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GAO Report Addresses Borrower Difficulty with Federal Direct Loan Program
On June 15, the Government Accountability Office (GAO) released a report titled “Federal Student Loans: Education Could Improve Direct Loan Program Customer Service and Oversight.” As part of its study into the Department of Education’s (Education) oversight of the Direct Loan program, GAO reviewed, among other things, Education contracts, monitoring plans, policies, procedures, and guidance related to servicers as well as servicer websites, a sample of communications sent to the borrower, the summary results from Education's 2014 and 2015 customer satisfaction surveys of borrowers, and Education’s quarterly and annual servicer performance reports and annual servicer reviews from fiscal years 2010-2015. In addition, GAO interviewed, among others, CFPB and Education officials, servicers responsible for serving more than 95% of Direct Loan borrowers, and a sampling of 24 Direct Loan borrowers – selected at random from Education data – who were in either (i) repayment; (ii) delinquency (less than 270 days); or (iii) deferment of forbearance. The report highlights borrowers’ limited telephone access to their assigned loan servicers to manage their loans as a key area of concern, noting particular limitations for borrowers on the West Coast assigned to a servicer on the East Coast. The results of Education’s 2014 and 2015 borrower satisfaction surveys revealed similar findings. GAO attributed consumers’ lack of access to servicers to Education’s failure to implement a minimum standard for servicer call center hours: “Education’s lack of a minimum standard for servicer call center hours, and the limited hours currently provided, impede borrowers’ access to customer service that is responsive to their needs and puts them a greater risk of delinquency and default.” The report further notes that Education lacks a systematic approach for capturing borrower complaints, including those received through servicers, and that its performance metrics and compensation structure for servicers, which is based on borrowers’ loan status, “can sometimes hinder Education’s strategic goals of providing superior customer service and ensuring program integrity.”
Based on its findings, GAO recommends that Education (i) establish a minimum standard for servicer call center hours to allow for improved access to servicers; (ii) ensure its complaint tracking systems sufficiently capture comprehensive and comparable information from servicers regarding the nature and status of borrower complaints; and (iii) analyze and modify its performance metrics and compensation. Generally, Education agreed with GAO’s findings and recommendations, but suggested that its current performance metrics reflect compliance; GAO maintains that they do not.
Department of Education Proposes Rule to Protect Student Borrowers from Alleged Predatory Practices by Postsecondary Institutions
On June 16, the Department of Education’s (Education) proposed rule to amend the regulations governing the Direct Loan program was published in the Federal Register. The proposal seeks to clarify and expand upon existing regulations intended to protect student borrowers from alleged predatory practices by postsecondary institutions. Specifically, Education proposes to amend existing regulations by, among other things, (i) establishing a more accessible and consistent borrower defense standard and streamlining the borrower defense process to ensure protection from institutions’ alleged predatory actions and omissions resulting in loan discharges; (ii) requiring certain institutions provide Education-issued plain language warnings to prospective borrowers and enrolled students on its Web sites and in all promotional materials and advertisements; (iii) prohibiting the requirement to use arbitration to resolve claims brought by a borrower against the school or waivers of his/her right to initiate or participate in a class action lawsuit regarding such claims; and (iv) prohibiting the requirement for students to engage in internal institutional complaints or grievances before contacting accrediting or government agencies with authority over the school regarding such claims. Comments on the proposed rule must be received by Education on or before August 1, 2016.
California AG Harris Continues Fight Against For-Profit Schools Allegedly Defrauding Consumers
On June 2, California AG Kamala Harris sent a letter to the U.S. Department of Education requesting that it revoke the Accrediting Council for Independent Colleges and Schools’ (ACICS) status as a recognized accreditor of for-profit schools. In the letter, AG Harris cited to state and federal enforcement actions taken against Corinthian Colleges, Inc. (Corinthian) – a non-profit school accredited by ACICS – for engaging in allegedly predatory and deceptive marketing practices. According to AG Harris, “ACICS failed to uphold their commitment ‘to the importance of a quality education experience for all students’ when they continued to accredit Corinthian campuses in the face of regulatory and enforcement actions.” AG Harris joins 13 other state Attorneys General in opposition to ACICS’s application for renewal as an accreditor. In a letter submitted to the Department of Education in April of this year, those 13 other state Attorneys General discussed similar alleged failings by ACICS in their respective states.
AG Harris’s recent letter comes after a February 25, 2016 statement requesting that the Department of Education revise its proposed regulations relating to debt relief for students affected by for-profit schools’ allegedly deceitful practices, and also follows the AG’s $1.1 billion judgment against Corinthian.
