Welcome to this meeting of the Consumer Advisory Board. As always, it is a pleasure to be here. You have much to offer the Consumer Financial Protection Bureau – telling us what you are seeing and hearing from your various vantage points.
I especially want to welcome our newest members, joining us for the first time since their appointment in August. Thank you Maeve Brown for taking the chair, and Ann Baddour for serving as vice chair. Together, over the last few years, we have had good discussions and valuable sharing of perspectives. I look forward to what we can accomplish moving forward.
Today, I want to talk to you about some of the issues people encounter when they are paying back debts. Specifically, I want to discuss the debt collection market and the student loan servicing market. Both are markets where consumers cannot vote with their feet, and where incentives and practices are not always aligned with consumer interests. We have seen great consumer harm in both markets, and we know that much work remains to be done. So I want to share with you a brief outline of our proposals under consideration that would overhaul the debt collection market. And I want to share with you some perspective on our continued efforts to improve the student loan servicing market. Many of you are engaged in these issues yourselves, and so we look forward to hearing from you.
Debt collection is a multi-billion dollar industry, with more than 6,000 debt collection firms in the United States. It is a difficult task in many ways, as I know first-hand from my days as a public debt collector in various offices, including as the Ohio Attorney General. Sometimes debt collectors are given inaccurate or incomplete information about the debts they are seeking to collect. They may also add errors of their own through processes that compound the harm to consumers. All of this generates problems and disputes, and it can drive up costs to collectors, which hurts the industry as a whole. When an account is sold or moved, the information that transfers may benefit only the collector, not the consumer, which creates still more problems.
The proposal we have under consideration right now would overhaul the entire process from the moment third-party collectors first receive their debt portfolios to their very last efforts to collect. The proposal also covers many debt buyers, and as part of our work in this area, we plan to address issues with first-party debt collectors on a separate track.
Debt collection generates more complaints to the Consumer Bureau than any other financial product or service. That has been true at all levels of government, federal as well as state, around the country, since well before we came along. We have heard complaints about collectors seeking to collect debt from the wrong consumer, for the wrong amount, or that could not legally be enforced. When consumers are contacted by collectors for debt they do not recognize, they often do not know where to turn. Some feel pressure to resolve the debt without a clear understanding of their rights. Some pay a debt they think is wrong, just to get the collector off their back. Other times, consumers spend significant time and money trying to dispute the debt, often in the face of unnecessary obstacles, simply because they have not carried all their personal records with them through all the years of their lives.
According to the preliminary results of a survey we conducted, about one out of three consumers has been contacted by a creditor or collector trying to collect a debt within the past year. That is some 70 million consumers. Many reported that they were being pursued on multiple debts – between two and four debts for most of these consumers. And fully one-third of the consumers contacted about a debt in the last year said they believed the collector was trying to collect the wrong amount.
In July, we held a field hearing on these issues in Sacramento, Calif., and thereafter we convened a Small Business Review Panel to gather feedback. And we will continue to seek counsel from consumer groups, the public, industry, and other stakeholders as we proceed with the rulemaking process.
Under our proposal, debt collectors would need to have more reliable information about the debt before they can collect. They would have to limit their attempts to make contact, clearly disclose details about the debt, and make it easier to dispute the debt. When responding to disputes, they would not be able to pursue collection without sufficient evidence. These conditions and restrictions would apply as well if the debt is sold or transferred. Our goal is to bring more accuracy and accountability to a market that desperately needs it.
Our proposal under consideration is not our first foray into the debt collection marketplace. In October 2012, we issued a rule establishing our supervisory authority over nonbank debt collectors with more than $10 million annually in consumer debt collection receipts. This covers some 175 debt collectors accounting for more than 60 percent of this market, and it was the first time the federal government had ever asserted supervisory authority over third-party debt collectors. We also have enforcement authority in this area, as do the Federal Trade Commission and state attorneys general, and we consistently work together in a group effort to police unlawful practices in the industry. Both on our own and with these partners, we have ordered companies to halt violations of law and made them refund hundreds of millions of dollars they had unlawfully collected from consumers. All of that experience creates a strong foundation for us now to proceed with our rulemaking to reform the debt collection market.
Debt can overwhelm people and leave them feeling helpless and powerless as they try to fend off harassing debt collectors. By cleaning up the integrity of this process, we can resolve many issues before they become problems.
The student loan servicing market – and indeed, loan servicing in general – is akin to debt collection in that consumers have little choice and cannot vote with their feet when something goes wrong. Looking out for and protecting student loan borrowers has been a priority for the Consumer Bureau since we opened our doors five years ago.
About 44 million consumers now owe money on student loans, and one out of four student loan borrowers are past due or in default. When this happens to a young person, the damage that is done to their credit can disrupt their lives in unexpected and troubling ways. It can make it hard even to pass an employment background check, much less buy a home or a car.
This should not be the case. If you take out a federal student loan to pay for college and later have trouble paying it back, you have a right under the law to arrange a payment based on your income. Cash-strapped borrowers should not be driven to default on a federal student loan. But we continue to see a vast disconnect between the experience of many borrowers and the protections created by the law, which include the right to pay nothing at all if you are out of work or your wages are low.
