This week the Consumer Financial Protection Bureau (“CFPB”) released an addendum to its Supervision and Examination Manual focused on the examination of private student lenders. The Student Lending Examination Procedures, available on the CFPB’s website, provide guidance to CFPB examiners on how to review private student lenders for compliance with consumer financial protection laws. The CFPB has supervisory authority over both very large banks and nonbanks that make private student loans.
The Student Lending Examination Procedures set out the following four main objectives of the examination process:
1. To assess the quality of the regulated entity’s compliance risk management systems, including internal controls and policies and procedures, for preventing violations of Federal consumer financial law in its private education lending business.
2. To identify acts or practices that materially increase the risk of violations of Federal consumer financial law in connection with private education lending.
3. To gather facts that help determine whether a regulated entity engages in acts or practices that are likely to violate Federal consumer financial law in connection with private education lending.
4. To determine, in consultation with CFPB Headquarters, whether a violation of a Federal consumer financial law has occurred, and whether further supervisory or enforcement actions are appropriate.
As part of this assessment, the CFPB examiner may walk through any of the seven examination modules outlined in detail in the Student Lending Examination Procedures, to ensure that “student lenders have the appropriate processes in place to prevent harm to borrowers.” Depending on the scope of the exam, some or all of the following modules will be covered:
1. Advertising, Marketing, and Lead Generation
CFPB examiners will review final advertisements and marketing materials, as well as the student lender’s process for creating and approving advertisements, for any deceptive or discriminatory advertising materials. Additionally, the examiner will look at how others market the student lender’s products, by reviewing the lender’s relationship with brokers, agents, and lead generators. While the examiner questions tend to focus on compliance with the specific advertising requirements under Regulation Z of the Truth in Lending Act (“TILA”) and Regulation B of the Equal Credit Opportunity Act (“ECOA”), the module also includes questions designed to root out potentially misleading marketing, such as advertisements that “make representations about future potential employment opportunities.”
2. Customer Application, Qualification, Loan Origination, and Disbursement
Examiners will look into whether the lender made appropriate general disclosures as required under TILA and Regulation Z, as well as the specific disclosures for private education loans required at application, approval, and disbursement. Student lenders will also have their underwriting and pricing policies reviewed for compliance with ECOA’s anti-discrimination requirements under this examination module.
3. Loan Repayment, Account Maintenance, Payoff Processing, and Payment Plans
Examiners are expected to ask questions designed to consider compliance with the Electronic Funds Transfer Act, as well as general questions related to the lender’s role in payment processing, account maintenance, provision of periodic statements, loan repayment options, and loan servicing transfers. If the student lender uses a service provider to handle general loan servicing duties, the examiner will focus on the lender’s oversight of and agreements with the service provider.
4. Customer Inquiries and Complaints
Examiners will review consumer complaints against a lender to determine whether they were resolved appropriately and in a timely manner. Specifically, the CFPB will look at the process by which a lender receives and replies to borrower complaints and inquiries, the systems in place to handle the complaint management process, and the policies in place for tracking, investigating, and resolving consumer complaints.
5. Collections, Accounts in Default, and Credit Reporting
Where applicable, student lenders will also be examined for compliance with the Fair Debt Collection Practices Act (“FDCPA”) through a review of servicing records, collection calls, and consumer complaints in connection with borrowers in default. Examiners will be interested in what workout options are made available for delinquent borrowers. In keeping with the CFPB’s message that supervised institutions are responsible for overseeing their relationships with service providers, the CFPB will also examine how the lender monitors its service providers for compliance with the FDCPA.
6. Information Sharing and Privacy
The CFPB examiner must consider the student lender’s compliance with the Fair Credit Reporting Act’s Affiliate Marketing Rule and the privacy notice requirements under the Gramm-Leach-Bliley Act.
7. Examination Conclusion and Wrap-up
While examiners may elect not to address each of the modules described above when assessing a particular entity under the Student Lending Examination Procedures, a conclusion and wrap-up is required for all examinations. The examiner must outline any findings, supervisory concerns, and regulatory violations. The examiner must also determine the root causes of any violations, identify actions needed to correct violations or remedy weaknesses in the lender’s compliance management system, and record any violations in the CFPB’s electronic database system. Finally, following the review, the examiner must make a determination on whether enforcement action is appropriate.
The recently released Student Lending Examination Procedures represent just a part of the CFPB’s renewed focus on the private student loan market. The CFPB has also issued a set of educational tools, still in their beta version, for students to use when navigating the student loan marketplace. Moreover, the CFPB continues to expand its oversight of the student lending process through its “Know Before You Owe” student loan initiative and through its Servicemembers Affairs Department, which works on student loan issues that are unique to members of the military. Student lenders should be prepared to see more from the CFPB on this topic in the weeks ahead.