Regulatory and Enforcement Topics in Student Lending

1. Regulatory and Enforcement Topics in Student Lending Anand S. Raman Presentation for

2. Overview • CFPB Student Lending Initiatives • Supervisory Authority and Examination Issues • Recent Enforcement Actions and Decisions • FTC Enforcement Actions • Looking Ahead

3. CFPB STUDENT LENDING INITIATIVES

4. CFPB Focus • The Consumer Financial Protection Bureau (“CFPB”), which has been in existence for five years, has continued to focus and refine its regulatory efforts within the student lending industry. • Among the primary objectives of the CFPB are transparency and clear disclosures, and the student loan servicing market has emerged as a highlighted area of focus. • “[T]he Bureau is taking action to improve accountability in the student loan servicing market….[The CFPB has] potent authority to send examination teams into these firms to assess them for compliance with the law and direct them to remediate any harm to consumers. In this manner, we will be working to ensure that student loan servicers play by the rules and treat borrowers fairly.” Dir. Richard Cordray, May 19, 2014 “[S]upervising the student loan servicing market has therefore been a priority for the Supervision program….and industry members who service student loans would be well served by carefully reviewing [our] findings….” Winter 2016 Supervisory Highlights, Mar. 2016

5. Early CFPB Student Lending Initiatives • Among the CFPB’s initial projects upon opening its doors in 2011 were: • Know Before You Owe: Student Loans Project • This joint project with the U.S. Department of Education (“DoE”) created a financial aid “shopping sheet” for higher education institutions to assist students in understanding the types and amounts of loans available. • The “shopping sheet” was finalized in July 2012. As of April 2014, more than 2,000 schools have adopted the document. • CFPB and DoE joint inspection of the private student loan industry. • Led to the issuance of a Joint Report in August 2012.

6. 2012 CFPB/DOE Joint Report • The CFPB/DoE Joint Report noted the following issues of concern: • Marketing of student loans has led to confusion among borrowers, particularly with respect to the difference between federal and private loans; • Use of cohort default rates to determine loan eligibility, underwriting, and pricing could lead to a disparate impact affecting minority borrowers; • Limitations in available student data may affect regulators’ ability to evaluate compliance with fair lending laws; and • Lack of a “consumer protection framework” for products that serve as economic substitutes for student loans (e.g., lines of credit).

7. Marketing and Servicing Initiatives Since the Joint Report, the CFPB has continued to request information and issue reports regarding the private student loan industry, particularly with respect to borrower repayment, defaults, and servicer behavior and marketing and disclosure. • February 2013: CFPB issues request for information regarding ways to encourage the development of more affordable loan repayment options for private student loan borrowers. • April 2014: CFPB Student Loan Ombudsman Mid-Year Report highlights borrower complaints of “auto-defaults” by lenders as a result of a death, bankruptcy, or proposed release of a co-signer. • August 2014: CFPB blog post discusses CFPB inquiry into lenders that market financial products to students based on agreements with schools. The Bureau subsequently sends “alerts” to schools to warn them that some financial institutions have not publicly disclosed marketing agreements.

8. Marketing and Servicing Initiatives • January 14, 2015: CFPB issued a Request for input on its “Safe Student Account Scorecard” for colleges. • Scorecard would help schools avoid partnering with financial institutions that offer credit services with “tricks and traps.” • Financial institutions would be required to provide clear descriptions of product fees and features, give full disclosure about its marketing practices, disclose earnings from student accounts, and provide an annual fees summary. • June 18, 2015: Ombudsman released Mid-Year Report discussing issues surrounding co-signer auto-release clauses, reporting that 90% of consumers requesting their co-signer be released are rejected. • Report also found that most private student loan contracts continue to contain auto-default clauses, with many of these policies being non-transparent and potentially harmful to consumers. • September 29, 2015: CFPB issued a Report on student loan servicing failures and a “Joint Statement of Principles on Student Loan Servicing” with the DoE and Treasury, which called for industry-wide standards, accountability, greater repayment and servicer-level data transparency.

