By Jillian Berman
The Consumer Financial Protection Bureau has been controversial since its inception. Initially proposed by Senator Elizabeth Warren, then a Harvard Law School professor, in 2007 , the agency became a target of many congressional Republicans after its founding in the wake of the financial crisis.
That controversy has been apparent in the bureau’s approach to the student-loan industry over the past several years. During the Obama administration, the CFPB engaged in aggressive oversight of student-loan servicers, lenders and other companies in the sector — suing major firms and highlighting alarming trends through reports based on borrower complaints and other sources.
The Trump-era CFPB has shifted its enforcement attention from major companies in the space to scam operators. The agency has also skipped student loan-related reports , in some cases only publishing them under pressure .
That change in attitude pushed the agency’s then-student loan ombudsman, Seth Frotman, to resign in protest in 2018 . Now, the executive director of the Student Borrower Protection Center, an advocacy group, Frotman and others expect to see a dramatic change in the Bureau’s approach to the student loan industry under a Biden administration.
The CFPB has “remarkably strong tools to stand up for student-loan borrowers,” including through enforcement actions, creating regulations, complaint monitoring and routine oversight of student-loan companies, Frotman said.
“We’ve seen how the current administration has pulled back on every single one of those,” he said. “The bureau with the right person put in place on day one has the power to nearly immediately use all of those tools.”
Uptick in enforcement
Under Richard Cordray, who was nominated by then-President Obama to run the CFPB and stepped down in 2017, the agency returned more than $750 million to student-loan borrowers. Those efforts were a result in part of complaints from borrowers that helped regulators zero in on troubling practices, according to a CFPB report from that period.
In addition, the Obama-era CFPB filed high-profile lawsuits in the student-loan space, including one against student-loan servicer Navient /zigman2/quotes/204528402/composite NAVI -3.22% , accusing the company of making it unnecessarily difficult for borrowers to repay their loans — allegations which the company says are false (they’ve moved to have the suit dismissed) — and for-profit colleges over their private-loan programs.
During the Trump administration, the CFPB has settled with multiple companies accused of misleading borrowers into paying for help to enroll in repayment programs offered by the federal government — tasks they could do by themselves and for free. But the agency has asked executives to pay a small fraction of the amount they’ve been accused of illegally charging student-loan borrowers.
“I think the bureau will tend to go back in the direction of where we were when I was the director and the Obama administration was in place,” Cordray said in an interview. “The approach was close cooperation between the CFPB and the U.S. Department of Education. That was all nixed when Betsy DeVos came into office.”
The Department of Education ended a memorandum of understanding between the two agencies in 2017 that allowed them to share information about borrower complaints. The agencies came to a new agreement earlier this year . Under the Obama administration, the agencies also worked together on creating guidelines for student-loan servicers.
Vaishali Rao, a partner at law firm Hinshaw & Culbertson who represents student-loan and other consumer-finance companies in regulatory investigations and litigation, said she expects that a Biden-era CFPB will increase enforcement.
“There will be a lot of things where the pen was put down and people are ready to pick it back up,” Rao said.
In addition to investigations and enforcement actions, those areas could include reigniting an effort that began towards the end of the Obama administration to develop a set of student-loan servicing guidelines at the federal level, Rao said. In the years since, some states have developed their own rules for regulating student-loan companies.
“Now that the industry has lived with” those state laws for a period, “it might be easier to get it done on the federal front,” Rao said.
Increased cooperation with state regulators
Over the past several years, a battle has been brewing between the Department of Education, state regulators and student-loan servicers over who has the authority to regulate those companies. Secretary of Education Betsy DeVos has taken the position that these firms aren’t subject to state law in part because they are federal contractors — an argument the firms have cited in litigation.
It’s likely that a new Department of Education could rescind the memo outlining DeVos’ argument. In addition, a Biden-era CFPB is likely to work more closely with state regulators monitoring student-loan firms through their own laws.
“The Biden administration could end these tactics immediately,” Frotman said of the Trump administration’s combative approach to state student loan regulations, “and start treating state attorneys general and state banking regulators as critical partners in the fight to protect borrowers’ rights.”
