Student loan borrowers may receive $3 million in compensation for missed maintenance

A federal financial regulator filed an enforcement motion this week against a widely known student loan servicing agency and numerous private student loan trusts. If approved, student lenders can have to pay tens of millions of dollars in penalties in addition to $3 million in restitution to borrowers, plus refunds or additional refunds.

The Consumer Financial Protection Bureau, an independent federal agency that oversees the financial services sector, announced Monday that it has filed suit against National Collegiate Student Loan Trusts and the Pennsylvania Higher Education Assistance Agency (generally known as PHEAA). The CFPB accused the businesses of widespread “multi-year service outages” that harmed borrowers, particularly in the course of the Covid-19 pandemic.

National Collegiate Trusts are a group of corporate foundations that hold securitized private student loans. PHEAA typically services these loans on behalf of the trusts and does business under the name American Education Services. Importantly, private student loans don’t qualify for federal student loan forgiveness and repayment programs, making these loans particularly problematic for borrowers experiencing hardship.

“The CFPB cracked down on a network of mutual funds that failed student loan borrowers, including at the height of the pandemic,” CFPB Director Rohit Chopra said in an announcement opinion On Monday. “Our enforcement action makes it clear that investors cannot shirk their responsibilities by behaving in corporate armchairs.”

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Private student loans don’t qualify for federal student loan forgiveness or flexible repayment options

Private student loans from National Collegiate Trusts and other lenders could be a tremendous burden for some borrowers, especially those with low incomes and people in difficult situations. These varieties of loans don’t qualify for federal student loan forgiveness programs, equivalent to: B. Public service loan forgiveness or disability layoffs. They also aren’t eligible for flexible, income-based repayment options like President Biden’s latest SAVE plan.

When private student loan borrowers aren’t any longer capable of make their payments, in lots of cases their only option is a short-term deferment or forbearance. This can defer payments for a time period and potentially provide borrowers with a lifeline in times of temporary hardship or unemployment. However, private lenders and repair providers must conform to these applications.

National Collegiate Trusts are a special form of private student lender. This is a group of individual trusts that acquired securitized packages of loan products from other industrial credit institutions (e.g. banks) greater than a decade ago.

“The National Collegiate Student Loan Trusts are a group of fifteen securitization trusts organized under the laws of Delaware,” the CFPB explains. “The National Collegiate Student Loan Trusts acquire, pool and securitize student loans, which they then service. As of February 2024, National Collegiate Student Loan Trusts held a complete of roughly 163,000 private student loans with outstanding balances of roughly $907 million.” National Collegiate Trusts outsource their services to 3rd parties equivalent to PHEAA, which does business as American Education Services.

CFPB Accuses National Collegiate Trusts and PHEAA of Failure to Process Student Loans

In its enforcement filing this week, the CFPB alleges that National Collegiate Trusts and PHEAA failed to answer borrowers’ relief requests between 2015 and 2021. These requests have turn into particularly acute in the course of the Covid-19 pandemic. This violates several federal laws, the agency claims.

“The CFPB’s complaint alleges that from 2015 to 2021, thousands of borrower applications – often for forms of payment relief – went unanswered,” the agency’s statement said. “These included requests for cosigner release, extension of forbearance or deferment, loan settlement or forgiveness, Servicemember Civil Relief Act benefits, or other forms of payment or rate reduction. Defendants have failed to properly respond to borrower inquiries for years, including during the COVID-19 pandemic.”

In some cases, National Collegiate Trusts’ loan servicer “misrepresented to consumers that certain inquiries would be answered when the company actually knew that this would not be the case,” the CFPB said. In other cases, the borrower wrongly rejected borrowers’ requests for natural disaster forbearance resulting from Covid-19.

PHEAA claims that from 2016 to 2021 it “did not have the authority to decide on individual loan applications without instructions,” it said in an announcement to PYMNTS.

Student loan borrowers could receive tens of millions of dollars in compensation and refunds

In order for the enforcement measure to be effective, it should be approved by a court. But if that happens, National Collegiate Trusts and PHEAA can have to pay greater than $2 million in penalties to the CFPB’s Victim Assistance Fund.

Additionally, borrowers could also be entitled to compensation. That would come with $3 million “in reparation to borrowers,” which might are available in the shape of $200 payments to people “who did not receive timely responses to exemption requests.” Additionally, borrowers may receive additional relief, including refunds for payments made or refunds of fees.

Borrower advocates praised the CFPB’s actions.

“Today’s action and proposed ruling are an important reminder that while private student loan borrowers are smaller than their federal student loan counterparts, they are also plagued by predatory companies seeking to profit at their expense,” said Winston Berkman-Breen, legal director at das Student Borrower Protection Center, in an announcement. “These companies either did not respond to borrowers’ requests for assistance or provided false information. Making borrowers wait years for responses from their servicers is unacceptable, the CFPB complaint states. We are encouraged to see the CFPB recognize this harm and put money back in borrowers’ pockets.”

This shouldn’t be the primary legal motion the CFPB has taken against National Collegiate Trusts. A previous CFPB lawsuit alleged that the trusts brought improper collection actions against borrowers when the debt was barred by the applicable statute of limitations or once they couldn’t prove that the borrower owed the debt. That lawsuit remains to be pending in federal court, although a judge issued a serious ruling in March that the trusts are covered by the Consumer Financial Protection Act.