The Consumer Financial Protection Bureau (CFPB) has sued student loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA), which does business as American Education Services (AES). The CFPB alleges that PHEAA has illegally collected on student loans that have been discharged in bankruptcy. It also alleges sending false information about consumers to credit reporting companies.
The CFPB’s lawsuit asks the court to order PHEAA to stop its illegal conduct. Further, it seeks redress to borrowers it has harmed and payment of a civil penalty.
“PHEAA has ignored its responsibilities and illegally pursued borrowers for loans they no longer owe,” said CFPB Director Rohit Chopra. “The CFPB is suing PHEAA for demanding money from borrowers that they do not owe. And for reporting false information to credit reporting companies.”
PHEAA: services student loan portfolio of $17.8bn
PHEAA is a student loan servicer with its principal office in Harrisburg, Pennsylvania. It is a public corporation organised under the laws of the Commonwealth of Pennsylvania. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly $17.8bn.
The United States Bankruptcy Code provides consumers a financial fresh start by discharging debts. It prohibits creditors from collecting on discharged debts. Many student loans, both federal and private, can be discharged in bankruptcy only if a borrower initiates a separate proceeding and meets a more stringent legal standard than is applied to other debts. However, certain private student loans are discharged in normal bankruptcy proceedings like other unsecured consumer debt.
AES services a range of private student loans. It includes those that have strict discharge requirements in bankruptcy and non-qualified loans that are routinely discharged. Nevertheless, when a consumer with private student loans serviced by AES receives a bankruptcy discharge, the CFPB says that the company’s practice is to treat all of that consumer’s education-related loans as not discharged. That is, unless it receives an explicit court order or other express direction from the loan owner.
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Second CFPB action against PHEAA this year
The CFPB alleges that PHEAA’s practices violate the Consumer Financial Protection Act and the Fair Credit Reporting Act’s implementing regulation. As a result of PHEAA’s practices, borrowers are forced to either pay debt they do not owe or risk being hit with negative information on their credit reports and default due to the purported non-payment.
This is the CFPB’s second public enforcement action against PHEAA this year. On May 6 the CFPB filed a complaint and proposed stipulated judgment. If approved by the court, it would require PHEAA and the National Collegiate Student Loan Trusts to pay more than $5m for student loan servicing failures. This includes failing to provide accurate information to borrowers and incorrectly denying forbearance requests.
