June 2015

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By Attorney Joseph Johnson

Currently there are 40 million Americans with outstanding student loan debt, with 8 million borrowers in default.   This debt totals over $1.2 trillion, with nearly $110 billion in default.  It should come as no surprise that the Consumer Financial Protection Bureau (“CFPB”) has turned its attention to student loan lenders and servicers.  The CFPB has recently been holding public field hearings on student loan debt around the country.  On May 14, 2015, I attended one such hearing in Milwaukee, Wisconsin.  This particular field hearing was held in conjunction with the CFPB officially launching its public inquiry into student loan servicing practices.

Similar to the actions taken regarding mortgages and credit cards, the CFPB is analyzing whether there are additional protections that can be implemented to improve the quality of student loan servicing.  The public inquiry is focused on a broad range of topics, including industry practices that create repayment challenges, hurdles for distressed borrowers that prolong repayment, economic incentives affecting the quality of service provided by student loan servicers and the availability of information regarding the student loan market.

At the Milwaukee hearing, CFPB Director Richard Cordray’s prepared remarks reflected these focuses, stressing that the processes borrowers allegedly have to navigate to simply pay back their student loans are wrapped in red tape and lack efficiency, transparency and uniformity.  In Cordray’s view, these deficiencies need to be addressed and the CFPB is looking to implement a comprehensive statutory or regulatory framework that provided uniform standards for the servicing of all student loans.  Additionally, Cordray found fault with the basic business model used by most student loan servicers in which the servicer receives a flat fee per account from the lender, regardless of the amount of attention a particular account needs.  Cordray believes this model provides an economic incentive for servicers to spend as little time as possible providing services on any individual account.  Cordray would like loan servicers to act in the best interest of the borrower as opposed to acting in the most profitable way.    

            Following Cordray’s remarks, a panel discussion was held with industry representatives. The lack of transparency in the lending and servicing processes again received the lion’s share of attention.  There seemed to be a general consensus, even among the loan servicer and university representatives, that there is room for improvement on how student loans are currently serviced.  Many proposals were made on how improvements could be made to the student loan industry during the panel discussion, including discussions on the skyrocketing costs of higher education, predatory lending,  the expansion of income based repayment plan options and/or loan forgiveness.  While the overall theme of the discussion depicted borrowers as the “helpless victim,” there was a surprising amount of commentary on financial literacy, or lack thereof, in borrowers.  There seemed to be strong support among all of the panelists for policies that better educate borrowers about the obligations and risks of taking out student loans.  One panelist, representing a prominent loan servicer, went so far as to suggest that borrowers should be required to take a semester long personal finance course as a condition to receiving student loan monies.

Judging from Cordray’s remarks and the discussion among the industry panelists, it seems it is not a matter of “if” the CFPB is going to reform student loan lending and servicing, but “when.”

Posted: 6/8/2015 3:43:38 PM by Tom Connor | with 0 comments