Showing posts with label Consumer Financial Protection Bureau. Show all posts
Showing posts with label Consumer Financial Protection Bureau. Show all posts

Monday, June 26, 2017

Trump should fire Betsy DeVos as Secretary of Education for gross incompetence. If Trump fails to act, Congress needs to do whatever is necessary to drive her from office

Let us take our minds off Russia for just a moment and focus on a massive economic problem that affects millions of Americans: the collapsing student loan program. Forty-three million Americans now hold about $1.4 trillion in student loan debt, and a lot of that money will never be paid back. 

As the New York Times recently reported, borrowers defaulted at the rate of 3,000 a day last year; and a total of more than 8 million people are in default. Default rates are highest in the for-profit college industry; five-year default rates in this sector are almost 50 percent.

The Department of Education is trying to keep default rates down by pressuring borrowers into income-driven repayment plans, but that tactic isn't working. Nearly half the people who sign up for those plans drop out within three years; and a lot of defaulting borrowers don't even bother to sign up.

In short, the federal student loan program is a train wreck, a catastrophe, an unmitigated disaster. 

As President Trump's Secretary of Education, it is Betsy DeVos's job to address the student-loan crisis; but in a series of wrongheaded decisions, DeVos has demonstrated that she is either grossly incompetent or in bed with the sleazy for-profit college industry. President Trump must fire her immediately, and if he does not, then Congress needs to bring all its forces to bear to drive her from office.

Here is a brief list of DeVos's fumbling misbehavior:

First, she hired consultants from the for-profit industry to give her advice, which is like a hiring a burglar to be a bank guard.

Second, she canceled the Obama administration's order that restrained loan processors from slapping huge fees on student-loan defaulters who quickly brought their loans back into repayment status.

Third, she is overhauling the Department of Education's new regulations for processing borrowers' applications to have their student loans forgiven based on claims of institutional fraud. This bureaucratic delay tactic will leave thousands of defrauded college borrowers in limbo for months and even years.

And finally, DeVos blocked implementation of a Department of Education directive banning for-profit colleges from forcing students to sign mandatory arbitration clauses as a condition of enrollment.

In my view, allowing the for-profit colleges to continue including mandatory arbitration clauses in their student enrollment documents is DeVos's most outrageous decision. Mandatory arbitration clauses bar students from suing their institution for fraud and prevent students from banding together to file class actions suits against colleges that engage in massive fraudulent behavior.

About a year ago, the Century Foundation urged the Department of Education to require the for-profits to stop including mandatory arbitration clauses in their enrollment documents, and two for-profits--University of Phoenix and DeVry University, publicly agreed to abandoned them voluntarily.

Numerous commentators have criticized the use of mandatory arbitration agreements when they are used by corporations to insulate them from lawsuits. Just within the last year, two courts have struck down mandatory arbitration clauses that for-profit education providers tried to enforce. In one case, a university's arbitration agreement required California students to arbitrate their claims in Indiana!

Since taking office, DeVos has shown herself to be a stooge for the for-profit college industry. If she knowingly does the bidding of this shady racket, then she behaving reprehensibly. If she is acting on the industry's behalf out of ignorance, then she's grossly incompetent.

But her motivations don't matter. Betsy DeVos has got to go. If Trump doesn't fire her soon, then federal legislators should join in a bipartisan call for her removal. Americans deserve a competent Secretary of Education who will act in the public interest, not the interests of the venal for-profit college industry. 

References

Patricia Cohen. Betsy DeVos's Hiring of For-Profit College Official Raises Impartiality Issues, New York Time, March 17, 2017. 

Danielle Douglas-Gabriel. Trump administration rolls back protections in default on student loans. Washington Post, March 17, 2017.

Seth Frothman & Rich Williams. New data documents a disturbing cycle of defaults for struggling student-loan borrowers. Consumer Financial Protection Bureau, May 15, 2017. 

Tariq Habash & Robert Shireman. How College Enrollment Contracts Limit Students' Rights. Century Foundation, April 28, 2016.

Magno v. The College Network, Inc.. (Cal. Ct. App. 2016).

Morgan v. Sanford Brown Institute, 137 A.3d 1168 (N.J. 2016).

News Release. Apollo Education Group to Eliminate Mandatory Arbitration Clauses. May 19, 2016.


Thursday, June 15, 2017

Federal court orders the Department of Education to rule on Everest College student's request for debt cancellation: Sarah Dieffenbacher v. Betsy DeVos

Dieffenbacher v. U.S. Department of Education: A Student Borrower seeks debt relief on grounds of fraud

From 2007 to 2012, Sarah Dieffenbacher attended Everest College-Ontario Metro, a for-profit college located in Ontario, California. She took out $50,000 in federal student loans to fund her studies.

In March 2015, Dieffenbacher filed a "borrower defense" application with the U.S. Department of Education, petitioning to have her loans cancelled on the grounds that Everest had engaged in fraudulent conduct in violation of California law.

In August 2015, Dieffenbacher defaulted on her loans. Educational Credit Management Corporation, her loan servicer, sent her a notice stating that it intended to begin garnishing her wages.

Dieffenbacher filed a timely objection and a request for a hearing. This objection consisted of a 29-page letter accompanied by 254 pages of exhibits. These exhibits included Diefenbacher's sworn statement and records from the California Attorney General's Office showing documented misconduct by Everest and its parent company, Corinthian Colleges.

On January 20, 2017, Dieffenbacher's attorney received a letter from the Department of Education stating that DOE was denying Dieffenbacher's objection to having her wages garnished. DOE said its decision was conclusive and that Dieffenbacher's only recourse was to file a lawsuit in federal court.

This Dieffenbacher did. In her lawsuit, Dieffenbacher claimed that DOE's decision was arbitrary and capricious and violated the Administrative Procedure Act.

Without admitting fault, DOE filed a motion to remand Dieffenbacher's case back to the Department so that its decision could be "reconsidered and re-issued in a way that would not be arbitrary, capricious, or contrary to law."

Judge Virginia Phillips' decision

Last week, Judge Virginia Phillips, a California federal judge, denied DOE's request for a voluntary remand. In Judge Phillips' view, the Department "[had] not established a substantial or legitimate concern guiding its request for a remand."

The judge pointed out that Dieffenbacher's application for loan forgiveness had been pending for more than two years and that the Department had made contradictory arguments about what it intended to do.

Indeed, Judge Phillips' suggested that the Department of Education was attempting to get Dieffenbacher out of court so that it could garnish her wages. "The Department's request for remand appears to be an attempt to evade judicial review so that it can retain the ability to garnish [Dieffenbacher's] wages without a conclusive ruling as to the enforceability of her loans," the judge observed. "Under such circumstances, the remand request appears both frivolous and in bad faith" [emphasis supplied].

Judge Phillips concluded her opinion by ordering DOE to rule on Dieffenbacher's loan cancellation application within 90 days. If the Department fails to comply, the judge added, she would proceed to hear Dieffenbacher's claims on the merits.

The Dieffenbacher case: More Evidence of the Department of Education's Stall Tactics

The Dieffenbacher case is the latest example of the Department of Education's efforts to avoid dealing with student borrowers' legitimate applications for loan forgiveness.

