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The CFPB and the Department of Education released a
private student loan market study. In its
press release, the CFPB noted that the study generally found
that the private student loan market has increased, but that
underwriting standards have loosened, resulting in many private
student loan borrowers struggling to repay their loans. The study
also found that private student loans are disproportionately used
by undergraduate students attending for-profit colleges (over 42%,
compared to 14% for all undergraduate students).
Importantly, the study found potential fair lending issues in
the current private student loan market. In particular, the study
noted that unlike traditional forms of credit, although the private
student loan borrower lacks income and credit history, the loans
are fully funded. This practice results in different standards to
determine ability and willingness to repay. As such, "cohort
default rates"—a measure of the federal student loan
repayment history of a particular group or "cohort" of
borrowers—are used to assist private student loan lenders
in eligibility, underwriting and pricing decisions. However,
according to the study, the use of such rates may implicate fair
lending issues under the CFPB's disparate impact approach
because racial and ethnic minority students are disproportionately
concentrated in schools with higher cohort default rates.
To address the concerns arising from the study, the CFPB and the
Secretary of Education made similar recommendations including:
· Requiring school certification of private student loans
(e.g. affirmative certification from school that loan
amount does not exceed student need);
· Modification and clarification of the definition of
"private student loan" under the Truth in Lending Act;
and
· A centralized database to access information about
private student loans similar to the National Student Loan Data
System provided to borrowers of Federal loans.
Both agencies stressed that a review of the Federal Bankruptcy
Code is needed to determine if additional relief for borrowers in
the private student loan market may be found there. The agencies
also noted that private student loans do not offer similar debt
management or mitigation options that Federal student loans
borrowers enjoy (e.g., forbearance, rehabilitation, or
deferment).
The CFPB also released a
fact sheet on its study of the private student loan market and
announced a
web tool in conjunction with the Department of Education to
help borrowers who have defaulted on their student loans. The CFPB
previously published
public comments on borrower's experiences and issued a
notice and request for information on existing private student loan
complaints (see June 26, 2012 Alert).
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In this week’s episode of "As the CFPB Turns" questions remain regarding Director(?) Richard Cordray’s constitutional authority to act as the Director of the CFPB.
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