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From Banking and Finance Law Daily, October 16, 2014

Distressed borrowers continue to suffer under private student loans; CBA disagrees

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau Student Loan Ombudsman has released a report highlighting complaints by struggling private student loan borrowers who describe being driven into default. Distressed borrowers report that they receive very little information or help when they get in trouble, that there are no affordable loan modification options available, and that the alternatives to default are temporary at best.

“We are hearing from consumers that they are driven into default because private student loan companies are not providing concrete loan modification options,”said CFPB Director Richard Cordray. “Struggling private student loan borrowers are finding themselves out of luck and out of options. Lenders and servicers must redouble their efforts to deal with these distressed borrowers.”

The report, 2014 CFPB Student Loan Ombudsman’s Annual Report, analyzes more than 5,300 private student loan complaints between Oct. 1, 2013, and Sept. 30, 2014, an increase of 38 percent over the previous year. It highlights that many consumers expressed a commitment to repaying their loans, if they could qualify for a payment plan that reflected their current financial circumstances. But, instead, many of these borrowers are being driven to default because no viable repayment options are available to them.

When a consumer defaults on his or her private student loan, the whole balance may become due in full, immediately. This usually causes damage to a consumer’s credit profile. It can also negatively affect a consumer’s ability to pass a background check for a job, obtain housing, and may impede access to other forms of credit.

Driven to default. The report outlines a number of ways that private student loan borrowers describe being driven to default, including:

  • little information on ways to avoid default;

  • no affordable loan modifications available; and

  • temporary fixes that only delay default.

In 2005, changes to federal bankruptcy law created special treatment for private student loans, making it more difficult for consumers to discharge this debt. These changes may have a harmful unintended consequence to borrowers in distress, said the report, creating a disincentive for lenders to offer flexible options for borrowers seeking help. In 2012, the CFPB and the Department of Education recommended that Congress re-examine whether the 2005 Bankruptcy Code changes met their desired policy goals and whether changes are needed.

In July 2013, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Federal Reserve Board issued a joint statement to all supervised financial institutions encouraging them to work constructively with private student loan borrowers facing distress, as this may be in the best interest of both the borrower and the financial institution. But complaints and other market data received by the CFPB suggest the industry is not making significant progress toward increasing the pace of loan modifications, said the bureau.

Borrower tools. The CFPB has also offered new tools to help borrowers take action when they run into trouble. A sample letter allows consumers to edit and send to their student loan servicer a request to lower monthly payments and obtain information on available repayment plans. They can download the sample letter to send by mail, or they can just cut and paste the text when they log into their account on the servicer’s website. The letter requests student loan payments that would allow borrowers to meet their other living expenses.

The bureau has also developed a sample financial worksheet to assist borrowers to determine maximum funds available to pay their student loans.

Student loan borrowers can also find help using the CFPB’s Repay Student Debt tool. This interactive resource offers a step-by-step solution to navigate borrowers through their options, especially when facing default.

CBA statement. Following the release of the report, the Consumer Bankers Association released a statement expressing its support for the private student loan market. According to the CBA, private student loans have a default rate of less than 3 percent, compared to federal loans, which have default rates over 14 percent.

Along with an ultra-low default rate, the CBA claims that less than 0.1 percent of private student loans had a complaint submitted to the CFPB, none of which is verified by the regulator. One complaint is too many, concedes the trade association, but these numbers clearly demonstrate the success and good business practices by CBA’s members, who are working to benefit students and their families.

“While the vast majority of private loans demonstrate ongoing successful repayment, CBA’s members remain committed to providing robust options to the very small subset of private loan customers experiencing sustained financial distress. We are working with the prudential regulators to develop short and long term loan modification programs to provide borrowers with more flexibility, particularly in the early stages of their career,” said the statement. “Some of CBA’s members already have launched loan modification programs, while others are piloting programs in advance of a broader roll-out. These programs are designed to address the unique nature of student loan borrowers within the confines of safety and soundness principles.”

Companies: Consumer Bankers Association

MainStory: TopStory ConsumerCredit CFPB Loans

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