In the Price case, which I wrote about recently, DOE took six years to rule on a University of Phoenix graduate's application for loan forgiveness based on her claim that Phoenix falsely certified that she had a high school diploma when she began her studies. Ultimately, DOE disallowed the claim. A federal court in Texas countermanded DOE's ruling and discharged the debt.

Last January, DOE sent a letter to 23,000 former students at Corinthian Colleges, assuring them that their loans had been approved for cancellation and that the loans would be forgiven within the next 60 to 120 days. Almost six months later, DOE has not kept its promise, which prompted a protest letter from 19 states' attorneys general.
So what's going on?

I think Betsy DeVos's DOE pencil pushers have added up the costs associated with discharging students loans under DOE's own rules and regulations and have found those costs to be enormous. DOE is trying to put the brakes on its administrative loan forgiveness process. The Department announced this week that it is rewriting the "borrow defense" regulations that Dieffenbacher relied on.

BUT IT IS TOO LATE. DeVos's efforts to slow down the loan forgiveness process will not withstand scrutiny in the federal courts, as the Price case and the Dieffenbacher case demonstrate.

The Consumer Financial Protection Bureau said in a recent report that eight million student borrowers are in default, with nearly 1.2 million defaulting in 2016 alone. As CFPB pointed out, people are defaulting at the rate of 2 borrowers every minute!

Two things must be done to bring the federal student loan program under control. First, the federal government must stop sending student aid dollars to for-profit colleges, which have shockingly high student-loan default rates.

Second, Congress must amend the Bankruptcy Code to allow distressed student borrowers to discharge their student loans in bankruptcy like any other unsecured consumer debt.

But Betsy DeVos's Department of Education refuses to face reality while it stalls for time. In the end, this approach is going to enrage millions of student borrowers. These borrowers are also voters, and they will vote for any politician who promises real debt relief to the legions of student borrowers who will never pay back their loans.

References


Dieffenbacher v. U.S. Dep't of Educ., ED CV 17-342-VAP (KK) (C.D. Cal. June 9, 2017).

Seth Frotman & Rich Williams. New data documents a disturbing cycle of defaults for struggling student loan borrowers. Consumer Financial Protection Bureau, May 15, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2017.

Andrew Kreighbaum. Court Orders Education Department to End Delay in Ruling on Loan Discharge. Inside Higher ED, June 9, 2017.

Andrew Kreighbaum. Education Department to hit pause on two primary Obama regulations aimed at for-profitsInside Higher ED, June 15, 2017.

Andrew Kreighbaum. State AGs Want Action on Student Loan DischargeInside Higher Ed, June 6, 2017.

Lisa Madigan, Illinois Attorney General. Letter to Betsy DeVos, US. Secretary of Education, June 5, 2017.

Price v. U.S. Dep't of Educ., 209 Fed. Supp. 3d 925 (S.D. Tex. 2016). [Link is to U.S. Magistrate's opinion, which was affirmed by a U.S. District Judge.]
 


Friday, June 9, 2017

If Trump Will Let CFPB Survive Their Work Will Protect Small Business Loans and Student Loans--essay by Steve Rhode

I can’t imagine a measure of the the amount of effort that has been invested into making sure the Consumer Financial Protection Bureau is wiped off the face of the earth.

Big business and companies wanting consumers to have less power in the financial world are not excited about the CFPB that has been fighting hard to protect consumers from scams and schemes to rip them off.

In the coming years, if the CFPB survives, they are planning on targeting mortgage loan servicing, student loan servicing, and small business lending to make sure consumers are not getting to get screwed by these entities.

Some people want government out of our lives at nearly all costs. But for all those who politically want the CFPB to go away there is one simple issue that should change your mind. Let’s be honest. big business has more money to fight back against consumers and people just do have the resources to make much of a difference when they get screwed over by their financial company.

Sure, there have been some hit and miss victories by the lone consumer but for the most part, the deep pockets win.

Take private student loans for example. Consumers could discharge a lot of private student loan debt in bankruptcy or invalidate it. But people don’t have the resources to wage these battles and fight back against the lenders. So guess what, lives are ruined.

The CFPB represents at least one entity that works hard to fight for consumers. It creates leverage against deceptive and abusive financial practices that take advantage of consumers. But in this atmosphere of America First – Consumers Last, the Trump Administration wants the CFPB to go away. According to USA Today, “the Department of Justice argued in an amicus brief that the structure of the Consumer Financial Protection Bureau (CFPB), the watchdog created after the financial crisis during the Obama administration, is unconstitutional.” Even the federal government wants consumer protections to vanish.

Wanting to make the CFPB go away from defending consumers does not make the underlying problems go away or increase the defense of people just like you when you get scammed and ripped off.

The CFPB has been fighting back to protect consumers by filing suit against Navient for not providing advice to help consumers. Navients response is they don’t have to provide good advice, just collect on loans. And Navient even knew they were peddling loans that were not affordable when they pushed them on students.

So let’s let the CFPB fight back to protect people with student loan issues and small business loans. The only thing you have to lose is a better financial future and more protections for those you love.
Steve Rhode

Get Out of Debt GuyTwitter, G+, Facebook

If you have a credit or debt question you’d like to ask, just click here and ask away.
This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.


******

I am in total agreement with Mr. Rhode regarding the value of the Consumer Financial Protection Bureau. The the Trump administration should  support the CFPB its mission, including the protection of student borrowers from unscrupulous for-profit college and ruthless student-loan debt collectors.

Richard Fossey

Monday, March 20, 2017

Trump administration cozies up to for-profit college industry: "I was wrong, I know, I know"



But I want you to know that I was wrong, I know, I know
I just wanna say that I was wrong, I know, I know
Well, I want you to know that I was wrong, I know, I know
And I just wanna say that I was wrong, I know, I know

I Was Wrong
  David Labuguen, Nathan Esquite, Zachary Hannah 

Patsy Cline gave one of the greatest lyrical apologies in music history when she sang, "I'm sorry, so sorry that I was such a fool." And of course about half of all country music songs are sung by some guy who says he's sorry for cheating on his girlfriend.

But for my money, the all- time best musical apology was sung by Arizona. So I want you to imagine me singing "I just want you to know that I was wrong, I know, I know."


I was willing to give Donald Trump and Betsy DeVos the benefit of the doubt regarding the student-loan crisis. I naively hoped Trump and DeVos would view this catastrophe with fresh eyes and take action to relieve massive suffering. 


But I was wrong.

Trump's Department of Education cozies up to for-profit college industry

Last week, Trump's Department of Education rolled back protections afforded to people who defaulted on their bank-based federal loans (the FFEL program). The Obama administration had instructed debt collectors not to assess penalties against FFEL defaulters if they entered a rehabilitation program within 60 days of default.


That relief is now off the table, and debt collectors are free to slap defaulters with a 16 percent penalty on the principal and accrued interest of defaulted bank-based loans.


And the New York Times reported that DeVos's Department of Education recently hired Robert Eitel to be a paid member of a "beachhead" team that advises DOE on regulatory matters. Mr. Eitel is taking an unpaid leave of absence from his job as vice president for regulatory legal services at Bridgepoint Education, Inc., a for-profit college company that operates Ashford University and the University of the Rockies.


