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One of the hallmarks of the CFPB’s enforcement actions has been its use of those actions to announce new legal standards. Navient attacks this enforcement strategy in its motion to dismiss a recent case brought against it by the CFPB. On January 18, 2017, the CFPB sued Navient, alleging a number of violations. The chief allegation is that Navient unlawfully “steered” consumers into resolving student loans defaults using forbearance instead of income-driven repayment plans (“IDB”), even in situations where IDB would have been allegedly better for consumers. The motion to dismiss briefing closed on May 15, 2017.

Navient’s main argument is that the CFPB cannot seek penalties against it for the alleged steering because no one had fair notice that steering, if it occurred, violated UDAAP before the enforcement action began.  This is especially so when, as Navient points out, it was governed by the comprehensive rules, regulations, and contractual obligations that never even mention the conduct that the CFPB is suing over.

In addition, Navient argues that the CFPB is required to engage in rulemaking before imposing penalties on industry actors for alleged UDAAP violations. The CFPB is authorized under 12 U.S.C. § 5531(a) to seek fines and penalties against any entity that that engages in “an unfair, deceptive, or abusive act or practice under Federal Law.” Navient argues that “under Federal Law” means the CFPB must declare that conduct violates UDAAP through rulemaking before seeking fines and penalties for alleged violations. This, Navient argues, is supported by § 5531(a)’s placement in the statute immediately before § 5531(b), which allows the CFPB to “prescribe rules . . . identifying as unlawful unfair, deceptive, or abusive acts or practices.” The CFPB disagrees, arguing that “under Federal Law” is a reference to the general prohibition on UDAAPs in § 5536, and that no rulemaking is required prior to a UDAAP enforcement action. No court that we know of has yet addressed this specific issue under Dodd-Frank. How the court resolves this argument could have a substantial impact on how the CFPB does business going forward.

Navient also attacked the premise of the CFPB’s steering claims. For steering to be a violation, Navient argues, the CFPB has to first establish that Navient had some legal duty to counsel consumers on whether IDB or forbearance is better for their individualized situations. In an attempt to manufacture that duty, the CFPB points to general statements on Navient’s website inviting consumers to let Navient help them resolve their student loan defaults. In response, Navient emphasizes that such generalized statements do not create a fiduciary relationship as a matter of law and rightly reminds the court that lenders are not fiduciaries of borrowers.

We will continue to follow this case and keep you posted. Oral argument on the motion has been scheduled for June 27.

On November 18, the GAO released a report examining issues related to implementation of the Servicemembers Civil Relief Act (SCRA) interest rate cap for student loans. The Senate Committee on Homeland Security and Governmental Affairs requested the report in response to indications that servicemembers with student loans who are eligible for an SCRA rate reduction may not always be receiving the benefit. (The SCRA requires creditors and servicers to reduce the interest rate to 6 percent during active-duty service on any pre-service obligation or liability, including student loans.) The GAO report concluded that servicemembers with private student loans may be particularly at risk of not receiving a rate reduction because nonbank private student loan lenders and servicers are subject to neither the same rules nor oversight as those of federal student loans and commercial FFEL student loans (FFEL loans made by private and state lenders that are not owned by the Department of Education). For example, unlike for federal and FFEL loans, servicers of private student loans are not required to identify eligible borrowers and automatically apply the rate cap. Additionally, no agency is currently authorized to routinely oversee SCRA compliance for private student loans made or serviced by nonbank lenders and servicers, such as private companies and institutions of higher education.

In its report, the GAO made a number of recommendations to ensure consistent treatment of eligible servicemembers across all types of student loans. In particular, the GAO recommended that the CFPB coordinate with the DOJ “to determine the best way to ensure routine oversight of SCRA compliance for all nonbank private student loan lenders and servicers,” including developing a legislative proposal to seek additional statutory authority to facilitate such oversight, if necessary.

In its written comments to the report, the CFPB acknowledged that it “shares the GAO’s interest in maximizing the effectiveness of [the] SCRA’s protections” and highlighted the tools currently at its disposal to facilitate SCRA enforcement, such as its collection of SCRA-related consumer complaints and ability to refer potential SCRA violations to the DOJ. Nevertheless, the GAO maintained that the existing tools are insufficient and additional interagency coordination is necessary to close the gap in SCRA oversight.

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.)

 

Senator Elizabeth Warren is scheduled to be the keynote speaker today for “National Student Debt Day,” an event in Washington, D.C. for “student loan activists from around the country.” The event is sponsored by Young Invincibles, which describes itself as “a national organization, working to engage young adults on issues, such as higher education, health care, and jobs.”

