Director Cordray targets payday and student lenders in remarks to Consumer Advisory Board

by Ballard Spahr LLP
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Director Cordray’s prepared remarks for yesterday’s meeting of the CFPB Consumer Advisory Board contained some particularly ominous signs for student and payday lenders.

In the student lending area, Mr. Cordray focused on perceived similarities between servicing problems experienced by mortgage loan borrowers and those experienced by student loan borrowers. Observing that student loan servicing has the “same problematic [financial] incentive structure” as mortgage loan servicing because the creditor and not the borrower hires the servicer, he commented that many consumers are unable “to negotiate for a more affordable payment plan on their loan obligations…even when a modification would make sense for all concerned.”

Last year, Rohit Chopra, the CFPB’s Student Loan Ombudsman, drew similar parallels between the mortgage and student loan markets. We commented then that his statements might be a signal that the CFPB is considering rulemaking to establish servicing standards for student loans. Director Cordray’s remarks to the Advisory Board that having “seen the impact [servicing problems have] had for so many homeowners…[the CFPB is] looking to take steps that may address the same kinds of problems for student loan borrowers” would seem to reinforce our suspicions that student loan servicing standards might be in the works.

His remarks also reinforce our concerns that servicers of federal and private student loans could find themselves increasingly becoming targets of CFPB civil investigative demands and enforcement activity and that the CFPB may attempt to assert supervisory authority over such servicers (as larger participants in the debt collection market, as service providers to covered persons or, once the CFPB adopts a rule for exercising supervisory authority over entities engaged in conduct that presents risks to consumers, as such an entity).

With regard to payday and other short-term loan products, Director Cordray’s remarks indicate such products continue to be in the CFPB’s line of fire. His comments focused on rollovers of such products, which he described as creating a “cycle of debt [that] is essential to the business model because they generate “the high fee income necessary to make the economics of the product work and perhaps to subsidize other products.” He indicated that the marketing of such products “as short-term solutions to an emergency need [obscures] the risks inherent in terms that can make a tough situation even more difficult.” Combined with his statement that the CFPB has been “analyzing these situations and determining how to deploy [its] various tools to best protect consumers while preserving access to responsible credit,” Mr. Cordray’s remarks strongly suggest new CFPB initiatives are on the horizon.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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