As the Times reported, the Securities and Exchange Commission is currently investigating Bridgepoint to determine whether the company violated the 90 percent rule that requires for-profits not to receive more than 90 percent of their revenue from the federal student aid program. Attorneys generals in California and Massachusetts are also investigating Bridgepoint,


And there have been more allegations of wrongdoing against Mr. Eitel's employer. Last September, Bridgepoint reached  a $31.5 million settlement with the Consumer Financial Protection Bureau to resolve allegations that Bridgepoint deceived students into taking out private loans that were more expensive than advertised. And in 2014, Bridgepoint reached a $7.5 million settlement to resolve charges against it brought by the Iowa attorney general.


And now Bridgepoint's chief legal counsel is a paid consultant for DOE. And DeVos also hired Taylor Hansen, a former for-profit lobbyist, to join DOE's beachhead team. (According to Bloomberg News, Hansen resigned his DOE post last Friday.)


Is Betsy DeVos in the for-profit industry's pocket?

This stinks, and it is a strong sign that Betsy DeVos, Trump's new Secretary of Education, is in the for-profit college industry's pocket.

The for-profit industry is betting that Trump will reduce the regulatory pressure on it, and for-profit stocks have soared since Trump took office. Bridgepoint's stock is up 40 percent. DeVry Education Group's stock is also up 40 percent and Grand Canyon Education's stock rose by 28 percent.

I think we can conclude that the Obama administration's strict regulation of the for-profit industry has come to an end. And to be strictly accurate, Obama's DOE did not get serious about cracking down on the for-profits until the last two years Obama was in office.

Bottom line is this. The for-profit industry will continue to exploit unsophisticated Americans who are only trying to better themselves by investing in post-secondary education.  This sleazy industry's track record is terrible, and the 5-year default rate for people who borrowed to attend for-profit schools is almost 50 percent!

Bankruptcy may be the only option for overburdened student-loan debtors

Millions of student-loan borrowers are now drowning in debt, which includes the penalties and interest tacked on to the amounts they borrowed. Based on recent events, they can expect no relief from Betsy DeVos's Department of Education.

God help the people who took out student loans to enroll in worthless for-profit programs that did not lead to good jobs.  President Trump apparently has no sympathy for these people--even though he claims them as his core constituency.

College borrowers who have been driven into default on their student loans now have only one avenue for relief: the bankruptcy courts. As the bankruptcy courts become better educated about the student-loan crisis, I think we can expect more compassionate decisions by bankruptcy judges. So let us turn our eyes toward the bankruptcy courts because struggling student-loan debtor have no other place to turn.

Robert S. Eitel of Bridgepoint Education: On DOE's ""beachhead" team


References

Patricia Cohen. Betsy DeVos's Hiring of For-Profit College Official Raises Impartiality Issues, New York Time, March 17, 2017.

Patricia Cohen. For-Profit Schools, an Obama Target, See New Day Under Trump. New York Times, February 20, 2017.

Danielle Douglas-Gabriel. Trump administration rolls back protections in default on student loans. Washington Post, March 17, 2017.

 Shahien Nasiripour. , Betsy DeVos Hands Victory to Loan Firm Tied to Advisor Who Just Quit. Bloomberg News, March 20, 2017.



Monday, March 13, 2017

Student Debtors and the Consumer Financial Protection Bureau: Trump needs to strengthen the CFPB, not weaken it

Last January, the Consumer Financial Protection Bureau sued Navient Corporation, a student-loan debt collector, accusing the company of "systematically and illegally failing borrowers at every stage of repayment."

According to CFPB Director Richard Cordray, Navient cheated student borrowers by making it more difficult for them to pay back their college loans. "At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs," Cordray charged. "Too many borrowers paid more for their loans because Navient illegally cheated them , , , "

Specifically, the CFPB accused Navient of these illegal practices:
  • Failing to correctly apply and allocate borrowers' payments to their student-loan accounts. "Navient repeatedly misapplies and misallocates payments--often making the same error multiple times,"  the CFPB alleged. And all too often, Navient would not correct its errors unless a borrower discovered the problem and brought it to Navient's attention.
  • Giving struggling borrowers bad advice about student-loan repayment options.  The CFPB also accused Navient of steering student debtors toward costly forbearance options when they were having trouble making their monthly loan payments. These options give borrowers a break from making their payments, but the interest continues to accrue during forbearance. CFPB believes Navient should have helped borrowers get into income-driven repayment plans (IDRs) that would lower their monthly payments instead of encouraging them to apply for forbearances.
  • "Obscur[ing] information" borrowers needed to remain in income-driven repayment plans. The CFPB also said Navient failed to adequately inform borrowers about what they need to do to maintain their eligibility for income-driven repayment plans. Once borrowers enter those plans, their monthly payments are determined by their annual income; but to remain eligible, borrowers must recertify their income every calendar year. Apparently, a lot of borrowers in IDRs do not know they are required to recertify their income on an annual basis.
As the New York Times said in an editorial, CFPB's charges against Navient "have the ring of truth." Without question, student borrowers who opt to skip loan payments temporarily under  a government-approved forbearance plan see their loan balances grow dramatically due to accruing interest, which accelerates their descent into default. And it seems evident that people in income-driven repayment plans don't understand what they need to do to maintain their eligibility; half the people who enroll in IDRs get kicked out of them for failing to recertify their income on an annual basis.

The student-loan debt collectors are hoping President Trump will dismantle or cripple the CFPB, which would prevent the agency from bringing lawsuits like the one it brought against Navient. And perhaps he will.

But I am hoping the Trump administration  surprises the corporate fat cats and throws its full support behind CFPB's lawsuit against Navient.  Indeed, the CFPB needs to become a lot more aggressive.

In my view, the CFPB should investigate the student loan guaranty agencies that are making a fortune in the student-loan collection business. As the Century Foundation reported last year, four of these agencies have amassed $ 1 billion apiece through servicing and collecting student loans.

Educational Credit Management Corporation, which holds a billion dollars in unrestricted assets, is particularly ruthless. Just last year, a federal bankruptcy judge assessed punitive damages against ECMC for repeatedly violating the automatic stay provision of the Bankruptcy Code by garnishing the wages of a Starbucks employee more than 30 times after she filed for bankruptcy in an effort to collect on a defaulted student loan.

In short, there is a lot for the CFPB to do, and the Navient lawsuit is only a small step in the right direction. It would be a tragedy if the corporate interests defanged the CFPB, which is only now getting serious about protecting student-loan debtors from abuse.

Richard Cordray, CFPB Director
photo credit: Getty Images

References

Bruner-Halteman v. Educational Credit Management Corporation, Case No. 12-324-HDH-13, ADV. No. 14-03041 (Bankr. N.D. Tex. 2016).

Consumer Financial Protection Bureau. CFPB Sues Nation's Largest Student Loan Company Navient for Failing Borrowers at Every Stage of Repayment. Consumer Financial Protection Bureau Press Release, January 18, 2017.

