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President Obama Announces Student Loan Initiatives; Senate Student Loan Refinance Bill Fails
On June 9, President Obama announced numerous initiatives related to federal student loans and signed a presidential memorandum directing the Education and Treasury Departments to execute certain of those initiatives. The central directive instructs the Education Department to initiate a rulemaking that will allow students who borrowed before October 2007 or who have not borrowed since October 2011 to cap their payments at 10 percent of their monthly incomes. The Education Department aims to finalize the program by December 2015. In addition, the President announced that, among other things, (i) the Education Department will renegotiate its contracts with federal loan servicers to alter financial incentives “to help borrowers repay their loans on time, lower payments for servicers when loans enter delinquency or default, and increase the value of borrowers’ customer satisfaction when allocating new loan volume”; (ii) the Education Department will proactively apply SCRA protections by reducing interest rates automatically for eligible servicemembers and will also provide additional guidance to Federal Family Education Loan program servicers to provide for a similar streamlined process; (iii) Treasury and the Education Department will work with tax preparation companies to communicate information about federal student loan repayment options; and (iv) the Education Department will expand other existing efforts to identify borrowers who may be struggling to repay and provide them with information about repayment options. The President also called on Congress to pass federal student loan refinance legislation championed by Senator Elizabeth Warren (D-MA). On June 11, the Senate failed to advance that bill, which was designed to allow federal loan borrowers to reat rates set last year by the Bipartisan Student Loan Certainty Act, and allow private loan borrowers to refinance loans into the federal program at the same rates.
Senator Durbin Presses Student Loan Servicers On SCRA; Consumer Group Wants More Student Borrower Information
On May 14, Senator Dick Durbin (D-IL) sent a letter to student loan servicers calling on them to voluntarily establish a liaison for servicemembers with student loan accounts to assist those servicemember with obtaining SCRA protections. On May 12, the National Consumer Law Center sent a letter to Education Secretary Arne Duncan complaining about the Department of Education’s alleged inadequate responses to NCLC inquiries seeking (i) information and data about why borrowers default and incidence of re-default; (ii) information about the Department’s commission and compensation system for servicers and collectors and performance evaluation metrics; (iii) copies of guidance to servicers and collectors; (iv) information about servicer performance broken down by percentage of loans in various stages of delinquency, percentage of borrowers enrolled in income-driven repayment (IDR), retention rates for those enrolled in IDR, re-default rates, and percentage of borrowers in deferments and forbearances; (v) information about collection and servicer complaint systems; and (vi) breakdown of accounts sent to the Department of Treasury for offset, including by type of benefit program and by demographic information including age. The letter also outlines NCLC’s operational concerns, including with regard to loan rehabilitation and affordable repayment, collection agency oversight, and servicing performance metrics.
New York Financial Services Regulator First To Sue Under Dodd-Frank's UDAAP Provisions
On April 23, New York State Department of Financial Services (NYS DFS) Superintendent Benjamin Lawsky became the first state regulator to sue a financial services company to enforce the Dodd-Frank Act’s Title X prohibitions against unfair, deceptive, and abusive practices (UDAAP). Last month, Illinois Attorney General Lisa Madigan filed what appears to be the first suit by a state attorney general to enforce Dodd-Frank’s UDAAP provisions. Although state authorities generally are limited to enforcing Title X against state banks and non-bank financial service companies—except that state attorneys general may enforce rules of the CFPB against national banks and thrifts—these actions bring into sharp focus the full scope and reach of the Title X’s enforcement provisions and are likely to inspire similar state actions.
Mr. Lawsky’s complaint accuses a nonbank auto finance company of violating Sections 1031 and 1036 of the Dodd-Frank Act, as well as Section 408 of the New York Financial Services Law and Section 499 of the New York Banking Law by, among other things, “systematically hid[ing] from its customers the fact that they have refundable positive credit balances.” The complaint alleges that the company concealed its customers’ positive account balances—from insurance payoffs, overpayments, trade-ins, and other reasons—by programming its customer-facing web portal to shut down a customer’s access to his or her loan account once the loan was paid off, even if a positive credit balance existed. The company allegedly failed to refund such balances absent a specific request from a customer. In addition, the complaint charges that the company hid the existence of positive credit balances by submitting to the New York State Comptroller’s Office false and misleading “negative” unclaimed property reports, which represented under penalty of perjury that the company had no unrefunded customer credit balances.The complaint claims that DFS’s examination findings for the company “demonstrate the persistent refusal and failure of [the company] and its owner . . . to implement even the most basic policies, procedures and controls necessary to manage a $300 million, state-licensed lending institution.” Further, Mr. Lawsky asserts that the company rejected “virtually all of those findings” and ignored or refused, based largely on economic considerations, to comply with written directives to institute proper policies, procedures, and controls.
