[author: John L. Culhane, Jr.]
The CFPB issued today its report to Congress on private student loans as mandated by Dodd-Frank, which the CFPB describes as the “Cycle of boom and bust in private student loan market.” Issued jointly with the Department of Education, the report consists of five parts dealing with (1) lenders, loan markets and products, (2) borrower characteristics and behaviors, (3) consumer protection, (4) fair lending issues, and (5) recommendations from the CFPB and DOE. The CFPB and DOE state that while they consulted consumer and industry stakeholders in preparing the report, they “chose principally to use a data-driven approach using more detailed information than has been available in the past.”
Among the report’s key findings are: (1) in addition to variable-rate and other features that make private student loans riskier than federal loans, various trends have made private student loans riskier, including that during the period 2005-2007, lenders loosened their underwriting standards, with the percentage of loans to undergraduates made without school involvement or certification of need growing from 40% to over 70%, (2) since 2008, lenders have tightened credit standards, such that in 2011 the percentage of loans with a co-signer increased to over 90% and 90% of student loans to undergraduates required the school’s certification of need, (3) the differences between federal and private student loans might not have been understood by many borrowers, and (4) default rates have spiked significantly since 2008, with 10% of all recent graduates of four-year colleges having monthly payments for all education loans exceeding 25% of their income and cumulative defaults exceeding $8 billion (representing more than 850,000 distinct loans).
The CFPB recommends that Congress consider (1) replacing “self-certification” with mandatory school certification, (2) changing how private student loans are treated in bankruptcy given the absence of evidence that the 2005 bankruptcy code amendments that made it tougher to discharge private student loans caused prices to decline or increased access to credit, (3) modernizing and clarifying the definition of a student loan under the Truth in Lending Act to cover products that serve as economic substitutes (such as credit lines for postsecondary expenses) but do not meet the current TILA definition, (4) creating a mechanism to help borrowers better understand their total debt obligations (such as a centralized mechanism similar to the National Student Loan Data System), and (5) whether additional data should be required to enhance consumer decision-making and lender underwriting.
Concurrently with issuing the report, the CFPB also launched a new online tool named the “Student Loan Debt Collection Assistant.” The tool is intended to provide information for students falling behind on their loans. The information varies depending on whether the student’s loans are federal or non-federal loans and the status of the loan. For example, if the student indicates that he or she has missed a payment but is not in default or is unsure if he or she is in default, the student is advised to contact the servicer and to use the CFPB’s “Student Debt Repayment Assistant” (an online tool the CFPB launched last October). If the student indicates that his or her loan is in default, the student is asked whether he or she is able to make any payments on the defaulted loan and the subsequent information the tool provides will vary with how the student responds.
Ballard Spahr lawyers are currently assisting private student lender clients in responding to enforcement investigations and in preparing for CFPB exams.
Finally, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection has scheduled a hearing on private student loans for July 24, and Rohit Chopra, the CFPB’s Student Loan Ombudsman, is scheduled to testify.