Current CFPB Issues Affecting Education Finance - PowerPoint Presentation

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Current CFPB Issues Affecting Education Finance

Richard P. Hackett, Esq.NCHER Winter Legal MeetingJanuary 24, 2014

1/23/2014

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Disclaimers

Rules for former CFPB executives (what I can’t talk about)I come to channel Chopra, not to praise him.

Topics

Student Loan Servicing Issues: what may show up in new examinationsWhat’s Missing in the PSL Markets: ConsolidationsRecent 8-ks from for-profit industryDiscussion: Informal versus formal CFPB regulatory tools applied to the education finance industry

Student Loan Servicing

Larger Participant Rule for non-bank servicers effective March 1, 2014One million “accounts” thresholdSallie, AES, Nelnet, Great Lakes, ACS (maybe), Mohela, EdFinancialSome large for profits? (see APSCU comment letter)

Bank servicers of PSLs and FFEL if over $10 Bn

May be already underway or completed for PSLs

Do changes to exam guidelines adding more on FFEL suggest a repeat?

Student Loan Servicing

Key Definitions in Larger Participant Rule“servicing” (1) receiving payments (or lockbox advice) + applying to account(2) when payments not required, maintaining records and communicating with borrower, or(3) interactions with borrowers, including default aversion, “conducted to facilitate” either of the foregoing

“ accounts”counts the streams of payments and not the number of loans or borrowers – see FFEL or Direct contracts to pay by borrower account, not number of loans

Student Loan Servicing

Bibliography of Tea Leaf sourcesPSL Ombudsman’s Reports: 2012, 2013“The Next Front,” October 18, 2012Student Loan Affordability, May 8, 2012Revised Education Loan Examination Procedures, December 3, 2013CFPB Consumer Advisory with form letter to servicers, October 16, 2013

CFPB Letter to Servicers regarding payment posting, November 26, 2013Servicer’s own CFPB complaint history – they may not be statistically representative, but CFPB will use them for focus

Servicing Issues - Payment Posting/Crediting

“Paid Ahead Status”Industry: Consumer has the cake (full principal credit) and eats it too (due date is advanced)CFPB: (1) trust but verify (2) traps may exist where large partial prepayments suspend ACH payments or bills, while interest accrues on remaining balance. Transparency needed. Problem exacerbated by non-transparent crediting across billing group (below).

Servicing Issues - Payment Posting/Crediting

Crediting Partial Monthly Payments (less than full amount due in billing group)Industry: Follow express instructions where given and follow reasonably inferred consumer desires where not given.CFPB: Pro-rata crediting across billing group in proportion to loan payment amounts appears designed to maximize late fees (cf. mortgage servicers). Makes more sense to apply to minimize number of delinquencies (cf. bank practice on debits before overdraft “convenience” accounts)

Legal Comment: Lack of transparency will be the legal hook for UDAAP in supervision:Does the servicer encourage partial payments but not explain the ramifications?

Does the servicer permit/facilitate targeting of partial payments?

Servicing Issues

Partial PrepaymentsIndustry: Follow express instructions where given and follow reasonably inferred consumer desires where not given.CFPB: Pro-rata crediting based on loan amount or payment amount can be much less beneficial to the consumer than crediting to the highest rate loan (Cf. CARD Act rules).Legal Comment: again, this is a transparency issue. See Paid Ahead above.

Failed attempts to prepay in full a single loan within a billing group are a more severe version of this issue (informal complaints from consolidation industry)

Servicing Issues

Timeliness and Accuracy of Payment PostingIndustry: Always post as of date of receiptCFPB: Consumers complain otherwise, citing late fees. Legal Comment: Posting times suggest a systems or process control issue. In addition to UDAAP, FCRA and furnisher rule may be legal hook. Sheer volume of payments highlights potential for harm. Consider hypothetical. 37 MM borrowers with average 2 accounts each and 20% paper payments = 14.8 MM paper payments a month. A .1% error rate produces 14,800 consumer injuries a month.

Servicing Issues

Servicing TransfersIndustry: Transfers are fairly rare and RESPA-like protections given (but see NFP allocations)CFPB: Experience in the mortgage industry suggests that servicing transfers have serious potential for consumer harm:Ed loan servicers do not always give “sender” notice, just “receiver” noticeACH automatic payment files do not come over (serious potential for harm)

Concerns about information continuity for those in process for change in repayment planConsumers may rely on servicer processes (crediting times, auto pay timing, options to “push” payments) that change without notice

Full account histories not transferred, resulting in inability of consumer to true up account balance with payment history

Servicing Issues

Struggling borrowers:PSLs: Area of strong policy emphasis from Office for Students (see “Student Loan Affordability” report + Chopra blog 1-9-2014). Servicers may be between a rock (no program options) and a hard place (CFPB concern over consumer harm of defaulted PSLs). Portfolio lenders (banks) gained more flexibility from joint regulatory guidance this summer.FFEL/Direct: Income driven repayment options will be a focus

