Small Agency, Big Impact

In the latter half of the 2000s, it became commonplace for regulators and policy analysts to refer to the “Wild West” landscape of student lending, especially private student loans. A decade later, the Consumer Financial Protection Bureau has announced itself as the new sheriff in town to the student loan industry and the for-profit colleges that fueled it.

Launched in 2011, the agency was formed as a response to the 2007-8 financial crisis and given oversight of mortgage lending, credit cards and student loans. Its formation put the regulatory functions of a number of federal agencies under one roof and meant that, for the first time, someone was looking over the shoulders of many private companies in higher education and other industries.

The result of that scrutiny over the last two years?

• In July 2015, the agency ordered Discover Bank to repay $18.5 million in student loans.
• In August, it took action against Wells Fargo’s student lending division for illegal student loan practices, ordering the company to pay a $3.6 million penalty and provide $410,000 in relief to consumers.
• In September, it fined Bridgepoint Education $8 million for allegedly deceiving students into taking out private loans that were more costly than advertised. The agency also ordered the for-profit college provider to award $23.5 million in student loan relief.

Most telling of all were the lawsuits the bureau filed against Corinthian Colleges and, later, ITT Technical Institute for separate predatory lending schemes. Those lawsuits preceded further federal sanctions and helped drive the collapse of Corinthian in 2015 and ITT this summer.

For-profit colleges were not part of the agency’s stated oversight mission. But its focus on student financial products led the CFPB to investigate those entities’ roles in facilitating private student loans as well as misrepresentations of outcomes like job placement rates.

The agency began looking into the for-profit chains at a time when the political environment in Washington was much less receptive to aggressive regulation of the industry. It eventually played a larger role than initially anticipated by many in higher ed in dealing a major blow to the for-profit industry.

It has, meanwhile, also reshaped the regulatory landscape for student lenders by hearing consumer complaints, issuing new lending standards and taking enforcement actions involving specific institutions. The CFPB focused not just on the providers of private student loans but also the entities -- guarantors and loan servicers -- who support the biggest lender all, the federal government. And it is primed to have an ongoing part in cleaning up practices in the student lending sector.

Senator Elizabeth Warren, the Massachusetts Democrat who was instrumental in establishing the CFPB, said in 2011 congressional testimony that enforcement is generally a last resort but having a “cop on the beat” is an essential tool for consumer protection. She said in a statement that the Bridgepoint action was the latest example of the agency acting on behalf of students.

“In just five short years since the CFPB opened its doors -- even as Republicans are trying to kill the agency -- we’ve seen example after example of the CFPB standing up for students who’ve been cheated by shady for-profit colleges and greedy student loan companies,” she said. “It’s increasingly clear with each enforcement action that the CFPB really is starting to level the playing field for students in this country.”

Clear Priorities

The agency was established by the 2010 Dodd-Frank Act, a law pushed by Warren (at the time a special adviser to the president) and other Democrats in response to the financial abuses that drove the financial crisis. Student lending quickly emerged as one of its key stated policy priorities, as seen in the cases it pursued.

“The CFPB certainly has a lot of its fingerprints on this shift in policy toward the for-profit colleges and toward questionable marketing and questionable loan practices,” said Teddy Downey, executive editor at the Capitol Forum, which provides analysis of consumer protection, antitrust enforcement and other issues.

Ori Lev, a lawyer at D.C.-based firm Mayer Brown and former deputy enforcement director at the CFPB, said the agency’s actions in the student loan space have helped raise the profile of the issue, much like the impact of its enforcement in the mortgage servicing market.

Consumer advocates say the CFPB’s impact has gone far beyond the enforcement actions it has taken against specific institutions and that the agency has played a key role in uncovering and publicizing abuses affecting student borrowers. The CFPB launched a complaint reporting system for student borrowers that provided an outlet for victims of shady dealings to report problems where they had none before. And the bureau is drafting a Payback Playbook to help guide borrowers through an overwhelming number of choices for payment plans.

“They’ve done a really great job highlighting a lot of the abuses in the for-profit [industry] and in the servicing sphere,” said Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “Having a national agency able to take complaints nationwide and able to do investigations that private citizens are not able to do has been very meaningful in this sphere.”

