We Need a New Way to Evaluate Student Lenders
Are private education lenders getting a bad rap?
After reading the Wall Street Journal's recent profile on Rohit Chopra, the Consumer Financial Protection Bureau's student-loan ombudsman, one gets the distinct impression that this might be the case.
Apparently, this subset of the financial services industry takes exception to being called out by him for dragging their feet on implementing meaningful loan remediation programs. They also object to being taken to task on the manner in which they report education-loan payment delinquency and default data—a format, they insist, that's consistent with the one that's used for all of their other consumer-lending activities.
Most of all, private lenders take umbrage with being chastised by the CFPB for their alleged missteps when the federal government—whose direct and guaranteed-loan programs are eight to 10 times the size of all of them put together—squeaks by with nary a mention.
So what gives? Are these companies being unfairly singled out by the student-loan watchdog or, as you might expect, is the truth somewhere in the middle?
Let's start by understanding the role that Chopra's supposed to play.
Identifying the Issues
The office of the student-loan ombudsman owes its authority to the Dodd-Frank Act, which requires the secretary of the Treasury and the CFPB's director to "provide timely assistance to borrowers of private education loans." The bureau's annual reports draw upon the substantive complaints it receives during the immediately preceding period and the investigations it undertakes as a result.
Case in point: In its fall 2014 semi-annual update, the bureau's director notes that of all the complaints it received between October 2013 to September 2014 from student borrowers, 57% had to do with a variety of difficulties in dealing with public and private lenders and loan-servicing companies—grievances that run the gamut of payment processing issues, problems obtaining accurate information on repayment options (particularly with regard to the private lenders) and even accessing basic account information. Another 39% involved repayment issues where financially distressed borrowers were frustrated by their inability to negotiate payment terms they can afford to make under the circumstances.
So when the ombudsman calls out private lenders for doing too little, too poorly and too slowly, it would appear that that the criticism is justly levied. However, when it comes to how repayment data – which is critical to the bigger picture — is being reported by all these lenders, well, that's somewhat less clear-cut.
Making Sense of the Data
Consumer installment-loan remittances are typically made on a monthly basis. Consequently, it makes sense that lenders should track that data the same way. For example, payments that are received on or before the due date are considered "current." Those that fall on either side of the contractual grace period (usually between five and 15 days after the due date) are noted as one to 30 days past due. Remittances that are tardier fall into the 31 to 60, 61 to 90 and later categories. This methodology is particularly useful for trend-spotting or, as a former colleague was fond of saying, "watching the pig move through the python."
Now for the confusing part: There is no universal standard for reporting this data to the outside world.
Although the most transparent loan companies publicize each category of delinquency, many others limit their reporting to later-stage problems (61 to 90 days late, 91-plus days late, and so forth). But that's just the half of it—literally—and it's where the government's handling of its own loan portfolio deserves criticism.
The Differences Between Private & Federal Student Loan Reporting
At last check, aggregate student loan balances are in the vicinity of $1.3 trillion. Yet only half that amount is currently in repayment because the underlying borrowers have completed their studies or left school for some other reason. Therefore, by extension, delinquencies and defaults should be measured solely against the aggregate amount of the loans that are in the process of being repaid.
Instead, the government expresses that data in the form of a percentage of the total amount that's outstanding (including loans that are not due to be repaid at this time), which has the effect of understating the severity of the problem by half.
In other words, the 11% delinquency rate that the Federal Reserve Bank of New York recently reported for student loans that are 90 or more days past due should actually be 22%. And that doesn't even take into account problem loans that have been temporarily accommodated (with forbearance or deferment) or those that are "only" one or two payments late.
There's even a difference of opinion on what constitutes a default.
Private sector lenders will typically call (terminate) a loan where the borrower falls three or more months behind, or sooner if he files for bankruptcy or announces that he has no intention of continuing his remittances for any other reason.
By contrast, Federal Direct and guaranteed loans (such as in the case of roughly $300 billion-worth of Federal Family Education Loans) are declared to be in default when payments migrate beyond 9 to 12 months past due—an absurdly long period by any measure. (Perhaps this has something to do with the government being on the hook for the loan balance at that point.)
As for private student lenders' tardiness in implementing meaningful loan remediation programs (including restructures that permanently extend durations and modifications that formally abate interest and/or reduce principal), that same reluctance also exists with government-backed FFELs, even though the borrowers are fully entitled to explore the myriad relief programs that the feds have put into place.
A Better Approach
Given all these inconsistencies, it would appear that a good first step would be to get all of the parties—government and private lenders, and subcontracted private loan-servicing companies—onto the same page for reporting purposes.
We can do that by establishing a universally applied protocol for depicting student-loan portfolio performance in a way that borrowers and taxpayers alike are able to evenly and objectively compare all these entities.
Specifically, delinquencies should be reported in terms of all their varying degrees of severity (past-due 30, 60, 90, and so forth) and expressed in percentage terms of the value of the loans that are currently in repayment. Likewise for defaulted contracts.
In addition, temporarily restructured loans (including those that have been granted forbearances and deferrals) should be reported as a discrete subset of the overall. That way not only would we be better equipped to gauge the efficacy of this approach, but we'd also gain a sense for the extent to which short-term solutions are being used by lenders and the servicers they hire to mask the severity of the underlying issue for selfish gain. The same goes for contracts that have been permanently restructured or modified.
Regarding what constitutes a default and when that should be declared, why not mandate that loans that go unpaid for 91 days be viewed as such—whether or not the D word is used—and in the case of those that are owned or guaranteed by the federal government, require lenders and servicers to immediately reconfigure the contracts under one of the many officially sanctioned relief programs?
The point is this: Reporting variations and accusations aside, $1.3 trillion is already out the door. If we want it back—without killing young borrowers or unduly burdening taxpayers in the process—we should be willing to do all we can to help these folks to repay their debts, even if that means waiting a little longer for the money or reworking every single loan in the portfolio.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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