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[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Notices]
[Pages 13327-13329]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04419]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

[Docket No. CFPB-2013-0004]

Request for Information Regarding an Initiative To Promote 
Student Loan Affordability

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Notice and request for information.

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SUMMARY: This notice requests information from the public to determine 
options that would increase the availability of affordable payment 
plans for borrowers with existing private student loans. Section 1035 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) establishes an ombudsman for student loans (Ombudsman) 
within the Consumer Financial Protection Bureau (Bureau). Among other 
things, the Ombudsman is responsible for making ``appropriate 
recommendations'' to the Director of the Bureau, the Secretary of the 
Treasury, the Secretary of Education, and Congress.
    In October 2012, the Ombudsman presented a report, which 
recommended that policymakers identify opportunities to spur refinance 
and modification activity in the private student loan market. This 
notice seeks information from market participants, consumers, and other 
stakeholders in order to provide more detailed information on ways to 
encourage the development of more affordable loan repayment mechanisms 
for private student loan borrowers.

DATES: Comments must be received on or before April 8, 2013.

ADDRESSES: You may submit responsive information and other comments, 
identified by Docket No. CFPB-2013-0004, by any of the following 
methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: The Bureau encourages the early submission of 
comments. All submissions must include the document title and docket 
number. Because paper mail in the Washington, DC area and at the Bureau 
is subject to delay, commenters are encouraged to submit comments 
electronically. Please note the number associated with any question to 
which you are responding at the top of each response (you are not 
required to answer all questions to receive consideration of your 
comments). In general, all comments received will be posted without 
change to http://www.regulations.gov. In addition, comments will be 
available for public inspection and copying at 1700 G Street NW., 
Washington, DC 20552, on official business days between the hours of 10 
a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect 
the documents by telephoning 202-435-7275.
    All submissions, including attachments and other supporting 
materials, will become part of the public record and subject to public 
disclosure. Sensitive personal information, such as account numbers or 
Social Security numbers, should not be included. Submissions will not 
be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: For general inquiries, submission 
process questions or any additional information, please contact Monica 
Jackson, Office of the Executive Secretary, at 202-435-7275.

    Authority:  12 U.S.C. 5511(c).

SUPPLEMENTARY INFORMATION: There are more than 38 million student loan 
borrowers with over $1.1 trillion in outstanding debt. The majority of 
the market consists of loans originated under Title IV of the Higher 
Education Act. The remainder of the market consists of private student 
loans. In July 2012, the Director of the Bureau and the Secretary of 
Education submitted a report to Congress detailing the private student 
loan market. The report \1\ found that, as of the end of 2011, there 
were more than $8 billion in defaulted private student loan balances, 
with even more in delinquency. Federal student loans frequently provide 
for income-based repayment options for borrowers with partial financial 
hardship, as well as rehabilitation options for borrowers in default. 
In general, private student

[[Page 13328]]

loans do not offer similar modified repayment options.
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    \1\ Consumer Financial Protection Bureau and Department of 
Education: Report on Private Student Loans (2012).
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    The Dodd-Frank Act requires the Secretary of the Treasury to 
designate an Ombudsman within the Bureau. The Dodd-Frank Act requires 
that the Ombudsman present an annual report describing the activities 
of the Ombudsman during the prior year, compile and analyze data on 
borrower complaints regarding private educational loans, and make 
appropriate recommendations to policymakers. In October 2012, the 
Ombudsman released an annual report.\2\ The report, among other things, 
analyzed complaints and other input from private student loan 
borrowers, and noted that many consumers reported difficulties 
negotiating repayment plans with their lenders and servicers in times 
of financial difficulty, as well as challenges finding refinance 
options. Included in the report was a recommendation that policymakers 
identify options to spur the availability of loan modification and 
refinance options for student loan borrowers.
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    \2\ Consumer Financial Protection Bureau: Annual Report of the 
CFPB Student Loan Ombudsman (2012).
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    Some policymakers have sought changes to the treatment of private 
student loans in the bankruptcy code. This policy option is not the 
primary subject of this Request for Information. Rather, this request 
seeks information on options to increase the level of affordable 
repayment options for both pre-default and post-default borrowers in 
distress who wish to repay their loans but may be lacking near-term 
ability to service their obligations.

