In a memorandum issued last week, U.S. Department of Education Secretary Betsy DeVos withdrew various memoranda issued by the Obama Administration ED Secretary and the ED’s Financial Student Aid Division (FSA) that provided policy direction for a new federal student loan “state-of-the-art loan servicing ecosystem” to be procured by the ED.  The memoranda were intended to guide the development of provisions in new contracts to be entered into by the ED with “customer service providers” it selected to participate in servicing federal student loans on the new servicing ecosystem.  ED had also planned to work with federal and state law enforcement agencies and regulators to apply the policy direction to the servicing of all student loans, to the maximum extent possible.

The memoranda had included: recommendations for changes to the compensation structure and performance measurements included in the federal Direct Loan servicing contracts; directions to contractors to designate, train, and appropriately compensate specialized servicing personnel to assist at-risk and certain other borrowers; and standards to provide consistency in the handling, processing, and application of payments by servicers and other servicing practices, such as how information about student loans is reported to credit bureaus and the process for servicing transfers.

In the fifth annual report of the CFPB Student Loan Ombudsman released in October 2016, the CFPB focused on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment (IDR) plans.  To address problems discussed in the report, the Ombudsman urged 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, 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 light of Secretary DeVos’s action, the CFPB could intensify its efforts to address servicing issues through heightened supervisory and enforcement activity, and potentially rulemaking.

It is unclear what the ED’s next steps will be.  In her memo, Secretary DeVos indicated the memoranda were withdrawn because ED “must promptly address not only [moving deadlines, changing requirements and a lack of consistent objectives in the student loan servicing procurement process] but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service.”  She stated that she looked forward to working with FSA staff “as well as others, in order to acquire new federal student loan capabilities that will provide borrowers with the tools necessary to efficiently repay their debt.”

 

Last week, the D. C. Circuit held oral argument in the CFPB’s appeal from the D.C. federal district court’s April 2016 ruling that the CFPB exceeded its statutory authority when it issued a CID to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

After denying ACICS’s petition to modify or set aside the CID in October 2015, the CFPB filed a petition in D.C. federal district court to enforce the CID.  The CID’s statement of purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it also has authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools. 

The district court observed that ACICS had “repeatedly and accurately explained [that] the accreditation process simply has no connection to a school’s private student lending practices” and that ACICS was not involved in financial aid decisions, meaning that it played “no part in deciding whether to make or fund a student loan.”  While noting that the CFPB might be “entitled to learn whether ACICS is connected to potential violations of the consumer financial laws by schools its accredits,” the court stated that the CID’s “statement of purpose and the CFPB’s actual requests belie any notion that its inquiry is limited in this way.  Indeed, the statement of purpose says nothing about an investigation into the lending or financial-advisory practices of for-profit schools.” 

At the oral argument in the D.C. Circuit, the CFPB’s attorney sparred with Judge David Sentelle as to whether the CFPB had satisfied the CFPA requirements that a CID must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”  In particular, Judge Sentelle questioned whether the CID’s use of the phrase “unlawful acts or practices” and reference to the CFPA and “any other Federal consumer financial protection law” was sufficiently specific to provide notice of how the conduct under investigation related to financial activity regulated by the CFPB.  The CFPB’s attorney argued that the CFPB was not required to describe the nature of the potentially unlawful conduct under investigation with greater specificity in a CID.

The CFPB’s attorney stressed the CFPB’s authority under the CFPA to issue a CID to anyone who might have information relevant to violations of laws enforced by the CFPB even if the CFPB could not enforce such laws directly against the CID recipient.  To explain why ACICS might have relevant information, he pointed to the CFPB’s enforcement actions against for-profit colleges accredited by ACICS that made loans to their students and allegedly made misrepresentations to their students about the schools’ accreditation status.  The CFPB’s attorney also resisted Judge Karen Henderson’s suggestion that for purposes of whether the CID constituted “fair notice” to ACICS, given the CFPB’s obligation under the CFPA to identify “the provision of law” applicable to the alleged violation under investigation, it would have been “an easy enough matter” for the CFPB to have added the CFPA’s definitions of “federal consumer financial law” and “financial product or service” to put ACICS on notice “of what you were looking at.”

