State AGs Keep Busy With Financial Services Cases

Financial Services Law

State attorneys general (AGs) remain busy in the financial services industry, with an almost $500 million settlement between a for-profit college and the AGs of 48 states and Washington, D.C.

Other actions at the state level include a settlement with a Massachusetts auto lender and an agreement in New York with a student loan servicer.

What happened

Tipped off by student complaints and a critical report issued by the U.S. Senate Committee on Health, Education, Labor and Pensions, state AGs launched an investigation into for-profit institutions, taking a closer look at allegations of deceptive and fraudulent practices. After five years, the AGs found that an Illinois-based for-profit institution used high-pressure tactics and emotionally charged language to enroll students and then misled them about the actual costs and the transferability of credits.

In addition, the institution deceived students about the graduation rate at the school as well as employment prospects and the actual earnings of graduates, the AGs said.

The AGs of 48 states and Washington, D.C. (New York reached a separate agreement, and California is working on its own deal), settled with the for-profit institution, which will provide $493.7 million in debt forgiveness for 179,529 students across the country and pay $5 million to the states.

The institution, which denied any allegations of wrongdoing or liability, agreed to provide a single-page disclosure form that will inform students of total direct costs, the median debt for students completing the program, completion rates, loan default rates, credit transferability, job placement rates and the median earnings of graduates. This assurance of voluntary compliance also includes a prohibition on deceptive or abusive recruiting practices as well as misrepresentations about accreditation, graduation rates, placement rates, financial aid and licensure requirements, among other topics.

“This agreement not only provides relief to former students, but also protects future students and advances our efforts to clean up the for-profit education industry,” Iowa Attorney General Tom Miller, one of five AGs who led the action, said in a statement, adding that the institution’s “practices were unfair to students as well as taxpayers who supported federal student loans that were destined to fail.”

Miller noted that the AGs intend to keep a close eye on the industry. “Decisions by the Department of Education put the burden on the states,” he said. “We plan to be vigilant, and we will work with other states in dealing with bad practices. We don’t have the partner in Washington that we had.”

In Massachusetts, Attorney General Maura Healey announced an agreement with an automobile lender that tweaked insurance rates in order to exceed the state cap on annual percentage rates (APRs). The Connecticut-based auto lender facilitated the sale of defective and inoperable vehicles by Massachusetts dealerships with financing, despite knowledge of consumer complaints against the dealers, as well as their high default and repossession rates, the AG alleged.

Specifically, the lender violated the state’s Cost of Consumer Credit Disclosure Act by failing to account for the cost of certain insurance policies that consumers were required to purchase, according to the investigation by the AG’s office. Although the vendor single interest (VSI) policies are meant to protect lenders when a vehicle is damaged or unrecoverable, the auto lender used VSI claims to recover for credit losses, causing the APR on consumers’ loans to increase in excess of the state’s cap of 21 percent.

To settle the charges, the auto lender agreed to provide refunds to consumers and waive all outstanding deficiency obligations for the hundreds of consumers who purchased vehicles from the dealerships; it will also repair consumer credit with credit reporting agencies and refund interest payments to consumers where the company misused VSI claims. In total, the lender will provide $733,925.

Further, the lender will begin tracking consumer complaints, repossession rates and delinquency rates of the dealerships it works with, the AG said.

New York Attorney General Letitia James announced a first-of-its-kind deal between her office and the Department of Financial Services (DFS), and a federal student loan servicer, totaling $9 million.

According to the AG and DFS, the servicer ran afoul of state law as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act by steering distressed borrowers into forbearances, which provide a temporary pause in payments but are only a short-term solution and, in most cases, increase the cost of the loan over the long term.

The servicer suggested forbearances in lieu of directing borrowers to apply for Income-Based Repayment (IBR), a program that required more time and effort on the part of the servicer, the AG and DFS said. When newer, more beneficial repayment options were introduced, the servicer declined to make those choices known to borrowers, as they likely would have been assigned to a new servicer.

The servicer also deceived borrowers about the availability of Public Service Loan Forgiveness (PSLF), a program that provides forgiveness of student loan debt after the borrower has worked 10 years in a public service job, the AG and DFS alleged. In some cases, the servicer informed borrowers that they were not eligible, even though they could have been had they consolidated their loans.

Other violations of law included failing to provide borrowers with the necessary account information to consolidate their loans (preventing some from doing so for more than three years), neglecting to process IBR applications in a timely and accurate fashion, requiring some borrowers to reapply for IBR unnecessarily, misallocating payments by borrowers (leading to late fees or interest in some cases), making inaccurate reports to credit reporting agencies, charging some borrowers late fees higher than the legal cap and overstating the monthly payments owed by members of the armed forces who were eligible for reductions under the Servicemembers Civil Relief Act, according to the AG and DFS.

The AG and DFS asserted the servicer also “consistently” misinformed borrowers who were behind one or more payments about the amount they needed to pay to become current on their loans, instead overstating the amount due.

To resolve the action, the servicer agreed to pay $8 million in restitution to borrowers (who will receive between $100 and $450 each) and $1 million in penalties to be divided evenly between the DFS and the AG’s office. The servicer transferred all the private and major federal loans to other servicers and will not service loans for the major federal programs or private loans for the next five years.

To read the Assurance of Voluntary Compliance, click here.

To read the press release from the Office of the Massachusetts Attorney General, click here.

To read the consent order in New York, click here.

Why it matters

State regulators continue to step in to fill gaps at the federal level, with two actions involving deceptive practices against student consumers. It seems clear that state attorneys general will continue to act when they see students being victimized—students are considered a vulnerable group requiring protection, they are being crushed by rising debt and the federal government seems less willing to extend protections to them. The third action features a popular target for regulators in Massachusetts and beyond—fraudulent auto dealerships. Taken together, the cases demonstrate that state attorneys general remain active, filling the void as the federal government shifts emphasis away from consumer protection, and willing to band together in big cases, creating a united front that has the effect of forcing quicker and larger settlements.



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