Under Cordray — a former attorney general of Ohio, the CFPB “worked closely,” with state regulators, “not just on individual matters, but on strategizing what to do and how to do it,” Cordray said. But “under a Biden administration with new leadership, that’s very, very likely to look very similar in its policies” to the Obama administration.
Still, even if the Biden administration takes a more collaborative approach towards state regulators, Frotman said he’d like to see state lawmakers and officials continue to focus on student loan oversight. These actors are often some of the first to recognize troubling trends in various consumer markets.
“One of the reasons why we got in the mess that we did was because for too long people looked at student debt and said Washington created this mess and Washington should fix it,” Frotman said.
Right now, payments and collections are paused on most federal-student loans, a freeze that’s set to expire on Dec. 31. Advocates have urged policymakers to extend the pause, given that the underlying economic fallout from the pandemic is still ongoing. The pause, which was included in the CARES Act, the coronavirus relief bill, was originally set to expire on Sept. 30, but President Trump extended it.
Regardless of when the pause is lifted, a Biden-era CFPB will play a role in monitoring the fallout. This period marks the first time that the government and its contractors have shut off — and will eventually turn back on — the entire student-loan system, a task that’s proved complicated.
Borrowers have seen their credit scores unintentionally dinged as a result of the payment pause and still had their wages garnished , despite the moratorium, among other challenges. Advocates have worried for months that when payments resume, borrowers, particularly those whose economic circumstances have changed during the pandemic, will face administrative hurdles to keeping their debt manageable.
One area where the Obama-era CFPB engaged in aggressive oversight of student-loan servicers was enrollment in income-driven repayment plans, the programs provided by the government that allow borrowers to repay their debt as a percentage of their income. That’s a process borrowers will likely face challenges with when student-loan payments resume.
“Borrowers are going to slip through the cracks and it’s the job of the servicers to make sure that doesn’t happen,” said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, “and provide a remedy when it does happen.
“It’s the job of the regulators to hold their feet to the fire,” she added.
Rao said she expects the pause to continue under the Biden administration. That will allow new CFPB staffers to take time to think about their student-loan servicing priorities because “there won’t be an immediate fire drill for borrowers who are behind on payments.”
If the pause is extended for a lengthy period, Rao said she anticipates that there will be some confusion among borrowers over whether it makes sense for them to continue to make payments during this time. Obviously, many borrowers who lost their jobs are coping with unexpected medical bills or can’t make payments for other reasons and, for them, the pause is a welcome relief.
But those able to make progress towards repaying their loans during this time are likely to have questions about whether it’s in their best interest to do so, Rao said. Rao is counseling her clients to anticipate these questions and to communicate with borrowers about them. She suspects a Biden-era CFPB will need to put out guidance or help that effort along in some other way, she said.
In addition, if the Biden administration does move forward with some kind of student-debt cancellation — the president-elect proposed discharging $10,000 of student debt for every borrower on the campaign trail, though some advocates and Democratic leaders have pushed him to cancel more — Rao said she anticipates Bureau staff will be involved.
Though any cancellation, whether through executive or congressional action, would ultimately be executed by the Department of Education, she expects that given the small group of people with deep knowledge of student debt, “they’ll be seeking the bureau’s guidance,” she said.
“A cancellation of any kind is going to take so much interaction between industry and borrowers and the student-loan ombudsman is really the center point of that,” Rao said.
Monitoring the industry during a revamp
The Department of Education’s Office of Federal Student Aid is currently in the midst of revamping the contract between the agency and the companies who are borrowers’ main point of contact when repaying student loans.
The future of that effort, which may take years, is in limbo, but once a new contract is in place, it’s likely that some companies that are currently working with borrowers won’t be a part of the new system. Yu said she hopes that regulators, like the CFPB, will keep a close eye on student loan companies during this transition.
“A lot of servicers are going to be out of a job and so what does that mean for their performance?” Yu said. “What does that mean for the borrowers whose loans are with those servicers in the time frame before their contracts are cancelled or discontinued?”
— Jacob Passy contributed reporting.