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  • Bipartisan Student Loan Certainty Act Passes; Industry Trade Groups Request TILA Compliance Grace Period

    Consumer Finance

    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.

    CFPB Student Lending

  • Prudential Regulators Encourage Private Student Loan Workouts

    Consumer Finance

    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.

    FDIC Federal Reserve OCC Student Lending Agency Rule-Making & Guidance

  • CFPB Releases Spring Rulemaking Agenda

    Consumer Finance

    On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.

    CFPB Payday Lending Prepaid Cards Student Lending Debt Collection Agency Rule-Making & Guidance

  • Spotlight on Student Lending (Part 2 of 2): Lessons Learned from CFPB Reports

    Consumer Finance

    In 2012 and 2013, the Consumer Financial Protection Bureau released several major reports and held field hearings focused on private student lending and servicing. In addition to recent CFPB activity, on June 25, 2013, the Senate Banking Committee held a hearing regarding private student loans at which, among other witnesses, the CFPB’s Student Loan Ombudsman Rohit Chopra testified.

    The largest CFPB report, and the one most sweeping in scope, was the Bureau’s study of the private student loan market and characteristics of private student loans that was mandated by Dodd-Frank and issued in July 2012 (Private Student Loans Report). In addition, in October 2012, the Student Loan Ombudsman issued his Annual Report in which, among other things, he characterized the nature of the student loan complaints received through the CFPB’s student loan complaint portal up to that point (Annual Report of the Student Loan Ombudsman). Further, on May 8, 2013, the CFPB issued another report and held a field hearing focused on what it described as the “potential domino effect” of student loan debt on the broader economy and proposing several options to assist private student loan borrowers. Finally, testimony at the above-referenced Senate Banking Committee hearing focused largely on how to increase the low refinancing and modification activity in the private student loan (PSL) market. 

    Taken together the Bureau’s reports, field hearings, and Congressional testimony put student lenders and servicers on notice that the Bureau will be looking closely at servicing issues, including loan modification and debt collection practices, as well as fair lending and likely fair servicing issues going forward, i.e., consistency in loan modifications and work outs.

    With respect to the Private Student Loans Report, the report made clear that, in the fair lending space, the Bureau intends to scrutinize the use of cohort default rate (a statistic calculated by the Department of Education and used to determine which schools will be eligible to participate in federal student aid programs) as an eligibility metric. Likewise, the report recommends that lenders obtain school certification of the student’s education costs to prevent over borrowing.

    As for the Annual Report of the Student Loan Ombudsman, from the Bureau’s perspective, the report likely validates the agency’s growing concern over student loan servicing insofar as the three main areas of consumer complaints described in the report are all focused in that area:  general servicing concerns, concerns about payment processing, and concerns about inability to obtain loan modifications. The report draws parallels between problems in student loan servicing and those in mortgage loan servicing. For example, the report describes consumer complaints focused on the misapplication of payments, untimely error resolution and consumer difficulty in contacting appropriate personnel (all areas that have been a focus in the mortgage servicing space). So evident were the similarities in the eyes of the CFPB that its student loan ombudsman, Rohit Chopra, urged the Treasury secretary, the CFPB and secretary of education to consider whether mortgage servicing program “fixes” can be applied in the student loan context.

    To this end, the Bureau has been sharpening its focus on repayment options in the private student loan market, with signals pointing perhaps to possible new rules setting student loan servicing standards.  However, in the meantime, the Bureau has taken some notable steps.  First, on February 21, it issued a notice and request for information on policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.  Over 30,000 comments have been received.  In addition, on May 8, as mentioned earlier, the Bureau proposed several policy “solutions” to assist student loan borrowers, such as providing “refi relief” for borrowers who have made timely payments, providing a “road to recovery” for borrowers by allowing their loans to be restructured, and providing a “credit clean slate” for borrowers who satisfy the terms of a workout plan.  Importantly, though, the Bureau conceded that there are still significant accounting and operational impediments to implementing these “solutions” that require further consideration.

    In light of the Bureau’s reports, field hearings, and other public statements, we advise private student lenders focus now on tightening internal controls with respect to fair and responsible lending issues as well as servicing and debt collection practices as those will areas of primary focus by the Bureau in examinations and otherwise going forward.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

  • Spotlight on Student Lending (Part 1 of 2): Facing Increased Regulatory Scrutiny, Student Loan Lenders Prepare for CFPB Examinations

    Consumer Finance

    Currently, total outstanding student debt (both federal loans and private loans) has risen to roughly $1.1 trillion dollars. That figure represents an over 50% increase since 2008 and makes student loans the largest source of unsecured consumer debt – surpassing credit cards. At the same time, at least with respect to federal student loans, delinquencies have risen sharply during the same time period and, with unemployment rates for recent graduates still high by historic standards, the risk of continued high delinquency rates remains significant. Complicating matters is that student loan servicers, and servicers of private student loans in particular, have limited ability vis-à-vis a mortgage lender to modify those loans for borrowers in default.

