The Federal Reserve Board announced last week that it was launching a new article series, Consumer & Community Context, that features original analysis about the financial conditions and experiences of consumers and communities, including traditionally underserved and economically vulnerable households and neighborhoods.

According to the Fed, the series is intended “to increase public understanding of the financial conditions and concerns of consumers and communities” and will be published periodically.  Through the series, the Fed seeks “to share insights and provide context for the complex economic and financial issues that affect individuals, communities, and the broader economy.”  Each issue will have a theme, with student loans the theme of the first issue.  The authors are described as employees of the Federal Reserve Board or the Federal Reserve System.

The title of the first article is “Can Student Loan Debt Explain Low Homeownership Rates for Young Adults?”  Its authors “estimate that roughly 20 percent of the decline in homeownership among young adults can be attributed to their increased student loan debts since 2005.”  Thus, the authors observe that although their estimates “suggest that increases in student loan debt are an important factor” in explaining the lower homeownership rates, such increases are “not the central cause of the decline.”

The authors also reference a forthcoming paper in which they find that “all else equal, increased student loan debt causes borrowers to be more likely to default on their student loan debt, which has a major adverse effect on their credit scores, thereby impacting their ability to qualify for a mortgage.”  They observe that this finding “has implications beyond home ownership” and call on policymakers to consider policies “that reduce the cost of tuition, such as greater state government investment in public institutions, and ease the burden of student loan payments, such as more expansive use  of income-drive repayment.”

The second article is titled “‘Rural Brain Drain’: Examining Millennial Migration Patterns and Student Loan Debt,” and looks at the relationship between student loan debt and individuals’ decisions to live in rural or urban areas.  The authors found that “individuals with student loan debt are less likely to remain in rural areas than those without it” and that “rural individuals who move to metro areas fare better than those who stay in rural areas across several financial and economic measures, including student loan delinquency rates and balance reduction.”  They observe that higher rates and amounts of student borrowing may be causing student loan debt to “play an increased role in the dynamics of urban-rural migration” in that “factors that previously drew individuals to rural areas may be outweighed by the desire or need for greater economic opportunity in urban centers.”  They suggest that researchers “could explore community development strategies that might create conditions that lead to more college graduates living in rural areas.”

 

The new year heralds many new developments in the state regulation of student loan servicers.  California, Illinois, and Washington have each taken significant steps in implementing their existing laws while legislation has been introduced in Virginia and New Mexico to regulate student loan servicers for the first time.

California. California’s Department of Business Oversight has published its student loan servicing annual report cover letter and student loan servicing annual report form.  The cover letter provides instructions for how licensees are to file the required annual report with the Commissioner by March 15th.  The annual report form requires detailed portfolio and borrower information as of December 31st, as well as aggregate complaint information for the calendar year.  These developments come along with the DBO’s publication of the third revisions to its proposed rules under the Student Loan Servicing Act.  The revisions include publication of NMLS forms, require that licensees appoint the Commissioner of the DBO as an agent for service of process, clarify the formula for assessing the required annual fee, and make various clerical revisions.

Illinois. Illinois is now accepting student loan servicer applications through NMLS.  The Student Loan Servicing Rights Act became effective December 31, 2018, but the state’s proposed regulations, published November 16, 2018, have not been finalized.

Among other requirements, the Illinois regulations require that each licensee maintain a “secured-access website” to handle communications and questions regarding new loan applications or existing loans.  The regulations further require that licensees provide “detailed” account information to borrowers on its website through a secure login system.  The regulations include an independent requirement that servicers maintain certain documents or information concerning each loan serviced consisting of: (1) the application; (2) disclosure statements sent to the borrower; (3) the promissory note or loan agreement; (4) complete loan history; (5) qualified written requests; (6) borrower instructions on how to apply overpayments; (7) statements of account sent to the borrower; and (8) any additional records specified by the Director of the Division of Banking.  All records must be maintained for a minimum of three years after the loan has been paid in full, assigned to collections, or the servicing rights have been sold, assigned, or transferred.

The regulations also include other novel additions, including that licensees maintain a consolidated report of all loans serviced by the licensee, provide same-day crediting of physical payments, provide same-day crediting of electronic payments received before a posted cut-off time, and apply payments received from cosigners only to loans for which the payor has cosigned unless otherwise specifically directed by the cosigner.