ACICS’s attorney asserted that the CID did not conform to the authority of the CFPB because conduct “in connection with accrediting for-profit colleges” did not implicate any consumer financial  laws enforced by the CFPB.  In response to Judge Robert Wilkins’ suggestion that ACICS was asking the court to take a “strict construction” of the CID’s wording and ignore other information about the nature of the CFPB’s investigation, ACICS’s attorney argued that even under a broad view, the phrase “in connection with” could not be used to expand the CFPB’s jurisdiction beyond information that could be relevant to a violation of a consumer financial protection law.

Judge Wilkins reacted to that argument by commenting that ACICS was aware of the nature of the potential violations being investigated and that an accrediting organization could have relevant information.  ACICS’s attorney asserted, in response, that the stated purpose of the investigation was for the CFPB to look at “conduct in connection with accrediting” for-profit schools rather than to look at for-profit schools and that nothing in “accrediting non-profit colleges” touched on laws that the CFPB has authority to enforce.  She also argued that the CID’s deficiency was not one of “semantics,” as Judge Wilkins suggested, but rather that the CID did not fulfill its purpose of providing notice of alleged unlawful conduct “that touches anything the CFPB has the authority to enforce.”

An affirmance by the D.C. Circuit is likely to lead other courts to more closely scrutinize CFPB CIDs for whether they adequately put the recipient on notice of the nature of the investigation and whether the investigation is within the CFPB’s jurisdiction.

The CFPB recently revised the prototype student loan Payback Playbook disclosures it has been developing with the Departments of Education and Treasury.  These revisions were based on feedback from nearly 3,500 individual student loan borrowers, student loan market participants, higher education policy experts and other stakeholders in response to the April 2016 Notice and Request for Information Regarding Student Loan Borrower Communications.  The CFPB also sent a letter to the Department of Education summarizing the revisions, feedback and the findings of an independent research firm retained by the CFPB to perform user testing on the Prototype Playbook.

The Payback Playbook disclosures are designed to be issued by student loan servicers to borrowers in order to help borrowers secure a monthly payment they can afford, thus mitigating delinquencies and defaults.  There are two versions of the Payback Playbook:  a General Playbook and an “At-Risk” Playbook.  The General Playbook displays a side-by-side comparison of a borrower’s current repayment plan and two alternative plans, one of which is an income-driven-repayment option personalized to reflect the borrower’s current financial circumstances.  The “At-Risk” Playbook is a “streamlined disclosure” targeted to borrowers with an increased risk of default, such as borrowers who are delinquent  or otherwise demonstrate characteristics that suggest an increased likelihood of economic hardship.  This disclosure identifies the borrower’s current repayment plan and also features a single income-driven-repayment option.  The revised disclosures are available here.

The original student loan Payback Playbook prototype disclosures were released in April 2016 and the public was able to provide comments until June 12, 2016.  Based on the comments received, and testing by an independent research firm, the CFPB made five general observations that informed its revisions to the Playback Playbook disclosures:

(1) Actionable Information: The disclosures need to contain information that will drive borrowers to take specific action (e.g., to contact their servicer or visit studentloans.gov to switch plans or to get more information) without providing too much detail, which could overwhelm borrowers and deter them from reviewing the document or taking further action.  Accordingly, the disclosures are intended to reflect a “concept-driven, plain-language” approach rather than an attempt to offer exhaustive details and descriptions of costs and alternatives.  The disclosures only present a limited selection of alternatives (i.e., one or two alternatives) that are tailored to be most appropriate for the individual borrower based on the borrower’s financial circumstances.

(2) Personalization: The CFPB favors an approach that would require servicers to utilize consumer tax data provided by the Department of Treasury and Internal Revenue Service to personalize the disclosures so they include estimated monthly payment amounts, repayment terms and other key information based on the consumer’s income and family size.  These disclosures are to be estimates so as to not be misleading to the consumer.

(3) User-centered Visual Design: The feedback favored  a “minimalist approach to presenting key information, bolded text, large font size, and the use of white space to draw consumers’ attention to relevant information.”  Electronic disclosures might also have to use color to draw attention to important information.