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

Bob Sullivan. Will a Trump presidency lead to more predatory lending? Market Watch, January 18, 2017.

Unfairly Squeezing Student BorrowersNew York Times, February 4, 2017.

Friday, January 13, 2017

Older Americans are burdened by their children's student loans

Gold will turn to gray and youth will fade away
They'll never care about you, call you old and in the way


Old And In The Way
David Grisman
Recorded by the Grateful Dead


The Consumer Financial Protection Bureau issued a useful report a few days ago on student-loan indebtedness and older Americans.  Here are some of the CFPB's key findings:
  • "The number of consumers age 60 and older with outstanding student loan debt quadrupled from 2005 to 2015, increasing from about 700,000 to 2.8 million."
  • During this ten-year period, the share of older student loan borrowers more than doubled, rising from 2.7 percent to 6.4 percent of all student-loan debtors.
  • The average amount older Americans owe on student loans roughly doubled in ten years from $12,100 to $23,500.
  • Among federal student loan borrowers who are 65 years old or older, nearly 40 percent are in default.
  • In 2015, the total amount that older Americans owed for student loans was $66.7 billion.
All this is very interesting, but here is the CFPB's most disturbing finding: Almost three quarters of older Americans with student-loan debt (73 percent) reported that their loans were "for a child's and/or grandchild's education."

How did so many older Americans become burdened by loans taken out for their children or grandchildren? Two reasons: either they took out a federal Parent PLUS loan for a child's education or they co-signed a private student loan.

Currently, private banks hold about $102 billion in student loans. Except in rare circumstances, the banks will not issue private student loans unless a co-signer agrees to be responsible for the debt. In most cases, the co-signer on a private loan is a parent or grandparent. And, as the CFPB pointed out, more than half of all co-signers are 55 years or older.

This is a serious problem because a lot of older borrowers who are burdened by their children's or their grandchildren's education costs face serious financial challenges of their own. A great many are having trouble meeting their own health care costs or saving for their retirement. 

And here is the great tragedy behind the CFPB's report. Elderly people who co-sign a student loan for a child or grandchild cannot discharge that debt in bankruptcy unless they can meet the "undue hardship" test articulated by the bankruptcy courts. And that is a very hard test to meet.

And this is true whether an elderly person's debt arises from a federal student loan or a private student loan.  In fact, Congress revised the Bankruptcy Code in 2005 (under the leadership of Senator Joe Biden) to put private student loans under the same undue hardship standard that applies to federal loans.

This is unjust, and many commentators have argued that private student loans should be dischargeable in bankruptcy like any other unsecured debt. But Congress has not repaired its mistake by repealing that pernicious 2005 revision in the Bankruptcy Code.

A lot of liberal U.S. Senators and Congresspeople bleat in compassionate tones about the plight of distressed student-loan borrowers. But what have they done to bring tangible relief to millions of people--including elderly people--who are suffering under the weight of overwhelming debt?

Perhaps our national legislators will read the CFPB report and realize that elderly people who become overburdened by debt they incurred to educate their children or grandchildren should be able to discharge that debt in bankruptcy if they become insolvent without having to meet the Bankruptcy Code's undue hardship restriction.

But that will never happen. To paraphrase an old Grateful Dead song, Congress treats older Americans like they're just old and in the way.




References

Ron Lieber. The Big Pause You Should Take Before Co-Signing a Student LoanNew York Times, August 12, 2016.

Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student DebtInternational Business Times, September 15  , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

Monday, November 7, 2016

Consumer Financial Protection Bureau Warns Student Borrowers: Paying Extra on Loans May Not Help You Pay Them Off Early

OK, let's assume for a few moments that you are a super responsible student-loan debtor who wants to pay off your college loans early and get on with your life.

And let's assume you have a few extra bucks at the end of the month and you want to make larger monthly payments on your student loans so you can reduce the principle faster and pay off your loan more quickly. That should work, right?

Maybe not. The Consumer Financial Protection Bureau issued a warning recently that some student borrowers who pay more than the minimum monthly payment on their loans may actually be extending the period of their indebtedness.  

According to the CFPB, some student borrowers have reported that their loan servicers are thwarting borrowers who try to pay off their loans early by making larger payments.. In fact, some servicers have constructed a loan collection system that penalizes people who may more than the minimum monthly payment.

How does this system work? In some cases, loan servicers have unilaterally lowered borrowers' minimum monthly payments, thereby extending these  borrowers' repayment period and the amount of interest that borrowers pay, and they have often done this without the borrowers' knowledge.

This arbitrary practice of resetting borrowers' monthly payment amounts is called "redisclosure," and the CFPB warns borrowers that they could trigger redisclosure by making extra payments to pay their loans off sooner.

As CFPB's Mike Pierce explained:
When borrowers pay more than they owe, they expect to save money on interest charges and get out of debt faster. But the practice we highlighted can hold these borrowers back, making it harder and more expensive for student loan borrowers to pay back their loans and get out of debt.
Of course the practice of impeding college borrowers from paying off their loans early is outrageous and should be illegal. But CFPB places the responsibility on the borrower to avoid being duped. Here is CFPB's advice:

1) "Double check to make sure you're still on track to meet your goals." In other words, check to see if your servicer lowered your monthly loan payment without your knowledge.

 2) "Tell your servicer what to do with your extra money." Make sure the extra money goes to             paying down your loan with the highest interest rate and that extra money goes toward paying down principle.

3) If something doesn't look right, ask for help."

Of course, this is good advice, but wouldn't it be better if the CFPB simply required student-loan servicers to do business honestly and transparently? Shouldn't borrowers be able to pay off their student loans early by making extra payments? And shouldn't servicers be prohibited from changing payment terms without the borrower's permission or knowledge?

References

Tim Grant. Financial protection bureau concerned by some student loan servicers' practices. Pittsburgh Post-Gazette, October 3, 2016. http://www.post-gazette.com/business/money/2016/10/03/Be-cautious-when-repaying-student-loans/stories/201609280032

.Seth Frotman. You have the right to pay off your student loan as fast as you can, without a penalty. Consumer Financial Protection Bureau, September 26, 2016. http://www.consumerfinance.gov/about-us/blog/you-have-right-pay-your-student-loan-fast-you-can-without-penalty/







Wednesday, March 16, 2016

Hucksters preying on student-loan debtors: They should go to jail

In December 2014, the Consumer Financial Protection Bureau filed a federal lawsuit against an outfit called Student Loan Processing.US (SLP) and James Krause, the company's sole owner. CFPB accused Krause and SLP of preying on unsuspecting student-loan borrowers who were looking for help in obtaining relief from oppressive student-loan debt.

According to CFPB, the defendants "charged consumers illegal upfront enrollment fees before providing any services, deceived customers about the cost of their services, and falsely represented an affiliation with the Department of Education." Specifically, the Bureau accused Krause and SLP of charging student-loan debtors an upfront fee for debt-relief services that debtors could have have obtained for themselves for free and then charging a $39 monthly fee every month for the entire repayment period.CFPB claimed in its complaint that SLP received "millions of dollars" from student-loan debtors and that it "misrepresented to consumers, directly or by implication, that they were agents of the U.S. Department of Education or were affiliated with it in some capacity."