9. Marketing and Servicing Initiatives • Oct. 14, 2015: CFPB issues its Annual Report of its review of 6,400 private student loan complaints and 2,300 debt collection complaints related to private and federal student loans collected between Oct. 1, 2014 and Sept. 30, 2015. • CFPB finds continued issues with repayment plans and transparency from private loan servicers, with over 10% of borrowers in forbearance, 12% of borrowers past-due, in addition to 4 million borrowers in default. • Dec. 16, 2015: CFPB sends “warning letters” to 17 colleges claiming that they failed to make student credit card marketing agreements public as required under the CARD Act. • The letters state that the CFPB had “not yet made a determination” if the school’s disclosure failure violated the CARD Act, but it urged schools to “reconsider [their] approach to public disclosure.” • Apr. 28, 2016: CFPB releases its student loan Payback Playbook prototype which requires servicers to provide borrowers with repayment options based on personalized information. • Public comments close on June 12, 2016.

10. Student Borrower “Tool Kit” • The Bureau has created several consumer “tool kits,” including Paying for College, an interactive resource targeted towards students and families to help evaluate higher education financing options, from applying for student aid to student bank accounts to repayment options.

11. Student Borrower “Tool Kit”

12. CFPB SUPERVISION

13. CFPB Supervisory Authority • The CFPB has supervisory authority over: • Banks with $10 billion or more in assets. • Non-bank student lenders. • Larger non-bank participants in the student loan servicing market. • In December 2013, the CFPB issued a Final Rule defining certain non-bank student loan servicers as “larger participants,” and therefore subject to Bureau enforcement and also its supervisory authority. • Under the rule, which became effective March 1, 2014, student loan servicers with more than one million accounts are considered a larger participant.

14. CFPB Issues Identified Through Supervisory Process • CFPB examines entities that service both federal and private student loans, focusing on several areas, including: • Advertising, marketing, and lead generation  • Customer application, qualification, origination, and disbursement • Loan repayment, account maintenance, payoff processing, and payment plans • Customer inquiries and complaints • Collections, accounts in default, and credit reporting • Information sharing and privacy

15. CFPB Education Loan Examinations • In its most recent Supervisory Highlights (Mar. 2016), the CFPB states that its supervisory program “has already touched a significant portion of the student loan servicing market,” and has found the following at some servicers: • Some improved overpayment allocation and loan modification practices. Examiners also noted the existence of reasonable private loan repayment plans, suggesting repayment or loan modification assistance offerings are possible. • Continued unfair auto-default practices. Responsible companies were required to immediately cease auto-default. Examiners also found that some companies had voluntarily stopped using auto-default clauses. • Failure to disclose significant adverse consequences of forbearance. • Use of inaccurate interest rates during loan conversion process between owners. Examiners found this to be an unfair practice. • Insufficient policies and procedures as required by the Federal Credit Reporting Act (FCRA) and its implementing regulation, Regulation V. Deficiencies included policies regarding compliance monitoring, employee training, record retention, third-party oversight, and furnishing technology.

16. RECENT ENFORCEMENT ACTIONS & DECISIONS

17. Recent Enforcement Actions • IrvineWebWorks, Inc., d/b/a Student Loan Processing (Stipulated Judgment, Apr. 2016) • Complaint filed in December 2014 alleged that the debt assistance company falsely represented its affiliation with the DoE, illegally charged consumers upfront enrollment fees, and did not clearly disclose or explain monthly charges. • In April 2016, SLP agreed to cease all operations of SLP and provide approximately $8.2 million in consumer remediation. A nominal $1 civil money penalty was imposed, due to SLP’s financial condition. • SLP was permanently enjoined from advertising, marketing, selling, etc. any debt relief or student loan service. • Student Aid Institute, Inc.(Administrative Consent Order, Mar. 2016) • Student loan debt relief company allegedly charged borrowers illegal advance fees for services, misrepresented the terms and benefits of federal loan benefits, failed to provide required privacy notices, and falsely represented a relationship with the DoE. • Company and its CEO were ordered to shut down debt-relief operations, cancel all consumer contracts, ensure borrowers receive all repayment benefits, and cease participation in the debt relief industry. The order included a $50,000 civil money penalty.

