The CFPB has released its fifth Annual report of the CFPB Student Loan Ombudsman discussing complaints received by the CFPB about private and federal student loans and the lessons drawn by the Ombudsman from those complaints.  The report states that it is based on the CFPB Student Loan Ombudsman’s analysis of approximately 5,500 private student loan complaints and 2,300 debt collection complaints related to private and federal student loans handled by the CFPB between September 1, 2015 and August 31, 2016.  (We note that this time period overlaps with the October 1, 2014 through September 30, 2015 period covered by the Ombudsman’s 2015 annual report.  In addition, it is inconsistent with the CFPB’s press release which stated that the new report “was informed by consumer complaints submitted to the CFPB between Oct. 1, 2015 and May 31, 2016.”)

The report also analyzes approximately 3,900 federal student loan complaints submitted between March 1, 2016 and August 31, 2016.  The CFPB began taking complaints about federal student loans on February 25, 2016.  (The number of complaints handled by the CFPB continues to represent an exceedingly low complaint rate given the millions of federal and private student loans outstanding.)

In his 2015 annual report, the Student Loan Ombudsman focused on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment plans.  In this year’s report, the Ombudsman focuses on complaints about the transition from default to an income-driven repayment (IDR) plan.  The new report indicates that, contemporaneously with its publication, the CFPB sent a data request to several of the largest student loan servicers calling for new information about their policies and procedures related to service provided to previously defaulted borrowers.  A copy of the data request is attached as Appendix C to the report.

The report describes various problems allegedly experienced by borrowers when making rehabilitation payments to debt collectors, such as retroactive invalidation of payments, and when a loan is transferred from a debt collector to a servicer, such as a lack of clear communication.  It also describes various problems allegedly experienced by borrowers after curing a default through an income-driven rehabilitation and then seeking full enrollment in an IDR plan, such as poor customer service.

The report reviews data related to rehabilitated loans, including projections that approximately 45 percent of FFELP borrowers rehabilitating their loans will default again (three-quarter of whom will default in the first two years following rehabilitation).  It discusses the outdated nature of the rehabilitation program, observing that it has not been revised in more than two decades and does not reflect two major changes to the federal student loan program in the intervening years – the termination of bank-based guaranteed lending and the establishment of a near-universal right for borrowers to make payments under an IDR plan.  The report suggests that use of a direct consolidated loan  rather than rehabilitation to cure a default can provide a faster track  to an IDR plan for some borrowers, and contains a diagram that compares the rehabilitation process to income-driven consolidation.

The report makes several recommendations for how policymakers and industry can address the problems discussed in the report, including the following:

  • In light of the rehabilitation program’s outdated nature, the Ombudsman urges policymakers to reassess the treatment of borrowers with severely delinquent or defaulted loans and to consider streamlining, simplifying or enhancing the current consumer protections in place for such borrowers.
  • To address problems discussed in the report, the Ombudsman urges policymakers and industry to consider various actions, including requiring collectors to initiate and assist borrowers seeking to complete applications for IDR plans and to hand-off these documents to servicers for processing, enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment.
  • The Ombudsman contends that borrowers, industry, and regulators would benefit from periodic publication of identifiable, servicer-level data related to the performance of previously-defaulted borrowers.  (The Department of Education directed the publication of servicer level data in the memorandum it released in July 2016 to provide policy direction for the new federal student loan “state-of-the-art loan servicing ecosystem” that the ED is currently procuring.)