Loan Modifications

    For the purposes of this request, a loan modification refers to a 
restructuring of a debt obligation agreed to by the creditor and debtor 
where the creditor agrees to a concession. In recent years, many 
homeowners have sought more affordable repayment options for mortgage 
obligations to avoid foreclosure. In such situations, some creditors 
may have an economic incentive to modify the loan, as the net present 
value (NPV) of the restructured debt may be greater in value than the 
value of the collateral after foreclosure costs. However, in other 
situations, with respect to securitized debt obligations secured by 
residential real estate, subordinated note holders might be unwilling 
to approve a change in terms. Given the potential impact foreclosures 
can have on the financial system and local economies, many policymakers 
pursued policies designed to encourage alternative repayment options 
for mortgage borrowers.
    The private student loan market might also benefit from further 
loan modification activity. Even with concessions, creditors might 
increase the NPV of distressed loans through such modifications. 
However, the market for private student loans differs from the market 
for residential mortgages. Private student loans are not secured by 
collateral and have generally lower outstanding balances relative to 
mortgages. These differences might fundamentally impact creditors' 
economic calculus for determining whether to offer a change in 
repayment terms.
    There are also some important similarities between the two markets. 
As with mortgage origination, student loan originators often access 
funding through the asset-backed securities (ABS) market. In 2012, 
public filings reveal that more than $4 billion of private student loan 
asset-backed securities were issued. Like in the mortgage market, 
private student loan underwriting practices have significantly improved 
since the economic downturn, which may limit the level of distress for 
future borrowers. Another notable similarity is the employment of 
third-party loan servicers unaffiliated with the original lender, 
though this practice is less prevalent in the private student loan 
market than in the mortgage market.
    Borrowers of federal student loans have a number of options to 
modify the terms of their obligations to ensure an affordable payment 
plan. For example, borrowers with a partial financial hardship can 
elect the Income-Based Repayment plan, which caps payments on eligible 
student loans as a percentage of income above 150% of the poverty line. 
Borrowers in default can rehabilitate many federal student loans by 
making ``reasonable and affordable'' payments in a consistent, timely 
fashion for a specified period. There are also provisions to adjust the 
status of a rehabilitated federal student loan on a consumer's credit 
report.
    Available data indicate that, in recent years, there has been 
limited modification activity in the private student loan market. There 
are a number of potential impediments to offering alternative repayment 
options. Some of these may include: (a) Accounting guidelines that add 
complexity when offering alternative repayment options without charging 
off the loan; \3\ (b) operational and information technology 
limitations among loan servicers; and (c) incentive mismatch among 
trustees, administrators, and/or noteholders in ABS trusts and loan 
servicers.
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    \3\ See, for example, CNBE Policy Guidance 2010-02, issued by 
the Office of the Comptroller of the Currency in August 2010.
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Impacts on Individual Borrowers and the Public

    Policymakers have employed various measures to prevent foreclosures 
among American homeowners and to mitigate resulting risks to the public 
and the broader economy. Examples of these risks include increased 
stress on insured depository institutions and decreased home values of 
properties proximate to foreclosed homes--both of which can lead to 
further distress. Given the relative size of the private student loan 
market and the nature of the product, private student borrower distress 
is unlikely to contribute to similar, significant systemic risk. 
However, distress among borrowers with all types of student loans may 
cause other negative effects in the broader economy. For example, the 
Department of Treasury's Office of Financial Research described in its 
recent annual report that student loan debt might dampen 
consumption.\4\ Changes in the household headship rates, automobile 
sales, and homeownership by younger Americans might also be impacted by 
student debt levels. Should these risks be significant, policymakers 
may wish to consider partnerships between the federal government and 
the private sector to increase the availability of alternative 
repayment options and reduce the levels of delinquency and default.
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    \4\ Department of the Treasury, Office of Financial Research: 
Annual Report to Congress (2012).
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    The Ombudsman seeks information in order to provide policymakers 
with further details on potential ways to increase payment 
affordability for private student loan borrowers in distress and on the 
risks of failing to do so. The deadline for submission of comments is 
April 8, 2013.
    The Bureau encourages comments from the public, including:
     Consumers;
     Financial institutions, including lenders and loan 
servicers;
     Nationally recognized statistical rating organizations 
(NRSROs);
     Private student loan asset-backed trust administrators;
     Institutions of higher education;
     Credit reporting agencies;
     Debt collectors;
     Housing finance professionals;
     Manufacturers of automobiles and other financed goods;
     Brokers and service providers in the residential real 
estate industry;