Apparently, student borrowers who used SLP's services to refinance their loan in a long-term income-based repayment plan would pay $39 a month to SLP for the entire repayment period, which could be up to 20 or 25 years! And borrowers whose income was so low that they would pay nothing under an income-based repayment plan would still pay SLP $39 a month.

CFB announced this week that the case is about to be settled. The Bureau released a proposed stipulated final judgment whereby SLP will stop its activities but will "neither admit nor deny any allegations in [CFPB's]complaint" except as stated in the court's final order.

So--case closed.

But Student Loan Processing isn't the only huckster preying on distressed student-loan debtors. In a Forbes.com article, Maggie McGrath listed nine other  companies operating in several states that were being sued by state or federal agencies for engaging in similar practices.

So what can we say about Student Loan Processing.US and similar companies? First of all,the government should do more than sue these predators in civil court; people who profit from preying on desperate student debtors should be prosecuted and sent to jail.

And if it is not a crime to do what CFPB accused SLP of doing, then it should be. President Obama should recommend new legislation to criminalize predatory behavior against student debtors, and Congress should take action.

In my view, these sleazy so-called "student debt relief" companies are just another sign that the government's wild scheme of moving college-loan borrowers into long-term income-based repayment plans is a failure. Even if these poor debtors are not fleeced by hucksters, they are forced into repayment plans that can stretch over their entire lives.  As I explained in an earlier blog, Brenda Butler, who graduated from college in 1995, struggled for many years to repay her student loans. Although she repaid more than the amount she borrowed, the total amount she owed doubled due to penalties and accrued interest. Finally, she defaulted and then entered into a 25-year income-based repayment plan. Butler won't be finished paying off her student-loan debt until 2037--42 years after graduating from college! And a heartless bankruptcy judge denied her request for a discharge of her student-loan debt.

Most people who sign up for long-term repayment plans will make monthly loan payments that are so low that interest continues to accrue, which means these borrowers will never pay off their loans. Thus, they will be on a treadmill, making token payments for as long as a quarter of a century.

There is only one way out of this quagmire of student-loan debt--now totally $1.3 trillion  People who can't pay back their student loans and still maintain a decent standard of living should be able to discharge their loan obligations in bankruptcy court.

Some day, this simple reality will be apparent to everyone. But until that day comes, millions of Americans are suffering.

References

CFPB Takes Action to Shut Down Illegal Student Debt Relief Scheme. Consumer Financial Protection Bureau, March 15, 2016. Accessible at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-to-shut-down-illegal-student-debt-relief-scheme/

Maggie McGrath. Student Debt Dishonor Roll: Meet the Hucksters Preying on Desperate Student Debtors. Forbes.com, July 29, 2015. Accessible at http://www.forbes.com/sites/maggiemcgrath/2015/07/29/student-debt-dishonor-roll/#2d2957823a34





Tuesday, June 9, 2015

Lee Siegel foolishly touts the virtues of student-loan default in a New York Times op ed essay

Lee Siegel, a successful writer, defaulted on his student loans;  and he bragged about it in the New York Times.

In a Times op ed essay, Siegel admitted that his loans paid for a valuable college experience. In fact, Siegel wrote, his education "opened a new life to me beyond my modest origins."

So why didn't Siegel pay off his loans? Apparently because meeting his financial obligations would have destroyed his "precious young life" by forcing him to take a job that would have stifled his creativity.

Siegel was vague about his loan obligations in his Times essay. He did not say where he attended college, how much he borrowed, or how much he now owes. Nor did he say how he manages to live comfortably with a huge debt hanging over his head, although he advised defaulters to marry or at least live with someone who has good credit. Thanks for the tip, Lee.

Siegel described his philosophy as one of "desperate nihilism," but I would be surprised if there is anything desperate about his lifestyle. He writes for the nation's most prestigious journals, he has written books, he appeared as a celebrity guest on CNBC. He has probably traveled overseas on numerous occasions. Perhaps he vacations in the Hamptons.

I think it was a mistake for Siegel to have bragged about defaulting on his student loans in the New York Times. He may think his essay displays his edginess, even his nobility. But basically he told the entire world he is a deadbeat.

Most student loan defaulters enter a world of pain.
Fortunately, Siegel stopped short of urging others to default on their student loans; it is a tort after all to interfere with others' contractual obligations. He did suggest, however, that a mass number of student-loan defaults might trigger wholesale reform of the way higher education is financed.

But Siegel is wrong about that. According to the Consumer Financial Protection Bureau, 7 million people are in default on their student loans and 9 million more are not making loan payments because they are in some form of deferral or forbearance.  Another million and half or so are in income-based repayment plans, and half of the people in those plans were kicked out for not reporting their income on an annual basis.Those are big numbers, but the massive meltdown of the federal student loan program has not prompted Congress to reform it.

It is totally irresponsible for a successful writer to tout student-loan default as a noble course of action. Most of the defaulting millions have had their lives wrecked by their failure to pay off their student loans. Their credit is shot, their wages are garnished, their income-tax refunds are levied, and they are hounded by debt collectors. And, if they are elderly, their Social Security checks are subject to garnishment.   Is there anything noble about that scenario?

Moreover, the New York Times acted irresponsibly when it published Siegel's essay. Siegel's self-serving defense of voluntary student-loan default may encourage other people to take the same reckless course of action; and most people who default on their student loans will enter a world of hurt.

It is true, of course, that millions of student-loan debtors are morally entitled to have their loans forgiven. People who were lured by fraud or misrepresentations into worthless for-profit college programs should have their loans wiped out. Many naive young people who borrowed money to enroll in mediocre programs at elite private colleges are also morally entitled to loan forgiveness.

But many people who borrowed money to attend college have done quite well; and apparently Lee Siegel is one of them. It is the height of arrogance for someone in Siegel's position to say, in essence, that the taxpayers should pay for his college education, an education he admits was valuable to him.

I have said, and I say again, that a reasonable bankruptcy process is the proper way to determine which people are legally entitled to have their student loans discharged. People who borrowed money for worthless college experiences; people who fell on hard times due to a job loss, illness, or divorce; people who tried to maximize their income but were unable to make enough money to pay on their student loans--all these people should be legally entitled to bankruptcy relief.

But simply walking away from student-loan debt is not an option. In fact, people who default on their student loans suffer catastrophic consequences. The Times would serve its readers better by editorializing in favor of bankruptcy relief for oppressed student-loan debtors, rather than publishing Siegel's very foolish essay.

References

David Marans, This Author Called for A Student Loan Boycott, And CNBC Was Not Having It. Huffington Post, June 8, 2015. Accessible at: http://www.huffingtonpost.com/2015/06/08/cnbc-student-loan-boycott_n_7537432.html

Lee Siegel. Why I Defaulted on My Student Loans. New York Times, June 7, 2015, Sunday ReviewSection, p. 4.









Monday, May 11, 2015

Senator Elizabeth Warren and the Brookings Institution's Matthew Chingos are ignoring reality: The federal government is not making a profit off the student-loan program

Do you believe the federal government is making a profit off the student loan program? You do? Then I have some beautiful beachfront property in southwestern Oklahoma I would like to sell you. That's right--Caddo County, Oklahoma is going to be the next Hamptons! 