Washington. The state of Washington has published revised student loan servicer regulations, which became effective January 1, 2019.  The rules implement the modifications to the Consumer Loan Act passed last year.  The regulations now define “student loan servicing” which, similar to other states, includes receiving scheduled periodic payments, applying payments, handling modification requests, and performing “other administrative services, including collection activities.”  The modifications clarify that the regulations do not apply to licensed collection agencies collecting loans in default, or licensed attorneys collecting loans as part of providing legal services.

Substantive changes to the Washington rules relate to servicers’ reporting duties in the event of business changes, the provision of payoff information to borrowers, and the provision of a toll-free number where the borrower may speak to a single point of contact about repayment and loan forgiveness options.  The regulations also clarify that if a servicer is acquiring, transferring, or selling servicing on federal student loans in compliance with federal Department of Education rules, the regulations’ loan transfer requirements do not apply.

Virginia. In Virginia, Democratic representative Marcus B. Simon introduced HB 1760, which would prohibit any person from acting as an education loan servicer without a license and mirrors legislation he introduced in 2017.  The bill exempts certain financial institutions and nonprofit institutions of higher education, but covers other entities that receive scheduled periodic payments, apply principal and interest payments, or perform other administrative services.  The bill makes a violation punishable by a civil penalty of up to $2,500.  Among other things, violations may result from activity related to borrower communication, payment application, and credit reporting.  The bill has a delayed effective date of October 1, 2020 with applications to be accepted March 1, 2020.

New Mexico. The New Mexico legislature may soon consider its own student loan servicing restrictions.  On December 27th, Democratic Senator Bill Tallman introduced the Student Loan Servicing Rights Act, which largely follows the form of other state bills, including Virginia.  Servicing—receiving scheduled periodic payment, applying principal and interest payments, or performing administrative services—would require a license.  Certain financial institutions are exempted.  A violation of the Act, which includes provision of false or deceptive information, misapplication of payments, and furnishing inaccurate credit information, can result in a civil penalty of up to $5,000.

With the 2018 midterm elections shifting state legislatures and governorships to Democratic control, similar legislation is expected in more states this year.

 

As we reported, the Department of Education announced earlier this month that it would begin implementing its “borrower defense” final rule which was issued in November 2016 by providing discharges of federal student loans made to any borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  The final rule was the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.

In addition to requiring the discharges, the final rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act.  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses.  In addition, schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions that were entered into before the final rule’s effective date.

In August 2018, following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the final rule and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the final rule that would be made by the proposal is the removal of the arbitration ban.

Although the October 2018 ruling requires the Department to implement the final rule, the Department has not yet indicated whether it will enforce the arbitration ban, such as by requiring schools to retroactively cancel arbitration agreements in existing contracts.  Politico reported last week however that Department Spokeswoman Liz Hill has indicated that guidance from the Department on mandatory arbitration agreements will be forthcoming.

 

 

 

In a December 13 posting, the Department of Education announced that on December 14, it would begin sending emails to borrowers “to inform them that the company that handles billing and other services related to their federal student loans will discharge some or all of the borrower’s loans within the next 30-90 days.”

The discharges are required by Department’s “borrower defense” final rule which was issued in November 2016 and the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.  It provides for the automatic discharge of federal student loans made to borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  Borrowers are also entitled to refunds of payments made on the loans.

According to media reports, the Department is expected to discharge $150 million in federal student loans owed by approximately 15,000 borrowers, with about half of the borrowers consisting of students who attended Corinthian Colleges.

 

The CFPB is facing criticism for not yet having issued the 2018 annual report of its Student Loan Ombudsman.  The 2017 annual report was issued in October 2017 and, like previous reports, included student loan complaint data and a discussion of such data.

The Dodd-Frank Act requires the Ombudsman to prepare an annual report “that describes the activities, and evaluates the effectiveness of the Ombudsman during the preceding year.”  Those criticizing the CFPB for not yet issuing a 2018 report emphasize the non-release of complaint data.  It should be noted however that while Dodd-Frank requires the Ombudsman to “compile and analyze data on borrower complaints regarding private education loans,” it does not impose a similar requirement for federal student loans nor does it require the Ombudsman to include complaint data in the annual report.

It is possible that the CFPB has not yet released the 2018 report because the position of Student Loan Ombudsman has remained unfilled since the August 2018 resignation of Seth Frotman, the former Ombudsman.  Mr. Frotman is now the Executive Director of the Student Borrower Protection Center.  Earlier this week, the Center issued a report containing an analysis of student loan complaints submitted to the CFPB on or after September 1, 2017.

