deceptive or abusive acts or practices, or other 
unfair acts or practices under the CFPA, sections 1031, 1036; 12 
U.S.C. 5531, 5536.
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    In addition to directing the servicers to revise their policies and 
procedures to prevent the collection of discharged loans, CFPB 
examiners directed them to do a multi-year lookback resulting in 
refunds to affected borrowers.\16\
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    \16\ In addition, CFPB examiners have separately cited student 
loan servicers for deceptive conduct that violates the CFPA when the 
servicers misrepresented to consumers that student loans are never 
dischargeable in bankruptcy or conveyed to consumers that their 
loans are not dischargeable because those consumers have completed 
bankruptcy. Supervisory Highlights, Fall 2014, section 2.5.5, 
https://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf and Supervisory Highlights, Fall 2015, 
section 2.5.3, https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf.
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III. Supervision and Enforcement

    The CFPB's supervisory observations and consumer complaints show 
that servicers continued to make collection attempts on student loans 
that were discharged through bankruptcy in many instances. This conduct 
violates Federal consumer financial law.\17\ The CFPB expects servicers 
to proactively identify student loans that are discharged without an 
undue hardship showing and permanently cease collections following a 
standard bankruptcy discharge order. The CFPB is prioritizing student 
loan servicing oversight work in deploying its supervision and 
enforcement resources in the coming year, including a focus on 
evaluating whether lenders and servicers cease collection of student 
loans once they have been discharged.\18\
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    \17\ Practices of this kind might also violate State laws, 
including State prohibitions on unfair or deceptive practices and 
State student loan servicing statutes.
    \18\ To the extent that continued attempts to collect result in 
improper accrual and collection of interest on discharged education 
loans, such practices may result in the provision of any report of 
examination or related information identifying possible tax law 
noncompliance to the Commissioner of Internal Revenue, per 12 U.S.C. 
5514(b)(6).
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    In its student loan servicing oversight work, the CFPB plans to pay 
particular attention to:
    a. Whether student loan servicers continue to collect on loans that 
are discharged by a bankruptcy discharge order;
    b. Whether servicers and loan holders have adequate policies and 
procedures to identify loans that are discharged by a bankruptcy 
discharge order and loans that require the borrower to go through an 
adversarial proceeding to demonstrate that they meet the undue hardship 
standard; and
    c. Whether servicers provide accurate information to borrowers 
about the status of their loans and the protections that bankruptcy 
offers.\19\
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    \19\ This list is not exhaustive. The CFPB may also scrutinize 
additional practices related to discharged student loans.
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    In exercising its supervisory and enforcement discretion, the CFPB 
will consider the extent to which entities engage in proactive review 
and remediation. For example, where servicers or loan holders identify 
errors, they can expand their analysis to include a review of all 
accounts exiting bankruptcy going back to their earliest available data 
and provide full remediation where they wrongfully collected from any 
borrower. In addition, servicers can proactively categorize loans based 
on whether they can be discharged, so their policies and procedures do 
not require individual determinations at the time of bankruptcy. In 
future supervisory and enforcement work, the CFPB will assess 
servicers' processes and determine whether necessary remediation was 
adequate to compensate borrowers for the errors.

IV. Conclusion

    The CFPB will continue to review closely the practices of student 
loan servicers for potential unfair, deceptive, or abusive acts or 
practices. Examiners will determine whether servicers of private 
student loans return loans to repayment status after a standard 
bankruptcy discharge has released the borrowers from these debts. The 
CFPB will use all appropriate tools, including its supervisory 
authority, enforcement authority, and referrals to State and other 
Federal authorities where appropriate to hold entities accountable if 
they engage in unfair, deceptive, or abusive acts or practices in 
connection with these bankruptcy-related practices.

V. Regulatory Requirements

    This is a general statement of policy under the Administrative 
Procedure Act (APA). It is intended to provide information regarding 
the CFPB's general plans to exercise its supervisory and enforcement 
discretion for institutions under its jurisdiction and does not impose 
any legal requirements on external parties, nor does it create or 
confer any substantive rights on external parties that could be 
enforceable in any administrative or civil proceeding. Because no 
notice of proposed rulemaking is required in issuing the Bulletin, the 
Regulatory Flexibility Act also does not require an initial or final 
regulatory flexibility analysis. The CFPB has also determined that the 
issuance of the Bulletin does not impose any new or revise any existing 
recordkeeping, reporting, or disclosure requirements on covered 
entities or members of the public that would be collections of 
information requiring approval by the Office of Management and Budget 
under the Paperwork Reduction Act.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-06002 Filed 3-22-23; 8:45 am]
BILLING CODE 4810-AM-P