Are there issues similar to HAMP (processing efficiency and hurdles; continuity of contact). Remember IBR/ICR are legal rights.Transparency of availabilityOverall penetration rate appears low and is consistent with

mis

-alignment of financial incentives to servicers in ED contracting (especially versus forbearance)

Blaming borrower inattention may not be an adequate response

Servicing Issues

CollectionsOmbudsman called out alleged practice of threatening non-judicial garnishment in PSL collection (2012 Report)Note possible effect of application of FDCPA to first party collections and exempt servicing collections under debt collection ANPR. Collections ANPR has many other potential “hot topics” for Ed finance:Out of statute collections

Itemization of debt in validation noticesCollector validation of debt in disputesReporting and selling disputed debts

Collector information quality, integrity and availability

Servicing Issues

Debt Collection Bulletins (July 10, 2013)Do section 807 and 808 of FDCPA already define servicer acts that are deceptive and unfair for purposes of Dodd Frank section 1036? Perhaps. Depends on facts and circumstances, but these acts will be subject to deception and unfairness analysis for all covered persons, not just FDCPA collectors.

Bulletin 2013-07; a mélange of 807 and 808 issues:Collecting amounts not in agreement or law (cf. attorneys fees demands)Payment processing/posting

Revealing consumer debt

Falsely representing the character, amount, or legal status of the debt.

Servicing Issues

Collections Bulletin 2013-07 – cont’dMisrepresenting that a debt collection communication is from an attorney. Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government. Misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency.

Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.

Threatening any action that is not intended or the covered person or service provider does not have the authorization to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt.

Servicing Issues

Collections Bulletin 2013-08Misrepresentations relating to credit reporting – paying debtsImproves credit report (stale debt issue; non-reporting issue)Improve credit score (move the supertanker)Improve access to credit (too complex an issue to predict)

Servicing Issues - Service members

Ombudsman’s 2013 report suggests some participants have effectively dealt with 2012 issues. Recall issues:Failure to execute SCRA rate reductions promptly and accurately (retroactively)Requiring annual active duty updatesAutomatic application of military deferment

Query: to what extent will CFPB require complete and accurate counselling about the complex matrix of deferment, IBR, PSLF, consolidation of FFEL to obtain these and the resulting loss of SCRA rate reductions?

Servicing Issues – Prognostication

Which of the forgoing will show up in exams?CFPB articulated concerns may not fully translate into initial exam focus and be fully inculcated through examiner training process, but knowledgeable folks are working on trainingRevised Examination Guidelines contain sufficient “hooks” to focus on payment processing, prepayment processing, repayment status and other issues noted above. Note expansion of “borrower benefits” section to include federal loans and focus on servicer personnel awareness, staffing adequacy and timeliness.

Partial payments section needs to be rewritten. Still based on mortgage suspense account procedures.

Servicing Issues - Suggestions

Use the two ombudsman’s reports and the Next Front report as checklists to review client activitiesCorrelate the issues from the reports with consumer complaints for the client, both from CFPB portal and from internal portalsA thoughtful feedback loop from complaint systems (external and internal) with evidence of prioritization, remediation and prospective tracking is a key part of CMSTransparency, Transparency, Transparency – consumer understanding of servicer process and repayment options may be more important than disclosure at origination, especially given the time gap between origination and repayment

Topic #2 – 8k filings by For-Profits

ITT ESI and Corinthian reveal CFPB CIDs and NORA letters in DecemberMatters go back to April 2012Reported focus in ITT is UDAAP and TILACFPB has spoken before about concern with filling 90-10 requirements with questionable PSLs from related third partiesSome reported arrangements are fairly transparent credit-risk loops where the third party is the creditor in name only

If those loans are lacking in underwriting and expected to default at very high rates, they may have some of the legal characteristics of “soft seconds” from the mortgage boom – loans made with known lack of ATR for an ulterior motive (other than getting paid back). But is Ed finance a comparable context for ATR?

Origination practices may provide a legal “hook” if not fully compliant, transparent or structured to create duress

Topic #3 – PSL Market for Consolidation

CFPB often complains of lack of access to risk-based pricing for graduates with good credit and employment historyBoth tax and bankruptcy benefits could be retained in a properly structured program. Huge marketing challenge, but see cream skimmers. Will the credit unions be first movers?CFPB writing suggest that consolidation of high-rate federal loans is possible, if:

Robust disclosureHackett suggests:Not if currently qualified for IBR/ICR or PSLFConsider offering two-party unemployment payment suspension (not high-rate commercial products) as part of strong disclosure of loss of IBR/ICR

Topic #4 – Discussion on Regulatory Approach

OS effectively employs bully pulpit (reports, blogs, media relations) in lieu of more formal tools. Is “bully” an adjective or a verb?Regulations take a long time and can create Procrustean beds, butRegulations don’t hurt shareholder relations like media campaigns. Lawyers can fight regulations for a decade.Informal processes allow more give and take and diverse practical solutions, but

Informal processes do not insure against the future outcomes of formal tools.Thoughts? Questions?