In addition to being the first of its kind, the suit is notable for several other reasons. First, the suit names the company’s individual owner and CEO. Mr. Lawsky recently urged financial services regulators to consider taking more actions against individuals. His remarks added to a trend among regulators and enforcement authorities to more aggressively pursue individual alleged bad actors. In the complaint, Mr. Lawsky argues that “as the person responsible for oversight of [the company’s] operations and for setting and effectuating policies” the owner caused the company to adopt a policy of “stealing, converting, and retaining for its positive credit balances belonging to its customers.”
Second, Mr. Lawsky claims that certain of the alleged practices violate Dodd-Frank’s prohibition against “abusive” acts or practices. Although defined in the statute, the government has yet to provide additional guidance as to which acts or practices might be considered “abusive.” For instance, the CFPB, which has authority to draft regulations defining abusive practices, has declined to do so. Instead it has elected to develop the abusive standard through enforcement, most recently in an action against a for-profit educational institution, though no court has yet ruled on what constitutes an abusive practice.
Third, Mr. Lawsky filed the suit with the help of an outside plaintiffs’ firm. The practice of state agencies hiring outside counsel to represent them in investigations has been the subject of lawsuits and criticisms. The practice has been criticized in part because it creates an incentive for the outside lawyers to find violations in order to be paid. It also has been the subject of litigation where the law firm assisting the agency also represented other clients adverse to the target of the investigation.
Fourth, the complaint alleges that the finance company violated Section 1036 with regard to its data security and privacy practices and representations. Mr. Lawsky claims that the finance company falsely represented to its customers, in connection with servicing automobile loans, that it implemented reasonable and appropriate measures to protect borrowers’ personal information against unauthorized access. Instead, the complaint charges the company failed to take such reasonable and necessary actions and/or expend resources necessary to provide such protection, and in doing so took unreasonable advantage of (i) the inability of its customers to protect their own interests; and (ii) the reasonable reliance by its customers on the company to act it their interests.
Finally, the suit demonstrates the significant level of regulatory and enforcement activity originating from the NYS DFS. In recent months, Mr. Lawsky has moved to exercise the full scope of his authorities and has positioned himself at the forefront of numerous financial services issues, including, for example, by: (i) developing a regulatory framework for virtual currencies; (ii) aggressively supervising mortgage servicing rights transfers; (iii) obtaining a substantial settlement in a state licensing enforcement action; and (iv) conducting an expansive investigation related to online payday lending.
CFPB Student Loan Report Focuses on Co-Signer Issues
On April 22, the CFPB released its mid-year report on student loan complaints, which summarizes approximately 2,300 private student loan complaints and 1,300 debt collection complaints related to student loans submitted to the Bureau between October 1, 2013 and March 31, 2014. The report focuses on complaints from private student loan borrowers with co-signers. The CFPB reports that 90% of the student loans extended in 2011 were co-signed. The report references complaints from borrowers who have faced “obstacles” when seeking to obtain a release for a co-signer, including those who have been denied co-signer releases for unknown reasons or for technical reasons, which the CFPB believes eventually can lead to unexpected defaults. Based on an unidentified number of consumer complaints, the CFPB’s Student Loan Ombudsman Rohit Chopra believes “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledges that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. However, he cautions that these acceleration clauses present risks for financial institutions where borrowers have been making timely payments, including with regard to (i) reduction of interest income, (ii) reduced recovery of principal, (iii) poor customer experience, and (iv) reputation risks from utilizing debt collection protocols in the face of a family tragedy. The report offers potential alternatives to “auto-defaults” upon co-signer death and bankruptcy, including assessing the borrower for co-signer release and maintaining the existing payment schedule, providing the opportunity to identify a new co-signer, or providing the borrower time to refinance the loan.
