The Consumer Financial Protection Bureau’s recent guidance regarding withholding transcripts from students with debts revealed that the CFPB is using a broad definition of “private education loan” that may apply to the practices of some not-for-profit schools. Additionally, although the CFPB characterized transcription-withholding practices as “abusive” under the Consumer Financial Protection Act, its analysis suggests that these practices may also be “unfair,” such that other regulators, including the Federal Trade Commission and states, may have authority to address them under other similar laws.
On Sept. 29, 2022, the Consumer Financial Protection Bureau (CFPB) released a special edition of its Supervisory Highlights focused on schools that make private education loans. That same day, the CFPB amended its exam manual to make clear that in exercising its supervisory authority, it would use the broader definition of “private education loan” found in the Truth in Lending Act (TILA) rather than the more narrow definition found in Regulation Z.
“The new exam manual thus instructs examiners that the Bureau may exercise its supervisory authority over an institution that extends credit expressly for postsecondary educational expenses so long as that credit is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965, and is not an open-ended consumer credit plan, or secured by real property or a dwelling,” the report noted. Private education loans include traditional in-school loans, tuition-payment plans, income-share agreements and loans used to refinance existing loans.
The CFPB’s report follows its announcement earlier this year that it would examine the operations of colleges’ in-house lending programs.
As detailed in the new report, CFPB examiners found that many in-house lenders withhold transcripts from students who are delinquent or in default on outstanding loans. According to the CFPB, one school refused to release official transcripts even after students entered new payment agreements, and some schools collected payments for transcripts but did not deliver them to students who were delinquent on their debts. The CFPB charged these schools with committing abusive acts or practices.
An “abusive” act or practice under the Consumer Financial Protection Act of 2010 (CFPA) includes taking unreasonable advantage of the inability of consumers to protect their interests in selecting or using a consumer-financial product or service. See 12 U.S.C. § 5531(d)(2)(B). The CFPB found that schools “took unreasonable advantage of the critical importance of official transcripts and institutions’ relationship with consumers.” Simply put, the CFPB objects to schools using this enhanced collections tactic to recover amounts due from their students. Moral suasion (using lawful tactics) and judicial debt collection are fair game. But withholding official transcripts, for the CFPB, constitutes taking an unreasonable advantage and violates the CFPA’s prohibition on “abusive” conduct.
There are two important points to note about the CFPB’s announcements.
1. Withholding Transcripts Might Also Be Unfair.
Although the CFPB didn’t charge these schools with committing an “unfair” act or practice, the agency’s reasoning might also have supported such a charge, in addition to the “abusive” charge. An act or practice is “unfair” when it causes or is likely to cause substantial injury to consumers that they could not reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition. See 12 U.S.C. § 5531(c)(1).
In its report, the CFPB found that students were likely to be harmed by the schools’ transcript-withholding practices because they were unable to pursue certain job opportunities for which official transcripts were required. The CFPB also found that students “do not have a reasonable opportunity to protect themselves in these circumstances,” as “most institutional debt is incurred after consumers have already selected their schools,” at which point “those schools have a monopoly over the access to an official transcript.” And the CFPB’s analysis left open the possibility of asserting that withholding transcripts does not benefit consumers or competition in a manner that would outweigh the identified harm to consumers.
Calling the schools’ transcript-withholding practices “abusive” allows the CFPB and state attorneys general to enforce the CFPA’s prohibition on abusive acts and practices with respect to this conduct. But if those practices are also “unfair,” as the CFPB’s reasoning suggests, they could also be addressed by the Federal Trade Commission, under the Federal Trade Commission Act (FTC Act), and states under their own laws, many of which are modeled after the FTC Act and also prohibit “unfair” acts and practices. Schools should therefore be aware that agencies other than the CFPB might take action against their transcript-withholding practices.
2. The CFPB’s Announcement Applies Equally to Not-for-Profit Schools.
Given its reliance on TILA’s broad definition of “private education loan,” the CFPB’s actions in this space should concern not only for-profit schools, but also not-for-profit and even public schools. For example, the CFPB noted that colleges and universities often charge tuition to students who do not complete 60% of the term. Under those circumstances, schools will often refund, pro rata, Title IV funds to Federal Student Aid and bill the student for the amount returned. Many schools, according to the CFPB, then offer a payment plan or other form of credit to the student. Some of those extensions of credit could be “private education loans” under TILA, which would then subject these schools to the CFPB’s supervisory authority in addition to its enforcement authority.
In its report, the CFPB warned that schools “should evaluate the financial services they offer or provide and ensure they comply with all appropriate consumer financial laws.” Various associations representing colleges and universities have urged the CFPB to provide greater clarity and transparency regarding its process in addressing practices regarding transcripts. On Oct. 12, 2022, several higher-education associations—including the American Council on Education, the American Association of Colleges and Universities, the American Association of Community Colleges, and Career Education Colleges and Universities—issued a joint statement encouraging “all college and university institutional and system leaders to review their existing transcript-hold policies and consider how they might be revised to address inequities, improve educational access and better serve their students.”
McGuireWoods has a dedicated team of attorneys to assist institutions of higher education with meeting their regulatory obligations. Please contact any of the authors of this article for questions or assistance.