CFPB publishes blog post on the release of private student loans in bankruptcy | Troutman pepper

On April 12, the Consumer Financial Protection Bureau (CFPB) published a blog post titled “Busting Myths About Bankruptcy and Private Student Loans.” In the blog post, the CFPB argues that some private education loans can be canceled in the event of bankruptcy. Specifically, the CFPB argues that the following private student loans can be canceled without proof of undue hardship or adversarial process:

  • Loans where the loan amount was more than tuition (such as tuition, books, room and board), which can occur when a loan is paid directly to a consumer.
  • Loans to pay for education at schools that are not eligible for Title IV funding, such as unaccredited colleges, a school in a foreign country, or unaccredited vocational training and certificate programs.
  • 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.
  • Loans to a student attending school less than half the time.

The CFPB then relies on its own previous research to argue that consumers rely on servicers to provide information about private student loans and cites specific consumer complaints as evidence that student loan owners, lenders, servicers and collectors are illegally collecting private student loans that should – according to the CFPB – have been discharged.

This blog post is another example of the seemingly high level of influence the CFPB wields over the Student Borrower Protection Center (SBPC). In our blog post On the CFPB’s position on “Discrimination as UDAAP”, we noted that the SBPC issued a report nearly a year before the CFPB’s announcement, arguing that discrimination should be applied as an act or unfair practice. The CFPB playbook seems to be the same here. In January of this year, the SBPC published a report titled “Morally Bankrupt: How the Student Loan Industry Stole a Generation’s Right to Debt Relief.” The report argues that only some private student loans face bankruptcy release limits, and argues that agencies must “use consumer financial protection tools to protect borrowers and hold the industry accountable” for anything. alleged wrongdoing on this topic. The recent CFPB blog post seems to indicate that it has taken up the issue raised by the SBPC.

Typically, the CFPB uses these types of blog posts and statements as a precursor to action on a particular issue. After publicly identifying what it perceives to be a problem, the CFPB will then take action to correct that problem by targeting industry participants implicated in any alleged wrongdoing. It seems inevitable that this blog post on private student loans will attract the same kind of scrutiny.

Troutman Pepper will continue to monitor any developments related to the CFPB and its oversight and application of the student loan industry.

About Kimberly Alley

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