 

 

Seth Frotman, the CFPB’s Student Loan Ombudsman, has sent a letter to CFPB Acting Director Mulvaney tendering his resignation effective September 1, 2018.  (In addition to Treasury Secretary Mnuchin and Department of Education Secretary DeVos, Mr. Frotman’s letter indicates that copies were sent to various Senate and House lawmakers.)

In his letter, Mr. Frotman is highly critical of the CFPB’s actions in the student loan arena.  He comments that the Bureau’s current leadership “has abandoned its duty to fairly and robustly enforce the law,”  “has made its priorities clear—it will protect the misguided goals of the Trump Administration to the detriment of student loan borrowers,” and “has turned its back on young people and their financial futures.”

 

 

The Department of Education has issued a proposal that would rescind the “Borrower Defense” final rule issued by the ED in November 2016 and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the final rule that would be made by the proposal is the removal of the final rule’s ban on the use of pre-dispute arbitration agreements  and class action waivers for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA).  Comments on the proposal are due by August 30, 2018.

Although the final rule had an initial effective date of July 1, 2017, there has been a series of postponements of the effective date.  A final rule published by the ED in February 2018 established July 1, 2019 as the current effective date.  In the supplementary information accompanying the proposal, the ED indicates that the negotiated rulemaking committee it established to develop proposed revisions to the 2016 final rule did not reach a consensus on the proposal.

The proposal includes the following significant changes to the 2016 final rule:

  • The final rule created a new federal standard for a “borrower defense” asserted with respect to Direct Loans and loans repaid by Direct Consolidated Loans.  A Direct Loan is a federal student loan made by the ED under the Direct Loan Program and a Direct Consolidated Loan is a federal student loan made by the ED under the Direct Loan Program that repays multiple Direct Loans or other specified loans.  A “borrower defense” includes a defense to repayment of amounts owed on such loans and a right to recover amounts previously collected on such loans.  Before 2015, the ED interpreted the Higher Education Act (HEA) to only allow a borrower to raise a “borrower defense” as a defense to repayment in a collection action.  The final rule codified the ED’s new 2015 interpretation that also allowed a borrower to raise a borrower defense in an affirmative claim for loan relief.  In the proposal, the ED seeks comment on whether it should return to its pre-2015 interpretation and only allow “defensive” claims from defaulted borrowers who are in a collections proceeding or accept both “defensive” and “affirmative” claims, including claims from borrowers still in repayment.
  • Prior to the 2016 final rule, a borrower defense could only be asserted based on an act or omission of a school that would give rise to a cause of action against the school under applicable state law.  The final rule created a new federal standard for Direct Loans disbursed after the final rule’s effective date under which a borrower defense could be a non-default, favorable contested judgment against a school, a school’s breach of contract, or a substantial misrepresentation made by a school on which the borrower reasonably relied to his or her detriment when deciding to attend or continue attending the school or deciding to take a Direct Loan.  The proposal would create a different federal standard for defenses to repayment based upon misrepresentations and would remove a breach of contract or judgment as a basis for borrower defense relief.  Instead, a judgment or breach could be considered evidence of a misrepresentation to the extent it bears on an act or omission related to the educational services provided.  Under the proposed federal standard, a defense to payment could only be based on a misrepresentation on which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan, for the student to enroll or continue enrollment in a program at the school and the borrower suffered financial harm as a result of the school’s misrepresentation.  A misrepresentation would be defined as a statement, act, or omission by a school to a borrower that is false, misleading, or deceptive, and made with knowledge of its false, misleading, or deceptive nature or with reckless disregard for the truth, and that directly and clearly relates to the making of a Direct Loan, or a loan repaid by a Direct Consolidation Loan, for enrollment at the school or to the provision of educational services for which the loan was made.
  • Under the 2016 final rule, a borrower defense claim based on a substantial misrepresentation could be asserted at any time but, to recover amounts previously collected on a Direct Loan, it had to be asserted not later than six years after the borrower discovered, or reasonably could have discovered, the information constituting the substantial misrepresentation.  The proposal would allow a borrower to assert a defense to payment at any time once the loan is in collections, including to recover amounts previously collected on a Direct Loan.  If the ED decides to continue to allow affirmative borrower defense claims, it proposes to only allow such claims to be filed within three years of the end date of the borrower’s enrollment at the school alleged to have made the misrepresentation.
  • The 2016 final rule bans both mandatory and voluntary pre-dispute arbitration agreements, whether or not they contain opt-out clauses, and class action waivers for borrower defense claims by schools receiving Title IV assistance under the HEA.  In adopting the final rule, the ED rejected the argument that the Federal Arbitration Act (FAA) barred the ED from including a ban on class action waivers or mandatory pre-dispute arbitration agreements.  When the final rule was adopted, we expressed our strongly-held view that the ED’s position was incorrect and that the final rule’s arbitration provisions were preempted by the FAA.  In stark contrast, the proposal would allow schools to use pre-dispute arbitration agreements or class action waivers as a condition to enrollment.  Citing the U.S. Supreme Court’s May 2018 decision in Epic Systems, the ED states that it believes “the Supreme Court’s recent affirmation of the Federal policy in favor of arbitration may warrant a different approach to these regulations.”  The ED also references Congress’ disapproval of the CFPB’s arbitration rule pursuant to the Congressional Review Act and states that “[i]n light of Congress’ clear action, the Department believes a change in its position to align with the strong Federal policy in favor of arbitration is appropriate.”  The ED’s supplementary information describes the potential advantages of arbitration, including that it can be quicker than litigation and “allow borrowers to obtain greater relief than they would in a consumer class action case where attorneys often benefit most.”  The proposal would require schools using pre-dispute arbitration agreements or class action waivers to satisfy the following conditions:
    • The school must make available on its website where information about admissions and costs is presented (which cannot solely be an intranet website), a plain language disclosure that the agreement or waiver is a condition of enrollment.
    • As part of entrance counseling, a school must provide: a description of its dispute resolution process that the borrower has agreed to pursue as a condition of enrollment, including the name and contact information for the individual or office that the borrower can contact regarding a dispute; a written description of how and when the agreement or waiver applies, how the borrower enters into the arbitration process or, for class action waivers, alternative processes the borrower can pursue to seek redress; and who to contact with borrower questions.

