By Aaron Wells, Chattanooga, TN—Officials with the Consumer Financial Protection Bureau [CFPB] plan to form new regulations for private loan creditors after seeking input from market stakeholders.
According to a news release by the Federal Register, there are more than 38 million student loan borrowers and outstanding debt has ballooned to over $1.1 trillion. While the vast majority of these are made by the federal government, the remainder consists of private loans.
In 2012, the director of the CFPB submitted a report to Congress detailing the private student loan market. According to the report, defaulted private student loans amount to over $8 billion, with even more in the delinquent stage.
“The student loan crisis has brought about new recommendations, and anything that helps borrowers I think is a good thing,” Dianne Cox, director of financial aid, said.
While federal loans often provide income-based repayment options for borrowers and a variety of options for those in default, according to the Federal Register news release, private loans are often much more difficult to modify if a borrower is unable to make payments in the amount originally agreed upon with the creditor.
“It sounds like the new rules will force lenders to be more flexible with refinancing and loan repayment terms,” Cox said. “These proposed changes aim to make it easier for borrowers to remain in good standing on their loans.”
Because private loans are often less flexible those made by the federal government, CFPB officials hope new regulations in the private sector will not only positively impact private borrowers, but could also lead to more timely repayments of federal student loans, Cox said.
“There are students who borrow the maximum federal student loans and then tap into more expensive private loans. Because collection on private loans is generally more aggressive, some of these borrowers will default on their federal student loans but take care of their private loan payments, if possible,” Cox said. “Borrowers who just have federal loan debt are struggling, but those with both private and federal loan debt have a double whammy.”
New regulations will also address the business practices of crediting agencies as they relate to customer service.
According to the CFPB report submitted to Congress, borrowers who called or emailed their private loan provider were often transferred to various lending departments and were given contradicting instructions from loan officers in the same office, which was also a characteristic of the home mortgage industry that collapsed in 2008.
“Student loan borrower stories of detours and dead-ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business,” Rohit Chopra, CFPB Student Loan Ombudsman, said in statement to the Federal Register. “Consumers deserve clarity, not chaos and confusion.”
Cox said new, clarified regulations could be beneficial to borrowers, as federal officials seek to avoid a crisis similar to what the mortgage industry faced five years ago.