Student loan servicers are paid to manage student loan accounts and inform borrowers – especially troubled borrowers – about their options for affordable monthly payments and to help them get on track. But a recent government report found that 70 percent of borrowers in default on a federal student loan actually had an income that could qualify them for a lower monthly payment. This raises serious questions about how servicers are discharging their responsibilities and whether they may be harming the most economically vulnerable borrowers in the process.
Last week, the Student Loan Ombudsman issued the latest annual report in this area. It discusses the plight of borrowers who had reached the point of defaulting on their student loans, which should be generally avoidable in light of the available options to help them cope with their debts. Among the findings in the report is that the programs designed to give a fresh start to borrowers in default are failing to fulfill their purpose and may be contributing to re-defaults by hundreds of thousands of borrowers.
Breakdowns in these programs are preventing consumers from getting their student loans on track and into affordable repayment plans. Estimates are that over the next two years, more than 200,000 student loan borrowers will collectively pay more than $125 million in unnecessary interest charges because of gaps between student loan programs. With this report, the Bureau has now documented breakdowns at every stage of the lifecycle for borrowers seeking to pay based on income.
In the report, the Student Loan Ombudsman calls for an overhaul of the process for borrowers to get out of default and back on track, offering recommendations to policymakers and industry to improve the recovery mechanisms for the most vulnerable borrowers. He also recommends that policymakers and companies take immediate action to address these problems, including improving consumer communications, realigning economic incentives to promote borrowers’ long term success, and improving access to servicing data on the performance of borrowers who had previously defaulted. Again, there is much work to be done, but we can see a path forward to make this market work better for student loan borrowers.
I would also like to highlight a positive development in student lending. For nearly three years, the Bureau has raised serious concerns about an industry practice that can cause surprise defaults for borrowers who are doing everything right, triggered by the death or bankruptcy of a co-signer. In 2014, we published a report on this issue of auto-defaults. At the time, we noted that when servicers, banks, and other lenders trigger auto-defaults, that hurts consumers and it may not even be in the best interest of the lenders or investors themselves.
In response, many banks and other lenders told the Bureau that they no longer planned to trigger auto-defaults for their borrowers, which may have seemed to put an end to this problem. Yet there was more to it. Private student loans are often sold and securitized. So in practice, the promises made by lenders are not the end of the story where borrowers find that their loans now have new owners that may not honor these same commitments.
In 2016, the Bureau reported that our examiners cited one or more student loan servicers for engaging in this practice, where a reasonable consumer would not likely have interpreted the promissory notes to allow their own default based on a co-debtor’s bankruptcy. At that time, our Student Loan Ombudsman called on the private student loan industry to take additional steps to protect their customers by removing auto-default provisions related to the death or bankruptcy of a cosigner from their loan contracts.
I am pleased to be able to share a communication I received last week from the Consumer Bankers Association, written on behalf of the nation’s largest private student lenders. They informed the Bureau that these banks have now taken further action by ensuring that their new loan contracts do “not provide a basis for accelerating or placing a good-standing loan in default” upon the death or bankruptcy of a co-signer. This means that even when these new loans are sold or securitized, the terms of the loans will protect borrowers from these harmful practices in the future.
For new borrowers, this is a welcome and noteworthy change, which makes new private student loans somewhat safer today than they were last year. Of course, we remain concerned about the kinds of auto-defaults that may be triggered on older loans, and we will be scrutinizing those practices wherever they may be occurring.
So we are continuing to identify and accomplish incremental changes to the way borrowers pay back student loans. Last year, we announced that we are considering potential industrywide rules to address the widespread problems reported by consumers with both private and federal student loans. For the upcoming year, both our Office of Supervision and our Office of Fair Lending have identified student loan servicing as a priority area for their supervision work.
And just yesterday, the Department of Education took another step to strengthen consumer protections for millions of borrowers by releasing detailed contract requirements for the companies it hires to service Direct Loans. This announcement builds on new policy guidance the Department of Education had released in July, which was developed with our input and issued to inform this ongoing contracting process. This latest step forward marks another important milestone in our joint effort to bring much-needed consistency and accountability to this market and we find the progress here to be encouraging.
As this work goes on, we continue to seek your input and engagement. Student loans play a crucial role for our young people as they seek an education and undertake their first actions to establish their creditworthiness. How they fare here can affect their ability to get a strong start on their financial lives. Amid the ongoing debate about this nation’s higher education policy, we must recognize that the challenges facing the millions of Americans who today are carrying student loan debt will have far-reaching ripple effects on the broader economy as well. With so much at stake, we must continue to find ways to address the student loan default problem and its many harmful consequences.
We have much more to do to improve practices in markets where consumers are paying back their debts – whether they stem from credit cards, auto loans, utility payments, student loans, or any other type of debt. Consumers often find themselves with little or no recourse when things go wrong. The Consumer Bureau is committed to changing that. Consumers deserve to be treated with dignity and respect; they deserve a chance to pay their debts without being forced to jump through impossible hoops to avoid failure.
We have much to cover today and I look forward to our discussions. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.