The proposal also includes changes relating to an array of other subjects such as: the charging of collection costs to defaulted borrowers by guaranty agencies; the capitalization of interest on loans sold by guaranty agencies after the completion of loan rehabilitation; financial responsibility provisions that establish the conditions or events that have or may have an adverse material effect on a school’s financial condition and which warrant the school’s provision of a letter of credit or other financial protection to the ED; the circumstances under which borrowers can qualify for a closed school discharge; and actions by the ED against schools to collect loan amounts discharged based on successful borrower defense claims or to obtain reimbursement of discharge amounts repaid to borrowers by the ED based on such claims.

 

 

The California Department of Business Oversight (DBO) has published a second round of modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published its first round of revised rules last month.

The latest revisions to the regulations clarify servicer responsibilities related to application of payments, borrower communications and handling of qualified written requests (QWRs), and recordkeeping requirements, among other miscellaneous changes.

Payments

The initial regulations provided that a servicer must credit any online payment the same day it is paid by the borrower, if paid before the daily cut off time for same day crediting posted on the servicer’s website, or the next day, if paid after the posted cut off time.  These requirements, which were unmodified by the first round of revisions, have now been changed to clarify that servicers must only apply payments the same or next business day, depending on whether received before or after the published cut off time.

Borrower Communications and Qualified Written Requests

The Act requires that a servicer respond to QWRs by acknowledging receipt of the request within five business days and, within 30 days, providing information relating to the request and an explanation of any account action, if applicable.  The first round of revised regulations added the limitation that a servicer is only required to send a borrower a total of three notices for duplicative requests.  The latest revisions add two additional provisions.  First, servicers are only required to send an acknowledgement of receipt within five days if the action requested by the borrower has not been taken within five days of receipt.  Second, servicers may designate a specific electronic or physical address to which QWRs must be sent.  If designated, however, this information must be posted on the servicer’s website.

The revised regulations also further specify what is required of customer service representatives.  Now, federal and private loan servicer representatives must inform callers about alternative repayment plans if the caller inquires about repayment options.  Federal loan servicers must now also inform callers about loan forgiveness benefits, if the caller inquires about repayment options.  These regulations have evolved significantly.  The initial regulations required that representatives “be capable of discussing” alternative repayment plan and loan forgiveness benefits with callers, and be trained in the difference between forbearance and alternative repayment plans.  The latest revisions have added specific triggers for discussing repayment options—and forgiveness benefits for federal loans.

Servicer Records

The first round of revisions eliminated the DBO’s specific record keeping formatting requirements.  In its place, the latest round of revisions has added the general requirement that the books and records required by the act must be maintained in accordance with generally accepted accounting principles.  The new revisions also change the information required as part of the aggregate student loan servicing report to require the number of monthly payments required to repay the loan.

The modifications are subject to comment until July 25, 2018.  As with the first round, the revisions will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.