Democratic Lawmakers Urge Education Department To Alter School-Sponsored Debit Card Rules
On April 22, Senator Elizabeth Warren (D-MA), Congressman George Miller (D-CA) and 22 other lawmakers sent a letter to Department of Education (DOE) Secretary Arne Duncan, supporting the DOE’s ongoing efforts to revise its rules that govern the ways higher education institutions request, maintain, disburse, and otherwise manage federal student aid disbursements. The DOE is considering changes that would, among other things, clarify permissible disbursement practices and agreements between education institutions and entities that assist in disbursing student aid, and increase consumer protections governing the use of prepaid cards and other financial instruments. The lawmakers specifically called on the DOE to “mandate contract transparency, prohibit aggressive marketing, and ban high fees when colleges partner with banks to sponsor debit cards, prepaid cards, or other financial products used to disburse student aid” through rulemaking that would, among other things, (i) prohibit colleges from entering into preferred relationships with financial institutions to offer debit cards or other financial products that charge fees associated with the disbursement and use of federal student aid; (ii) ban revenue sharing deals between colleges and financial institutions; and (iii) require colleges to post agreements with banks on their websites and report them to the CFPB and other government agencies annually.
New York Launches Student Lending Resource Center
On March 13, the New York DFS launched a new website to provide student borrowers with information about (i) the types of financial aid available; (ii) what to do in the event of default; (iii) “how to avoid unnecessary or unfair fees when opening a bank account at school”; and (iv) the tax credits and deductions available for education expenses. The website also includes a link to the DFS’s consumer complaint portal to allow borrowers to file complaints about “student-related” financial products or services. The website was launched as part of the state’s Student Protection Unit announced in January 2014.
More CFPB Senior Staff Changes Announced
On March 12, the CFPB announced several new senior officials, as described below. We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.
- Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.
Mr. Langer will fill a position vacated by Rick Hackett last year. At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.
- Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.
- Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.
- Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.
CFPB Sues For-Profit Educational Institution Over Private Student Loan Origination Practices
On February 26, the CFPB filed its first enforcement action against a for-profit higher-education company, alleging that the company engaged in unfair and abusive private student loan origination practices.
In a civil complaint filed in the U.S. District Court for the Southern District of Indiana, the CFPB asserts that the company offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The CFPB claims that when the short-term loans came due at the end of the first academic year and borrowers were unable to pay them off, the company forced borrowers into “high-rate, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations. Moreover, the CFPB claims that the company’s business model is dependent on coercing students into “high-rate, high-fee” private loans, despite the low average incomes and credit profiles of the students, and a 64 percent default rate on such loans.
The company issued a statement denying the charges, criticizing the CFPB’s decision to file suit, and challenging the CFPB’s jurisdiction. The statement describes the suit as an “aggressive attempt by the Bureau . . . to extend its jurisdiction into matters well beyond consumer finance” and expresses the company's intent to “ vigorously contest the Bureau's theories in court.”
The complaint details a number of alleged “high-pressure” origination tactics the CFPB claims resulted in part from the compensation structure the company established for its financial aid staff, which included commissions based on loan origination volume. The complaint also details the loan programs at issue, asserting that the programs were ostensibly run by third parties, but were controlled and guaranteed by the company, which allowed it to establish lenient lending criteria to maximize student participation. The company also is alleged to have misrepresented to prospective students the company’s accreditation and the placement rates and salaries of its graduates.
For certain students who did not obtain private student loans to pay-off the short-term company product and instead carried balances on the short-term credit through graduation, the CFPB asserts the company offered a “graduation discount” if the borrowers agreed to pay off some or all of the balance in a lump sum rather than through an installment plan. The CFPB reasons that to the extent the lump sum discounts were not applied to the installment plans, such discounts constituted finance charges subject to TILA’s disclosure requirements. The CFPB asserts that the company failed to clearly and conspicuously disclose those charges in writing to borrowers who opted not to pay a lump sum and instead entered into installment plans.
The CFPB brings claims for violations of the Consumer Financial Protection Act’s prohibitions on unfair and abusive practices, as well as for violations of TILA. In addition to injunctive relief, the CFPB is seeking unspecified monetary relief, including restitution for harmed borrowers, disgorgement, rescission, and civil money penalties.
CFPB Student Loan Ombudsman Questions Marketing Of Student Financial Products; GAO Recommends More Transparency
On February 13, CFPB Student Loan Ombudsman Rohit Chopra published on the CFPB's blog an update on the CFPB’s review of student financial products and raised concerns about certain marketing arrangements between financial institutions and colleges and universities, and the level of transparency associated with those agreements and the products marketed under them. He specifically questioned financial institutions that “generate a significant amount of their revenue on these products while students are currently in school.” On the same day, the GAO published a report on student debit and prepaid cards and marketing agreements, which recommends that Congress take steps to increase transparency.
