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Financial Services Law Insights and Observations

CFPB Student Loan Ombudsman's Annual Report Calls on Policymakers to Reform Rehabilitation Programs

Federal Issues Consumer Finance CFPB Student Lending Debt Collection

Federal Issues

On October 17, the CFPB Student Loan Ombudsman (Ombudsman) released a report on student loan complaints related to debt collection and servicing issues submitted to the CFPB between September 1, 2015 and August 31, 2016. During the period covered in the report, the CFPB received approximately 5,500 private student loan - and 2,300 debt collection - related complaints. Following an August 18 CFPB report that focused primarily on student loan complaints regarding income-driven repayment (IDR) plans, the Ombudsman’s recently issued report emphasizes alleged breakdowns in the “rehabilitation” process: “The majority of borrowers who cure a default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, these borrowers describe a range of communication, paperwork processing, and customer service breakdowns at every stage of the default-to-IDR transition.” According to the report, borrowers attempting to enroll in IDR plans face issues such as: (i) delays, do-overs, and dead ends when working with debt collectors to establish and verify income-driven rehabilitation payment amounts; (ii) communication gaps between debt collectors and servicers when transferring a borrower out of default and into an IDR plan; and (iii) servicers failing to “proactively take the steps necessary to help them understand how to access IDR and quickly enroll,” in some cases leading to subsequent delinquency and re-default. The report recommends that policy makers and industry stakeholders reform the default-to-IDR transition process by, among other things, (i) streamlining and simplifying its structure; (ii) improving borrower communication; and (iii) reevaluating the economic incentives currently in place for debt collectors and student servicers to encourage long-term borrower success, rather than focusing on short-term borrower outcomes.

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