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New York Launches Student Protection Unit, Investigation Of Debt Relief Companies
On January 22, New York Governor Andrew Cuomo launched a new Student Protection Unit within the New York Department of Financial Services dedicated to investigating potential consumer protection violations in the student loan industry. Its first public investigation is focused on companies the unit believes are charging “high, improper fees without adequate notice for enrolling students in debt relief programs that are available for free through the federal government.” The Student Protection Unit issued subpoenas to 13 debt relief companies seeking advertising materials, contracts, consumer disclosures, and fee schedules among other materials.
CFPB Releases Annual Report On College Cards, Urges Disclosure Of Campus Marketing Agreements
On December 17, the CFPB released its annual report to Congress on college credit card agreements, prepared pursuant to the CARD Act. The report follows an inquiry launched earlier this year into financial products marketed to students. The study revealed that since 2009, the number of college card agreements in effect has decreased by 41 percent, the compensation paid to colleges and universities has decreased by 40 percent, and the number of new accounts opened by students has decreased by 18 percent.
The Bureau’s press release urges financial institutions to voluntarily disclose to the public any agreements with colleges and universities to market debt, prepaid, and other products to students and warns that “[t]he CFPB prioritizes its supervisory examinations based on the risks posed to consumers” and “[failing to make] college financial product arrangements transparent to students and their families . . . increase[s] such risks.”
CFPB Finalizes "Larger Participant" Rule For Student Loan Servicing, Updates Exam Procedures
On December 3, the CFPB issued a final rule that will allow the Bureau to supervise certain nonbank student loan servicers for the first time. The CFPB already oversees student loan servicing at the largest banks. The new rule will allow the Bureau to also oversee “larger participants” in federal and private loan servicing, defined as any nonbank student loan servicer that handles more than one million borrower accounts. The Bureau estimates that its final rule will allow supervision of the seven largest student loan servicers, responsible for servicing the loans of more than 49 million borrower accounts. The final rule takes effect on March 1, 2014.
Several commenters to the Bureau’s initial proposal requested further clarification of what constitutes an “account.” The final rule, like the proposed rule issued on March 28, 2013, considers each separate stream of fees to which a servicer is entitled for servicing post-secondary education loans with respect to a given student or prior student to be an account. Commenters also requested further clarification of the inclusions and exclusions implicit in this definition. The Bureau declined to make any substantive changes and instead adopted its proposed definitions with only technical changes.
The final rule does adopt several adjustments to the proposed definition of “student loan servicing.” The Bureau changed the proposed definition to address comments related to the use of a lockbox and similar services, agreeing that the function of merely receiving and remitting payments without handling borrowers’ accounts should not itself be considered “student loan servicing” for purposes of the final rule. The final rule also further clarifies that the purpose of an interaction with a borrower is important for determining whether it is “student loan servicing” and that activities to prevent default arising from post-secondary education loans are only included if conducted to facilitate the core servicing activities identified in the definition of “student loan servicing.” In addition, the Bureau adjusted the clause of the definition that addresses periods when payments are not required on the loan to make clear that it intends the clause to apply during all periods when no payment is required on a loan, including, for example, periods of forbearance.
The Bureau did not receive any objections to the proposed method of aggregating accounts of affiliated companies for the purpose of calculating volume and therefore adopts the aggregation method as proposed. The final rule also adopts the proposed threshold of one million accounts for the student loan servicing market, despite numerous comments requesting an alternate threshold for qualifying entities as “larger participants.”
On the same date, the CFPB released updated student loan examination procedures, which the Bureau revised to account for examination of nonbank servicers under the larger participant rule. In addition, the revised procedures prepare examiners to identify potential violations outside of consumer financial service laws applicable to servicers and administered by the CFPB, including potential violations of certain Servicemember Civil Relief Act (SCRA) requirements. The procedures also were revised to emphasize student loan servicing transfer and repayment issues, two issues the CFPB has highlighted as areas of concern over the past year.
CFPB Asks Student Loan Servicers About Payment Practices
On November 26, the CFPB sent a letter to student loan servicers offering them an opportunity to submit information about the options they make available to borrowers seeking to make extra payments on their private student loans. Last month, the CFPB recommended servicing policy changes and published a consumer advisory containing customizable, sample text that borrowers can electronically submit their servicers to indicate that they wish to allocate payments in excess of the amount due to their highest-rate loan in order to reduce their total interest paid. The Bureau states that it has since received inconsistent feedback from industry participants about the usefulness of this approach.
In response, the CFPB is now seeking additional information for use in responding to consumer inquiries and developing additional consumer education materials. The CFPB asks servicers to provide information about (i) the allocation of lump sum payments by the Department of Defense and other third parties on behalf of servicemembers or others seeking to direct lump-sum payments to specific loans; (ii) the percentage of borrower payments made through online bill pay systems and direct debit, and servicer practices related to borrower instructions provided with such payments; (iii) servicers’ ability to accommodate standing instructions for future excess payments; and (iv) the methods by which servicers communicate with borrowers about directing prepayments.