OCC Updates Comptroller's Handbook to Include New Student Lending Booklet
On May 9, the OCC updated its Comptroller’s Handbook to include a new booklet titled “Student Lending.” Despite banks having to alter their private student lending strategies as a result of the 2008 financial crisis, the OCC’s booklet maintains that banks can still benefit from the wider array of consumer products and the broader business model that the private student lending industry offers. The new booklet contains information related to banks’ participation in the private student lending industry, including, but not limited to:
- Inherent credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation risks in the industry.
- Unique aspects of private student loans, such as the “significant time lag between loan advances and repayment, and the student borrower’s lack of certainty in finding a stable, reliable primary source of repayment after graduation.”
- Regulatory expectations for safe and sound operations, cautioning that banks should adhere to the credit underwriting and documentation standards as stated in 12 CFR 30, appendix A, “Safety and Soundness Standards.”
- Risk management practices, reminding banks that use third parties to market, solicit, or originate private student loans to have in place risk management frameworks that include due diligence in selecting third parties, written contracts that have been vetted for duties, obligations, and responsibilities of all parties (compensation parameters included), and ongoing monitoring and quality assurance programs.
Designed for examiners to use in their examination and supervision of banks involved in the private student lending industry, the booklet outlines two sets of examination procedures: (i) primary examination, when an examiner’s objective is to “assess risk level, evaluate the quality of risk management, and determine the aggregate level and direction of risk of the bank’s student lending activities”; and (ii) supplemental examination, when examiners “determine whether student lending marketing activities are consistent with the bank’s business plans, strategic plans, and risk appetite, and that appropriate controls and systems are in place before the bank rolls out new products or new-product marketing initiatives.” Finally, the booklet advises examiners reviewing banks’ student lending activities to “remain alert for lending practices and product terms that could indicate discriminatory, unfair, deceptive, abusive, or predatory issues.”
CFPB Releases Draft Payback Playbook, Aims to Aid Student Borrowers
On April 28, the CFPB released a draft set of student loan disclosures, the Payback Playbook. Outlining repayment options for student loan borrowers, the Payback Playbook is intended to help borrowers effectively manage their monthly payments and avoid default. The Payback Playbook will be available on borrower’s monthly bills, in regular email communications from student loan servicers, or when borrowers log into their accounts. The Payback Playbook for most borrowers would summarize three personalized repayment options, while borrowers who are at risk of default or have missed a payment will receive a “single option with personalized instructions written in plain language describing how to lower their monthly payment.” The CFPB held a press call during which Director Cordray addressed the key objectives of the Payback Playbook, including: (i) aid federal student loan borrowers by personalizing income-driven repayment plans and providing a chart of action to ensure that consumers understand their right to an affordable payment plan; (ii) address the “growing disconnect between borrowers searching for affordable loan payments and [the] nation’s student loan default problem”; and (iii) address consumers’, student loan servicers’, consumer advocates’, and borrowers’ “most urgent problems.”
Senator Murray Sponsors Bill to Expand and Strengthen the SCRA
On March 17, Senator Patty Murray (D-WA) sponsored the SCRA Enhancement and Improvement Act of 2016 (the Act). The Act focuses especially on student loan servicers, but encompasses all financial institutions covered by the SCRA. Although the text of the Act is not yet available, the recently issued press release on the Act describes its proposed changes to the SCRA. Among other changes, the Act would revise the SCRA by: (i) requiring automatic application of the SCRA’s interest rate cap; (ii) ensuring that student loan servicers have a dedicated SCRA representative; (iii) reducing the SCRA’s interest rate cap from 6% to 3%; (iv) protecting servicemembers when their loans are transferred or sold by requiring “sufficient notice”; (v) forgiving all federal and private student loan debt if a servicemember dies in the line of duty; (vi) expanding the interest rate cap to all debts, no matter when incurred; (vii) clarifying that servicemembers may bring a private right of action under the SCRA; (viii) doubling the fines for violations of the SCRA; and (ix) expanding certain protections on mortgages, leases, and cable and internet contracts.
California AG Harris: Department of Education Should Revise Regulations to Protect Students Defrauded by For-Profit Colleges
Last week, California AG Kamala Harris requested that the Department of Education revise its proposed regulations regarding debt relief for students allegedly misled by “predatory” and for-profit colleges that advertise inflated job placement rates and asked that the Department “do more” to protect the students affected. Defrauded students have a right under Federal law to have loans discharged when their schools engage in misrepresentations and other unlawful conduct. According to AG Harris, the process for asserting this right is unclear. While the Department has emphasized that it intends to enforce an effective and streamlined loan discharge process to provide students’ relief, in the second of three negotiated rulemaking sessions, the Department “unveiled proposed language that contradicts the intent of previous discussions by narrowing, limiting, and delaying student relief.” In response to the Department’s proposal, Harris called on the Department to revise its regulations in a manner that ensures “fair and effective defense-to-repayment procedures.” Specifically, AG Harris commented that the procedures must (i) refer to state law for a basis to assert a defense; (ii) not include a statute of limitations for borrowers to assert a defense to repayment; (iii) provide procedures for broad and instantaneous relief to student borrowers affected by schools’ deceptive practices; and (iv) ban schools from making the discharge process burdensome and expensive.
