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CBA Statement for the Record - Education and Workforce Committee Hearing on active oversight of the Dept. of Education
February 24, 2016
The Honorable John Kline The Honorable Bobby Scott
Chairman Ranking Member
Committee on Education and the Workforce Committee on Education and the Workforce
U.S. House of Representatives U.S. House of Representatives
Washington, DC 20515 Washington, DC 20515 Dear Chairman Kline and Ranking Member Scott:
The Consumer Bankers Association (CBA) appreciates the Education and Workforce Committee’s active oversight of the Department of Education’s activities. We would like to take this opportunity to submit the following comments regarding the hearing, “Examining the Policies and Priorities of the U.S. Department of Education.” CBA is the voice of the retail banking industry whose services provide access to credit for consumers and small businesses.
Our members operate in all 50 states, serve over 150 million Americans and collectively hold two-thirds of the country’s total depository assets.
Private Student Lending Marketplace
CBA’s members include financial institutions that offer private-sector student loans to qualified customers seeking to earn a higher education in their pursuit of the American dream. CBA members offer competitive products that constitute a small but steadily growing portion of the options available to students and families deciding how to finance higher education.
According to ongoing surveys done by the research company Measure One, the majority of private student loans that are made today are provided by CBA members.1 In fact, Measure One analyzes loan data from the nation’s six largest active private student lenders – five of whom are CBA members. Overall, these six lenders represent two-thirds of the total outstanding private student loan market, which is about $100 billion, or roughly 7.6 percent of total student loans outstanding. CBA members account for a larger percentage of new loan volume.
These private student loans are performing extraordinarily well, with delinquency rates in the third quarter of 2015 that remain less than 3 percent. Only 2.2 percent of loans are in a late stage of delinquency, defined as more than 90 days past due. Long-term delinquencies declined 11 percent year over year, with short term delinquencies down 13 percent to 2.8 percent. Charge- offs, meaning the loan has not had a payment for 120-180 days, depending on the policies of the institution, have been dropping as well, down to only 2.2 percent.
Private Student Lending Perspective on Loan Performance and Consumer Protection
Private lending has been slowly but steadily increasing since 2009, after dropping precipitously during the Great Recession. Private student loans represent only a small portion of the total student loan market, but their performance illustrates the value of careful lending. These loans have robust underwriting standards that measure a borrower’s ability to repay. Sound underwriting also helps ensure borrowers are issued responsible loans – arguably the most important consumer protection available.
Although income-driven repayment programs are an effort to assist federal borrowers, we believe those programs should not be a replacement for sound up-front practices. It’s clear that under income-driven repayment plans, taxpayers absorb the great majority of the risk from the loans involved, with some risk borne by the borrower and very little by institutions of higher education.
This risk disparity is particularly acute in PLUS Loans, a supplemental loan program for graduate students and the parents of undergraduates. These loans are made with only a backward looking review for bad debts rather than a comprehensive, forward-looking assessment of the borrower’s ability to repay. In the case of Parent PLUS loans, which unlike Stafford, Unsubsidized Stafford and Grad PLUS loans are not eligible for income-driven repayment, the parent borrower absorbs substantial risk, as do taxpayers. Conversely, institutions have almost no risk in the supplemental PLUS loan programs. Parent PLUS loans are not part of institutions’ default rate calculations. Additionally, repayment rates are a much better gauge of taxpayer risk in Grad PLUS, a nearly unlimited lending program with generous forgiveness provisions.
Since 1980, the average published tuition and fees have risen 1,100%, or more than four times the rate of inflation. The overall increase in outstanding student debt is attributable to two factors—more students are attending college, and they are borrowing increasing amounts. CBA is concerned that offering unlimited opportunities to borrow federal loans without any consideration of the ability to pay them back is leading to excessive costs to taxpayers and to students’ families. We encourage the Committee to seek more loan performance data from the Department and to consider ways to better align risks and rewards in the federal loan programs.
