Head of Consumer Watchdog Agency Talks Student Lending, For-Profit Colleges
Richard Cordray, the newly minted director of the Consumer Financial Protection Bureau, is ensuring some of the agency’s focus is placed on student debt.
The bureau announced that it will begin taking complaints from Americans who borrowed money to finance their education—whether difficulties in taking out private loans, repaying the debt, or managing loans that have gone into default. The move is a particularly important one for private borrowers as non-bank lenders had little federal oversight and often-lax regulations prior to Congress passing the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Campus Progress spoke with Cordray and the agency’s new Student Loan Ombudsman, Rohit Chopra, about the complaint system and what the bureau has in the works to help protect the rights of thousands of young Americans who borrow to pay for higher education. The edited interview follows.
Campus Progress: How will this new complaint system you’re implementing benefit young Americans who are saddled with student loan debt?
Cordray: Our sense is, from getting prepared to launch this effort, that federal student loan borrowers have gotten help over the years from the Department of Education but private student loan borrowers had really nowhere to turn and nowhere to seek help.
[With the new complaint system,] that has changed and they can come to us with their concerns and problems and seek help from us. We will stand on their side.
Among the things we are expecting and are interested in hearing about from them are trouble making full payments, any kind of confusion or misleading advertising or marketing of private student loans, billing disputes—which we find with all of our products get a high level of complaints—and issues around deferment and debt collection.
CP: What sort of enforcement mechanisms will be in place to ensure that lenders provide resolutions to borrowers’ complaints that actually provide relief? Essentially, what are the incentives for lenders to cooperate?
Cordray: There’s considerable incentive for them to cooperate, and our complaint function here works as it has with credit cards and mortgages. When we get a complaint, we route that complaint to the institution and give them an opportunity to address it. We’ve found both in the credit card and mortgage field that … when they get it from us it’s harder to ignore. [The financial institutions] make an effort; they have a timeframe they have to meet and it comes back to us.
If it’s been successfully resolved, great—we will check with consumers to understand their view of the [issue] as well. But if it hasn’t been resolved, then we will work the complaint.
If complaints are not resolved, or it’s an inappropriate resolution, we will prioritize those complaints for investigation and consider taking further action—which includes not only the ability to enforce the law, but use of that information to prioritize our examinations of different institutions.
That’s a very powerful tool for us—to be able to actually go out on the ground and of look carefully at [financial institutions’] operations, ask questions, and to see about the concerns that were raised in complaints.
CP: Will the information you get from the complaints also be used to shape any regulation or policy recommendations for Congress concerning the private student lending industry?
Very much so. The reality is that complaints to us are several things. They are for one, an individual opportunity to help the person complaining and better their situation. Second, they are a window into what’s going on out there and that’s incredibly useful for us.
All these different antennae we have from people who come to us and tell us about their experiences, how it affected them—the pattern of those complaints very much affects our priority settings in terms of what we do with the resources of bureau. It helps us prioritize our enforcement actions and our rule writing.
And if we can’t resolve something by writing a rule, we can seek legislative action. It’s also a foundation that Congress understands because they’re constantly getting complaints and inquiries from a lot of the very same people who are now coming to us, so they’re sensitive to that and it gets their attention.
Chopra: In the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the [Consumer Financial Protection Bureau], Congress specifically talks about private student loans and the need to analyze those complaints.
We’ll be issuing recommendations to the Secretary of Treasury, the Secretary of Education, and Congress to make sure, whether through legislation or through other means, we can fix these problems and make the market work better for student loan borrowers.
CP: Previously, through the Federal Register, you also collected complaints from student loan borrowers and experts on the lending industry. Were there any emerging themes? What are your plans for those complaints?
Chopra: We did two big things to get comments from students—and we heard from thousands of them. One was the financial aid shopping sheet and another was comment through the Federal Register Notice on private student loans.
What we know from feedback on the financial aid shopping sheet is that students don’t actually understand how to make some of these choices. They want to know what their payment is after graduation. They want to know what their debt is, and they want to learn how they will repay it. We’re still working through those thousands of comments we received through the Federal Register notice but it’s a lot of the same things [Cordray] has already mentioned: problems with billing, fine print. Hopefully by next month we’ll be able to report back what we’re learning.
CP: This new complaint system is a great way to give young people means for dealing with loans. Are there other programs within the bureau you’re exploring that will empower young people and help them protect their rights as consumers?
