September 22, 2019

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GAO report on private student loan rehabilitation programs calls on CFPB to provide clarification

A new report issued by the Government Accountability Office titled, “Private Student Loans: Clarification from CFPB Could Help Ensure More Consistent opportunities and Treatment for Borrowers,” calls on the CFPB to provide clarification to nonbank private student loan lenders regarding private student loan rehabilitation programs.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act) passed by Congress last year amended Section 623 of the Fair Credit Reporting Act to allow a “financial institution” to honor a consumer’s request to have a reported default regarding a private education loan removed from the consumer’s credit report without the information being considered inaccurate when the consumer successfully meets the terms of a private student loan rehabilitation program offered by the financial institution.  The amendment also provides that if a financial institution is supervised by a federal banking agency, it must obtain the agency’s approval of the loan rehabilitation program.  In addition, it directed the GAO to review the implementation of the amendment.   (In February 2019, the FDIC and Federal Reserve Board issued a joint advisory to make financial institutions aware of the provisions in the Economic Growth Act dealing with loan rehabilitation programs.)

The report discusses the uncertainty that exists as to two issues concerning loan rehabilitation programs under amended FCRA Section 623.  The FCRA generally defines a “financial institution” as a bank or credit union.  Accordingly, the GAO reports that uncertainty exists about the authority of nonbank lenders to offer private student loan rehabilitation programs that includes the FCRA safe harbor for removing a default from a consumer’s credit report.  The GAO recommends that the CFPB, in light of its general FCRA rulemaking authority as well as its FCRA enforcement authority, provide written clarification to nonbank private student loan lenders on their authority under the FCRA to offer such programs. 

Following a review of a draft copy of the GAO’s report, Director Kraninger sent a letter to the GAO stating that the Bureau does not intend to act on this recommendation, observing that there is no Congressional directive for a financial institution that is not supervised by a federal banking agency to seek the Bureau’s approval for a private student loan rehabilitation program nor does the FCRA indicate that the Bureau’s approval would carry any consequences.  (Director Kraninger’s letter is an appendix to the report.)  In response, the GAO states that “we maintain that although the [Economic Growth] Act does not require CFPB to act on this issue, CFPB could play a role in clarifying whether FCRA authorizes nonbanks to offer rehabilitation programs that enable the lender to obtain legal protection for removal of default information from a credit report.  CFPB intervention is warranted given the lack of clarity in the private student lending industry and is consistent with CFPB’s supervisory authority over nonbank financial institutions and its FCRA enforcement and rulemaking rehabilitation programs.”  In the GAO’s view, such clarification could result in more lenders offering rehabilitation programs.

The second area of uncertainty discussed in the GAO report involves what constitutes a “default” for purposes of amended FCRA Section 623.  The GAO reports that the FDIC, Federal Reserve, and OCC officials have indicated that they do not have the authority to interpret what constitutes a private student loan default that can be removed upon successful completion of a rehabilitation program.  Accordingly, given the CFPB’s FCRA rulemaking authority, the GAO recommends that the CFPB provide written clarification on the meaning of “default” after obtaining insight from the prudential regulators and relevant industry groups.

In her letter discussing the draft GAO report, Director Kraninger states that such clarification is premature because of ongoing work by the Consumer Data Industry Association to update the credit reporting guidelines for private student loans and after such work is completed, the CFPB will consult with the relevant regulators and other interested parties to determine if additional clarification or guidance is needed.  In response, the GAO states that the Association’s work “presents a good opportunity for CFPB to participate in these discussions and to work in conjunction with the industry and other relevant regulators to help alleviate any contradiction between what CFPB would determine in isolation from any determination made by industry.  Further, such participation would allow CFPB to weigh in on legal and policy issues from the start, potentially avoiding any need for future rulemaking.”  The GAO also comments that the CFPB’s involvement and issuance of clarification would help to ensure more consistent treatment among borrowers participating in rehabilitation programs as well as consistency in credit reporting information.

We support the GAO’s recommendations for clarification by the CFPB as to both areas of uncertainty.

Other issues discussed in the report include the level of risk presented by private student loan rehabilitation programs to financial institutions and the effect of such programs on a borrower’s credit score and access to credit.

Copyright © by Ballard Spahr LLP

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Culhane, Ballard, Partner
Partner

John L. Culhane, Jr., is known for his work advising on interstate direct and indirect consumer and residential mortgage loan and leasing programs, through both traditional brick-and-mortar facilities and e-commerce. Before joining Ballard Spahr, Mr. Culhane was associate counsel with Mellon Bank, N.A.; associate counsel with Bank of America NT&SA; and senior attorney (section chief) with the National Credit Union Administration, the federal agency regulating federal credit unions.

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