The CFPB released its third Annual Report of the Student Loan Ombudsman, Rohit Chopra, discussing complaints received by the CFPB about private student loans and the lessons drawn by the Ombudsman from those complaints. Before turning to the substance of those complaints, and the conclusions drawn by the Ombudsman, we think it important to put the complaints and those discussions in perspective.

Private student loans currently make up less than 7.8% of the overall student loan market, which is not entirely surprising given that lenders routinely encourage borrowers to maximize their federal loans and other aid before turning to private loans. Despite challenging economic conditions, default rates on those loans are at historic lows of 3%, compared to 14% for federal student loans, according to MeasureOne and industry student loan data cooperative.

While consumers do complain about those loans, the complaint rate is exceedingly low. The 5,300 complaints that the CFPB received as compared to the millions of private student loans outstanding shows that lenders and servicers effectively manage most student loan accounts. Moreover, as the CFPB indicates on its website, but rarely mentions in its reports, the CFPB makes no effort to verify the accuracy of the complaints it receives. It is unclear if the CFPB eliminates identical complaints received in prior years from its reporting. But it is clear from the Complaint Portal that lenders and servicers promptly respond to these complaints and that in the majority of cases, the response is accepted by the complainant.

With that in mind, we turn to the Report. The Report addresses key issues that the CFPB’s enforcement, examination, and policy arms are likely to focus on in the coming year. It indicates that the CFPB is likely to make moves to encourage student loan lenders and servicers to:

• Provide longer-term options to borrowers in or at risk of default;
• Go beyond existing pre-origination disclosure requirements and provide more detail about the differences between private and federal student loans at or prior to the time the loans are made;
• Permit borrowers to return to school as a way of postponing repayment;
• Waive any contractual rights to place borrowers into default upon the death or insolvency of the co-signer, even if the loan was originally approved based on the creditworthiness of the cosigner; and
• Apply payments in a way that minimizes loan defaults and late fees.

The Report was most heavily focused on lenders’ alleged failure to help distressed borrowers. The CFPB has previously faulted lenders for their approach to this issue, referring in the Report to their progress as “disappointing.” The Report did acknowledge that student loan securitization adds a layer of complexity to lenders’ ability to provide more generous repayment options to borrowers. But, it also cited two other factors, which the CFPB believes to have played an equally significant role: the Bankruptcy Code’s special treatment of student loans, and lenders’ alleged failure to communicate the differences between federal and private student loan repayment options to borrowers.

If past practice is any guide, the CFPB is likely to pursue these issues through a combination of use of its bully pulpit, lobbying efforts, industry guidance, and enforcement actions. As required under Dodd-Frank, the Student Loan Ombudsman also recommended three ways that Congress may be able to address these issues. In making these recommendations however, Mr. Chopra also shed some light on how the CFPB is likely to approach the issues as well.

First, Mr. Chopra recommends that Congress consider making student loans easier to discharge in bankruptcy, thereby incentivizing lenders to provide distressed borrowers with more generous repayment options. The CFPB is likely to follow-up on this recommendation with further reporting and Congressional testimony. Given the current Congressional gridlock, however, these efforts are unlikely to result in the passage of any significant legislation.

Second, he recommends that the CFPB “determine” whether lenders provide adequate disclosures to borrowers about repayment options for private student loans. As required under Dodd-Frank, the recommendation is framed as a call for Congress to evaluate the effectiveness of current private student loan disclosure requirements. The recommendation’s wording may also signal that the CFPB is likely to begin investigating student lenders’ repayment-related disclosures for alleged UDAAP violations.

Finally, the Student Loan Ombudsman recommends that Congress exempt forgiven student loan debt from taxation as it did of forgiven mortgage debt during the height of the financial crisis. This, too, is likely to stall in Congress.

The Report is based entirely on the CFPB Student Loan Ombudsman’s analysis of approximately 5,300 private student loan related complaints and 2,700 debt collection complaints submitted to the CFPB from October 14, 2013 to September 30, 2014. This number includes only complaints to which the lenders responded, indicating that they had at least some relationship with the borrower-complainant. Earlier this year, we blogged about Mr. Chopra’s mid-year report on student loan complaints. We also covered the first and second annual reports.