18. Recent Enforcement Actions • Corinthian Colleges, Inc. (Default Judgment, Oct. 2015) • Complaint alleged Corinthian, a for-profit institution, engaged in predatory student lending practices, including: • Intentionally creating a “funding gap” between available federal student loan funding and tuition rates, forcing low-income students into excessive private loans. • Aggressively pursuing illegal debt collection practices, including preventing students from attending or registering for class until payment was made. • In February 2015, ECMC, the purchaser of most of Corinthian’s campuses, agreed to, among other things, provide over $480 million in debt relief to Corinthian students and remove negative information from credit reports. • The Court issued a default judgment in Oct. 2015 finding that Corinthian had engaged in unfair, deceptive, and abusive acts or practices (UDAAP) and violated the Fair Debt Collection Practices Act (FDCPA). • Court ordered Corinthian to pay over $530 million in consumer restitution.

19. Recent Enforcement Actions • Student Financial Resource Center d/b/a College Financial Advisory (Complaint filed Oct. 2015) • Complaint alleges the company deceived consumers by accepting application fees for financial aid services when it provided no services or individualized advice, and misrepresented its affiliation with government and university financial aid offices. • Student Financial Aid Services, Inc. (Stipulated Judgment, Sept. 2015) • Company allegedly used deceptive sales tactics through its websites and call center representatives to encourage consumers to enroll in subscription financial services. SFAS then allegedly enrolled customers in automatic recurring charges without their consent and failed to explain the amounts and dates of those future charges, or how they could be avoided. • SFAS agreed to pay $5.2 million in consumer restitution and cancel all recurring, automatic service charges. $1 CMP due to limited company financial resources after it provides the full amount of remediation.

20. Recent Enforcement Actions • Discover Bank, The Student Loan Corporation, Discover Products, Inc. (Administrative Consent Order, July 2015) • Discover and its affiliates allegedly engaged in unfair and deceptive practices and violated the FDCPA: • Overstated minimum amounts due for certain borrowers by including interest on loans still in deferment and not required to be paid; • Failed to correctly provide required tax information to certain borrowers, stating that they paid $0.00 in interest without disclosing a separate form was required to be filled out to receive the correct information; • Placed more than 150,000 calls to borrowers at inappropriate times (before 8am and after 9pm) and failed to address the problem despite learning of the violation; and • Failed to comply with the legal consumer notifications required by the FDCPA during its communications with borrowers. • The companies agreed to revise policies and procedures, provide between $92 and $500 in account credits to consumers, and reimburse up to $300 of tax preparation costs for those who amended their 2011 and 2012 tax returns. The order included a civil money penalty of $2.5 million.

21. ACICS Court Decision on Scope of CFPB Authority • CFPB v. Accrediting Council for Independent Colleges and Schools (D.D.C. Apr. 21, 2016) • The CFPB issued a civil investigative demand in August 2015 in order to determine whether ACICS was engaging in unlawful acts or practices in connection with accrediting for-profit colleges. ACICS petitioned the Bureau to set aside the CID, which was denied in Oct. 2015. • ACICS submitted a motion to reconsider, which was declined, and the CFPB filed a petition with the U.S. District Court for the District of Columbia. • In its Opinion, the Court stated that “the final analysis this case boils down to the answer to one question: Did the CFPB have the statutory authority to issue the CID in question? Unfortunately for the CFPB, the answer is no.” • “Although it may be that the CFPB is entitled to learn whether ACICS is connected in any way to potential violations of the consumer financial laws by the schools it accredits, the [CID’s] statement of purpose and the CFPB’s actual requests belie any notion that its inquiry is limited in this way. Indeed, the statement of purpose says nothing about an investigation into the lending of financial-advisory practices of for-profit schools.” • The CFPB filed an appeal with the D.C. Circuit on June 20, 2016. CFPB v. Accrediting Council for Indep. Colls. & Schs., Civil Case No. 15-1838 (RJL), 2016 WL 1625084, *2-*3 (D.D.C. Apr. 21, 2016) (emphasis added).