Caddo County, Oklahoma in springtime
Beachfront lots are still available!
Uncle Sam is not making a profit on student loans

Some people actually believe that Uncle Sam is making a bundle off the federal student loan program. Senator Elizabeth Warren is of that mind. She once said that the government's profits from the student-loan program are "obscene."


And last February, Senator Warren and five other U.S. Senators wrote Secretary of Education Arne Duncan a scolding letter charging the Department of Education with making a profit off of student loans. The Senators accused the government of overcharging student borrowers and "pocketing the profits to spend on unrelated government activities."


Senator Elizabeth Warren: Government profits on student loans are "obscene"
And apparently, the policy wonks over at the Brookings Institution also think the student loan program is producing a profit for the federal government. Matthew Chingos recently published a Brookings paper proposing to significantly lower interest rates on student loans while assessing student borrowers a fee that would be placed in a "guarantee fund" to cover student loan defaults. Chingos argued that his plan would keep the government from profiting from student loans while having a contingency fund to cover the cost of defaults.

Theoretically (and only theoretically), the government is making a profit on student loans.  The government's cost for borrowing money is about 1.9 percent on ten-year Treasury Bonds . And the government is currently loaning money to undergraduate students at a 4.7 percent interest rate. If all students paid back their loans, the government would indeed make a handsome profit.

But, as everyone knows, a high percentage of students are defaulting on their loans. According to Chingos, the government estimates only 0.6 percent of students will default, but of course that is absurd. Every year, for the past 20 years, the Department of Education has been issuing reports on the percentage of students in the most recent cohort of borrowers who default within two years of beginning the repayment phase of their loan. Over that period, that number has never been lower than about 5 percent. Last year, the figure was 10 percent--16 times higher than the DOE default estimate that Chingos cited.

In a Forbes.com article, Jason Delisle and Clare McCann reported that the government estimates that about 20 percent of student-loan borrowers will eventually default on their loans--that's 30 times higher than the rate cited by Chingos.

And let's not forget A Closer Look at the Trillion, the Consumer Financial Protection Bureau's 2013 report on the federal student loan program.   CFPB reported that 6.5 million out of 50 million outstanding student loans were in default--13 percent.


Need more data? The Federal Reserve Bank of New York issued its most recent report on household debt in February 2015. The Bank found student loan delinquency rates worsened in the 4th quarter of 2014, with 11.3 percent of aggregate student-loan debt being 90 days delinquent or in default.(up from 11.1 percent in the previous quarter).

Just one more tidbit of information. The Department of Education recently admitted that more than half of the student-loan borrowers who were signed up for income-based repayment plans, the government's most generous loan-payment option, had dropped out due to failure to file their annual personal income reports on time.  That is a clear sign that many student-loan borrowers are so discouraged that they aren't bothering to file the necessary paperwork to keep their loan status in good standing.

The Chingos Report and Senator Elizabeth's Letter to Secretary Duncan Ignore Reality

I am astonished that Michael Chingos and Senator Warren would publicly state that the government is making a profit off the student-loan program when it so clearly losing money. What's going on?

Tragically, our politicians and policy analysts simply can't face the fact that the student-loan program is out of control. It is so much easier to demand a pseudo reform based on the fantasy that the government is making money off the student loan program than to face reality.

References

Chingos, Matthew M. End government profits on student loans: Shift risk and lower interest rates. Brookings Institution, April 30, 2015. Accessible at: http://www.brookings.edu/research/papers/2015/04/30-government-profit-loans-chingos

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/

Jason Delisle and Clare McCann. Who's Not Repaying Student Loans? More People Than You Think. Forbes.com, September 26, 2014. Accessible at: http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/?utm_content=buffer1e0e0&utm_medium=social&utm_source=facebook.com&utm_campaign=buffe

Federal Reserve Bank of New York. Quarterly Report on Household Debt and Credit: February 2015. Accessible at: http://www.newyorkfed.org/householdcredit/2014-q4/data/pdf/HHDC_2014Q4.pdf

Senator Elizabeth Warren, et. al to Arne Duncan, February 25, 2015. Accessible at: http://www.warren.senate.gov/files/documents/2015_25_02_Letter_to_Secretary_Duncan_re_Student_Loan_Profits.pdf

Tuesday, November 4, 2014

Occasionally, The New York Times Says Something Sensible About the Student Loan Crisis: Bankruptcy Relief for Private Student Loan Borrowers

Last month, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB)issued a report highlighting the hardships experienced by students who took out private loans to attend college. Unlike the federal student loan program, which offers income-based repayment plans and economic hardship deferments to student-loan borrowers who run into financial trouble, private lenders generally do not offer any type of relief for distressed student-loan borrowers.

What the CFPB did not say in its report is that private student-loan borrowers, like borrowers in the federal student loan program, cannot discharge their student loans in bankruptcy unless they can show "undue hardship," a very difficult standard to meet.
All the CFPB report offered as a remedy to this problem was a form letter that student-loan borrowers could modify and send to their private lenders to beg for relief.  That is really not much of a solution.

Yesterday, however, the New York Times commented on the CFPB report and made a sensible suggestion. The Times proposed that Congress repeal the 2005 "undue hardship" provision that makes it almost impossible for private student-loan borrowers to discharge their loans in bankruptcy. In the alternative, the Times added, legislation should be passed that requires private lenders to modify loan terms for distressed student-loan borrowers. "Now it's time for Congress to fix [the error it made when it passed the 2005 law]," the Times editorialized, "by rescinding the bankruptcy provision or requiring lenders to create clearly advertised flexible payment plans in exchange for retaining it."

Respected commentators have recommended rescinding the 2005 Bankruptcy Code provision for years. In 2009, Rafael Pardo, a law professor and noted researcher on the student-loan crisis, testified before a Congressional committee on the special hardships suffered by individuals who took out private student loans to finance their college studies.  Here is what Professor Pardo said:
Because the costs of private student loans can quickly spiral out of control, and because there exist limited nonbankruptcy options for mitigating the financial distress imposed by such costs, borrowers of private student loans are particularly vulnerable to the negative effects of undue-hardship discharge litigation.  If they end up seeking relief through the bankruptcy system and subsequently fail to prevail in their claim of undue hardship, they will find themselves struggling interminably under an oppressive amount of educational debt with little to no other options for relief.
In short, Professor Pardo told the Congressional committee:
By stripping away the one social safety net that existed for borrowers of private student loans--that is, the automatic discharge of such loans in bankruptcy--Congress has likely condemned certain student-loan debtors to the Sisyphean task of repaying obligations that will never be extinguished. [Emphasis supplied.]
In his testimony, Professor Pardo stated unequivocally that Congress should repeal the 2005 "undue hardship" provision that has made it almost impossible for individuals to discharge their private student-loan debts in bankruptcy.  Pardo testified as follows:
I respectfully urge Congress to restrike the balance between student-loan debtors and lenders of private student loans by restoring the automatically dischargeable status of private student loans in bankruptcy.
Without a doubt, repeal of the 2005 Bankruptcy Code provision is essential to providing relief to distressed college borrowers who took out private student loans.  It is refreshing to see that the New York Times essentially agrees with Professor Pardo on this issue, although the Times equivocated a bit by saying that Congress might pass a law requiring private student-loan lenders to offer flexible payment terms as an alternative to repealing the 2005 Bankruptcy Code provision.