We also urge improved disclosures to consumers, such as aligning federal loan disclosures with the extremely detailed list of disclosures private lenders are required to provide by the Truth in Lending Act (TILA). This law exists, in part, to ensure that consumers are fully aware of their repayment obligations for credit products provided in the private market. Under current law, federal student loans are exempt from TILA, including the disclosure of the Annual Percentage Rate (APR), which accounts for fees and the impact of deferred payments when calculating the cost of credit. Better disclosures will afford consumers the opportunity to make better choices.
The Enterprise Complaint System
The Department’s new initiative to create an Enterprise Complaint System (ECS) that will provide a means for students and borrowers to file complaints and provide feedback about federal student loan lenders, services, collection agencies, and institutions of higher education has the potential to provide benefit with the proper safeguards. Construction of the ECS and its focus needs careful consideration, and we encourage the Department to consult other agencies and industry partners to ensure it is used correctly. The ECS initiative was launched by President Obama last March as part of his Student Loan Bill of Rights.2 The purported goal of the ECS is to improve servicing of federal student loans and to identify schools, servicers and collection agencies that draw high numbers of complaints. We note that the Consumer Financial Protection Bureau (CFPB) already collects complaints on 11 different products and services, including private student loans. Our members have been working with the CFPB as it hones its complaint process and we offer the following comments based on this experience.
As demonstrated in a recent comment letter, we urge the Department to carefully construct the ECS drawing from lessons learned from the CFPB and other agencies.3 Specifically, we recommend that if the Department chooses to release complaint information publicly, it must take important precautionary measures to protect confidential consumer information, validate the facts of complaints, establish an appeals process, and adopt informed disclosures to promote transparency, among other recommendations.
It is also critical for the Department to contextualize the complaint data so that reports about complaints provide information that is useful and understandable to the public and stakeholders. The intended complaint subjects – federal student lenders, servicers, collection agencies, and institutions of higher education – offer a variety of different products and services that will be difficult to compare. For this reason, we suggest the Department follow the Federal Trade Commission model which only relays consumer complaints to the parties necessary for resolution. Otherwise, the out of context data may create confusion and lead to false conclusions.
Further, observations of the CFPB Database show that larger organizations often will receive more complaints overall. However, total number of complaints conveys little value unless put in the context of the size of the organization because an organization that has more customers is statistically likely to receive more complaints. Ensuring that numbers of complaints are presented relative to the size of the entity being complained about is a key to providing useful information to consumers and the public.
We also urge the Department to follow the intent of the Student Aid Bill of Rights and confine the loan complaint intake to only federal student loans. With the CFPB already collecting complaints on private student loans, the Department must clearly define the federal student loans under its jurisdiction and eliminate the possibility of duplicating the collection of private student loan complaints. Currently, the CFPB separates federal and private student loan complaints and immediately routes those identified by customers as relating to federal student loans to the Federal Student Aid Ombudsman. We suggest the Department follow that example and immediately route complaints that include any concerns about private loans to the CFPB for its sole handling with respect to such concerns in order to avoid double counting and uncertainty about who should respond to the consumer.
In addition, before launching the ECS, the Department should clarify how it plans to ensure complaints properly correspond to borrowers’ problems in various aspects of the life cycle of the loan. Borrowers in delinquency and/or default are likely to have contact with multiple organizations (schools, lenders, guarantors, servicers, debt collection agencies, etc.) throughout the process. The ECS must clearly delineate the entity at the source of the complaint to better inform consumers and aid dispute resolution.
On behalf of the members of the Consumer Bankers Association, we appreciate the opportunity to submit this statement for the record. The Department of Education is charged with many responsibilities, and we appreciate the complexity of managing the enormous federal student loan system. Our comments are meant to provide the Committee with some additional information about the role of private lenders in this system and to share our recommendations and experiences as policies are debated on Capitol Hill and in the Department. CBA members are proud of our record of providing financing for American’s college students and would be happy to answer any questions the Members of the Committee or the Department might have.
Richard Hunt President and CEO
Consumer Bankers Association