CFPB Student Financial Products Update
In December, CFPB Director Richard Cordray urged financial institutions to voluntarily disclose on their websites agreements with colleges and universities to market bank accounts, prepaid and debit cards, and other products to students. Mr. Chopra states that the CFPB also collected agreements available in the public domain by checking state open records databases and other websites where such agreements are disclosed.
Although it is unclear whether this collection produced a representative sample, Mr. Chopra states that the CFPB identified “several agreements” pursuant to which financial institutions provide direct payments to schools in exchange for use of the schools’ logos. Other agreements, the CFPB claims, provide bonus payments to schools based on whether students sign up for a checking account marketed on campus. A third category of agreements provide colleges discounted or free services in exchange for allowing a financial company to market products to students.
Mr. Chopra acknowledges that many financial institutions offer good products at competitive prices, but he reinforced the CFPB’s belief that voluntarily disclosing marketing agreements “is a sign of a financial institution’s commitment to transparency” and added that “[r]esponsible financial institutions also want students to know they don’t have to choose their product if they don’t want to.”
Mr. Chopra encouraged students, schools, financial institutions, or other who wants to share information about the availability of these agreements to email the CFPB. He also encouraged students to submit complaints about student loans, checking accounts, or credit cards.
GAO Report On Student Financial Product Transparency
GAO examined the functions of college cards and the characteristics of the schools and card providers offering them, and assessed the benefits and concerns associated with student debit and credit cards. The GAO reported that as of July 2013, 11 percent of U.S. institutes of higher education are party to an agreement to provide debit or prepaid card services to students. Those schools tend to be larger than institutions that do not offer such services, and most offered students the ability to receive federal aid on a card.
The GAO identifies concerns about fees, ATM access, and neutrality. Specifically, the GAO stated that two large card providers charge a fee for card purchases that use a PIN versus a signature, and that total fees paid by students is unknown. With regard to ATM access, the GAO found that Education Department regulations regarding access to free ATMs or branches for students who receive federal aid is insufficient and should be more specific to ensure free access to federal funds on cards. Finally, the GAO believes that marketing agreements may create incentives for schools to influence student choice of financial service provider, and that increased transparency could help ensure that terms of such marketing agreements are fair and reasonable for students and do not create conflicts of interest for schools.
To achieve this increased transparency, the GAO recommends that Congress require financial firms providing debit and prepaid card services to colleges to publicly file their marketing agreements. In addition, the GAO would like the Education Department to (i) specify what constitutes convenient access to ATMs or bank branch offices for students receiving federal student aid funds and (ii) develop requirements for schools and card providers to present neutral information to students about their options for receiving federal student aid funds.
CFPB Reports Results Of Student Loan Payment Allocation Practices Inquiry
On February 3, the CFPB’s student loan ombudsman, Rohit Chopra, released a summary of student loan servicers’ responses to questions the CFPB posed last November about the application of borrower payments. In that November request, the CFPB asked a group of unidentified 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’s summary of the responses explains that the request was sent to “a number of private student loan servicers” and that the respondents “represented many different forms” including “third-parties servicing notes held by banks or in a securitized pool, large depository institutions servicing loans in-house, and small depository institutions.” However, a chart included in the summary reports the results of only six respondents.
The report presents a short list of “key findings”:
- Many servicers responded that they cannot honor specific payment allocation instructions communicated through online, third-party bill pay services.
- Many servicer online payment platforms allow borrowers to direct payments to a specific loan, but others do not. Some that do not provide a workaround, requiring the borrower to contact their servicer following a payment and request a reallocation.
- Many servicers indicated that they are making other changes to improve communications to borrowers about payment processing policies.
- Many servicers have limited ability to accept payment instructions in advance of a payment made by a third party (e.g. payments made by the Department of the Defense on behalf of servicemembers receiving loan repayment assistance).
- Some servicers have recently changed their payment allocation policies and now allocate payments from borrowers in excess of the scheduled payment amount or statement balance due to balances with the highest interest rate.
In addition, in response to servicer inquiries regarding an appropriate standard allocation policy when borrowers have both fixed and variable rate loans, the Ombudsman states, based on the CFPB’s preliminary analysis, that applying excess funds toward the loan with the highest current interest rate will save the borrower interest in the short run and over the life of the loan.