Recent remarks by Rohit Chopra, the CFPB’s Student Loan Ombudsman, to the Congressional Forum on Student Loans and in an interview with Bloomberg Radio could presage new CFPB student loan recommendations to Congress or even CFPB examinations, investigations, and/or rulemaking proceedings.
In his remarks to the Congressional Forum, Mr. Chopra analogized student loan borrowers who did not receive the value they expected for their loans to “underwater” homeowners. After describing the plight of “underwater student loan borrowers making high monthly payments [who] are often unable to modify or refinance their loans,” Mr. Chopra discussed “lessons from the mortgage market” that might be applied to student loans.
One of those lessons, according to Mr. Chopra, is the need to align incentives “among schools, students, lenders, and taxpayers.” After describing efforts in the mortgage market to create incentives for originators to exercise due care by retaining a portion of the credit risk, Mr. Chopra observed that “policy makers might consider this principle” to realign incentives in the student loan market. This observation suggests the CFPB could be considering a “skin in the game” proposal for private student loans that would require originators to retain some percentage interest in every private student loan they originate.
Another mortgage market lesson noted by Mr. Chopra was the importance of mortgage borrowers being able to refinance at the current low interest rates. Mr. Chopra observed that “many borrowers who took out a federally-guaranteed PLUS loan in 2007 are paying a rate of 8.5 percent — which appears to be rather high given today’s interest rate environment.” His suggestion that “[i]t would be helpful to determine impediments to vigorous competition in the student loan refinance market” could presage a CFPB proposal to require private student loan originators to refinance their loans, and/or CFPB investigations and/or examinations of institutions to determine why they are not currently doing so. (Mr. Chopra’s example seemed to be an implicit criticism of the rate structure for Department of Education consolidation loans, which are used to refinance federally-guaranteed PLUS loans, since he seemed to be encouraging private lenders to refinance those loans.)
The last mortgage market lesson discussed by Mr. Chopra was the negative impact of inadequate servicing on mortgage borrowers seeking to take advantage of modification or refinancing opportunities. Given the concerns expressed by Mr. Chopra about the inability of student loan borrowers to modify or refinance their loans, which seemed to differ somewhat from the concerns about servicing expressed in the Private Student Loan Report, his servicing comments could presage CFPB examinations or investigations of servicers of federal and private student loans, either as larger participants (through a separate rulemaking proceeding or as part of the existing debt collection rulemaking, depending on how debt collection is defined), as service providers to covered persons, or as entities engaging in conduct that poses risk to consumers, or, in the case of private student loans, as persons that “offer or provide” private education loans. It could also presage CFPB rulemaking to establish billing error procedures for private student loans.
While Mr. Chopra alluded to interest rate concerns in his comments to the Congressional Forum, he addressed those concerns more directly in his Bloomberg Radio interview. In particular, he commented that federal regulators could have a role in making sure that the loans are priced appropriately for risk and he specifically observed that “[c]ertain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market.”
Those comments suggest the CFPB may be planning to take a closer look at the interest rates charged on private student loans. Given the comprehensive disclosures for private education loans, it’s hard for us to believe that the rates could possibly be deemed unfair or deceptive. Does that mean that the CFPB is signaling that it might consider them abusive? Moreover, Dodd-Frank bars the CFPB from directly setting usury limits. Does this mean that the CFPB might somehow seek to use its authority to impose disclosure requirements as a way of indirectly limiting high interest rates? For example, might the CFPB seek to create a category of “high cost” private student loans subject to onerous disclosure requirements as a way of discouraging lenders from originating them?
Perhaps Mr. Chopra was simply engaging in a form of regulatory jawboning. But if not, the implications for the student loan industry are very troublesome. Further clarification from the CFPB would be welcome.