[[Page 13329]]

     Professional associations, such as those representing 
health professionals and teachers;
     Providers of financial counseling; and
     Other interested parties.
    The Bureau is interested in responses in the following general 
areas, as well as specific questions below. Please feel free to respond 
to any of the questions outlined below.

Scope of Borrower Hardship

    1 What are the primary drivers of private student loan borrower 
distress?
    a What characteristics might predict distress at loan origination?
    b What characteristics might predict distress for borrowers who 
complete a program of study?
    c What characteristics might predict distress during repayment?
    d What are typical debt-to-income ratios of borrowers in distress?
    2 How do borrowers in distress typically stay current with their 
private student loans? To what extent do borrowers reduce consumption 
or adjust living arrangements to meet obligations?
    a Do borrowers seek to reduce payments on federal student loans in 
order to make payments on private student loans?
    b To what extent do borrowers in distress accrue other debt (credit 
cards, family loans) to meet private student loan obligations?
    c To what extent do borrowers in distress forego ``other 
nonessential expenses'' to meet private student loan obligations?

Current Options for Borrowers with Hardship

    3 What options currently exist for borrowers to permanently or 
temporarily lower monthly payments on private student loan obligations? 
To what extent have these affordable repayment options cured 
delinquencies?
    4 How do lenders typically evaluate whether or not a borrower 
qualifies for these affordable repayment options? If lenders make use 
of financial models, what are the key drivers of these models?
    5 Do lenders work directly with co-signers to modify terms? If so, 
how?
    6 What is the incidence or expectation of re-default rates among 
restructured private student loans?

Past and Existing Loan Modification Programs for Other Types of Debt

    7 What are some examples of loan modification programs sponsored by 
a public entity or the private sector that have been successful? Which 
features of these programs might be applicable to a student loan 
affordability program? Which features of these programs might not be 
appropriate for a student loan affordability program?

Servicing Infrastructure

    8 Is the servicing infrastructure utilized by major lenders 
flexible enough to process loan modifications at scale? What are the 
limitations of these servicing platforms? Are those limitations capable 
of being overcome? What are the estimated costs of overcoming those 
limitations?
    9 What are the key differences between servicing of student loans 
compared to servicing of residential mortgages that must be considered 
when crafting an affordability program?

Consumer Reporting and Credit Scoring

    10 How are payments plans for defaulted private and federal student 
loans currently reported to consumer reporting agencies? How are 
rehabilitated federal student loans reported by consumer reporting 
agencies, and how does that reporting affect credit scores?

Lender Participation

    11 How might an affordability program sponsored by a public entity 
mitigate moral hazard and selection bias?

Borrower Awareness

    12 What are some examples of modification or refinance initiatives 
that successfully made borrowers aware of a new program? Which features 
of these programs are applicable in the private student loan market?
    13 What are the most effective communication mechanisms to reach 
borrowers in distress?

Spillovers

    14 How do student loan payments impact access to mortgage credit? 
How does student debt impact a consumer's ability to accumulate a down 
payment? How does student debt impact a consumer's ability to meet 
debt-to-income requirements for FHA-insured and private sector 
mortgages?
    15 To what extent does student loan debt impact the market for 
automobiles? How does student loan debt impact a consumer's ability to 
secure an auto loan?
    16 What evidence exists about the impact of student loan debt on 
consumption, savings, homeownership, household formation, 
entrepreneurship, and other indicators of economic health?

    Dated: February 20, 2013.
Garry Reeder,
Chief of Staff, Bureau of Consumer Financial Protection.
[FR Doc. 2013-04419 Filed 2-26-13; 8:45 am]
BILLING CODE 4810-AM-P
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