Her remarks can be expected to fuel CFPB and Department of Education efforts to place pressure on lenders and servicers to provide more refinancing options to student loan borrowers.

 

In a letter sent last week to U.S. Department of Education Secretary Arne Duncan, four U.S. Senators urge the ED “to direct federal student loan servicers, debt collectors, and all other third parties” to delay use of the new robocall authority given by the Bipartisan Budget Act of 2015.  Two Senators are Democrats (Elizabeth Warren and Edward J. Markey) and two Senators are Republicans (Michael S. Lee and Orrin G. Hatch).

Signed into law by President Obama on November 2, 2015, Section 301 of the Budget Act amended the Telephone Consumer Protection Act (TCPA) to create a new exemption for debt collection robocalls made to cellular and residential telephone numbers.  Prior to the amendment, such calls would have been prohibited absent the recipient’s prior express consent.  As amended by Section 301, the TCPA now allows such calls to be made without the recipient’s prior express consent if such call, when made to a cellular phone, “is made solely to collect a debt owed to or guaranteed by the United States,” or, when made to a residential line, “is made solely pursuant to the collection of a debt owed to or guaranteed by the United States.”

The Senators assert that the robocall authority should not be used until the ED can “demonstrate with data that the use of this authority will provide net benefits for both student loan borrowers and taxpayers and will not result in potentially abusive debt collection practices.”  They also contend that the new robocall authority cannot be used until the FCC issues implementing regulations and that such authority can only be used for calls to student loan borrowers and not to “their relatives or references that may be secondarily responsible for the debt.”  In their letter, the Senators ask the ED to tell them by January 11, 2016 whether it agrees with their interpretations of the TCPA amendments.

The Senators’ interpretations do not appear to be supported by Section 301.  Section 301 has no explicit effective date.  In contrast, other Budget Act sections have explicit effective dates, including one section with an effective date that is tied to the issuance of implementing regulations.  While Section 301 directs the FCC, in consultation with the ED, to issue regulations to implement Section 301, it does not provide that that Section 301 is ineffective until such regulations are issued.  Also, the rulemaking authority provided by Section 301 only allows the FCC to “restrict or limit the number and duration of calls made to a telephone number assigned to a cellular telephone service to collect a debt owed to or guaranteed by the United States.”  Accordingly, such regulations would not impact robocalls to residential telephone numbers.

In addition, nothing in the language of the exemption suggests that it allows robocalls only to a student loan borrower and not to others who are liable for the loan.  The exemption’s only limitation is that the robocall must be made “solely to collect a debt owed to or guaranteed by the United States’’ or “solely pursuant to the collection of a debt owed to or guaranteed by the United States.”  Finally, the Senators are asking the ED to revisit a policy decision about the benefits of these calls that was made by the Congress in enacting the TCPA amendments and the President in signing them into law.

We will be interested to see whether the CFPB shares the Senators’ interpretations of the robocall exemption in connection with examinations of student loan servicers and debt collectors involved with federal student loans.

 

Pursuant to a March 2015 Presidential directive, an interagency task force consisting of the Department of the Treasury, Department of Education, Office of Management and Budget, and Domestic Policy Council has issued recommendations on best practices in performance-based contracting intended to ensure that federal student loan servicers “help borrowers responsibly make monthly payments on their student loans.”  In developing its recommendations, the task force consulted with the CFPB.

The task force recommended that Federal Student Aid (FSA) take the following actions:

  • Use a compensation structure that provides incentives to servicers to keep all borrowers current and also provides targeted incentives based on the performance of borrowers identified by FSA as being at a greater risk of default when they leave school.  FSA should evaluate the impact of the targeted incentives on borrower performance to determine whether they should continue through the duration of the servicing contract.
  • Use an allocation formula that is structured to award new loan volume based on a comprehensive set of metrics that measure servicer performance in (i) driving positive borrower performance, (ii) providing quality customer service, and (iii) adhering to contract requirements and maintaining strong business practices and internal controls.
  • Establish a minimum level of required services to be provided by servicers that includes
    (i) certain standardized communications (such as “a core set of clear, easy-to-read tables that contain consolidated loan information that is most valuable for the borrower to make informed decisions”), and (ii) technology-enabled communication methods, with enhanced, “higher-touch” servicing requirements for borrowers at risk of default, including those identified as being at greater risk of default at school separation and those who become delinquent.  (The task force also recommended that servicers be allowed to apply for waivers of certain requirements on a subset of borrowers “to test innovative strategies that improve borrower outcomes.”)
  • In conjunction with the development of a centralized complaint system, implement a standardized complaint process that provides for clear borrower rights, a specific process to address borrower complaints about servicer interactions, and an escalation process with an FSA resource to address escalated complaints.
  • Use oversight and auditing of servicers to monitor compliance with contractual requirements and incorporate compliance assessments into performance metrics.  Servicers should be subject to administrative and contractual sanctions, including withholding of payment and penalties for noncompliance or other contract violations.