    Not surprisingly, given this backdrop, borrowers have lodged complaints with the Consumer Financial Protection Bureau (CFPB or Bureau) focused on their inability to obtain loan modifications, concerns about improper payment processing, and concerns about servicers’ debt collection practices. All of these factors have prompted the Bureau to draw comparisons to the recent mortgage servicing crisis and to increase focus and attention on the student lending and servicing industry in an effort to stave off a problem of those proportions.

    In addition, the Bureau has focused its attention within student lending and servicing on other, more traditional areas of regulatory concern.  For example, the Bureau in the past year indicated it intends to closely scrutinize student lenders on fair lending issues – especially the use of non-credit bureau attributes such as cohort default rate – as well as unfair, deceptive, or abusive trade practices.

    For non-bank private student lenders, regulation by the CFPB represents a significant increase in the type of regulatory scrutiny to which lenders have traditionally been subject.  Even for large bank student lenders, which have long been subject to examinations by their prudential regulators, CFPB regulatory oversight will present new challenges insofar as the Bureau’s focus is solely on consumer protection and compliance and it has made clear that understanding and regulating private student lending is one of its high priorities.

    Here are several steps that student lenders and servicers can take now to proactively mitigate risk in the current environment, including:

    1. Developing, implementing and, as applicable, updating fair and responsible lending programs (including training of key employees in this area)
    2. Conducting periodic fair lending and UDAAP risk assessments
    3. Conducting gap analyses of collections and servicing practices to ensure compliance and CFPB readiness

    It bears emphasizing that the future likely holds increased regulatory scrutiny, especially from the Bureau and especially in the area of student loan servicing and debt collection. Private student lenders will also see increased scrutiny with respect to fair and responsible lending compliance, including their use of non-credit bureau attributes in underwriting and pricing and their marketing practices, e.g., how borrowers are solicited and whether a lender uses different marketing efforts based on loan products, such as those specific to a particular major, school, or geography.

    In December 2012, the Consumer Financial Protection Bureau released their student loan examination procedures, and since doing so, has commenced several examinations of bank and non-bank private student lenders. Lenders will have to show compliance with a variety of federal laws applicable at various stages (called modules) of the lending process and will be examined for potentially unfair, deceptive or abusive acts and practices.

    The procedures indicate that exams will be composed of several modules:

    1. Advertising, marketing and lead generation
    2. Application, qualification, loan origination, and disbursement
    3. Repayment and account maintenance
    4. Customer complaints
    5. Collections and credit reporting
    6. Information sharing and privacy

    The CFPB’s examination personnel will review the lender’s organizational documents and process flowcharts, board minutes, annual reports, management reports, policies and procedures, rate and fee sheets, loan applications, account documentation, notes and disclosures, file contents, operating checklists and worksheets, computer system details, due diligence and monitoring procedures, lending procedures, underwriting guidelines, compensation policies, audit reports and responses, training materials, service provider contracts, advertisements, and complaints. Examiners may also interview the lender’s personnel and observe customer interactions.

    Examiners will review potential legal and regulatory violations in modules roughly corresponding to the processes by which education loans are developed, marketed, originated and serviced, and the processes for handling consumer complaints, delinquencies and defaults, credit reporting and privacy protection. The examination process is intended to help the CFPB determine whether consumer financial protection laws have been violated and, if so, whether supervisory or enforcement actions are warranted.

    BuckleySandler advises student lenders to prepare for a CFPB exam by carefully reviewing the Bureau’s examination procedures, reports, and other public statements concerning student lending and servicing. We also recommend conducting a gap analyses between those materials and existing policies and procedures, and as appropriate, filling any identified gaps.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB UDAAP Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

  • CFPB Issues Report, Holds Field Hearing on Student Loan Relief Policy Options

    Consumer Finance

    On May 8, the CFPB issued a report regarding student loan affordability and related policy issues. The report summarizes and analyzes public responses to the CFPB’s request for information and discusses policy options for addressing these issues.  In particular, the paper explores policy options for restructuring student loans, including, for example, allowing distressed private loan borrowers to convert their obligations into federal student loans, which would allow them to accesses certain income-based repayment and other benefits available to federal loan borrowers, and options for a public-private loan restructuring program. The paper also identifies multiple policy options for jumpstarting the refinance market, including creating a “centralized source on private student loans[, which] could create the conditions and data standards for the emergence of an auction-like marketplace for refinance activity.” The paper states that compliance with existing laws on origination, servicing, and collection of student loans is also critical. On the same day the report was issued, the CFPB held a field hearing at which CFPB Director Richard Cordray, other CFPB officials, and industry and consumer groups discussed many of the issues presented by the CFPB information request and report, including the effects  of student debt burdens on individuals and the broader economy, and potential debt relief policy options.

