With the Dodd-Frank Act giving the Consumer Financial Protection Bureau (CFPB) regulatory oversight over private student loans, issuers in the asset class must now work closely with the agency as it formulates rules to govern the sector.
Dodd-Frank also gave the CFPB supervision and enforcement authority over nonbanks that provide or offer private education loans to consumers and banks with $10 billion or more in assets.
Jeffrey Taft, a partner at Mayer Brown, said that this means that the agency has purview over approximately 125 of the largest banks (and their affiliates), two or three credit unions and all nonbanks providing private education loans.
In November last year, the CFPB announced the appointment of Rohit Chopra as the private education loan ombudsman. This CFPB position was created by Dodd-Frank to offer a centralized source of assistance to private education loan borrowers.
The bureau is preparing a report to Congress on July 21 on private student lending as required by the Dodd-Frank Act. The comment period during which the CFPB asked for market opinion ended Jan 17.
The bureau had sent out a notice published in the Federal Register to ask the student loan industry certain questions regarding the business; the CFPB is required to issue a report to Congress in July answering several questions regarding private education loans and lenders.
The CFPB sent out specific questions that industry players, including the biggest student loan lender Sallie Mae, responded to and gave recommendations for. The questions the bureau asked include: What makes borrowers choose private student loans?; Where do students get their information on private education loans and lenders?; What data sources do students have to gauge the appropriate amount of student debt that they can incur?; How well are the amount and timing of private education loan repayment terms understood?
Increased Scrutiny
Taft said that it is interesting that Congress viewed private student lenders as being in need of the same level of federal supervision and examination as firms from the payday lending and residential mortgage sectors.
Depending on the size of the student loan company, coping with new regulations might mean varying degrees of difficulty. "Nonbank financial companies have not been subject to comprehensive supervision and examination at the federal level and may not have existing procedures or personnel to respond to requests and work with examiners," Taft stated. The banks, he said, are accustomed to being examined, but for some of these nonbanks, this type of scrutiny is a new thing for them and might not be as easy.
The CFPB might be considering additional disclosures aside from those covered by the Truth in Lending Act for private student lenders. However, Taft believes that the CFPB's focus will likely be more on how these lenders market their products and services.
Sallie Mae, in its comment letter to the CFPB, stated that currently most private education loans are made via highly regulated traditional banking channels by lenders that have been and that still fall under the Truth in Lending Act and other laws. In the student loan issuer's letter to the CFPB, Sallie Mae COO John Remondi explained to the bureau that currently schools certify most private education loans. The lender is advocating the route of school certification as a good safeguard against overleveraging by students.
Sallie Mae claimed that it will not disburse a private education loan until the school's financial aid office gives a certification that the loan is necessary. "This is not because we are required to - we are not - but because it is an important check against over-borrowing," Remondi wrote in the letter to the CFPB.
In Sallie's letter, Remondi stated that the issuer has new products that were designed to assist borrowers in making more informed, affordable choices. Remondi explained that until 2007, almost all borrowers postponed loan payments while at school. In 2009, Sallie Mae encouraged students to make payments while in school and created shorter repayment periods based on loan amounts. This has resulted in considerably lower costs during the loan's life. Two-thirds of Sallie Mae borrowers now choose to make their payments while attending college.
As to the scope of the CFPB's authority on student lenders, Taft noted that the agency has broad authority to take various types of enforcement action, and the state attorneys general also have the ability to enforce many of the provisions in Title X of the Dodd-Frank Act. In addition, the CFPB, as required by the Dodd-Frank Act, has appointed a private student loan ombudsman to receive and resolve informally complaints from borrowers and to analyze data on borrower complaints.
The CFPB's report to Congress on July 21 might put a spotlight on the weaknesses in legislation that might set the roadmap for future student regulations, including the extent of the bureau's powers of implementation. However, Taft believes that not much might happen in the coming year when it comes to legislative initiatives on the student loan front and other sectors given the upcoming election and other contentious regulatory issues.
EFC's View
Vince Sampson, president of the Education Finance Council (EFC), which represents nonprofit and state agency student lenders, said that the CFPB is like a black box in the securitization industry, since the bureau has given no indication as to the type of regulation it will pursue.
Moreover, it is unclear how CFPB regulation will relate to oversight by the Securities and Exchange Commission (SEC) or any other government agency by which many market participants are already regulated.
He explained that the EFC and its constituents are communicating with three different divisions of the bureau: the office of the student loan ombudsman; the office of nonbank supervision; and the division of research, markets and regulation.
"Private student lenders are looking possibly at three different regulations simultaneously or sequentially," Sampson said. He added that of these three divisions, the EFC currently works most closely with the student loan ombudsman and the division of research, markets and regulation. The EFC is helping the CFPB develop industry best practices as the bureau creates private student loan regulations and has also presented the regulator with data on historical non-federal student loan default rates.
"Since the passage of CFPB, we understand that we have a new regulatory framework and that the bureau needs disclosure on the market side," Sampson said. "We are helping the CFPB enhance consumer understanding and shape policy. To its credit, the CFPB has been actively working with us and receptive to our information. We hope that the CFPB continues to engage the private lenders before taking on a public position to make for better and more useful regulations."
In working with the CFPB, the EFC is trying to communicate the specific role of nonprofit student organizations, their bond issues, who the borrowers are in these programs and the size of the private loan nonprofit space, which is at $7 billion. The EFC has also discussed the loan products of their members and the characteristics that distinguish these from loans from companies like Discover, First Marblehead, Chase and Sallie Mae with the understanding that these private student loans are not painted with the same brush.
Another issue that the EFC has talked about with the CFPB is risk retention, where there is a cross-pollination between the CFPB and the SEC in terms of assessing risk to investors. The nonprofit and state agencies have a unique take on this issue, according to Sampson. These agencies' securities have not been transferred to an SPV. They have instead remained on these agencies' balance sheets, which means that the interests of the investor and issuer are much more aligned.
In the EFC's comment letter, Sampson said that colleges and universities that were once a key source of data for students are currently greatly constricted in offering information on non-federal supplemental loans.
Information is also not readily given on student support programs provided by the state agency and non-profit student loan providers. This is a result of colleges and universities creating a preferred lender list, which is a complex, confusing and costly process. It has also stopped many schools from offering such information entirely for fear of exposing themselves to legal or regulatory consequences.
"Schools would not give out a full list of supplemental student loan lenders and have been forced to offer students Federal PLUS loans instead or just give students a list of a hundred school names that students have to sift through," Sampson said.
The ombudsman has launched an initiative where borrowers can file private student loan complaints. Sampson said that there are existing processes that the nonprofit and state agency student loan industry already uses to handle and resolve these types of questions.
The EFC's constituents are neither national nor hyper-regional, so they have built processes for these types of cases. In Kentucky, for instance, there is a diverse population that comprises both urban and rural borrowers, so the process must be flexible enough to cover all across population demographics.
