Continuing its focus on the student loan industry, the Consumer Financial Protection Bureau (CFPB) ordered a debt relief company to shut down operations and pay a penalty for allegedly scamming borrowers and misrepresenting an affiliation with the Department of Education (DOE).

What happened

The DOE offers several plans for borrowers with federal student loans, including options that let borrowers set their monthly payments based on their income. The DOE does not charge any fees to apply for or enroll in such plans.

But California-based Student Aid Institute and CEO Steven Lamont charged borrowers a fee to participate in the federal student loan programs, the CFPB said, marketing itself to student loan borrowers and misrepresenting that the fees were required to participate in the program, reaping "millions of dollars" in advance fees from consumers.

In addition to misrepresenting that the fees were required, charging the fees violated the Consumer Financial Protection Act, which requires that at least one debt be renegotiated, settled, or reduced before a fee can be collected for debt relief services, the Bureau added. Going back to December 1, 2012, Student Aid typically collected an upfront fee of $395 or $495, plus a $39-per-month maintenance fee. During the relevant time period, Student Aid brought in approximately $3.6 million, causing harm to about 4,300 consumers, the Bureau said.

In addition, required privacy notices were not provided to borrowers, as mandated by Regulation P, the CFPB alleged, and the company also falsely represented an affiliation with the DOE, implying that it was affiliated with or endorsed by the federal government. Student Aid's marketing contained other misrepresentations, the Bureau charged: student loan borrowers were deceived about how much they would save, whether they were eligible for loan forgiveness, and whether they had been preapproved for specific programs.

For example, the company represented to a consumer that "You are eligible to reduce your current payment of $595 to $63 which may save you $63,900 over the term of your student loan," even though Student Aid had no basis for making such a statement. Similarly, consumers were "routinely" told that "[l]oan forgiveness and forbearance are available on most federal loans," when in reality consumers are only entitled to loan forgiveness under certain conditions, which Student Aid failed to explain to consumers, the CFPB alleged.

Pursuant to the consent order, Student Aid Institute was directed to shut down its debt relief operations and immediately stop charging customers any fees for its services, as well as canceling all contracts. Both Lamont and Student Aid Institute were prohibited from offering or receiving any payments from debt relief services going forward and must pay a $50,000 penalty.

The CFPB also ordered Student Aid Institute to help borrowers with their annual certification for the DOE. Each year, the Department mandates that student loan borrowers recertify income-driven repayment plans. For any borrowers enrolled in any income-driven repayment or forgiveness plan with a renewal or recertification deadline within 30 days of the entry of judgment, Student Aid must "prepare, process, and mail all paperwork necessary to maintain enrollment in the plan."

Why it matters

"We see more and more companies and websites demanding large upfront fees to help student loan borrowers enroll in income-driven plans that are available for free," CFPB Director Richard Cordray said in a statement about the action. "These practices bear a disturbing resemblance to the mortgage crisis where distressed consumers were preyed upon with false promises of relief. We will continue to shut down illegal scams and address sloppy servicing practices that victimize consumers." The action against Student Aid and Lamont builds on prior actions by the CFPB and state attorneys general taken against illegal student debt relief operations, the Bureau noted, reminding the industry that illegal student loan servicing practices is one of its top priorities.

To read the Consent Order in In the Matter of: Student Aid Institute, click here.