The Consumer Financial Protection Bureau’s (CFPB) Student Loan Ombudsman recently released his first annual report on private education loans. Mandated by the Dodd-Frank Act, the Report focuses on recurring issues faced by student loan borrowers and recommends future government action to address those issues. As such, it is informative reading for private educational lenders, higher education institutions facilitating or benefiting from such loans, and third-party servicers to the industry.
The full October 16, 2012 Annual Report can be found here: http://www.consumerfinance.gov/reports/annual-report-of-the-cfpb-student-loan-ombudsman/.
- Issues Faced by Student Loan Borrowers.
Based primarily on information gleaned from approximately 2900 complaints received by the CFPB since March through its new student loan complaint system, the Report first surveys the recurring types of problems faced by private student loan borrowers. Report at 5-12. Roughly five percent (5%) of issues related to obtaining a loan, e.g. confusing terms, rate confusion, denial, confusing marketing, sales tactics or pressure, financial aid services, and recruiting. Approximately sixty-five percent (65%) of complaints related to repayment of the loans, e.g. unexpected fees, billing, deferment, forbearance, fraud, and credit reporting, while the final thirty percent (30%) related to payment problems, e.g. default, debt collection, and bankruptcy. The Report offers a number of examples. Among those highlighted were the inability to speak with lender or servicer personnel empowered to negotiate repayment, inability to refinance to better terms (even when credit improves over the years), misapplication of payments, confusion caused by different servicers and selling of loans, conflicting or bad instructions by servicers, debt collection abuses, Servicemembers Civil Relief Act (SCRA) errors, and overall confusion between private and federal loan terms and practices. The Report also singles out for-profit college affiliated loans, indicating they are sometimes pushed by school representatives and quickly provided, but that borrowers are unable to find adequate employment to service “the debt offered by parties affiliated with the school, despite assurances to the contrary.” Report at 11.
- Ombudsman’s Discussion.
After recognizing the statistical and temporal limitations of the underlying data and that complaints range dramatically in complexity, from simple confusion to serious issues, the Report goes on to discuss certain “insights” from the data that “do raise concerns.” Report at 13-17. Generally, the distribution of complaints by lender-servicer is not surprising and correlates to their relative market share, particularly among the seven largest players in the industry. Many of the “deficiencies” with private student loans seem comparable to those identified in the mortgage servicing industry. The unique role of loan servicers, which are not selected by borrowers and which are loyal to lenders, is highlighted here and throughout the Report, with the Ombudsman observing: “Given this structure, it is difficult for borrowers to exert market discipline that ensures appropriate customer service.” Id. at 14. Additionally, the lack of attractive refinancing and restructuring options, both for those that should qualify for better rates and those facing economic hardship, is perceived as a serious issue that may prevent “many young adults from full economic participation,” e.g. home ownership. Per the Report, creative efforts are needed – from lenders, entrepreneurs, community banks, schools, and others – to clarify and streamline (e.g. through technology) existing options and to provide new options for borrowers. Id. 14-17.
As required by the Dodd Frank Act, the Report concludes with recommendations to several relevant Congressional committees, the Secretary of Treasury, the Director of the CFPB, and the Secretary of Education for action on private education loans. Report at 18-19. The Report recommends Congress (i) identify opportunities to spur the availability of loan modification and refinance options for student loan borrowers. The Report further recommends the Department and Bureau heads (ii) assess whether efforts to correct problems in mortgage servicing could be applied to improve the quality of student loan servicing and (iii) continue incentives to increase adoption of the Income-Based Repayment (IBR) program for federal student loans. On recommendation (ii), the Ombudsman plainly implies that, as regulators found necessary in the mortgage servicing market, “more adequate oversight” and “additional guidelines” may be necessary for student loan servicers. Id. at 19. On recommendation (iii), many of those student borrowers struggling to manage private loans also have federal loans; thus, the Report suggests that reducing federal payments through IBR and other federal programs may improve a borrower’s ability to meet his or her private loan obligations. Id.
Although the Report itself lacks the force of law, it is likely reading material for lawmakers and regulators of the private student loan industry and may foreshadow future rulemaking and enforcement priorities focused on, for example, servicer behavior, for-profit affiliated loans, restructuring protocols, and refinancing incentives.