As a follow up to a January 2014 meeting with private student loan lenders and servicers convened by Director Cordray and Education Secretary Arne Duncan, the CFPB sent letters last week to certain “market participants” requesting information about current and planned loan modification options. The letters reference guidance on private student loans with graduated repayment terms also issued last week by the CFPB jointly with the Fed, FDIC, NCUA, and OCC.
Information Requests. According to a blog post by Rohit Chopra (the CFPB’s Student Loan Ombudsman), the CFPB has sent the requests to check on the progress lenders and servicers have made since last year’s meeting in developing “more options to help borrowers avoid default and increase the likelihood of full repayment.” Mr. Chopra indicates that the requests will help the CFPB “get to the bottom of” questions from borrowers asking why their lenders “won’t make a deal” and how repayment plans work.
The requests are divided into three sections dealing with existing private student loan modification options, planned private student loan modification programs, and federal student loan modification programs. Each section contains a series of questions. The requests indicate that they are not confidential supervisory information requests and responses are voluntary.
In response to the CFPB’s announcement that it was sending the requests, the Consumer Bankers Association issued a statement noting that “the private student loan market continues to enjoy an over 97 percent repayment rate with the vast majority of borrowers paying back their loans in accordance with their agreements.” The CBA also commented that many of its members are continuing to work with the prudential regulators to develop loan modification programs and that many have already launched modification programs, while others are piloting programs in advance of a broader roll-out.
Graduated Repayment Terms Guidance. The guidance is intended for financial institutions that originate private student loans that provide graduated repayment terms at origination. It advises such institutions to “prudently underwrite the loans in a manner consistent with safe and sound lending practices” and to “provide disclosures that clearly communicate the timing and the amount of payments to facilitate a borrower’s understanding of the loan’s terms and features.”
The guidance contains six principles dealing with the following issues that financial institutions “should consider in their policies and procedures for underwriting private student loans with graduated repayment terms at origination”:
- Ensure orderly repayment
- Avoid payment shock
- Align payment terms with a borrower’s income
- Provide borrowers with clear disclosures
- Comply with all applicable federal and state consumer laws and regulations and reporting standards
- Contact borrowers before reset dates
Although the guidance appears intended to make lenders feel more comfortable in offering graduated repayment programs, it could have the opposite effect due to the many restrictions it contains. In addition, the guidance could call into question some of the minimum payment programs already in the marketplace.