    CFPB Student Lending

  • CFPB Announces Field Hearing on Student Loan Issues

    Consumer Finance

    On April 18, the CFPB announced a field hearing about student loan issues, to be held in Miami-Dade County on May 8, 2013. The CFPB has not yet announced witnesses but has stated the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. In the past, the CFPB has made policy announcements in connection with field hearings. On April 8, the comment period closed on a CFPB notice and request for information regarding policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.” The CFPB also recently proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The comment period for that proposal does not close until May 28, 2013.

    CFPB Student Lending

  • Ninth Circuit Enforces Student Loan Arbitration Agreement

    Consumer Finance

    On April 11, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, held that a national bank could compel arbitration of a dispute involving student loans. Kilgore v. KeyBank, Nat’l Ass’n, No. 09-16703, 2013 WL 1458876 (9th Cir. Apr. 11, 2013). Former students of a failed flight-training school filed a class action in state court seeking broad injunctive relief against the bank that originated their student loans and the loan servicer. However, each of the students had executed a promissory note containing a provision requiring arbitration and prohibiting arbitration of claims on a class action basis. The bank removed the action to federal district court and moved to compel arbitration. The district court denied the motion and subsequently granted the bank’s motion to dismiss the claims. On appeal, the Ninth Circuit held that the arbitration provision was enforceable under the Federal Arbitration Act and that it was not substantively or procedurally unconscionable under state law. The court further held that the plaintiffs’ claims were not exempt from the FAA under the “public injunction” exception because the bank’s alleged statutory violations already ceased, the class affected by the alleged practices is small, and there is no real prospective benefit to the public at large from the relief sought. The court vacated the district court’s dismissal of the students’ claims, reversed the denial of the bank’s motion to compel arbitration, and remanded with instructions to the district court to compel arbitration.

    Arbitration Student Lending

  • CFPB Announces Major Update to Consumer Complaint Database

    Consumer Finance

    On March 28, the CFPB released tens of thousands of consumer complaints related to mortgages, student loans, bank accounts and services, other consumer loans, and credit cards. Credit reporting complaints, will be released in the near future. The expanded database is a live database that is updated daily. It includes one million data points, covering approximately 450 companies, and allows users to track, sort, search, and download information. The CFPB has made the data available in formats that allow developers to build applications, conduct analyses, and perform research, and the database includes functionality to let users build their own visualizations, charts and graphs, and embed the data on other websites or share it through social media. The CFPB is encouraging consumers, analysts, developers, data scientists, civic hackers, and companies that serve consumers, to analyze, augment, and build on the public database to develop ways for consumers to access the complaint data or “mash it up” with other public data sets. The CFPB also released a fact sheet about the database, which provides some summary analysis of the data, as well as a “snapshot” report that provides information about the CFPB’s complaint handling process and additional summary presentation of the data. The CFPB also held a field hearing to review the complaint database and solicit public feedback. Consumer groups participating in the event repeatedly stressed the need for more specific data, including the full narrative description of complaints submitted by consumers, while industry representatives continued to caution the regulator about risks associated with unverified data.

    Credit Cards CFPB Student Lending

  • CFPB Proposes Rule to Supervise Nonbank Student Loan Servicers

    Consumer Finance

    On March 14, the CFPB proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The CFPB has authority to supervise, regardless of size, nonbanks that originate private education loans, and can define and supervise larger participants in other markets for consumer financial products or services. The CFPB proposes to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers. The CFPB’s test to determine volume would consider the number of accounts serviced, whether for federal or private loans, for which an entity and its affiliated companies were responsible as of December 31 of the prior calendar year. After designation, a servicer would remain a larger participant until two years after the first day of the tax year in which the servicer last met the account volume test. The CFPB would use its existing student loan examination procedures to review larger participants’ “student loan servicing,” which the proposed rule defines as: (i) collecting and processing loan payments on behalf of holders of promissory notes, (ii) maintaining account records and communicating with borrowers on behalf of loan holders during deferment periods, and (iii) interacting with borrowers to facilitate collection and processing of loan payments. An entity notified that the CFPB intends to undertake supervisory activity would have an opportunity to challenge the larger participant determination. The CFPB is accepting comments on the proposal for 60 days following publication in the Federal Register.

    CFPB Nonbank Supervision Student Lending

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