WASHINGTON — As the regulatory climate heats up for student loan servicers, banks and other companies still involved in that sphere should start preparing now for a tougher environment.
Multiple government agencies have intensified calls for universal standards for student loan servicers, just as enforcement actions mount and many see parallels to the kinds of mistakes that riddled the mortgage industry in the run-up to the foreclosure crisis.
Experts say companies should be taking steps to improve recordkeeping and be mindful of both the Consumer Financial Protection Bureau's already active enforcement authority as well as the threat of new industrywide regulations.
"This would be a timely moment to be doing self-auditing of accuracy, be transparent with consumers if there are mistakes being made and taking a look at whether there are debt collection-related practices or dealing with debt collectors that could be raising issues with fairness," said Jo Ann Barefoot, chief executive of Jo Ann Barefoot Group.
In recent days, reports by the CFPB and Department of Education have highlighted concerns about servicer shortcomings while also recommending reforms. While the CFPB is still exploring issuing new rules, some observers said the agency can already penalize servicers under broad authority to target "unfair, deceptive, or abusive acts and practices," or UDAAP.
The CFPB signaled its concern in 2013 when it added student loan servicers to its authority to supervise "larger participants" in certain nonbank sectors.
"I don't think of it as student loan servicers should be preparing today for a rulemaking that may come," said Ori Lev, a partner at K&L Gates and a former deputy director of enforcement at the CFPB. "I would think of it as student loan servicers should be taking steps today to reduce their UDAAP risks given the CFPB's active tools of enforcement and supervision."
At the same time, some of the recommended reforms appear to have the industry's support, such as a proposal by the DOE for Congress to make it easier for servicers to contact struggling borrowers on their cellphones.
"The No. 1 issue that we as an organization support and our members support is the effort to allow servicers to call student and parent borrowers on their cellphones," said James Bergeron, president of the National Council of Higher Education Resources, which represents lenders, servicers and other student lending stakeholders. "One of the challenges that has been identified by federal policymakers is the belief if you have the ability to contact borrowers you can almost always resolve the problems that they're having. It's all about effective borrower communication."
But other ideas, such as allowing private student loan debt to be discharged in the bankruptcy process, are opposed by the industry and would require legislative changes.
Focus on Repayment Plans
Heightened pressure on servicers comes as attention continues to focus on the overall cost of student debt, estimated to exceed $1.2 trillion. The CFPB's report of findings from public feedback on consumer experiences, a joint set of principles for reform released with the Departments of Education and Treasury, and a separate DOE report on how to strengthen the student loan system were all triggered in part by the Obama administration's "Student Aid Bill of Rights," which included "the right to an affordable repayment plan."
Last week, the CFPB released an annual report from its student loan ombudsman highlighting a relatively high concentration of defaults among outstanding federal student loans that had been made by private lenders. The agency said the report "offers additional support for the bureau's recent recommendation that policymakers pursue industrywide standards for student loan servicers."
A big focus for the government, which has become the nation's primary direct student lender after the 2010 elimination of the federal program to subsidize private loans, as well as for consumer advocates has been the lengths to which servicers help steer distressed borrowers into alternative repayment plans that allow them to tailor their payments to their income.
"For the system to work for students and taxpayers, it is essential that servicers make students aware of their options and help them take advantage of income-driven repayment options," said Deputy Treasury Secretary Sarah Bloom Raskin in an emailed statement.
The DOE's paper called for future borrowers in the federal direct loan program to be able to use a single, simplified income-based repayment plan. Meanwhile, the DOE said borrowers with private loans lacking such repayment options should be able to discharge outstanding debt in bankruptcy, and credit reporting should treat borrowers with such payment plans more favorably. The department has significant influence through the process of selecting contractors to service direct federal loans.
"Right now we have 8 million Americans in default on a student loan, and that's millions too many. Most of those defaults could have been avoided if servicers were properly enrolling borrowers in these income-driven repayment plans," said Rohit Chopra, a senior fellow at the Center for American Progress and formerly the CFPB's student loan ombudsman. "It's just so important that borrowers are getting accurate information and their servicers are not cutting corners when it comes to managing their loans. We saw this nightmare already in the mortgage market, and we don't want to relive it."
