Banking

Student loan servicers fear 1-2 punch from CFPB, Education Dept.

Student loan servicers are bracing for tougher supervision and more monetary penalties from the Consumer Financial Protection Bureau as the Biden administration tackles the thorny issue of massive student loan debt.

Rohit Chopra, the CFPB’s first student loan ombudsman, will likely crack down on servicers once he is confirmed by the Senate to lead the bureau, observers say. Chopra is widely expected to tag-team servicers with his old boss, former CFPB Director Richard Cordray, who is now the chief operating officer of federal student aid in charge of the Education Department’s $1.7 trillion portfolio of loans.

“Chopra’s primary issue has been student loans,” said Nate Viebrock, an attorney with Viebrock and DeNittis. “He could use rulemaking like debt collection that is broad enough to address certain practices of student loan servicers.”

Rohit Chopra (left), who awaits Senate confirmation as CFPB director, and the Education Department’s Richard Cordray, who once led the CFPB, are expected to work with the Treasury Department on a road map for student-loan-servicing reforms as part of an effort to reduce defaults and improve borrower outcomes.

Bloomberg

Chopra is closely aligned with Sen. Elizabeth Warren, D-Mass., who joined Senate Majority Leader Chuck Schumer, D-N.Y., and other lawmakers last week in calling for Biden to extend a pause on federal student loan payments until March 2022. Warren also wants Biden to cancel federal student debt.

Chopra and Cordray are expected to work with the Treasury Department on a road map for student-loan-servicing reforms as part of an effort to reduce defaults and improve borrower outcomes.

“There’s going to be a lot of coordinated work between the Education Department and the CFPB across a number of different avenues on federal loans,” said Allyson Baker, a partner at the law firm Venable who chairs its financial services practice and was a CFPB enforcement attorney.

In the near term, Democratic lawmakers raised concerns in a letter to President Biden on Wednesday that federal student loan servicers will be overwhelmed once millions of borrowers whose payments were paused by the Coronavirus Aid, Relief and Economic Security Act are scheduled to resume payments on Oct. 1.

Restarting payments “will present a significant challenge for borrowers, loan servicers, and the Department of Education, and we urge you not to let the payment pause lapse when borrowers are still depending on this financial relief,” the letter said.

Past emergency suspensions of student loans during natural disasters were followed by increased numbers of borrowers who went delinquent or defaulted on their loans. Before the pandemic, nearly one in five federal student loans was in danger of default, though performance data is hard to come by, experts said.

“Tens of millions of people have had their student loans turned off. Turning them on in one fell swoop without a clear plan is a recipe for disaster,” said Seth Frotman, executive director of the Student Borrower Protection Center and a former CFPB student loan ombudsman. “Restarting payments without first addressing failures across the student loan system would be a huge error. The process will also require coordination between the Department of Education and regulators. There was widespread mismanagement and abuse in this market even before the pandemic. Now there is going to have to be significant oversight when they turn back on payments.”

Many expect the CFPB and Education Department will work together to ensure more oversight and accountability. There is a push underway to require more consistent standards, disclosure requirements and improved borrower contact similar to requirements enacted for mortgage servicers after the financial crisis.

The CFPB currently has two supervisory examiners on loan to the department to help it set up audit programs for federal student loan servicers, sources said. The bureau did not comment when asked about any such efforts.

When Cordray led the CFPB, he launched a public inquiry into student loan practices and released a report in 2015 on “widespread servicing failures” that the agencies may use as a blueprint for reforms going forward, some experts said.

Within the backdrop of the larger debate about federal student loan debt, banks are advocating for changes to federal student loan applications such as streamlined disclosures that would more clearly explain the costs and terms of federal student loans. A primary issue with federal loans is that borrowers take out too much money in comparison to what they make, some experts said.

The CFPB currently oversees student loan servicing at nonbank servicers that handle more than 1 million borrower accounts, whether they service federal or private loans, and at the largest banks.

Private student loans totaled $138.6 billion as of the third quarter of 2020 — or just 8% of all outstanding student loan balances, according to estimates from the education data provider MeasureOne. Still, the private student loan market is larger than both payday loans and medical debt in collections, with private student loans producing roughly $10 billion in fees a year, which is on par with bank overdraft fees, Frotman said. The CFPB also is expected to take a closer look at fintechs that are offering student loans and other refinancing options.

Bank trade groups are lobbying for servicers of federal loans to have the same plain-language disclosure requirements as those of private loans by the Truth in Lending Act.

“Clearly any student loan crisis that exists sits squarely on the federal government’s egregious overlending practices that in any other context would be considered predatory,” Richard Hunt, president and CEO of the Consumer Bankers Association, said in a letter Thursday to lawmakers before a hearing with Education Secretary Miguel Cardona.

Private student lenders are vastly more successful in underwriting and getting repaid than the federal government, Hunt said, largely because the government has no underwriting requirements or ability-to-repay assessment of student borrowers.

“There are a lot of loans that people take out to finance education that don’t fall in the bucket of student loans, from credit cards to home equity lines of credit to specialty lenders offering lousy products or high-risk, high-cost products,” Frotman said.

Servicers and fintechs are concerned about increased supervision and enforcement by the CFPB.

Experts also are closely watching the ongoing litigation against Navient., the Wilkes-Barre, Pennsylvania-based servicer that has been the target of the CFPB and numerous state lawsuits alleging various consumer abuses. Though a trial date has not yet been set, a recent report by Fitch Ratings noted that a resolution of the CFPB litigation “could occur,” though “the exact timing of a decision and potential financial impact of an adverse judgment are impossible to predict.”

“The enforcement action against Navient creates an additional layer of uncertainty, including not only the potential monetary restitution to borrowers and fines, but the potential reputational risk an adverse judgment could have on current and future client relationships, particularly government contracts,” Fitch said.

Last year, Navient had the most complaints to the CFPB of any private student loan servicer with 646 out of a total of 1,936 complaints for the year ended August 2020, according to the annual report of the CFPB’s ombudsman. Of the 6,950 complaints received, more than 5,014 were about federal student loan servicers.

Though Chopra is still a commissioner at the FTC, other changes on students loans are in the offing. The CFPB may elevate the role of the student loan ombudsman, a position appointed by the Treasury Secretary. Many experts have speculated that Robert G. Cameron, a former student loan servicing executive who was named the private education ombudsman by former CFPB Director Kathy Kraninger, will be replaced once Chopra is confirmed to lead the agency.

During the Trump administration, former Education Secretary Betsy DeVos rolled back state regulatory and disclosure requirements for student loan servicers claiming they were preempted by federal law. Frotman said he expects a concerted effort to overturn the preemption.

Complaints from student loan borrowers were not shared with the Education Department for three years. In 2017, DeVos instructed student loan servicers not to submit data or documents directly to agencies other than her department regarding investigations or oversight. Data sharing resumed between the department and the CFPB last year.

Another area that Cordray is focused on is the Education Department’s public loan forgiveness program that gives public servants a chance to have the balance of debt erased after 10 years of on-time payments. Reports from both the Education Department and Government Accountability Office have found that up to 98% of applicants were rejected for the plans.

“Cleaning up these programs that exist is part of the critical work,” Frotman said.



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