Cordray: We have a whole division of the bureau which we call Consumer Engagement and Education that is devoted to working with Americans of all kinds. Young and old, including those in school but also those who are out [of school], and maybe struggling with making decisions about whether to buy a house, how to handle credit card debt, and how those things affect their credit scores.
Part of our mission at the bureau is to inform consumers so they’re better able to make decisions for themselves and their families. That is important to us.
We’ve also have a tool on our website called Tell Your Story, where people can relate to us their experiences in the financial market place, whatever it is that they are concerned about, or what they’ve seen. It’s been tremendously informative for us and, again, helps guide us not only on the actions we’re taking at the bureau but also alert us to where there’s a need … to empower them to make better informed choices.
CP: Will the bureau explore creating simpler documents for students that break down the loan features, similar to the mortgage templates you’ve created?
Cordray: The Know Before You Owe project was started in the mortgage realm, then the credit card realm, and we’ve extended it into the student loan realm. A few months ago, we launched an interactive web tool called the Student Debt Repayment Assistant, which tens of thousands of students have used so far. It helps them understand the terms of repayment and how all of that will work, which is a mystery to a lot of people.
Second, we released a draft of a financial aid shopping sheet that the Department of Education has been eager to work with us on to improve the information on student loans that is provided to students and their families. We’re also conducting a study for Congress on private student loans where we will assemble a lot of this information.
Simplifying the terms, clarifying the choices for people, making it easier to boil that down so they know what the important terms are and they’re not lost in a maze of fine print—that is a priority for us here.
CP: The student loan debt problem has soared to new heights, and is set to exceed $1 trillion soon. Despite this, student loan debt hasn’t received as much media attention as other bubble-crises—like the housing market crash or credit card debt—have. Why do you think that is?
Cordray: Actually, I think that is changing. One of the obvious reasons why the mortgage crisis received so much attention is because the mortgage market is the largest single consumer finance market—and it is multiple trillions of dollars. It has also been credited accurately with being the trigger that brought down the entire economy and sank us into the recession that has been so hard for young people. Many of these young people are struggling to find employment in this tough economy so that’s why the mortgage crisis got the attention it did.
But due to efforts like [Campus Progress’], I think the student loan problem is becoming recognized by people as a large and growing problem. It is not a size comparable to the mortgage problem, but it is significant. It’s approaching $1 trillion and has surpassed credit card debt.
The other thing that’s important here to understand is: Who is this problem affecting?
This problem is focused on young people, who are the ones we should care tremendously about because much of the future of this country rides on their ability to succeed. Young people with talent, with ambition, with smarts, who are trying to get an education—knowing that it’s often a ticket to greater opportunity—lack the finances to do it. If they can navigate the lending market successfully, they can hop up the ladder to success.
But if they navigate it unsuccessfully, they’re set back and won’t be able to get the education they need, or they might get saddled with debt that they could not afford and did not understand. We are taking some of the real hope of our future and dragging it into a mire that is really something that should be of concern to every American.
CP: Are you concerned about for-profit colleges?
Cordray: We are concerned about for-profit colleges—and we’ve said this repeatedly—because we’re concerned in general in the consumer finance market that the normal market forces may not be working properly.
In this area, sometimes its lack of information—people just don’t know enough to make good choices, or the information they have is dense and confusing and therefore impenetrable and they’re left to guess. We saw the same of thing in the mortgage market, and it’s a lot of the same dynamic at work here.
There are also forces at work [in] for-profit colleges where there is no attention to ability to repay—because there are other incentives to making those loans.
We’ve seen instances when some of the for-profit schools are anticipating as much as a 50 percent default rate on loans they make to students. They’re not telling the students that, but they are disclosing that information to their investors. So there is a lot of concern.
CP: What else is on the bureau’s radar that might also help young people, aside from tackling the student loan debt problem?
Chopra: Looking at all the financial products that affect young people in a very holistic approach, and looking at the last two months of what Director Cordray has launched, they are all things that disproportionately affect young people.
He launched an inquiry of overdraft fees that disproportionately affect young people. He has proposed supervising debt collectors, which again touches young people who are saddled with credit card debt or student loan debt. He is making sure that the banks are complying with all the laws and provision including the CARD Act, which makes sure there are no predatory practices that go after college students. It’s not just student loans here—we’re going after every single piece of the puzzle where young people are falling prey.