(4) Adaptation to Specific Borrower Segments, Including At-Risk Borrowers: The CFPB noted that “at-risk” borrowers should be presented with language that clearly articulates the benefits and availability of a zero dollar income-driven-repayment payment.  Specific disclosures might also be adopted for specific consumer segments such as public service workers and members of the military.

(5) Targeted Distribution: The CFPB recommended that the Department of Education conduct further evaluation to assess the effectiveness of distribution methods for these disclosures.  Some of the comments indicated that it would be helpful to retrieve these disclosures in real time on a secure, borrower-facing portal and others indicated that it would be helpful to include these disclosures in regular periodic statements.

In its letter, the CFPB noted that it looks forward to receiving feedback from the Department of Education.

The CFPB has released a new report, “Snapshot of older consumers and student loan debt,” that provides statistics on the growing number of consumers age 60 and over (older consumers) who owe student loan debt and the growing amount of such debt.  The report also discusses complaints about student loan debt submitted by older consumers to the CFPB from March 2012 to December 2016.  According to the CFPB, the report can offer insight to policy makers examining “potential changes to the higher education finance market, including changes to federal student loan programs,” as to “how changes in the availability of borrowing and repayment options may affect the long-term financial well-being of older consumers.”

The report includes the following statistics:

  • The number of older consumers with student loan debt quadrupled from 2005 to 2015, increasing from about 700,000 to 2.8 million consumers.
  • The average amount of student loan debt owed by older consumers roughly doubled from 2005 to 2015, increasing from $12,100 to $23,500, with older consumers owing a total of $66.7 billion in student loan debt as of 2015.
  • Based on the CFPB’s analysis of survey data, 73 percent of older student loan borrowers (which appears to include co-signers) report that their student loan debt is owed for a child’s and/or grandchild’s education.
  • The proportion of delinquent student loan debt owed by older consumers increased from 7.4 percent to 12.5 percent from 2005 to 2012, with 37 percent of student loan borrowers age 65 and older in default in 2015.
  • The number of borrowers age 65 and older who had their Social Security benefits offset to repay a federal student loan increased from about 8,700 to 40,000 borrowers from 2005 to 2015.

The report indicates that as of January 1, 2017, consumers 62 and older submitted approximately 1,100 student loan complaints and approximately 500 debt collection complaints related to student loans.  (Based on the CFPB’s December 2016 complaint report, the CFPB has received a total of 33,713 student loan complaints since July 2011.  The report did not break out the number of debt collection complaints that were related to student loans.)

According to the CFPB, issues described in complaints submitted by consumers 62 and older included the following:

  • Servicing practices that delay or prohibit enrollment in income-driven repayment (IDR) plans or limit the consumer’s ability to reduce his or her monthly payments when the consumer’s income changes, such as the servicer not advising the consumer about the ability to have monthly payment amounts reassessed under an IDR plan when income is reduced
  • Misallocation of co-signer payments to other loans owed only by the primary student borrower which may cause the co-signer’s payment to appear short and result in late fees and interest as well as reporting of late or missed payments to consumer reporting agencies
  • Difficulties in obtaining a co-signer release or accessing account information needed to monitor the account
  • Offset of the consumer’s Social Security benefits following a default on a federal student loan despite the consumer’s right under federal law to make income-based payments to rehabilitate the loan
  • Threats by debt collectors to collect on federally-protected benefits to repay private student loans

The report includes several suggestions and recommendations including:

  • Review of the co-signing process for private student loans “to understand whether the origination process fully brings to the attention of older co-signers that they are taking on liability for the debt”
  • Streamlined access to IDR plans for older borrowers whose only source of income is Social Security

On Monday the CFPB released updated examination procedures for student loans.  This update revises and expands on a previous update that was released in December 2013 in conjunction with the CFPB’s “larger participants” rule for student loan servicers. The new procedures serve to offer CFPB examiners more detailed guidance for examining student loans servicers subject to the CFPB’s supervisory authority, including banks, private student loan lenders, and others servicers subject to CFPB supervision under the Bureau’s “larger participants” rule.