Yet some industry representatives say the emphasis on student loans is misguided and what policymakers should deal with more immediately is the cost of tuition.
"The big problem that lawmakers and policymakers need to look at is the underlying problem, not just the symptom. It is the cost of college that has continued to accelerate that is the issue here," said Harrison Wadsworth, a partner at the government affairs firm Washington Partners who is a consultant to the Consumers Bankers Association on student lending issues. (The CBA has members involved in the private loan market.)
While some of the government's recent recommendations deal specifically with private loans, in addition to servicing of federal loans, Wadsworth and other industry representatives argue that defaults of private loans have been relatively limited.
"A lot of these proposals seem like they're talking about something else and not the current private loan market," Wadsworth said.
New Rules May Be Coming
The CFPB has officially announced only one student loan servicer enforcement action, which alleged a UDAAP violation in July by Discover Bank. Navient independently disclosed a CFPB investigation in August. Citigroup similarly disclosed an investigation without naming the regulator, while the Wall Street Journal earlier this month reported that Wells Fargo was investigated by the CFPB over student loan servicing practices.
Barefoot said the UDAAP prohibition may be the CFPB's most effective weapon in addressing servicing concerns.
"My guess would be that we'll see limited legal and regulatory requirements combined with jawboning. … When the industry does not follow that kind of guidance, it can turn into UDAAP issues down the road as to whether they have engaged in unfair practices," she said.
"UDAAP tends to fill the cracks when you don't have specific regulations requiring things, but there is concern about the fairness of a practice. The industry needs to be mindful of the risk that is just off the edge of the written rule."
Yet when the CFPB released its Sept. 29 report cataloging servicing complaints, the bureau said that it intended "to explore potential industry-wide rules to increase borrower protections." The report found problems with payment processing, records getting lost, confusion over servicing transfers and insufficient resources for servicing distressed borrowers.
"The CFPB is telegraphing that they are going to do some kind of prescriptive rule. Usually when they explore rules, they end up writing rules," said Nicholas Smyth, an attorney at Reed Smith and a former CFPB enforcement attorney.
Smyth said earlier policies regarding servicing other types of debt – such as the CFPB's mortgage servicing standards as well as the recent credit card reform law – could be indicators for how the agency might structure a rule.
"The mortgage servicing rules are … very clear about modifications and options when a consumer is having trouble paying their mortgage loan. They require servicers to take applications for loss mitigation assistance and respond to those applications within a short period of time," he said.
"Furthermore, they require mortgage servicers to tell consumers what documents or other information might be missing from an application. These are the kinds of requirements that student loan servicers should be looking at for guidance on what the CFPB may impose on them."
Barefoot said one particularly important step for servicers to take sooner rather than later is ensuring the integrity of their loan data.
"A lot of servicing problems are about bad information," she said. "It's not that anyone is trying to do the wrong thing, it's just that there have been mistakes and poor records."
Better Servicing Has a Cost
While officials and advocates push for servicers to make more of an effort to steer borrowers into repayment plans more likely to succeed, industry representatives say enhancing servicer quality comes with a cost.
Bergeron said his group estimates that federal servicing contractors receive on average $2 per month per borrower.
"If you're trying to keep a borrower out of delinquency and out of default, and you're having multiple conversations with them over the span of a year, we do not think that that is a sufficient level to have that personal, high-touch service," he said.
Yet some of the reforms proposed by policymakers for student loan servicers have industry endorsement.
Bergeron said the Education Department recommendations supported by the National Council of Higher Education Resources include streamlining of repayment plans, improving student loan counseling and ending tax liability for certain loan charges, among others. But the group is most focused on a proposed reform to the Telephone Consumer Protection Act that would allow servicers to use auto-dialing technology to call borrowers on their cellphones.
The current prohibition on such contact prevents "us from having direct, personalized communication with the borrowers to let them know about repayment options they're entitled to under the law, talk about the consequences of default, and work with them to ensure that they meet their financial obligations to taxpayers," Bergeron said.
Allowing private student loan debt to be dischargeable in bankruptcy would also require congressional change, but industry representatives have so far taken issue with that idea. "We would like to see more study on that issue before the administration would support it," Bergeron said.