The CFPB has issued a new report, “Data Point: Final Student Loan Payments and Broader Household Borrowing,” which looks at repayment patterns for student loans and how borrowers who have repaid their student loans subsequently use credit.  The CFPB’s analysis focuses on borrowers when they first pay off individual student loans.  The report uses data from the Bureau’s Consumer Credit Panel, a nationally-representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies.

Key findings include the following:

  • Most borrowers paying off a student loan do so before the scheduled due date of the final payment, often with a single large final payment.  The median final payment made on a student loan is 55 times larger than the scheduled payment (implying a payoff at least 55 months ahead of schedule), with 94 percent of final payments exceeding the scheduled payment and only 6 percent of loans paid off with the final few payments equal to the scheduled payments.
  • Most borrowers paying off a student loan early also simultaneously reduce their credit card balances and make large payments on their other student loans.  These borrowers are also 31 percent more likely to take out their first mortgage loan in the year following the payoff.  While this evidence shows that early student loan payoffs coincide with increased home purchases, the simultaneous reduction in credit card and other student loan balances suggests that increased wealth or income may influence when borrowers pay off student loans, reduce credit card balances, and purchase homes.
  • Most borrowers who pay off a student loan by making all of the scheduled payments pay down other debts in the months following payoff rather than take on new debt.  Those borrowers with additional student loans put 24 percent and 16 percent of their newly-available funds toward, respectively, paying down their other student loans faster and reducing credit card balances.  Unlike borrowers paying off a student loan early, borrowers paying off on schedule are not more likely to take out a mortgage for the first time.

The CFPB observes that because the results discussed in the report show that repayment of one type of debt directly affects payments and borrowing on other kinds of debt, “policies and products that change repayment terms or balances for one credit product are likely to have spillover effects on  others, either enhancing the intended effects (e.g. payment relief, increased credit access) or leading to compensating shifts (e.g. reallocated payments or borrowing).”  As a result, the CFPB believes that analyzing borrower behavior across all liabilities can improve its understanding of the underlying mechanisms that influence behavior and allow it to more accurately predict the impact of new policies or products on consumers and the overall marketplace.

The CFPB also notes that while its analysis focuses on student loan borrowers who successfully pay off their loans, similar approaches could be applied to struggling student borrowers and might shed light on how borrowers use other credit products to cope with their student debt, how their access to other credit may be inhibited, and how available repayment plans and other programs change these outcomes.

The District of Columbia Department of Insurance, Securities, and Banking (DISB) has issued a second round of revised emergency and proposed rules under the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.  The latest revision, backdated to April 20 from its May release, provides “numerous substantive changes” in response to public comments.  A blackline of the revised emergency rules showing changes from the rules adopted in December 2017 can be found here.  The Student Loan Servicing Alliance filed a lawsuit in March 2018 challenging the rules as preempted by federal law.

The first revision made one substantive change from the initial rules by reducing the annual assessment fee from $6.60 per loan to $.50 per borrower.  The second revision further modifies the annual assessment fee by eliminating the additional “fixed” component.  Now, licensees are subject only to the volume-based assessment.  Application fees (initial and renewal) and reinstatement fees have also been reduced by $100.

For the first time, the proposed rules explicitly acknowledge and yield to federal law.  The DISB recordkeeping rules now apply “[e]xcept to the extent prohibited by federal law” and allow the Commissioner to “waive or reduce” the requirements if compliance “would require the licensee to violate federal law.”  The revisions also add protections by prohibiting public disclosure of the records under the Freedom of Information Act.

Unlike the recordkeeping provisions, the examination authority contains no deference to federal law.  The examination authority has also been expanded to allow the Commissioner to consider reports prepared by other federal or state agencies in conducting an examination and to conduct joint examinations with federal or state agencies.  The rules now also explicitly allow the Commissioner to request “policies and procedures, consumer complaints, financial statements, and any other reasonable information.”

Most significantly, the revisions have eliminated the initial penalty provisions, which allowed the Commissioner to impose a penalty of up to $5,000 “for each occurrence of each violation of the act” by a licensee and up to $25,000 “for each occurrence of each violation of the act” by an unlicensed person.  The revisions have also reduced the penalty for failure to timely file an annual report from up to $1,000 per business day to up to $50 per day.

The revised rules also expand the oversight of the DISB.  The rules now require updating of any information on file with the commissioner within ten business days of it become inaccurate.  Additionally, licensees must now notify the Commissioner in writing of “any material fact or condition” which may preclude the licensee from fulfilling its contractual obligations.