While these updated procedures introduce a number of changes, the most extensive revisions are found in Module 3, covering student loan servicing. The servicing-related revisions and additions to this module include:

  • Expanding the range of sources and materials that examiners should review in the course of an examination of a student loan servicer, specifically mentioning policies and procedures governing the oversight of subcontractors and service providers, loan records on servicers’ systems, copies of written communications provided to borrowers, call recordings, websites and online accounts using test logins, and “any other relevant documentation”;
  • Adding separate sections calling for assessment of compliance with FCRA and ECOA adverse action notice requirements, addressing loan payoff and billing statements, and covering cosigned private education loans;
  • Introducing an extensive new section titled “Borrower Communications for Federal Loans,” which addresses communications to borrowers regarding the various repayment options available to borrowers with FFELP loans and Direct Loans (i.e. those originated by the Department of Education), as well as a similar section pertinent to servicers of private education loans offering alternative repayment plans or loan modification options;
  • Revising and expanding module sections on payment processing, servicing transfers, in-school deferment and repayment, and borrower benefits (such as reductions for ACH payments, graduation bonuses, payment deferment for active duty service members, Teacher Loan Forgiveness, Perkins Loan Cancellation, Defense to Repayment, and Public Service Loan Forgiveness for certain federal student loan borrowers working for qualifying employers).

To help identify the revisions made by the CFPB, we created a blackline copy of the revised procedures that compares the updated procedures to the previous (December 2013) version.

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.)

 

In a new blog post by Student Loan Ombudsman Seth Frotman, the CFPB discusses its concerns regarding how student loan servicers may be responding to borrowers seeking to make partial prepayments on their student loans and provides advice to such borrowers.

The CFPB expresses its concern that “student loan servicers may be making it harder for borrowers to get ahead who have made additional payments on their loans. A number of consumers have reported that, after trying to get ahead on paying off their student loans, they were sidetracked by their student loan servicer.”  According to the CFPB, these consumers have reported that by lowering their monthly payment amount, their servicers extended the repayment period, thereby increasing the amount of interest the borrower would pay.  The CFPB indicates that servicers are reported to have made such a change without a request from the borrower and, in some cases, without letting the borrower know the change would be made.

The CFPB warns borrowers who seek to pay down their loans more quickly to watch out for “surprise redisclosure” of payment terms by servicers, meaning a resetting of loan repayment  terms.

Borrowers are advised that if they discover from their monthly statement or account payment history that their servicer has lowered their monthly payment, they can tell their servicer to set their monthly payment back to their requested payment amount, or choose to make extra payments each month.  Borrowers who regularly make partial prepayments through automatic payments are advised that they should contact their servicer to establish a standing instruction as to how such prepayments will be applied (such as to the loan with the highest interest rate).  Borrowers are also advised that they can provide instructions with individual payments and to make sure partial prepayments are not advancing payment due dates by creating a “payment holiday.”

Finally, borrowers are advised to submit a complaint if they have trouble with their servicers.

In February 2014, the CFPB presented its findings based on responses it received to a letter sent to private student loan servicers asking them for information about their practices for handling extra payments from borrowers.  Such practices are routinely the subject of scrutiny by CFPB examiners.

 

In a new blog post, the CFPB states that recent research “underscores the disproportionate impact of student debt on communities of color.”  According to the CFPB, federal government data shows that over 90 percent of African-American and 72 percent of Latino students leave college with student loan debt, compared to 66 percent of white students and 51 percent of Asian-American students.  The CFPB also states that while Asian-American students may be less likely to have federal student loans, separate research has shown that Asian-American students who need to borrow more than $30,000 may be more likely to rely on private student loans offering fewer borrower protections.

The CFPB describes “some things we have heard” about student loan debt “from a wide range of stakeholders, including researchers, consumer advocates, and the civil rights and labor communities.”  Such “things” include that student debt can prevent economic mobility of borrowers, “especially borrowers of color;” there is research suggesting “higher rates of student loan defaults and delinquencies in ZIP codes populated primarily by minorities with higher income levels;” and economic barriers continue to make it hard for African-American and Latino families to save and pay for college without having to take on large amounts of debt.

