The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016. The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers. The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.
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In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:
- More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default. According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
- Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
- Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
- Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting. The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
- Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.
The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers. The CFPB also urged policymakers and industry to consider various actions, including 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.
In the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.” It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.
Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards. The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”