Pulling back the curtain on the CFPB’s student loan complaint database

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Both presidential candidates have made student loan repayment a priority and there’s growing frustration within Congress and the Department of Education over how many borrowers are either delinquent or in default on their student loans.

With repayment options more generous than ever, blame for the student loan crisis has increasingly been laid at the feet of federal and private loan servicers as well as private collection agencies (PCAs) — the folks in the unenviable position of trying to contact and persuade non-payers to get current on their obligation.

The self-appointed sheriff has been the Consumer Financial Protection Bureau (CFPB), whose push into student loans has, to-date, included penalties levied against private student loan providers (i.e. Discover and Wells Fargo) and institutional loan programs (i.e. Bridgepoint Education), as well as efforts to bring the U.S. Department of Education’s federal student loan servicers under its purview.

At the heart of the CFPB is its complaint database, which has garnered its fair share of congressional side-eyeing. In just less than five years we’ve seen roughly a million complaints that cover everything from mortgages to credit cards to student loans. It provides fascinating insight into the problems and challenges that go with servicing federal and private student loan debt.

A tempest in a teapot

To-date the CFPB has logged around 25,000 complaints (4,500 of which are classified under debt collection rather than student loans), which seems like a lot but turns out actually isn’t. Considering the $1.3-trillion in outstanding student loans represents the largest consumer-held debt outside of mortgages, complaints only represent about 3.8 percent of the entire database and they’re an order of magnitude less than complaints related to mortgages (205,000), debt collection (119,000), credit reporting (113,000), credit cards (76,000) and bank accounts (73,000).

These numbers are also lifetime counts back to March, 2012. Over the past seven months (when federal student loans got their own dedicated sub-product category) total complaints stand at around 6,500, split almost evenly between the two loan programs.

Several thousand complaints hardly seems trivial but we’re talking federal and private loan portfolios that include some 41.5-million and 4 million borrowers in repayment each. That translates into about 8 complaints for every 100,000 (10,000) borrowers currently repaying their federal (private) student loans, none of which the CFPB’s actually verified.

A very difficult process

Under the best circumstances loan servicing’s anything but easy. People move, phone numbers change (one of the most expensive parts of servicing is skip tracing) and even with good contact information, servicers know people don’t want to take their calls.

It’s also rarely a one-and-done exchange. Paperwork gets sent out but it’s borrowers who control when it’s completed and returned, and where forms don’t get filled out correctly the cycle sadly restarts. This time ends up being transactional limbo; no payments have been typically made but no relief’s officially been granted either so penalties accrue and letters or calls continue to come in.

For both sides it’s an exercise in patience that you can see in the CFPB’s numbers. Some 18 percent of complaints related to federal student loan servicing (see table below) involve difficulties decreasing, postponing or moving into more flexible repayment options, which is discouraging given the program specifically touts such benefits.

It’s also apparent in the high percentage of payment handling issues across both loan program types, especially given accusations that servicers are maximizing late fees or rolling overpayments rather than helping borrowers pay down their principal.

Contract terms aren’t there to manage when things go smoothly; they exist to protect parties when things go wrong. That works to a lender’s advantage as it’s they, not borrowers, who need to be compliant with a dizzying array of federal and state regulations and it’s their lawyers who drafted and know the contract’s terms best.

Government knows this information imbalance exists which is why it requires lenders to make borrowers aware of things like fees, penalties and repayment terms not only when they get their loan but also whenever changes are made.

Of course we all know consumers routinely dismiss such disclosures. They’re hard reads for experts but more importantly they run against consumers’ optimism and economic reality. Nobody takes out a loan thinking they’ll struggle to pay it back and someone in need of financing is in no position to reject terms, which effectively means rejecting the loan.

That’s a train wreck waiting to happen given how frequently we know borrowers do end up in trouble. When payments get missed, venting about fees or the frequency of phone calls often ends up being their only recourse; after all, they already agreed to the terms. It also explains why more than a quarter of all private student loan complaints involve borrowers frustrated that they can’t obtain flexible or lower payments on loans that rarely offer such options.

You can see this in the CFPB’s data too as almost four out of every five complaints end up being closed with just an explanation and 80 percent ended up not being disputed by customers.

