Consumer Financial Services Law

CFPB Hits Student Loan Servicer With Lawsuit

The Consumer Financial Protection Bureau (CFPB) has sued a major student loan servicer as detailed by the complaint filed in Pennsylvania federal court.

What happened

The CFPB's complaint alleges that the servicer created obstacles to student loan repayment in a multitude of ways that amounted to allegedly unfair, abusive and deceptive practices.

The CFPB alleges that the company failed to follow the directions of borrowers with regard to repayments, repeatedly misapplied or misallocated payments, made the same errors repeatedly and neglected to correct mistakes. According to the CFPB's complaint, the servicer allegedly steered borrowers toward paying more than they needed to on their loans, and guided borrowers into forbearance agreements in lieu of a new repayment plan. Under federal law, borrowers have the right to apply for a repayment plan with a lower monthly payment. Instead of informing consumers about this option, the CFPB says the servicer would suggest forbearance, where borrowers take a break from making payments but interest continues to accrue. Between January 2010 to March 2015, the company earned $4 billion in interest for borrowers enrolled in multiple, consecutive forbearances, the CFPB claims.

The servicer likewise allegedly failed to adequately inform borrowers in income-driven repayment plans about their obligation to recertify their income and family size on an annual basis. Many borrowers failed to renew their enrollment on time and lost their lower monthly payments as a result, the CFPB said, and this practice also allegedly led to losing other protections such as interest subsidies and progress toward loan forgiveness.

The complaint also alleges that borrowers seeking to release a co-signer from a loan faced obstacles and were confronted with allegedly deceptive information from the servicer. Although the servicer stated that a borrower could apply to release a co-signer after a certain number of consecutive, on-time payments were made, the CFPB alleges that the company reset the clock when a borrower prepaid a monthly installment.

Finally, the CFPB claimed that the servicer potentially harmed the credit of disabled veterans by misreporting to the credit reporting companies that severely and permanently disabled veterans who had their loans forgiven under the federal Total and Permanent Disability discharge program had instead defaulted on their loans.

The CFPB is purporting to enforce claims based on these alleged facts under its claimed authority to prosecute unfair, abusive or deceptive practices. The CFPB's complaint also includes a claim for violation of Regulation V in the servicer's credit reporting practices.

Why it matters

The CFPB has kept a close eye on student loans, publishing a report on the industry in 2015 that featured a framework for reform, followed up by a study in 2016 that found eight million borrowers are in default on more than $130 billion in student loans, a problem the CFPB perceives as exacerbated by what it views as poor loan servicing. "For years, [the servicer] failed consumers who counted on the company to help give them a fair chance to pay back their student loans," CFPB Director Richard Cordray said in a statement. "At every stage of repayment, [the servicer] chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because [the servicer] illegally cheated them and today's action seeks to hold them accountable." Whether the Trump administration will continue to prosecute the action is unclear as of this writing. The servicer has publicly denied the allegations.

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Supreme Court Considers New York's Surcharge Law

The Supreme Court of the United States recently heard an oral argument concerning New York's surcharge law, addressing whether the statute—which prohibits the imposition of surcharges on customers who pay with credit cards but permits discounts for those who pay in cash—constitutes an infringement of merchants' First Amendment rights.

What happened

In reaction to the expiration of provisions of the Truth in Lending Act (TILA) that prohibited credit card surcharges, the New York legislature enacted Section 518 of the General Business Law, which states: "No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both." Merchants are still permitted to offer cash discounts.

New York's law took effect in 1984 along with similar statutes in ten other states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, Oklahoma, and Texas. Enforcement of the New York law was limited over the years, in part due to the standard provisions in credit card issuers' contracts that prohibited the use of surcharges.

But over the last decade, as sellers began challenging these provisions, issuers have dropped their contractual prohibitions on credit card surcharges. In response, a group of New York businesses and their owners and managers filed suit challenging Section 518 in 2013. The plaintiffs claimed the law violated their First Amendment free speech rights, requesting it be declared unconstitutional.

A federal district court judge sided with the merchants and struck down the law but a panel of the U.S. Court of Appeals for the Second Circuit reversed. Section 518 does not regulate speech, the court held—it regulates conduct. Prices, although necessarily communicated through language, do not rank as "speech" within the meaning of the First Amendment.

"By its terms, Section 518 does not prohibit sellers from referring to credit-cash price differentials as credit-card surcharges, or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges," the panel wrote. "Whether a seller is imposing a credit-card surcharge—in other words, whether it is doing what the statute, by its plain terms, prohibits—can be determined wholly without reference to the words that the seller uses to describe its pricing scheme."

However, other federal circuit courts reached different conclusions when considering surcharge laws, including the U.S. Court of Appeals for the Eleventh Circuit. Recognizing the split, the Supreme Court of the United States granted certiorari in the Second Circuit case.

At oral argument, the justices seemed skeptical when questioning the merchants' counsel. "I just don't see anything about speech in the statute," Justice Sonia Sotomayor commented, while Justice Stephen Breyer noted that the law appears to be a form of price regulation that states a merchant "can't charge a surcharge" for credit and is silent about any cash discount.

Responding to Justice Breyer, Deepak Gupta, counsel for the merchants, told the Court that state officials informed some of the merchants that they didn't need to change what they charged—instead, they needed to change what they told consumers. "That's not price regulation," Gupta said. "That's the regulation of how prices are communicated."

Justice Elena Kagan did not appear persuaded, commenting that the merchants placed a great deal of emphasis "on a few cases in which prosecutors describe the law in a certain way," but that the New York statute, "as written, doesn't really do any of the things that you are saying."

Indicating another path the Court could take, Justice Samuel Alito remarked that he was "uncomfortable" ruling on the constitutionality of a state law without the input of the state's highest court. "So why shouldn't we certify that question of interpretation to that court before we plunge into this First Amendment issue?" he asked. Gupta answered that the merchants had raised an as-applied constitutional challenge based on the application of the law to the plaintiffs.

Eric Feigin, arguing as amicus curiae on behalf of the United States, tracked Justice Alito's position to suggest that the Court remand the case to the Second Circuit "and allow for the New York Court of Appeals to have a definitive interpretation of the law, because there's clearly some dispute about what the New York law does."

Advocating on behalf of the New York Attorney General's Office, Steven Wu told the justices that the "plain text of New York's statute refers only to a pricing practice and not to any speech." Justice Kagan pointed out that the state's "enforcement history" seemed to be at odds with this argument while Justice Alito expressed concern that individual district attorneys could have different interpretations of the statute.

Justice Ruth Bader Ginsburg also pushed back on Wu's characterization of the law as "direct price regulation," noting that it "doesn't set any price at all. It lets the merchant set the price. And the question is how that price is described."

Considering various hypothetical pricing scenarios and how the state would view them, Justice Anthony Kennedy asked if the New York statute is too vague. Wu answered in the negative, stating that the law could withstand a vagueness challenge. He also indicated that a dual pricing system would be legal under the statute, although Justice Kagan replied that the Second Circuit had "abstained" from deciding that issue.

To read the transcript of the oral argument in Expressions Hair Design v. Schneiderman, click here.

Why it matters

A decision from the justices is expected later this term, with significant implications for retailers across the country and particularly those in states with surcharge laws, including California and New York.

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