Everyone in higher education should be clamoring for repeal of the Bankruptcy Code's "undue hardship provision for all student-loan borrowers, whether they borrowed from the federal student loan program or borrowed from private lenders.  Literally millions of distressed student-loan borrowers are suffering  because they cannot repay their loans and have no real means of relief in the bankruptcy courts.

But if across-the-board reform cannot be achieved politically, at least Congress should repeal the "undue hardship" provision as it applies to people who took out student loans from the private banks. Even the New York Times, which at times seems almost clueless about the student-loan crisis, has figured that out.

References

Editorial. Driving Student Borrowers Into Default. New York Times, November 3, 2014.

Rafael Pardo. ABI Members Testify on Discharging Student Loan Debt in Bankruptcy. ABI Journal, November 2009, p. 10. Accessible at: http://www.abiworld.org/AM/Template.cfm?Section=Home&CONTENTID=59097&TEMPLATE=/CM/ContentDisplay.cfm


Friday, October 31, 2014

Rohit Chopra and Rich Cordray Should Be Ashamed of Themselves: The Consumer Financial Protection Bureau's Timid Report on Distressed Private Student-Loan Borrowers

Rohit Chopra should be ashamed of himself.
Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB), issued a report earlier this month on the status of distressed private student-loan borrowers.  The report is so timid, so tepid, so lacking in real recommendations for reform that Chopra and Chopra's boss, CFPB Director Richard Cordray, should be ashamed of themselves.

Basically, Ombudsman Chopra's  report analyzed more than 5,000 student loan complaints directed at private lenders.  The report documents that many students who borrowed money from banks to attend college have been driven into default.  Chopra's reported identified these problems:
  • Borrowers who have trouble paying back their private loans receive little information from the banks about their options for modifying their loan terms.
  • People who borrow from the banks often find that there are no loan-modification options available.  
  • Private lenders are sometimes willing to offer borrowers a temporary forbearance from making their loan payments, but these forbearances often only delay default. Moreover, borrowers sometimes have to pay enrollment fees or experience processing delays in order to get nothing more than temporary relief. 
Chopra's report ends on a pathetic note. Although it professes to offer "new tools to help borrowers take action when they run into trouble [with private student loans]," the report offers nothing more than a sample letter "that consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans."  That's all the CFPB has to offer--a crummy form letter!

Chopra and the CFPB Understate the Harm Caused by the Private Student Loan Industry

Chopra and the CFPB vastly understate the harm done to student borrowers who take out loans from private lenders to finance their college educations.

First of all, many students are ignorant of the difference between private loans and loans obtained through the federal student-loan program. Federal loans give distressed borrowers access to economic hardship deferments, income-based repayment plans, and loan consolidation options.  For the most part, these options are not available to people who borrow money from private lenders to finance their college studies. Moreover, federal student loans generally offer lower interest rates than private student loans.

Many students are so unsophisticated that they do not realize that they are taking out loans from private lenders rather than participating in the federal student loan program. Thus, students often pass up the opportunity to participate in the federal student loan program and fall into the clutches of private banks.

Second, unlike most federal student loan programs, private lenders generally require students to obtain co-signers for their student loans.  In most cases, the co-signer is a student's parent or other relative. Parents who co-sign their children's private student loans become personally liable for the debt--all of it.

Third, students and their parents may not realize that private student loans,like federal student loans, cannot be discharged in bankruptcy absent a showing of undue hardship, which is very hard to establish in a bankruptcy court. Students who take out private loans and are unable to pay them back may see their parents dragged down into financial ruin if their parents are not able pay back the debt. In most cases, the parents will have no recourse to the bankruptcy courts. 

The Federal Government Should Shut Down the Private Student-Loan Industry

The CFPB report is pathetic in terms of its advice to students and their families who find themselves unable to pay back their private student loans.  All Cordray and Chopra could think to do about the rapacious private student-loan industry was draft a form letter that students can use to beg for mercy when they find themselves unable to make their loan payments.

Students don't need sample letters to deal with the private student-loan industry; they need effective relief from private student-loans that many students did not fully understand when they signed the loan documents.

What needs to be done?

Congress needs to repeal the 2005 amendment to the Bankruptcy Code that has made it almost impossible for student borrowers and their co-signers (usually parents) to discharge their private loans in bankruptcy.  

If Congress would take this simple step, the private student-loan industry would almost immediately shut down, which would be a good thing.  The banks are happy to loan students money so long as students' parents co-sign the loans and bankruptcy relief is unavailable.  But if private student loans could be discharged in bankruptcy like any other unsecured debt, the banks would get out of the student-loan business in a hurry.

In the meantime, Rohit Chopra, Rich Cordray and the CFPB need to issue dire warnings to college students and their families not to take out private loans to attend college.  Such loans may make sense for people who are enrolling in expensive but high-quality professional programs in law or medicine. But low-income students have no business taking out student loans from banks and other private lenders.  Too often, taking out a private student loan leads to financial disaster not only for the student but for the student's parents as well.

Mr. Chopra and Mr. Cordray are fully aware of the harm being caused by private student-loan financiers.  “Struggling private student loan borrowers are finding themselves out of luck and out of options," Mr. Cordray acknowledged.  Unfortunately, Mr. Chopra, Mr. Cordray, and the CFPB do not have the courage to propose effective reforms.

Mr. Cordray should be ashamed of himself too.
References

CFPB Report Finds Distressed Private Student Loan Borrowers Driven Into Default. Consumer Financial Protection Bureau, October 16, 2014.




Friday, September 19, 2014

Is it OK to beat a dead horse? The Consumer Financial Protection Bureau sues Corinthian Colleges

According to Chronicle of Higher Education, the Consumer Financial Protection Bureau has sued Corinthian Colleges, accusing the company of "predatory lending and illegal collection tactics." 

As the Chronicle noted, Corinthian is "the crippled for-profit higher-education company that is in the process of winding down its operations."  In fact, Corinthian has entered into a deal with the U.S. Department of Education, whereby the company will sell or close most of its campuses in exchange for continued access to federal student aid money.

The CFPB is accusing Corinthian of some pretty bad stuff. "We believe Corinthian lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school," Richard Cordray, the CFPB chief,was quoted as saying in the Chronicle article.

If Corinthian Colleges did the things the CFPB accused it of doing, then it certainly deserves to be sued. But, as the Chronicle of Higher Education pointed out, the company was already in financial trouble. 

I am happy to see the Consumer Financial Protection Bureau take some strong action against the for-profit college industry, which has been wracked by reports of abusive behavior.  Several for-profits have been accused of engaging in unsavory practices. But I would be happier still if the CFPB would go after abusive for-profit colleges that are not teetering on the edge of closure.  

It is OK, I suppose, to beat a dead horse now and then. But I would like to see the CFPB to beat a few live ones.

