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CFPB student loan ombudsman releases first annual report

Posted in Student Loans

Recently, the CFPB’s Consumer Response Team released its Snapshot of Complaints, providing a one-page summary of the approximately 2900 private student loan complaints received by the CFPB from March 1, 2012 through September 30, 2012.  Last week, only six days later, Rohit Chopra, the CFPB’s Student Loan Ombudsman, released his first Annual Report, providing a more detailed discussion of the issues faced by private student loan borrowers, his observations regarding them, and his recommendations for legislative and regulatory initiatives to address them.

While the Snapshot observed that the most common complaints involved either repayment or the inability to make payment, industry members should take note that the Annual Report more broadly characterizes these as issues that are all related to loan servicing.  Those servicing issues are then grouped into four categories: first, ones where responsible borrowers are reportedly “stymied” by servicing policies (such as not offering the ability to refinance): second, ones where borrowers are reportedly “surprised” by servicing procedures (such as offsetting deposit account funds against outstanding loan payments): third, ones where struggling borrowers are reportedly “frustrated” by collection practices (such as assessing forbearance fees); and fourth, ones where military borrowers are reportedly disadvantaged by non-compliant SCRA programs (such as requiring additional documentation to retain the 6% rate cap).

In discussing these issues, the Ombudsman acknowledges that the complaints are not necessarily indicative of the prevalence of the practices, that the complaints vary greatly in their weight and potential import, and that by and large the complaints regarding a company are generally proportionate to its market share.  That said, the Ombudsman is concerned that “the breadth of potential servicing errors and the inability to easily modify a loan bear an uncomfortable resemblance to experiences faced by homeowners in the mortgage market.”  Comments directed to specific industry participants encourage lenders to develop creative loan modification programs for struggling borrowers, investors and entrepreneurs to develop innovative loan refinance programs for suitably employed college graduates, and colleges and universities to develop appropriate financial planning programs for their existing students and new alumni.

Dodd Frank expressly requires that the Annual Report include appropriate recommendations for legislative and regulatory action.  Accordingly, the Ombudsman recommends that Congress “identify opportunities to spur the availability of loan modification and refinance options,” which would appear to be a call for new federal loan programs.  On the regulatory side, the Ombudsman recommends that the Treasury, the Department of Education, and the CFPB work together to improve the Income-Based Repayment program for federal student loans.  But very tellingly, the Ombudsman also recommends that the agencies draw on the lessons learned in mortgage servicing to improve the quality of student loan servicing.  With our extensive experience in that arena, the members of our Consumer Financial Services and Mortgage Banking Groups have long been encouraging  student loan servicers to engage in the same sorts of self-assessments, before the CFPB comes knocking at the door, and we are already actively engaged in assisting our clients in doing so.