The Consumer Financial Protection Bureau on Friday announced it had filed a lawsuit against the Pennsylvania Higher Education Assistance Agency (PHEAA), alleging that PHEAA illegally collected on student loans that had been discharged in bankruptcy and provided false information to credit reporting companies. The CFPB is seeking to halt these illegal practices, provide redress to affected borrowers, and impose a civil penalty on PHEAA.
According to the CFPB, PHEAA has been engaged in several illegal activities. The key allegations include:
- Illegally Collecting on Discharged Loans: The CFPB asserts that PHEAA has been collecting or attempting to collect on student loans that have been discharged in bankruptcy. Between 2017 and 2021, PHEAA allegedly pursued approximately 7,934 private student loans that should have been discharged, including at least 177 loans that were eligible for discharge. This practice forces borrowers to either pay debts they do not owe or face negative credit reporting and potential default.
- Providing False Information to Credit Reporting Agencies: PHEAA is accused of furnishing inaccurate information to credit reporting agencies, treating discharged loans as still active. This false reporting can harm borrowers’ credit scores and hinder their ability to obtain future credit.
- Failure to Recognize Discharged Loans: The CFPB claims that PHEAA lacks adequate policies and procedures to identify when loans have been discharged in bankruptcy. Instead, PHEAA’s default practice is to treat all private student loans as not discharged unless explicitly directed otherwise by a court or loan owner. This systemic failure results in the wrongful collection and false reporting practices described above.
The CFPB’s lawsuit claims that PHEAA’s practices violate both the Consumer Financial Protection Act and the Fair Credit Reporting Act. The CFPB issued a bulletin in March 2023 warning student loan servicers about these issues, but PHEAA allegedly failed to comply, continuing its illegal practices.