References

Field, Kelly. Federal Watchdog's Lawsuit Accuses Corinthian Colleges of Predatory Lending. Chronicle of Higher Education, September 16, 2014. 

Thursday, May 1, 2014

The Private Student Loan Industry Doesn't Need Better Regulation: It Needs to Be Exterminated

Businesses that protect homeowners from termites and roaches call themselves pest control companies. But speaking as a homeowner, I don't want the roaches in my house to be controlled. I want them dead.

Image credit: pestcontrolman.cm
The Consumer Financial Protection Bureau (CFPB) is much like a pest control company that looks out for the interests of the pests.  It wants to regulate the the nation's rapacious financial services sector in a way that doesn't cause the banks too much discomfort. When it comes to the private student loan industry, this attitude is a mistake.

As the New York Times pointed out in a recent editorial, private student loans are very different from federal student loans.  Students who take out federal student loans get a fixed interest rate, and they can apply for an economic hardship deferment if they run into financial difficulties.  Private lenders often offer variable interest rates that allow monthly loan payments to adjust upward,  and they usually don't have any process in place to assist financially distressed borrowers.

The CFPB collects hundreds of complaints each year from people who took out private student loans. In a recent analysis,  the  Bureau reported that some private student-loan borrowers were forced into default without warning even though they were current on their loan payments In particular, the CFPB documented that some student-loan borrowers who were making regular payments on their loans were forced to pay back the entire amount of their loans if a person who co-signed their loan died.  Some student borrowers received notice from their lender that their loans were being called due at the same time they were mourning the loss of the parent or grandparent who had cosigned the student's college loan. Now that's crumby behavior.

And guess which private lender received the most complaints? Sallie Mae.  The CFPB received 995 complaints about Sallie Mae between October 2013 and March 2014.  That's a 50 percent jump over the previous measuring period.

And coming in second place for most number of complaints was JP Morgan Chase.

Issuing private loans is a particularly lucrative business for the banking industry. Why? First of all, in 2005, the banks got Congress to amend the bankruptcy laws to make private student loans almost impossible to discharge in bankruptcy.

Second, about 90 percent of these loans are co-signed--often by a parent or a grandparent. Co-signers stand jointly liable with the student borrower when it comes to paying off a private student loan. And co-signers--like the student borrowers themselves--cannot discharge a private student loan in bankruptcy except under very rare circumstances.

In its recent report, the CFPB practically begged the banks to be more compassionate to their student-loan debtors.  Rohit Chopra, CFPB's Student Loan Ombudsman, pointed out that a student-loan borrower who had a bad experience with a bank would be less likely to use that bank for other banking matters. And, Chopra added, treating student-loan borrowers  badly might hurt the banks' reputation.  Yes--the CFPB's Student Loan Ombudsman actually expressed concern about the banks' reputation!

The New York Times, commenting on the CFPB's report, thinks more federal regulation is the way to deal with the rapacious private student-loan industry. "Federal regulators clearly have a lot to do to address what amounts to a student loan crisis," the Times editorialized. Regulators "can begin by preventing contracts that unfairly burden borrowers," the Times suggested and loan terms "should be clearly stated."  And--the Times concluded, student-loan borrowers should be notified when their loans are at risk and borrowers in good standing should not be "shoved into default."

Personally, I don't give a damn about Sallie Mae's reputation or the reputation of the banks that have been mistreating private student-loan debtors. And I don't think another layer of regulation will make the banks behave more compassionately or more responsibly.

The way to deal with problems in the private student-loan industry is to shut this sleazy business down. And that can be easily done. All Congress needs to do is to repeal the 2005 law that made it exceedingly difficult for private student-loan debtors and their guarantors to discharge student loans in the bankruptcy courts.

If Sallie Mae, JP Morgan Chase, Wells Fargo and the other major players in the private student loan industry knew that distressed student-loan debtors could discharge their student loans in bankruptcy in the same way they could discharge other non-secured debts, they would get out of the student loan business in a hurry.  And that is exactly what we should want them to do.

References

Rohit Chopra. Mid-year update on student loan complaints. Consumer Financial Protection Bureau, April 2014.

Editorial. Troubling Student Loans. New York Times, April 29, 2014, p. A20.





Tuesday, January 14, 2014

Say it ain't so, Joe! Penn State coach Joe Paterno was in bed with Bank of America

According to a story in the Pittsburgh Post-Gazette, Penn State football coach Joe Paterno--Penn State's beloved "Joe Papa"--signed two $100,000 contracts to promote Bank of America products and sign some football helmets and footballs.

Jerry Sandusky and Joe Paterno
Photo credit: Paul Vathis/Associated Press

Apparently, Joe's $13 million pension, his access to a private jet, and his million dollar salary were not enough for him.  He had to sign on as a shill for Bank of America. No wonder he didn't spot Jerry Sandusky seducing little boys in the Penn State locker room.  Joe was too busy autographing footballs.

And the alumni association for Penn State University, Joe Papa's employer, also had a special deal with Bank of America. According to the same Pittsburgh Post-Gazette story, Penn State received more than $2.7 million in fees and royalties  from a deal to help a Bank of America subsidiary market high-interest credit cards to Penn State students and alumni.

Penn State's alumni association received a "1 percent kickback royalty" on retail purchases made by Penn State alumni on the Penn-State branded card and the association got 0.5 percent of purchases made by Penn State students.

Of course, both deals were confidential. We would not know about them were it not for a 2009 federal law that requires colleges and universities to file copies of their agreements with credit card companies with the Consumer Financial Protection Bureau. At one time, more than a thousand colleges and universities had deals with credit card companies. Today that number has dropped to about 600.

According to the Consumer Financial Protection Bureau, some universities made millions on these deals, but others got very little.  The University of St. Thomas, a Catholic university in Houston, Texas, only made $2,365 on its credit card deal in 2012. Why sell your soul for peanuts?

The Pittsburgh Post-Gazette story is another indication of the corporatization of American colleges and universities. Instead of focusing on their mission, which is to provide students with a high-quality education at a reasonable price, they wandered into the banking business, taking kickbacks from credit card companies in return from helping them peddle high-interest credit cards to college students.

This tawdry tale provides yet another reason for a federal open-records law that would require all colleges and universities that receive federal student-aid money to make all their records available to the public.

References

Associated Press. Joe Paterno earned $13.4M pension.  ESPN College Football, May 22, 2012. Accessible at: http://espn.go.com/college-football/story/_/id/7959425/joe-paterno-earned-134m-pension-penn-state-nittany-lions

Jo Becker. Joe Paterno Won Sweeter Deal Even as Scandal Played Out. New York Times, July 14, 2012. Accessible at: http://www.nytimes.com/2012/07/14/sports/ncaafootball/joe-paterno-got-richer-contract-amid-jerry-sandusky-inquiry.html?_r=0

Consumer Financial Protection Bureau. College Credit Card Agreements. Accessible at: http://www.consumerfinance.gov/credit-cards/college-agreements/

Tim Grant. Penn State leads U.S. in earnings from collected credit card royalties. Pittsburgh Post-Gazette.com, January 11, 2013.  Accessible at: