Consumer Financial Protection Bureau asks institutional lenders to stop withholding transcripts

The use of transcripts in higher education institutions as a debt collection tool has recently been the subject of much debate and scrutiny. Since suspending transcripts is one of the few levers institutions have to settle outstanding balances, institutions have long required that students be up to date with their financial obligations to access a transcript. Critics of the practice, however, argue that such withholdings can limit former students’ ability to transfer to new institutions, seek employment, or earn more advanced degrees, even for insignificant or minor debts.

At the state level, eight states – California, Colorado, Illinois, Louisiana, Maine, Minnesota, New York, Ohio and Washington – have passed laws prohibiting or restricting the use of transcripts. And several other states are currently considering similar legislation. At the federal level, transcripts have recently been the focus of the Consumer Financial Protection Bureau (the “CFPB”) and the US Department of Education (the “Department”), as noted below.

CFPB finds some transcript withholding policies violate federal law

The Dodd-Frank Wall Street Reform and Financial Consumer Protection Act (the “Act”) gives the CFPB the power to oversee non-banks that offer or provide loans to private education, including institutions of higher education. 12 USC §5514(a)(1)(D). The applicable definition of “private education loan” is found in Section 140 of the Truth in Lending Act or 15 USC §1650.

Using this authority, the CPFB began to examine internal institutional loan programs, including transcript retention practices, in January 2022. In late September, the CFPB issued a report concluding that “institutions have taken unreasonable advantage of the critical importance of official transcripts and institutions’ relationship with consumers”. The report goes on to explain that because transcripts may be necessary to pursue employment or future educational opportunities, “the consequences of withheld transcripts are often disproportionate to the amount of underlying debt.” , and that consumers with little or no bargaining power may be forced to pay miscalculated debts or give up job or education opportunities altogether.

Based on the report, the CFPB determined that the general transcript retention policies as part of a credit extension are “abusive” under the Act, and institutional lenders have been ordered to stop this practice. The report does not define the term “general policy” nor does it provide examples of policies that may meet or conflict with the Act.

For institutions under the authority of the CFPB, an extension of credit by an institution may include offering private education loans, deferred tuition products, or tuition payment plans. Federal student loans issued under Title IV of the Higher Education Act or overdue tuition or fees that are not part of an institutional credit extension are not covered by these guidelines.

Department considering regulatory action

Together with the CFPB, the Ministry has also recently indicated that it is willing to address the issue of backlogged transcripts. In December 2021, Secretary Cardona cited enrollment and transcripts are long-standing institutional policies that can “block the retention and completion of our most underserved students.”

The Department has given more thought to this issue in its most recent development of negotiated rules. As a member of Summary document on certification procedures, the Department proposed revising 34 CFR §668.14 to prevent institutions from being able to “withhold transcripts or take other adverse action against a student related to a balance owing by the student that results from… fraud or fault of the establishment or its staff.” According to Spring 2022 unified program of regulatory and deregulatory actionsthe Department is expected to publish a notice of proposed rulemaking on certification procedures in April 2023.

Take away food

Institutional loans are subject to a multitude of federal regulations and state laws, including consumer credit and consumer protection laws. Keeping abreast of these federal and state laws and administering an institutional student loan program in accordance with their complex requirements is a tall order. This is especially true when institutions operate campuses in multiple jurisdictions, have students who reside in multiple jurisdictions, or offer a variety of student financing options (eg, loans, payment plans, retail contracts). Compliance is essential, however, as the ramifications of non-compliance can be serious. Federal and state regulators have also made it clear that they intend to aggressively enforce the regulatory framework that applies to student funding opportunities offered by schools.

For an overview of some important federal requirements that higher education institutions should consider when considering an institutional loan program or any other student funding opportunity, institutions are encouraged to consult Thompson Coburn’s white paper: ” Institutional Loan Compliance Considerations.” We encourage institutions considering any form of student funding opportunity (even simple payment plans) to consult with an attorney and other qualified advisors to develop a compliance plan.

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