To be clear, I’m certainly not suggesting that borrowers don’t have legitimate gripes that could benefit from having a government advocate on their side. Loan servicing’s a people-driven process and the folks on the collection side of the call are as human and fallible as the borrowers they’re dealing with.

What I am suggesting is that there’s a difference between complaining about a legitimate wrong and finding something unfair after the fact because it suddenly affects you personally.

It’s what ends up most riling some lawmakers and servicers about the CFPB’s publishing unverified complaints and consumer narratives. Communication breakdowns may be “he said, she said” issues but — at least in the case of the federal loan program — they’re easily verifiable since all borrower calls are recorded. That the CFPB doesn’t and instead lets those accusations stand as facts ends up making the agency look less like a consumer protector and more like a political puppet.

Bad actors or bad rules?

The Department of Education knows it’s difficult to compel repayment yet they’re also sensitive to the idea that borrowers enter into the complaint process at a disadvantage, which is why the contracts they maintain with servicers and PCAs rely on performance-based pricing and borrower allocation models that reward default prevention strategies and customer satisfaction.

The premise that it’s cheaper and easier to prevent defaults than fix them makes sense as does giving companies the flexibility to work with people who are financially struggling. In fact, when the Department renegotiated its loan servicing contractsback in 2014 it specifically boosted how much it pays servicers for current accounts and progressively reduced how much it’d pay the longer a borrower was delinquent. It also stopped penalizing servicers for the number of defaults and increased the weight given to borrower satisfaction when allocating servicers new accounts.

All things being equal these kinds of changes should lead to disproportionately fewer customer service-related issues on federal student loans compared to private loans yet strangely enough they don’t (see figure below).

One explanation is that federal servicing complaints mask two different actors: loan servicers — who process payments and manage delinquent borrowers — and the PCAs that recover defaulted loans or help defaulters get those loans back into good standing.

That makes sense seeing as the borrowers worked, the payment collection strategies employed and fees charged are all different between the two groups, yet it actually only ends up magnifying the frustrations delinquent, as opposed to defaulted, borrowers have.

It turns out that PCA complaints only represent about 25 percent of federal student loan issues and they really only help explain away gripes about fees and call frequency (see figure below), both of which are to be expected. Default collection costs are higher than late payment fees and calls to collect on bad loans are frankly just less friendly after a year of unsuccessful attempts to help borrowers avoid this very situation.

All of this makes the notion that servicers are the logical root of the problem feel wrong given the need for strict adherence to federal and state rules and borrower-centered pricing. From sophisticated auto-dialers to the guided scripts and borrower histories that pop on a call center agent’s screen, the entire process — everything from call frequency to loan information to the options borrowers are presented with — ends up being a full-on exercise in managing regulatory compliance.

That suggests the real breakdown, where it exists, isn’t with servicers but instead in regulatory oversight that can be unclear, delayed or so poorly designed that it requires routine updating. For the CFPB that’s an uncomfortable thing to have to admit since it essentially means some of the issues it’s tackling and rules it’s trying to impose are beyond the agency’s purview.

The same logic holds for private student loan servicing even with companies like Navient bearing a disproportionate share of the complaints (mainly because of the outsized share of the private loan originations done by its corporate sister Sallie Mae). When the relatively small nominal number of issues are coupled to just eight percent of the 255 servicers accounting for 90 percent of all complaints, it’s extremely difficult to suggest with a straight face that problems are industry-wide.

When the pendulum swings too far back

Where student loans are concerned the CFPB increasingly looks and behaves like a hammer in desperate search for a nail. The fact that it maintains and acts on a public database of unverified claims in the presence of clear selection bias is worrisome. That it treats loans servicers as “guilty until proven guilty” should be cause for much deeper congressional scrutiny.

Student loans are as complex as any other contractual agreement and borrowers deserve an advocate with the legal understanding to help them fully exercise their rights when things go sideways. At the same time, equity is a pendulum that swings both ways. For a country that’s had to endure a presidential election season riddled with accusations passed off as facts, where the opportunity exists we should hopefully want and expect less of it from the federal government, not more.

@EdAnalyst

Note: This article was originally posted on LinkedIn.