A new CFPB report entitled “Overseas & Underserved: Student Loan Servicing and the Cost to Our Men and Women in Uniform” contains the CFPB’s findings regarding student loan servicing problems faced by servicemembers.  According to the CFPB, it has handled more than 1,300 complaints from military borrowers relating to the servicing or collection of student loans since it published its last report on this topic in October 2012.  While the new report relies primarily on complaints, the CFPB states that it also reviewed other information, such as comments received in response to requests for information, submissions to the “Tell Your Story” feature on its website, and input from discussions with consumers, regulators and law enforcement agencies, and market participants.

The report, which deals with both federal and private student loans, includes the following findings:

  • Obstacles encountered by servicemembers seeking military deferments include insufficiently trained servicing representatives, failure by servicers to provide necessary information, properly process deferments or explain denials, and inconsistencies in application criteria and policies and procedures for deferments when borrowers have multiple types of student loans or loans serviced by multiple servicers.
  • Servicemembers or their family members seeking a student loan discharge have encountered a lack of transparency as to the process for requesting forgiveness of loans made to a servicemember killed in action.  Servicers have not accurately reflected discharges in credit information furnished to consumer reporting agencies and may not have policies and procedures in place to provide recourse for permanently disabled veteran co-signers of private student loans.
  • Servicemembers continue to encounter difficulties in obtaining the SCRA six percent interest rate cap, with servicers improperly processing such requests or failing to clearly convey information about the application process and other requirements for obtaining the SCRA rate cap.
  • Problems encountered by servicemembers in attempting to use cash benefits awarded under the Department of Defense Student Loan Repayment Program (SLRP), which are paid directly to servicers, include processing problems when directing funds to specific
    high-rate loans and poor communications relating to the processing of SLRP payments, such as the servicemember’s obligation to make additional payments while an SLRP payment is being processed.

In May 2015, the CFPB issued a new request for information regarding student loan servicing.  It has actively been soliciting responses to the RFI, which are due by July 13, 2015, by encouraging borrowers to “sound off” about their “problems with student loan debt” and run ins with “repayment roadblocks.”  (Another CFPB blog post published yesterday tells borrowers that “it’s not too late to share your #studentdebtstress story.”)

In its conclusion to the new report, the CFPB comments that “[i]n contrast to the robust federal protections for borrowers with mortgages, there is currently no comprehensive statutory or regulatory framework that provides uniform standards for the servicing of all student loans.”  This comment strongly suggests that in addition to supervising nonbank larger participant servicers of federal and private student loans, the CFPB is considering rulemaking to establish servicing standards for student loans.

The CFPB has issued a “Mid-year update on student loan complaints” that analyzes the approximately 3,100 private student loan complaints received by the CFPB between
October 1, 2014 and March 31, 2015.  The update also analyzes the approximately 1,100 debt collection complaints related to student loans during the same period.  There is no indication as to whether there was any overlap in these complaints which, in any event, represent a miniscule percentage of student loan borrowers.  According to the CFPB, it received 34 percent more private student loan complaints during this period as compared to the same period last year, perhaps not surprising given the efforts it has made over the past year to stimulate complaints.  Like the CFPB’s April 2014 update, the new report highlights issues related to co-signer releases.

The CFPB’s analysis and findings include:

  • In December 2014, the CFPB sent letters to “certain market participants about current industry practices and policies related to co-signed private student loans.”  (A sample of the letter is included as an appendix to the update.)  The CFPB received six responses “from respondents representing many corporate forms, including large depository institutions and third-parties servicing loans held by banks or in a securitized pool.”  The CFPB does not indicate what portion of the industry these respondents represent.  It found that of the borrowers who applied for a co-signer release from the six respondents, 90 percent were rejected, with the most common reason for the rejection being the borrower’s failure to meet certain pre-application requirements such as making a specified number of on-time payments.  According to the CFPB, the approval criteria “were rarely communicated in a transparent fashion.”
    We find that conclusion surprising, since in our experience marketing materials for these programs specifically disclose the need for on-time payments and a credit check.  Moreover, the conclusion seems questionable in light of a footnote noting that approval rates were higher among respondents that received fewer applications, which suggests that many of the borrowers in question simply would not be considered creditworthy.  The CFPB commented that the “absence of a clear articulation of specific factors that are considered when evaluating a borrower for a co-signer release raises questions about whether lenders have reasonable requirements for borrowers seeking to obtain this commonly-advertised  benefit.”  But these factors are articulated, as noted above, and we see no reason why lenders should have to disclose the specific credit criteria they use in making loans, which, as we understand it, are typically the same criteria they use in doing the “credit check” for what is essentially a refinance of an existing loan.
  • Based on its review of an unidentified “selection of private student loan contracts,” the CFPB found that the contracts generally contained co-signer-related auto-default provisions.  There is no explanation as to what “generally” means.  The CFPB then commented that while respondents to its information request “claimed that they no longer place loans in default when a co-signer dies or files for bankruptcy and the borrower is otherwise in good standing,” this practice “is generally not memorialized in loan agreements.”  It noted that student loan complaints cited the continued use of auto-default clauses by “some market participants” to place a loan in default upon a co-signer’s death or bankruptcy even if the borrower was paying as agreed.  Since the CFPB does not investigate complaints, we are hard pressed to understand how it knows that the borrowers were paying as agreed and could be expected to continue to do so.
    The CFPB also commented that the decision to retain auto-default clauses in private student loan contracts “may create risks for consumers if loans are sold or securitized.” According to the CFPB, in such circumstances, “the contractual arrangements and incentive structures can create the conditions for servicers to limit their discretion and enforce the provisions-even if it is not in the long-term interest of the bondholders-unless servicers are sufficiently indemnified.” This represents a tremendous speculative leap that still fails to address why it would be unreasonable for a lender or holder to make a credit decision based on the death or bankruptcy of the person on whose creditworthiness the lender relied in making the loan.
  • The CFPB discussed “unexpected factors” used by the respondents to disqualify borrowers from co-signer releases, such as accepting an offer to postpone payments through forbearance or making prepayments (with the CFPB noting that the prepayment scenario “may be a violation of federal law in some circumstances.”)  Aside from stating these facts, the CFPB neglects to explain why it would be reasonable for a borrower to conclude that he or she had made the required number of consecutive on-time payments when the borrower stopped making payments altogether.
  • Other co-signer complaints noted by the CFPB included the inability of co-signers to access key documents such as billing statements and notices of missed payments and “significant bureaucratic barriers and red tape” encountered by co-signers when attempting to make payments on co-signed loans.  However, the CFPB says nothing about the extent to which cosigners can obtain this information on the servicer’s website and it continues to ignore the fact that the payment allocation routines it finds objectionable (and which can necessitate manual processing) are the same ones promoted by the Department of Education.
  • Changes suggested by the CFPB to address co-signer release issues include more transparent communication regarding co-signer release criteria, warning borrowers about actions that may lead to disqualification for a release, notifying borrowers when they have met the criteria for a release, and making release applications more accessible.  (In April 2014, the CFPB also issued a consumer advisory about co-signer releases that included sample letters to be sent to servicers, with one to be used by borrowers seeking information about a release and the other by co-signers seeking a release.)
  • The update also includes a section entitled “Roadblocks to Refinance” that discusses problems faced by borrowers when seeking to pay off loans in full (such as difficulty in obtaining accurate payoff information or paying off high-rate loans when a servicer handles multiple loans).  To address these concerns, the CFPB suggests that servicers offer electronic means to request payoff statements and change processing policies to make it easier for borrowers seeking to refinance to provide advance prepayment instructions in anticipation of proceeds from a refinance provider.

The update concludes with the comment that its analysis and findings were shared with Director Cordray “who expressed concern that student lenders and servicers may not be making even the most modest investments to improve their processes to ensure appropriate levels of customer service.”  Given the  superficial nature of much of the analyses and the limited factual support for many of the findings, we can only say that we are disappointed by such remarks.

 

The Wall Street Journal and Politico have reported that Rohit Chopra, the CFPB’s student loan ombudsman, will be leaving the CFPB next week.  According to the reports, Mr. Chopra did not indicate in his resignation letter to Treasury Secretary Jacob Lew what his next position would be.

Seth Frotman, the CFPB’s Deputy Assistant Director for the Office for Students, is expected to handle student loan work on an interim basis.

The Wall Street Journal also reported that Senator Elizabeth Warren has endorsed Mr. Chopra to succeed Benjamin Lawsky as Superintendent of the New York Department of Financial Services.