The CFPB plans to make the information its gathers public, but will not identify any particular servicer. Servicers that intend to voluntarily provide information in response to the Bureau’s requests are instructed to do so by December 17, 2013.
CFPB Student Loan Report Recommends Servicing Policy Changes
On October 16, the CFPB Student Loan Ombudsman issued a second annual report on student loans. The report analyzes and discusses approximately 3,800 complaints submitted by consumers to the CFPB from October 1, 2012 through September 30, 2013. According to the report, the most common complaints related to borrowers attempting to adjust the repayment terms of their loans in times of hardship, problems with debt collection practices, problems covering a range of payment processing issues, and general customer service issues. The report did caution that given its reliance on complaints and other non-scientific collection of data, it is not based on a representative sample and should not be used to draw conclusions as to the prevalence of problems in the student loan marketplace.
The majority of the report seeks to again draw parallels between problems previously seen in the mortgage servicing marketplace to those the CFPB sees in the student loan market. The CFPB also adds that some perceived problems in student loan servicing mirror those previously observed with regard to credit card servicing. The CFPB cites consumer complaints that servicers (i) fail to explain their payment application policies and processes, (ii) do not apply payments to highest interest loans first, (iii) apply underpayments to maximize late fees, (iv) fail to timely apply on-time payments, (v) do not provide electronic access to payment histories for payments made by phone or mail, (vi) lose payments, and (vii) are unable to provide accurate payoff information. In addition, the CFPB reports that consumers complained about numerous problems that arose following a transfer of the loan from one servicer to another. The CFPB also highlights its concern about insufficient refinancing and modification activity, but notes a recent statement from prudential regulators that the CFPB expects may help address those issues. The CFPB further discusses concerns about the servicing of loans for military servicemembers, but notes that some servicers have moved to address these alleged problems.
Stressing the interests of investors in addition to policymakers, and drawing from requirements in the CFPB’s new mortgage servicing rules and the 2009 Credit CARD Act, the Ombudsman recommends that student loan servicers take certain steps to address these and other servicing concerns:
- Provide notices prior to and following a change in servicer and ensure timely transfer of all documents and information;
- Introduce greater consistency in the handling of payoff requests, providing borrowers with a timely payoff statement in writing, and honoring the estimate for sufficient time;
- Improve error resolution procedures;
- Designate a single point of contact or team for each borrower;
- Improve and expand record management and retention policies;
- Initiate follow up communications after a missed payment;
- Improve payment posting to ensure timely application of payments;
- Reconsider fee-based model for expedited payments; and
- Deliver statements 21 days prior to payment date.
Further, the Ombudsman recommends that congressional policymakers, in connection with reauthorization of the Higher Education Act next year, consider statutory amendments to implement these suggested student loan servicing practices.
The CFPB suggests these changes as it prepares its final student loan servicer larger participant rule, which is expected in the coming weeks. If finalized largely as proposed, the rule will allow the CFPB to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers.
On the same day, the CFPB also issued a consumer advisory to help borrowers instruct their servicers on how to process their payments. The CFPB advises borrowers to provide instructions to servicers with each payment and provides a sample instruction letter. For example, one such instruction letter would be used by borrowers to direct application of overpayments toward the highest-interest rate loans.
CFPB Event Focuses on Student Banking
On September 30, the CFPB (or the Bureau) hosted a “Banking on Campus” forum, an event it described as a continuation of its February 2013 request for information about financial products and services marketed to college students. The event featured remarks from government officials, including the CFPB and the U.S. Department of Education, as well as presentations from students, school officials, financial institution representatives, and consumer advocacy groups. Generally, the discussion centered on the potential financial impact of exclusive marketing arrangements between schools and financial service providers on students, particularly with regard to financial aid disbursement products.
Director Cordray provided opening remarks in which he stated the Bureau’s concern that colleges and universities may be encouraging or even requiring students to use financial products that do not offer the best deals, while the schools are “secretly making money” from marketing agreements with financial service providers.
CFPB Student Loan Ombudsman, Rohit Chopra followed with a presentation that summarized the findings from the Bureau’s request for information, which may indicate the direction the CFPB will take in further scrutinizing student banking products and services. According to Mr. Chopra, the CFPB received 162 responses to its request for information and reviewed publicly available information. The Bureau’s initial observations include, among others, that: (i) financial product marketing partnerships have shifted to student checking, debit and prepaid card products (particularly student ID card accounts and financial aid disbursement cards/accounts); (ii) college affinity products generally do not appear to have more attractive features compared to other student checking products; and (iii) marketing arrangements between financial institutions and institutions of higher education for many student banking products are not well understood.
Mr. Chopra identified the following as questions requiring further exploration:
- How can colleges and universities better use their bargaining power to negotiate better product terms and conditions?