The CFPB’s blog post follows an August 2016 letter sent by the National Consumer Law Center to the Secretary of Education in which the NCLC describes the “disproportionately negative impact [of student debt] on borrowers of color.”  In the letter, the NCLC suggests that the Department of Education’s efforts to track racial outcomes for federal student loans have been inadequate and urges the ED to conduct such tracking.  The NCLC lists various types of “borrower outcome data” it wants the ED to track, analyze by race, and report (e.g., borrowers who missed payments and are delinquent or who were charged collection fees).  In similarly describing student debt as having a disproportionate impact on communities of color, the CFPB may be signaling that it intends to make that issue a focus of supervisory and enforcement activity.

 

 

The CFPB announced that it has entered into a consent order with Bridgepoint Education, Inc., the owner of two for-profit colleges, to settle charges that the company’s representatives engaged in deceptive acts or practices by misrepresenting the potential costs of loans offered directly by the company to students.  The consent order requires the company to provide approximately $23.5 million in consumer relief in the form of loan forgiveness and refunds, and to pay an $8 million civil money penalty to the CFPB.  In its press release, the CFPB stated that its investigation was assisted by the California Attorney General and the Department of Education.

According to the consent order (whose findings of fact or conclusions of law are not admitted or denied by the company), Bridgepoint deceived students about the total cost of the loans it offered by understating the monthly repayment amount.  Specifically, the CFPB found that Bridgepoint told students that borrowers could pay off the loans with monthly payments of as little as $25, when “in many instances typical payments on [such loans] were greater than $25.”

The consent order requires Bridgepoint to refund all payments made by students on direct loans, including principal and interest, which total nearly $5 million.  The company must also forgive all outstanding debt on its direct loans, which totals approximately $18.5 million, and remove all tradelines placed with any consumer reporting agency about any student loan debt.

Under the consent order, the company must require all entering and current students who are borrowing money to finance their education to generate a personalized disclosure using an “Electronic Financial Impact Platform” developed by the CFPB before enrolling in a program of study.  The disclosure shows estimates of a student’s costs, total debt and corresponding monthly loan payments over a term of years based on current interest rates, the student’s income if he or she successfully graduates, and post-graduation expenses.  The disclosure appears to be similar to information provided to users of the “Paying for College” tools available on the CFPB’s website.

Although the consent order also prohibits the company from making false, deceptive, or misleading statements regarding actual or typical monthly payments students are obligated to make in connection with its direct student loans, it is unclear whether the consent order permits Bridgepoint to make new direct student loans.

The CFPB’s finding that Bridgepoint’s “as low as” claims were deceptive because borrowers had higher monthly payments “in many instances” would appear to also have implications for advertisements of other credit products and “as low as” claims made as to other credit terms, such as interest rates.  In addition, the finding suggests that the CFPB would apply the same standard to “up to” claims made as to credit terms such as credit limits or loan amounts.  (The FTC has used a similar standard for “up to” savings claims in advertisements.  The FTC has indicated that Section 5 of the FTC Act requires advertisers using such claims to be able to demonstrate that a consumer is “likely” to achieve the maximum claimed savings under normal circumstances.)

For-profit colleges have become a CFPB target.  In September 2014, the CFPB commenced an action against Corinthian Colleges alleging misrepresentations regarding job  placement rates and alleged improper debt collection practices.  That action ended with a $531 million default judgment and Corinthian’s bankruptcy and dissolution.  In February 2014, the CFPB filed a lawsuit against ITT Educational Services, Inc. in which it alleged that ITT misled student loan borrowers about job placement rates and salaries after graduation, misrepresented information about accreditation and the transferability of credits, and strong-armed students into high-interest loans that the company knew students would be unable to repay.  In March 2015, the district court rejected ITT’s attempt to obtain a dismissal of the CFPB’s complaint based on a challenge to the CFPB’s constitutionality.  In June 2016, ITT’s attempt to appeal the decision was rejected by the Seventh Circuit, which found that the denial did not qualify as an immediately appealable order.  Earlier this month, ITT announced the closure of all of its campuses.

