Moneybox

The Government’s Student Loan Watchdog Quit in Disgust This Week. Here’s What the Conflict Is Really About.

WASHINGTON, DC - NOVEMBER 27:   Supporters of the Consumer Financial Protection Bureau hold signs as they gather in front of the agency November 27, 2017 in Washington, DC. President Trump has picked White House Budget Director Mick Mulvaney as the acting director after former director Richard Cordray stepped down and named his chief of staff Leandra English as acting director, setting up a possible court battle over who will lead the agency.  (Photo by Alex Wong/Getty Images)
The Consumer Financial Protection Bureau is going through a bit of a rough patch.
Alex Wong/Getty Images

This week, the federal government’s student loan watchdog quit his job in disgust. Seth Frotman, who has served as the Consumer Financial Protection Bureau’s student loan ombudsman since 2016, resigned Monday in a furious letter, which accused the Trump administration of selling out borrowers to corporate interests. Frotman’s note covered a long list of grievances, and pointed to several examples of political appointees hamstringing the agency, but there’s one issue hanging over it all: Federal officials have seemingly decided to stop policing the student loan servicing industry, an industry that has played a central yet underappreciated role in America’s education debt crisis.

“The Bureau’s new political leadership has repeatedly undercut and undermined career CFPB staff working to secure relief for consumers,” Frontman wrote in his letter. “These actions will affect millions of student loan borrowers, including those harmed by the company that dominates this market.” According to the Wall Street Journalwhich cites “people familiar with the matter”—that line was a very thinly veiled allusion to the CFPB’s ongoing lawsuit against Navient, long one of the nation’s largest servicers.* There has been speculation that the agency is about to back off that suit as part of a wider easing of oversight on the servicing industry, which has been the frequent focus of the ombudsman’s work.

The CFPB’s student loan ombudsman is supposed to act as its in-house advocate for Americans who are struggling with their college debt. His office takes complaints from individuals who are having trouble paying back their loans, tries to resolve them, and publishes detailed reports about the problems borrowers are encountering. Most of the complaints the ombudsman receives are directed at loan servicers—the middlemen that the government relies on to manage borrowers’ accounts, guide them on their payment options, and collect the checks each month. Some servicers have a better reputation than others, but as a whole, the industry is notoriously prone to mistakes like botching paperwork and failing to properly process payments. The screw-ups can be a headache to fix and often cost customers money—or in a worst-case scenario, might lead them to unnecessarily default on their debts. The ombudsman’s office has cataloged these problems carefully over the years, and were it not for that work, the public would have little firm idea about the extent, and have far less recourse .

The CFPB hasn’t just acted as a repository for gripes about the servicing industry, though: It’s also taken action against it. In January 2017, as most of Washington was girding itself for the Trump era, the agency made a show of force and sued Navient, the industry-dominating corporation, accusing it of “systematically and illegally failing borrowers at every stage of repayment.” The company allegedly kept its operating costs down by cutting corners on customer service, steering borrowers into bad repayment options that were simpler and cheaper to administer. It failed to do basic things like inform borrowers of key deadlines for renewing their repayment plans. It also made grossly negligent errors like telling credit agencies that some disabled customers had defaulted on their loans, when in fact their debts had been discharged. Joining with the CFPB, several state attorneys general have also filed suit against the company.

Navient’s alleged behavior isn’t just a sideshow in America’s struggle with education debt. It’s very much at the core of it. Even if students borrow too much for school, they are supposed to have options like income-based repayment plans that at least keep the debt manageable month-to-month. But more than 15 percent of borrowers are still defaulting within four years. That shows servicers are failing miserably at helping borrowers—and the Navient suit tells us that at least some of the problem is probably profiteering.

The Trump team, however, has shown less concern for the plight of student borrowers than for the companies that want to make a buck off them. Secretary of Education Betsy DeVos is in the process of deep-sixing rules painstakingly pieced together by the Obama administration that were supposed to help clamp down on the worst for-profit colleges. She’s also run interference on behalf of servicers, including in the Navient case. Last year, she ended an information-sharing agreement with CFPB, cutting it off from data necessary to oversee the industry. In March, her department preposterously informed state regulators that they were barred from enforcing state consumer protection laws against servicers because it would “undermine uniform administration” of the federal student loan program. Last month the CFPB’s lawyers told a federal judge the Department of Education is preventing it from obtaining documents it needs in the Navient suit. Meanwhile, DeVos’ department has taken steps that may make it easier for Navient to win a major servicing contract up for grabs.

Inside the CFPB, things are no better. The agency is currently being run by the White House’s budget director, Mick Mulvaney, a former Republican congressman who previously argued that the agency shouldn’t exist. Since taking over, Mulvaney has been a good friend to the financial services industry generally, shuttering a number of the CFPB’s lawsuits and investigations. In March, he closed its Office of Students and Younger Consumers, and folded Frotman’s ombudsman team into the CFPB’s financial education office. This move raised questions about whether the agency will pursue any major new enforcement actions against predatory lenders or servicers, or if the student debt team will be relegated to dealing with financial literacy issues.

Another question still to be determined is whether Mulvaney—who has been evasive when asked about the CFPB’s enforcement actions—will simply quash the Navient lawsuit altogether. It’s looking pretty likely he will. Conservatives, such as the Wall Street Journal editorial board, have urged him to drop the case. Navient’s chief executive has done the same. And earlier this year, ProPublica reported that Mulvaney’s crew had told CFPB lawyers to prep for a potential settlement with Navient, which staffers were worried might not amount to more than a slap on the wrist. That prompted a letter from Democratic senators, who demanded information on the CFPB’s recent interactions with Navient.

Even if Mulvaney forces the CFPB to bail on the lawsuit, states could continue pursuing their own cases. But the CFPB’s exit would deprive the effort of resources and manpower. More broadly, the Trump administration has clearly decided to go easier on servicers, just as it has decided to go easier on predatory payday lenders or for-profit colleges. That likely means more borrowers will be abused under its watch. Frotman’s resignation is a warning of what’s to come.

*Correction, August 31, 2018: An earlier version of this post incorrectly referred to Navient as the nation’s largest student loan servicer.