Some of the group’s recommendations to the CFPB included extending bankruptcy rights to student loan borrowers, creating flexible repayment plans and working to limit predatory student lending similar to the standards the agency established for mortgage issuers.
Any program initiated by regulators must contain five features, the group said:
- "Modifications must be truly affordable for borrowers;
- Borrowers must not lose any existing rights or protections;
- Borrowers must be able to enforce their rights under the modification program;
- The program must reach a high percentage of eligible borrowers; and
- The program must be fair to borrowers, taxpayers, and lenders."
The advocacy group also pushed the CFPB to address default rates for students at for-profit colleges, and for students who fail to finish bachelor’s degree programs -- the debt numbers for these students are much higher than average, the group said. It also wants the agency to increase transparency of the loan payment relief process and ensure other consumer protections.
“We are especially concerned about borrowers who do not contest the actions because they do not know where to go for help or are not able to find an attorney they can afford. In such cases, courts have entered default judgments without ensuring that the plaintiff actually owns and has the right to collect on the debt.”
Among other concerns, the legal watchdog mentioned that the structure of federal regulations surrounding loan refinancing must address potential moral hazard of the loan middlemen that work between consumers and lenders, known as servicers.
“Any program, particularly one that relies on incentives to servicers or on purchase of loans from existing servicers and lenders, must not be a bailout or giveaway to lenders. This is essential to avoid moral hazard on the part of lenders and servicers. The industry should not be allowed to externalize the costs of the shortsighted and destructive lending decisions it made,” the comments continue.
The CFPB has set its sights on student loan servicers, last month issuing a proposed rule that would bring the financial middlemen under their supervision. They also noted in the Federal Register notice, however, that the proposals “would not impose new substantive consumer protection requirements.”
Last November, the Federal Reserve Bank of New York released a report finding that student loan debt increased by $42 billion since 2011 to $956 billion, representing 8 percent of total loan debts – surpassing credit card, car loan and other types of consumer debt default for the first time. (Mortgage default still reins supreme, representing 71 percent of the 11.3 trillion in overall consumer debt in the U.S.)
Though the Fed’s report found that 11 percent of student loan borrowers were 90 or more days delinquent, that number is probably double the estimated amount because of payment grace periods and other fine print not included in the calculations.
“It’s a catch-22. Do student loan borrowers pay the loan instead of the rent and risk eviction, or pay the rent instead of the loan and damage their credit reports, making it difficult to find a job, rent an apartment, or get affordable car or health insurance?” asked Arielle Cohen, an attorney at the National Consumer Law Center, in a statement on Wednesday.
The group's letter is in response to a request by the bureau in February asking for stakeholder input on how to create a new regulatory safety net for those who take out student loans.
“Too many private student loan borrowers are struggling with unwieldy debt that prevents them from climbing the economic ladder,” said CFPB Director Richard Cordray. “We will be analyzing plans for policymakers to consider that might help avoid a repeat of the mortgage meltdown for today’s student loan borrowers.”
In its comments, the National Consumer Law Center urged the CFPB to be “aggressive” in mediating issues for student loan borrowers.
“Because of the unusual conditions and serious hardships faced by this group of borrowers, the need for assistance is great, and the risk of moral hazard is low – investor demand drove the origination of these loans, and with appropriate regulation, private lenders will hopefully not return to these bad practices,” it wrote.
The National Consumer Law Center draws its insight from "experiences representing low-income consumers," it told the CFPB.