CFPB Releases Fact Sheet: Policy Priorities over the Next Two Years
On February 25, the CFPB released a fact sheet outlining its policy priorities over the next two years. The document lists the following nine near-term priority goals: (i) arbitration; (ii) consumer reporting; (iii) debt collection; (iv) demand side consumer behavior; (v) household balance sheets; (vi) mortgages; (vii) open-use credit; (viii) small business lending; and (ix) student lending. Regarding arbitration, the CFPB noted that it “will continue the rulemaking process and propose a rule consistent with its study that will further enable consumers to effectuate their rights and hold institutions accountable for unlawful conduct.” With respect to consumer reporting, the CFPB will focus on issues surrounding the accuracy of consumer reporting and institutions’ dispute resolution processes. In the debt collection space, the CFPB plans to initiate rulemakings on debt collector conduct (including issues relating to the substantiation of consumer debt and the disclosure of information to consumers) while simultaneously pursuing rigorous supervision and enforcement activity to ensure industry compliance. Regarding demand side consumer behavior, the CFPB will focus on financial education for consumers. With respect to household balance sheets, the CFPB will conduct research and data analysis on household financial health and decision making. For mortgages, the CFPB will focus on the implementation of existing rules as well as the supervision and enforcement of issues relating to equal and fair access to credit. In the open-use credit space, the CFPB plans to conduct small-dollar, installment lending, and overdraft market rulemakings while conducting complementary supervision and enforcement work to support its new rules. Regarding small business lending, the CFPB will (i) build a small lending team that will begin conducting research and outreach for a small business lending rulemaking; (ii) employ its consumer response team to build infrastructure to analyze small business complaints; and (iii) examine small business lenders for fair lending compliance. Finally, with respect to student lending, the CFPB will work on servicer alignment as well as supervision and enforcement of servicers’ legal obligations. In addition to these nine priority areas, the CFPB also indicated that it plans to continue to focus on well-established and ongoing work streams, such as fair lending oversight of indirect auto lenders and its rulemaking on prepaid cards.
CFPB Monthly Complaint Snapshot Highlights Financial Services Markets
On January 28, the CFPB released its monthly complaint report focusing on a number of financial services markets, including debt settlement, check cashing, tax refund anticipation checks, money order providers, and credit repair. The report states that, since July 19, 2014, the CFPB has handled approximately 2,700 complaints relating to these other types of financial services. According to the report, debt settlement and credit repair complaints are among the more common complaints, and over a quarter of these complaints mention student loans, with borrowers selecting fraud or scam as their primary issue. Additional findings highlighted in the snapshot include: (i) consumers being charged excessive fees, including upfront fees that are generally prohibited by law, for debt settlement and credit repair services; (ii) consumers encountering problems redeeming money orders, taking issue with the amount of time it took to resolve errors with customer service representatives; and (iii) consumers complaining they were victims of fraud when using money orders and travelers checks. The CFPB identified New York State and the New York metro area as its geographic spotlight in this issue, noting that, as of January 1, 2016, the CFPB has received 50,400 complaints from New York State consumers alone. Similar to past reports, mortgages remain the most complained-about product.
FDIC and Federal Reserve Announce Settlement with Connecticut-Based Financial Aid Company Over Deceptive Practices
On December 23, the FDIC announced separate settlements with a Connecticut-based financial aid company and an affiliated Utah-based bank for alleged deceptive practices in violation of the FTC Act. Separately, the Federal Reserve announced a settlement solely with the Connecticut-based company for allegedly violating the FTC Act by employing deceptive practices. The company provides financial aid disbursements to higher education institutions for its students. According to the agencies, the company omitted material facts about its financial aid disbursement business, such as: (i) details about alternative disbursement methods available to students; (ii) a full and complete fee schedule; and (iii) information regarding the locations of fee-free ATMs. In addition, the agencies alleged that the company prominently displayed school logos, suggesting to students that schools had endorsed its refund product.
The FDIC’s orders against the company and the bank require each to pay a civil money penalty of $2.23 million and $1.75 million, respectively. In addition, the company and the bank together will pay approximately $31 million in restitution to roughly 900,000 consumers. Under the terms of the Federal Reserve’s order, the company will: (i) pay approximately $24 million in restitution to an estimated 570,000 consumers; (ii) pay a civil money penalty of more than $2 million; (iii) adopt a consumer compliance risk-management program; and (iv) refrain from future violations of section 5 of the FTC Act.