The National Consumer Law Center’s annual conference wrapped up this weekend. We were honored to have a number of top federal student aid regulators at our conference this year. We wrote about Treasury Deputy Secretary Sarah Bloom Raskin’s speech in a separate post. We were also honored to hear from Department of Education Deputy Under Secretary Jeff Appel and Consumer Financial Protection Bureau Assistant Director and Student Loan Ombudsman Rohit Chopra. Participants ranged from legal aid advocates, private attorneys, and representatives from other state and federal agencies.
At the session on student loan servicing, Student Loan Borrower Assistance Project Director Deanne Loonin highlighted the need to look beyond incentives as the exclusive way to improve servicing.
This is not to say that incentives don’t matter. They do. We know this from the collection agency experience where the Department of Education’s change in commission structure (and subsequent regulatory changes) has led collection agencies to finally do a better (although far from perfect) job of following the law, at least with respect to the loan rehabilitation program.
Deputy Secretary Raskin focused on the recent improvements in servicing incentives in her speech. We agree that the provisions in the renegotiated contracts should better incentivize servicers to offer the full range of options to borrowers. The goal is to help prevent defaults. There is still much more to be done to strengthen these incentives. In any case, incentives alone are not enough. The government must also create a clear and enforceable set of borrower rights AND engage in oversight so that servicers that do not comply with their responsibilities face real consequences.
Enforceable rights mean both public and private enforcement. Take this hypothetical example: A borrower calls his servicer and asks for income-based repayment. The representative replies that it’s too much work and she doesn’t feel like explaining the IBR process. What can the borrower do? The Department of Education directs borrowers with complaints to talk to their servicers (hmm…isn’t that the agency that just told the borrower that they don’t feel like helping) or call the ombudsman. The Department describes this latter option as a “last resort.” Contacting the ombudsman can certainly be helpful in many cases, but the ombudsman’s office is set up as a “neutral” mediator, not a borrower advocate. Perhaps the borrower can do what most other consumers do and select a different servicer. Think again. Unfortunately, the government left out this typical component of competition when it created the servicing system. Borrowers are not allowed to switch servicers, with the limited exception of a new program allowing borrowers to select one of the four main servicers as part of the consolidation process. (We’ve written previously about our concerns about this new system).
How about private enforcement in court? This is possible, but very difficult because courts have said that there is no private right to enforce the Higher Education Act. There are ways around this, but courts have been finding all sorts of contorted ways to shut the door on private enforcement. The borrower in the example above could literally be stuck in a never ending Kafkaesque nightmare where he escalates his complaint and is continually sent back to complain to the same people that started the whole problem.
In addition to incentives and private enforcement, the government must aggressively oversee these contracts for legal compliance. This too is a missing piece of the puzzle. We have seen a company like Sallie Mae (now Navient), for example, continuing to get lucrative contracts and renewals despite repeated problems and enforcement actions against them. Senator Elizabeth Warren highlighted this problem when she questioned Federal Student Aid Chief Business Operations Officer William Leith in September. Among other statements by Senator Warren that day: “Let me get this straight: You break the law. You don’t follow the rules. You treat the borrowers badly…and you all just renegotiated the contracts to make sure that across the portfolio [loan servicers] are going to make a little more money if nothing changes?”
That’s not right.
Again, we were encouraged to hear from so many top regulators at our conference this year. This shows that the government is paying attention. Now is the time to add some teeth to this renewed interest.