22. FTC ENFORCEMENT ACTIONS

23. Recent FTC Enforcement Actions • The Federal Trade Commission (FTC) has also recently taken actions against companies alleging violation of the Federal Trade Commission Act and the Telemarketing Sales Rule. • Good Ebusiness, LLC (Stipulated Order, May 2016) • FTC alleged that companies charged consumers illegal upfront fees between $500 and $800 based on claims that it could renegotiate the payment terms on student loan debt. • Consumer Assistance, LLC (Complaint filed May 2016) • FTC and the State of Florida filed a complaint alleging similar illegal student debt practices, i.e., charging illegal upfront fees for assistance with student loan debt relief. • Defendants also allegedly claimed they would audit student loans for errors that would invalidate or reduce their balance and repair consumers’ credit. • Student Aid Center, Inc. (Complaint filed May 2016) • FTC and the State of Florida filed a complaint alleging a similar student debt relief scheme to the cases above. • Defendants also allegedly used deceptive telemarketing practices when consumers requested refunds.

24. LOOKING AHEAD

25. Looking Ahead • The CFPB has maintained a consistent focus on the student lending industry. • In its Spring 2016 Rulemaking Agenda, which included proposed rulemaking initiatives on the topics of arbitration, payday lending and debt collection, the CFPB continued to refer to student loan servicing as a long-term area of focus. • With more than 130 actions in the past 5 years – and nearly 20 enforcement actions already taken in 2016 – the CFPB will no doubt continue to use its enforcement authority in a number of areas, including student lending.

26. Equal Credit Opportunity Act (ECOA) • Fair lending continues to be a central focus of the CFPB, which has taken actions against both banks and non-banks in the credit card, indirect auto lending, mortgage lending, and wholesale mortgage lending industries. • The CFPB has also indicated that it will continue to consider disparate impact as a method of proving lending discrimination.

27. Fair Debt Collection Practices Act (FDCPA) • Debt collection practices are an area of interest to the CFPB, which has taken more than 25 actions in this area.. • These actions have resulted in the ordered issuance of approximately $2 billion in consumer relief and almost $140 million in civil money peanlties. • Actions have included the practice of collecting on student loans (Corinthian, ITT Education, Discover Bank). • Debt collection has been on the CFPB’s rulemaking agenda since 2013, and the Bureau is currently engaged in qualitative testing to determine what information would be useful to consumers and what should be provided to them.

28. Fair Credit Reporting Act (FCRA) • In February 2016, the CFPB issued a bulletin that emphasized that furnisher policies and procedures must meet the required FCRA standards. • The CFPB has consistently taken action against several different types of companies in various industries (auto lending, credit reporting agencies, debt buying) for FCRA violations. • The CFPB has reported that it has found FCRA violations during examinations of student lenders, though it has not yet finalized any enforcement actions.

29. Third Party Oversight • The Bureau has initiated nearly 50 enforcement actions relating to third-party compliance since 2012. • Third party compliance actions have totaled approximately $2.8 billion in consumer restitution and nearly $250 million in civil money penalties. • These actions span the consumer finance industry: indirect auto lending, debt collection, payment processing, mortgage servicing, ancillary products, tax refund preparations, mobile phone billing, credit reporting, customer service vendors, and debt relief services. • To date, there have been enforcement actions involving either student loans or against a student lender directly relating to the actions of a third party.

30. Marketplace Lending • The rise of the marketplace lending has resulted in increased attention from regulators and other financial institutions. Broadly, “marketplace lending” is defined as: • Treasury: A lender that “uses investment capital and data-driven online platform to lend either directly or indirectly to small businesses and consumers.” • FDIC: “Any practice of pairing borrowers and lenders through the use of an online platform without any bank intermediary.” • The CFPB has also commented on marketplace lending in relation to student lending, advising consumers looking to pay off federal student loans with a private loan to consider the interest rates and “know that you’ll probably sign away certain benefits like loan forgiveness and income-driven repayment programs.” Understanding online marketplace lending (Mar. 2016). • The use of big data – or non-traditional data sets generated from internet and digital-based information – has also been identified as a potential area of concern.

31. CONTACT INFORMATION Anand S. Raman anand.raman@skadden.com 202-371-7019