Evaluation of transcript withholding practices in the U.S. relation to recent CFPB report

The Consumer Financial Protection Bureau (CFPB) issued Supervisory Highlights in late September 2022 stating that post-secondary institutions that provide loans directly to students (Institutional Lenders) and that have “blanket” policies to withhold transcripts are engaged in abusive acts or practices under the Consumer Financial Protection Act. Under this Act, the CFPB, the U.S. federal agency dedicated to consumer protection, has supervisory authority over nonbanks that offer or provide private education loans, including Institutional Lenders. Despite the recent Fifth Circuit decision that calls into question the constitutionality of the CFPB’s funding mechanism, organizations at this time should expect CFPB’s supervision program to continue during the pendency of the appeal process and beyond, whether under an appropriated funding structure or otherwise.

These recent Supervisory Highlights follow the CFPB announcement in January 2022 that it would examine the student lending practices of Institutional Lenders. Transcript withholding practices are one of the specific areas the CFPB indicated it would examine. In this January 2022 release, the CFPB stated that “[w]hen a school withholds academic transcripts from students that owe the school a debt, this prevents students from using their transcripts to demonstrate their education levels in the job market.”

One critical item to keep in mind is that the Supervisory Highlights state that “blanket” policies to withhold transcripts are abusive, but the term “blanket” is not defined or explained in this context. Therefore, grey area remains. Transcript withholding in any circumstance runs risk of the CFPB finding that an Institutional Lender engaged in an abusive act or practice under the Act. However, it seems that by stating that “blanket” transcript withholding policies are abusive, rather than all transcript withholding policies, the CFPB may be open to a more nuanced approach and may agree that careful and considerate application of transcript withholding practices on a case-by-case basis may not be considered abusive.

So, what can an Institutional Lender do when faced with unpaid student debts?

Institutional Lenders should review and evaluate their transcript withholding practices in light of recent developments and should not rely on past practices without review. This review should assess whether such practices are compliant with CFPB expectations, state laws with respect to transcript withholding (that may apply based on a student’s state of residence, regardless of the institution’s location), student expectations, and the shared goals of the Institutional Lenders and their students for students’ professional success. Two things are simultaneously true: Institutional Lenders should have the ability to have reasonable policies and procedures that promote timely payment of legitimate outstanding debts, and students should have the ability to access transcripts needed for professional and educational opportunities. The practical question is how to have both of these reasonable and valid needs met.

An Institutional Lender that has an existing transcript withholding practice has several options to consider with advice from legal counsel:

  • Discontinue the practice of transcript withholding altogether, regardless of the circumstances, and for future loans, perhaps consider other methods and sources of collateral to ensure payment;
  • Carefully review the facts and circumstances related to any previous transcript requests from students that have been denied and remain outstanding, and based on the results of this review:
    • Communicate with the affected students to offer their transcripts (either all affected students or students with relatively small amounts of outstanding debt); 
    • If there are any complaints or disagreements about the amount or nature of the outstanding debt, these should be carefully reviewed to confirm the debt amount is accurate and communication of this review should be made to the student; and/or
    • Communicate with affected students to work out a payment plan with respect to the outstanding debt and provide transcripts as needed to students for professional and further educational opportunities if students cooperate and make progress with the payment plans even if full payment has not yet been received;
  • If any transcript-related fees were collected by the Institutional Lender without providing the transcript to the student, refund such fees or provide the transcript;
  • Consider and document any nuances of the Institutional Lender’s transcript withholding policy and practices if, in fact, there was no “blanket” policy or practice, including documentation of each instance in which the Institutional Lender did provide transcripts to students with outstanding debt and any guidelines for factors considered, such as the size of the debt; and
  • If the transcript withholding practice will continue, the Institutional Lender should clearly and accurately disclose the practice, and any other consequences associated with failure to pay, in documentation associated with the student loan.

In general, the more an Institutional Lender can move (or stay) away from any “blanket” practice and consider transcript requests on a case-by-case basis as they are received, the better.

Which Institutions are Subject to CFPB Supervision?

As stated above, the CFPB has supervisory authority over nonbanks that offer or provide private education loans, including Institutional Lenders. The set of institutions and entities subject to CFPB examination is quite broad under the Consumer Financial Protection Act, and though the statutory authority has not changed, the group of institutions that the CFPB states it will supervise has recently been made broader in practice. Specifically, the Supervisory Highlights published in September state that a previous version of the CFPB’s Education Loan Examination Procedures referenced the Regulation Z definition of “private education loans” rather than the definition under the Truth in Lending Act (TILA). Under the CFPB’s updated Education Loan Examination Procedures published in September 2022, the CFPB will use the TILA definition, rather than the Regulation Z definition, for determining its examination authority with respect to private education loans. The TILA definition is broader because it does not include the exemption from the definition of “private education loan” for extensions of credit in which the covered educational institution is the creditor if: (i) the term of the extension of credit is 90 days or less or (ii) an interest rate will not be applied to the credit balance and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments. Therefore, Institutional Lenders that make loans that fit within this Regulation Z exemption from the “private education loan” definition should expect CFPB supervision of such loans under the updated Education Loan Examination Procedures.

 

 

Authored by Elizabeth Boison, Stephanie Gold,  Joel Buckman, and Sara Lenet.

 

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