 

 

The CFPB’s Student Loan Ombudsman has released a new “Mid-year update on student loan complaints” that highlights issues related to income-driven repayment plan (IDR) application issues.

The update covers complaints submitted from October 1, 2015 through May 31, 2016.  During that period, the CFPB handled approximately 3,500 private student loan complaints and approximately 1,500 debt collection complaints related to private and federal student loans.  The CFPB began handling complaints related to federal student loan servicing in February 2016 and handled more than 2,400 such complaints during the period covered by the update.  (Previously, such complaints were directed to the Department of Education (ED).)

Although the CFPB has repeatedly said that it does not verify the accuracy of complaints, the update appears to treat all complaints as valid.  The update discusses borrower complaints involving delays in the processing of IDR applications (which includes recertifications) allegedly caused by servicers.  It then goes on to describe various adverse consequences that can result from such delays, including capitalization of interest, delayed access to interest subsidies, and decreased potential loan forgiveness.  The update also discusses problems reported by consumers related to IDR application rejections, such as the rejection of incomplete applications from “otherwise eligible borrowers” without providing an opportunity to remedy deficiencies and the rejection of applications due to the use of forbearance.

The “Ombudsman’s discussion” section of the update includes several recommendations (but carries the standard caveat that the discussion “represents the Ombudsman’s independent judgment and does not necessarily represent the views of the [CFPB].”)  The Ombudsman suggests “market participants may wish to consider immediate action to address the specific problems identified in this report.”  According to the Ombudsman, specific elements of the policy direction issued last month by the ED to Financial Student Aid related to student loan servicing practices “offer an approach that market participants may wish to consider to better serve their most vulnerable customers and to strengthen IDR processing.”  The Ombudsman describes the “specific, limited circumstances” set forth in the policy direction for denying enrollment in IDR plans and observes that “[a]ll other deficiencies that would otherwise cause an application to be denied should instead render the application incomplete, and the policy directive indicates the servicer should actively engage with the borrower to complete the application.”

The Ombudsman also suggests that “servicers seeking to strengthen communications related to certain types of incomplete applications may wish to provide borrowers with clear and actionable instructions to complete IDR applications.”  To that end, the CFPB has issued a prototype “Fix It Form” that “may be particularly helpful for borrowers seeking to enroll in an IDR plan who must submit Alternative Documentation of Income (ADOI) or provide a written attestation that they have no income.”  According to the Ombudsman, the form “offers one approach for servicers seeking to take immediate action to improve the level of service they provide to their customers applying for IDR.”  The form “documents any deficiencies with borrowers’ IDR applications and communicates to borrowers about how to address the deficiencies and get their applications back on track.”  The CFPB also published a blog post that informs consumers how they can use the Fix It Form when submitting an IDR application and includes a link for consumers to download the form.

The Ombudsman also calls for immediate action by policymakers to publish identifiable, servicer-level performance data related to the handling of IDR applications, such as recertification rates, processing time, approval and denial rates, and delinquencies and default following IDR plan enrollment and recertification denial.  As the Ombudsman notes, the ED, in its policy direction, called for the publication of servicer-level performance data covering a wide range of practices, including enrollment in IDR and other repayment plans.

Given its past practices, servicers need to be aware that the CFPB may well be signaling its firm intention to use its UDAAP authority in both examinations and enforcement actions to accelerate the timetable for changes in IDR servicing, changes that the ED has conceded require amendments to its existing contracts.  In that regard, footnote 4 in the update is particularly telling.  Footnote 4 provides an abbreviated history of the CFPB’s involvement with what it refers to as “auto-default” provisions, provisions under which a student loan would be in default if either the borrower or the cosigner filed for bankruptcy.  In its June 2015 mid-year update, the Ombudsman expressed concerns about alleged “auto-default” provisions in loan agreements.  Subsequently, as reported in the CFPB’s Winter 2016 Supervisory Highlights, which covered examinations completed between September 2015 and December 2015, examiners determined that one or more student loan servicers engaged in unfair practices in enforcing such provisions.