- How can students be better equipped to shop for student checking, debit, and prepaid card products?
- What obstacles do colleges and universities face when seeking to adopt established professional best practices on disclosure of debit card arrangements?
- Have colleges and universities established codes of conduct for employees who negotiate marketing agreements for checking, debit, and prepaid card products?
- How does the delivery model for federal student aid impact this market, and what can be learned from other federal benefit delivery models, such as Treasury’s Direct Express program?
Several of the student and consumer advocacy group panelists claimed that under exclusive marketing arrangements between financial service providers and schools, students are steered into unneeded and non-competitive products that result in unnecessary fees. Those participants called for more choice for students and stressed that schools should promote direct deposit of disbursement funds over the use of cards to allow students to choose their own financial service provider. At least one consumer group panelist called for revenue sharing agreements between schools and providers to be prohibited. Other participants referenced U.S. PIRG’s May 2012 report, which contains campus card best practices and recommendations for the CFPB to enforce the Electronic Fund Transfer Act, including by enforcing the rule that prohibits any person from being required to have an account at a particular institution as a condition of receipt of a government benefit
CFPB Announces Student Loan Debt Toolkit
On August 28, the CFPB announced the launch of a toolkit for use by school districts and other public service organizations in assisting employees repay student loan debt. The CFPB also asked such employers to pledge to inform their employees of available loan debt forgiveness options. The initiative accompanies the CFPB’s issuance of a Public Service & Student Debt report, which analyzes loan repayment options for various types of public service employers in both the public and private sectors. The CFPB also released an online action guide to advise employees about public service loan forgiveness benefits and eligibility.
August Beach Read Series: CFPB's Supervision of Student Lending and Servicing Takes Shape
Over the past year, the CFPB has started to publicly outline its supervisory approach to student lending and servicing. In doing so, it repeatedly has identified similarities between the lending practices that led to the subprime mortgage crisis and the escalating default rate in the burgeoning level of student loan debt. Rather than wait for a student loan crisis, the CFPB is attempting to put in place a program it hopes can help prevent one.
As part of that program, at the end of 2012, the CFPB released its student loan examination procedures. Also in 2012 the CFPB released two reports (July 2012 and October 2012) aimed at curbing purported violations of law, and it has continued to highlight student loan issues this year, including in a recent update on student loan complaints. In addition, in March of 2013, partly to address the complaints of student loan debtors, the CFPB announced its intention to supervise and examine the larger non-bank education loan servicers. That rule should be finalized next month.
Student lenders and servicers also should take note of the CFPB’s recently issued debt collection guidance, which, among other things, holds CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts. Many of the guideposts set forth in the guidance reflect the standards to which third-party debt collectors are held accountable under the FDCPA.
For more information about the CFPB’s debt collection guidance, please see a recent article by BuckleySandler Partner Valerie Hletko. Over the coming months, look for additional articles from BuckleySandler attorneys about the CFPB’s activities in the area of student loans and other non-mortgage consumer financial products and services.
Bipartisan Student Loan Certainty Act Passes; Industry Trade Groups Request TILA Compliance Grace Period
The Bipartisan Student Loan Certainty Act passed Congress last week and is awaiting the President’s signature. When signed, it will lower the interest rates for federal student loans made on or after July 1, 2013, but also will create some immediate compliance burdens for lenders and servicers. On August 5, four industry trade groups submitted a letter asking the CFPB to (i) implement a 30-day grace period (from enactment) for lenders and servicers to make necessary system changes and update TILA disclosures, and (ii) clarify that lenders and servicers will not be required to modify TILA disclosures provided prior to or during the grace period. Noting that this “will be the second time in less than 45 days that the interest rate for subsidized Stafford loans has changed,” and that the law mandates “an immediate and broad shift in the entire interest rate structure for all Federal Direct Loans,” the letter identifies the significant challenges in complying with the new structure, including the challenges to lenders and servicers in accurately disclosing interest rates as required by TILA. As precedent for the requested transition period, the trade groups refer to the Federal Reserve Board’s allowance for a transition period when it wrote the private student loan regulations in 2009.
Prudential Regulators Encourage Private Student Loan Workouts
On July 25, the FDIC, the OCC, and the Federal Reserve Board issued a joint statement to encourage financial institutions to “work constructively with private student loan borrowers experiencing financial difficulties.” The statement explains that prudent workout arrangements are consistent with safe-and-sound lending practices and are generally in the long-term best interest of both the financial institution and the borrower. Specifically, under the Retail Credit Policy, which covers student loans, “extensions, deferrals, renewals, and rewrites of closed-end loans can be used to help borrowers overcome temporary financial difficulties.” As such, the agencies promise not to criticize institutions for engaging in prudent workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in adverse credit classifications or troubled debt restructurings in accordance with accounting requirements under GAAP. Further, the regulators state that modification programs should provide borrowers with clear and easily accessible practical information about the available options, general eligibility criteria, and the process for requesting a modification.