After reanalyzing certain sample loan level data, the CFPB announced that it is not making any changes to the key findings and recommendations in its July report to Congress on private student loans.  The CFPB had posted a “research note” on its website to accompany the report disclosing that it had been informed by the lenders who provided the sample lender loan level data that the manner in which it had analyzed certain data could produce incomplete results.  The CFPB indicated that it would reanalyze the data in light of the lenders’ advice. 

The “research note” has now been removed. Initially, the results of the CFPB’s reanalysis were reflected in an updated report and separate guide to the updates.  The guide has since been replaced by a new summary.  The guide had indicated that the “most material change” to the report’s conclusions was that, although still significant, there was less “direct-to-consumer” (DTC) borrowing during 2005-2007 than the report had originally found.  The summary no longer describes the change as “material” but instead refers to it as “notable.”  Either way, despite the lower frequency of DTC borrowing, and the fact that the report now seems to indicate that lenders learned to manage the risks of over-borrowing appropriately, the CFPB is standing by its finding that there is a greater risk of consumer harm in DTC lending programs.  It is likewise standing by its recommendation for mandatory school certification to address that risk.  

To buttress that finding and the related recommendation, the updated report includes a new “Figure 7A” which compares the median ratio of total loan balances to tuition and fees during the period 2004-2011 for school-certified loans with the corresponding median ratio for DTC loans.  According to the CFPB, “[w]ith the additional perspective provided by Figure 7A, the relationship between DTC lending and elevated levels of borrowing becomes clearer.” 

Perhaps concerned about making a change favorable to lenders, the CFPB also updated the report to specifically state the percentage of private student loan borrowers who did not exhaust their Stafford loan options.  The guide had stated that, in addition to the advice the CFPB received from the sample lenders, “[o]ther industry observers also made inquiries about  the extent of exhaustion of federal Stafford Loans by private student loan borrowers.”  The summary now indicates that the change resulted from “feedback from industry experts.” Whereas the report originally stated that 45% of borrowers with Stafford and private loans did not borrow their individual Stafford loan maximum, the report now states that 54% of students who took a private student loan did not borrow their individual Stafford loan maximum.  The numbers do not appear to have changed; instead, the CFPB simply included in its calculations those borrowers who took private student loans but no Stafford loans. 

We assume the CFPB is breathing a sigh of relief that the reanalysis did not force it to change its findings and recommendations but wonder why it felt the need to change its descriptions of the results of its reanalysis.

The CFPB issued today its report to Congress on private student loans as mandated by Dodd-Frank, which the CFPB describes as the “Cycle of boom and bust in private student loan market.”  Issued jointly with the Department of Education, the report consists of five parts dealing with (1) lenders, loan markets and products, (2) borrower characteristics and behaviors,
(3) consumer protection, (4) fair lending issues, and (5) recommendations from the CFPB and DOE.  The CFPB and DOE state that while they consulted consumer and industry stakeholders in preparing the report, they “chose principally to use a data-driven approach using more detailed information than has been available in the past.” 

Among the report’s key findings are: (1) in addition to variable-rate and other features that make private student loans riskier than federal loans, various trends have made private student loans riskier, including that during the period 2005-2007, lenders loosened their underwriting standards, with the percentage of loans to undergraduates made without school involvement or certification of need growing from 40% to over 70%, (2) since 2008, lenders have tightened credit standards, such that in 2011 the percentage of loans with a co-signer increased to over 90% and 90% of student loans to undergraduates required the school’s certification of need, (3) the differences between federal and private student loans might not have been understood by many borrowers, and (4) default rates have spiked significantly since 2008, with 10% of all recent graduates of four-year colleges having monthly payments for all education loans exceeding 25% of their income and cumulative defaults exceeding $8 billion (representing more than 850,000 distinct loans). 

The CFPB recommends that Congress consider (1) replacing “self-certification” with mandatory  school certification, (2) changing how private student loans are treated in bankruptcy given the absence of evidence that the 2005 bankruptcy code amendments that made it tougher to discharge private student loans caused prices to decline or increased access to credit, (3) modernizing and clarifying the definition of a student loan under the Truth in Lending Act  to cover products that serve as economic substitutes (such as credit lines for postsecondary expenses) but do not meet the current TILA definition, (4) creating a mechanism to help borrowers better understand their total debt obligations (such as a centralized mechanism similar to the National Student Loan Data System), and (5) whether additional data should be required to enhance consumer decision-making and lender underwriting. 

Concurrently with issuing the report, the CFPB also launched a new online tool named the “Student Loan Debt Collection Assistant.”  The tool is intended to provide information for students falling behind on their loans.  The information varies depending on whether the student’s loans are federal or non-federal loans and the status of the loan.  For example, if the student indicates that he or she has missed a payment but is not in default or is unsure if he or she is in default, the student is advised to contact the servicer and to use the CFPB’s “Student Debt Repayment Assistant” (an online tool the CFPB launched last October).  If the student indicates that his or her loan is in default, the student is asked whether he or she is able to make any payments on the defaulted loan and the subsequent information the tool provides will vary with how the student responds. 

Ballard Spahr lawyers are currently assisting private student lender clients in responding to enforcement investigations and in preparing for CFPB exams.

Finally, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection  has scheduled a hearing on private student loans for July 24, and Rohit Chopra, the CFPB’s Student Loan Ombudsman, is scheduled to testify.

In a notice published in today’s Federal Register, the CFPB is seeking public comment on a series of questions about private student loans.  According to Rick Hackett, the CFPB’s Assistant Director for Installment Lending Markets, the CFPB wants to hear from “students, families, school counselors, lenders, servicers, and anyone who has anything to do with private student loans” because “hearing [their] stories will help [the CFPB] understand how people make decisions.”  The questions are divided into four categories: (1) scope and use of private education loans, (2) information and shopping for private loans, (3) institutional loans, and (4) repayment. 

Dodd-Frank requires the CFPB and the Department of Education, in consultation with the Justice Department and the FTC, to submit a report on private education loans and private education lenders to Congress by July 21, 2012. While the CFPB intends to use the input received on its questions in preparing that report, it’s far from clear that the CFPB has the authority to conduct a study of private student loans in the absence of a confirmed Director. The due date for comments is January 17, 2012.  Since many of the people from whom the CFPB hopes to hear are unlikely to be regular Federal Register readers, the CFPB’s website also invites comments and includes a link to the notice.