Four Senate Democrats (Senators Boxer, Warren, Durbin and Reed) recently introduced a bill entitled the “Student Loan Borrower Bill of Rights.” On March 1, 2014, the CFPB will begin overseeing servicers of federal and private student loans that qualify as “larger participants” and there is speculation that the bill was drafted with CFPB input.
Fueling this speculation are provisions in the bill that address various servicing related concerns that the CFPB has repeatedly highlighted, such as how servicers apply extra payments and communicate with borrowers about possible alternative payment arrangements. In addition, some of the bill’s provisions, such as those requiring notices to be provided to the borrower by transferors and transferees of student loans, track CFPB requirements for mortgage loans.
The bill includes disclosure and servicing requirements for private student loans and Title IV federal student loans. Among the bill’s provisions are:
- Disclosures for private student loans that the lender must give before the first fully amortizing loan payment, when a borrower is 30 days delinquent, and when a borrower notifies the lender that the borrower is having difficulty making payments or becomes 60 days delinquent (with the disclosures in the latter circumstances to include information about alternative repayment and benefit plans for which the borrower is eligible)
- A requirement for a private student loan lender to provide the borrower with specified information about forbearance and deferment options
- A requirement for the CFPB, in consultation with the Department of Education (DOE), to issue regulations to implement certain of the new disclosure requirements and create model disclosure forms
- Notices that must be given by transferors and transferees of student loans
- Requirements for application of payments on private student loans, including excess payments, and authority for the CFPB, in consultation with the DOE, to issue regulations on application of payments
- Requirements for when a lender or servicer of a private student loan must consider a charged-off loan “rehabilitated” and request removal of the delinquency that led to the charge-off by consumer reporting agencies
- Requirements for servicers of student loans made to servicemembers to designate an employee to act as a special liaison and establish a toll-free number that connects to the liaison and a prohibition on charge-offs and reporting of deliquencies on student loans made to active duty military
- Requirement for servicers to make borrowers’ loan histories available on their websites or in writing upon request
- Requirement for the CFPB, in consultation with the DOE, to issue rules requiring servicers to have error resolution procedures and authority for the CFPB, in consultation with the DOE, to establish servicing standards to reduce delinquencies and ensure borrowers understand their loan rights and obligations
- Requirement for the CFPB, in consultation with the DOE, to issue rules on application of payments on federal student loans
- Requirement for school certification of private student loans and limits on when a school may provide a certification.
The bill would also provide that pre-dispute arbitration agreements for private student loans are unenforceable by servicers. Last week, the CFPB released some of the preliminary results of its arbitration study. We voiced our concern that the CFPB has already made up its mind and seems to be setting the stage for a rulemaking that will likely not be favorable to the industry. Assuming the CFPB did have a hand in drafting the bill, the bill’s provision on pre-dispute arbitration agreements could be another indication of where the CFPB is heading.
In addition, the bill’s arbitration provision raises an issue as to its constitutionality. It would expressly make arbitration agreements entered into before the bill’s date of enactment unenforceable by a servicer if the borrower’s dispute involved an alleged violation by the servicer that occurred on or after the enactment date. The bill’s retroactive approach should be contrasted with Section 1028 of Dodd-Frank, the provision that authorizes the CFPB to issue regulations that prohibit, condition or limit pre-dispute arbitration agreements in connection with consumer financial products or services, but only if, after completing its arbitration study and report, “the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.” Section 1028 provides that any such regulations would apply only to agreements “entered into after the end of the 180-day period beginning on the effective date of [such regulations].”
The bill would allow federal regulators to use their TILA enforcement authority to enforce certain of the bill’s requirements and make servicers subject to TILA civil liability for violations of certain requirements.