By Donielle Tigay Stutland, J.D.
In a newly released report, the GAO is recommending that the CFPB provide written clarification to nonbank private student lenders on their authority under the FCRA to offer loan rehabilitation programs.
The U.S. Government Accountability Office (GAO) has released a May 2019 report, under its authority from the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), giving recommendations and seeking clarification from the Consumer Financial Protection Bureau on private student loan rehabilitation programs.
In May 2018, the federal Fair Credit Reporting Act was amended by Section 602 of EGRRCPA to allow some financial institutions—including banks—to voluntarily offer rehabilitation programs for borrowers who default on private student loans. Borrowers who complete these programs can request to have the default removed from their credit reports, which could slightly improve their access to credit. The EGRRCPA also provided that the GAO may review the implementation and effects of these programs. The GAO has noted that nonbank financial institutions are also interested in offering these programs but are not certain of their authority to do so. The report (GAO-19-430) recommends that the CFPB clarify which types of financial institutions have the authority to implement these programs.
In February 2019, the Federal Reserve Board and Federal Deposit Insurance Corporation issued a joint advisory that financial institutions may offer voluntary private student loan repayment programs under the EGRRCPA (see Banking and Finance Law Daily, Feb 4, 2019).
Report Findings. The report looked at the risks associated with private loan rehabilitation programs and noted that private student loan rehabilitation programs are expected to pose minimal additional risks to financial institutions. The report indicated that private student loans compose a small portion of most banks' portfolios and have consistently low default rates. In almost all cases, banks have mitigated credit risks by requiring cosigners for private student loans. Rehabilitation programs are also unlikely to affect financial institutions' ability to make sound lending decisions, in part because the programs leave some derogatory credit information—such as delinquencies leading to the default—in the credit reports.
The report also concluded that the effect of such programs would be small; borrowers completing private student loan rehabilitation programs would likely experience minimal improvement in their access to credit. The report noted that a simulation revealed that removing a student loan default from a credit profile would increase the borrower's credit score by only about eight points, on average, and that an eight-point increase would be only a very small improvement to the average credit rating. The effect of removing the default was greater for borrowers with lower credit scores and smaller for borrowers with higher credit scores. The report gave reasons that removing a student loan default could have little effect on a credit score: the delinquencies leading to that default—which also negatively affect credit scores—remain in the credit report, and borrowers in default may already have poor credit.
Report Recommendations. GAO is making two recommendations: 1) the CFPB should provide written clarification to nonbank student loan lenders on their authority to offer private student loan rehabilitation programs, and 2) the CFPB, after consulting other regulators and industry groups, should provide written clarification on what information in a consumer’s credit report constitutes a private student loan reported "default" that may be removed after successful completion of a private student loan rehabilitation program.
The report notes that the CFPB, in a written response, has indicated that it does not plan to act on the first recommendation. The CFPB noted that the FCRA does not govern the actions of private student loan lenders; as such lenders are not included in the definition of "financial institution" under the Act. The GAO notes that although the FCRA does not require the CFPB to act on this issue, the Bureau 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 from a credit report.
With respect to the second recommendation, the CFPB’s response letter on the GAO’s report stated that the issue was premature because of ongoing work by the Consumer Data Industry Association. CFPB indicated that after such work is completed, the CFPB will work and consult with the relevant regulators to determine if additional guidance or clarification is needed.
Companies: Consumer Data Industry Association
MainStory: TopStory BankingFinance CFPB FairCreditReporting FederalReserveSystem FedTracker Loans OversightInvestigations
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