Influence on Other Regulators

The bureau has pushed other agencies to become more forceful in their own enforcement of those sectors as well, observers said, both through the influence of key personnel and a lead CFPB role in federal interagency collaborations. They say the agency’s leadership has helped push other agencies, like the Education Department, to take a more active regulatory role in the for-profit and student loan servicing areas.

Rohit Chopra, the agency’s first student loans ombudsman, joined the U.S. Department of Education in January as special adviser to Education Secretary John King Jr. He previously was a senior fellow at the Center for American Progress after leaving CFPB. (Chopra this month moved to the Hillary Clinton campaign’s transition team.)

“The CFPB is not just an amorphous institution. It’s made up of people with ideas and priorities,” Downey said.

Downey observed that CFPB has thus had a direct influence on the department through former employees like Chopra. But it’s also influenced the department with sharing of information and competition for enforcement and jurisdiction, factors reflected in recent steps by the department.

The Department of Education in July launched a federal student aid feedback system. The department has also taken a more forceful role in enforcement on for-profit college and student loan servicing issues. The two agencies collaborated with the Treasury Department to release in July a set of customer service standards for student loan servicing companies.

In 2014, an interagency task force launched to build on the work being pursued separately by the Federal Trade Commission, the Securities Exchange Commission, the Departments of Justice, Treasury and Veterans Affairs, and the CFPB. Many cited the task force as driving investigations and enforcement actions in the for-profit sector. Secretary King has become increasingly outspoken on for-profits in particular, even using the denial of nonprofit status for one institution as a warning to other colleges looking to dodge federal oversight.

Message to #4profit schools who are thinking about converting to nonprofit status for the wrong reasons: #DontDoIt pic.twitter.com/Jnyngb9dnl

-- U.S. Dept of Education (@usedgov) August 11, 2016

Downey said the Department of Education’s involvement in the sector hasn’t been a question of the tools available but the willingness of its leaders to go after the sector.

“This not a question of law or jurisdiction,” he said. “It’s a question of political will.”

Role Going Forward

It’s not clear what role the CFPB will continue to play in oversight of for-profits. In investigations involving ITT and Corinthian, the agency targeted private student loans facilitated by the institutions.

“The hook for CFPB’s jurisdiction -- at least predominantly for the for-profit side -- has been the for-profit’s willingness to make their own [private] loans, to be lenders, or at the very least to facilitate a private loan scheme,” Downey said.

He and other observers said that as for-profits have drawn back from facilitating private student loans, the CFPB is likely to take a less active role in regulating the sector. That’s because when private student loans aren’t in play, the watchdog agency’s jurisdiction becomes less clear.

“The CFPB only has authority over for-profit schools if they can tie the school’s conduct to either private student loans or debt collection activity,” Lev said.

Agencies like the Department of Education and Federal Trade Commission, on the other hand, have much broader jurisdiction to act in the for-profit sphere.

Some prominent voices within the agency have argued that it has jurisdiction over any financial product, including federal student loans. The CFPB said it does not comment on issues of jurisdiction. But spokeswoman Moira Vahey said CFPB has authority over entities that offer consumer financial products and services.

Pushing the Envelope

The agency hasn’t been without its critics, including those who say it has overstepped its role in some instances.

Richard Hunt, president and CEO of the Consumer Bankers Association, has written that the agency should reform its complaint process, which he said takes complaints directly and releases them each month unverified and without context. He also said the agency’s high-profile enforcement actions don’t provide clear guidance to the industry as a whole.

Hunt said in a statement that multiple disclosures, in addition to strong underwriting by lenders, are helping student loan borrowers pay off their debt.

“Robust underwriting used by banks, plus strong servicing programs to assist their borrowers throughout the life of the loan, are helping families meet their obligations. To make college more affordable, we need to help students become better informed, more careful borrowers,” he said.

Aaron Lacey, a lawyer in St. Louis, whose clients have included entities like for-profit colleges and others in the higher ed sector, said the CFPB has gone beyond its jurisdiction in certain arguments made in the Corinthian and ITT cases.

“I certainly believe there were elements of those actions that arguably went beyond what most people felt was the purview of the CFPB,” he said.

The agency suffered a rare public setback in April when a federal judge ruled that the agency did not have authority over college accreditors. U.S. District Judge Richard J. Leon blocked the CFPB’s efforts to force the Accrediting Council for Independent Colleges and Schools to release information about its approval process for several for-profit college chains.

It was another issue where the bureau was out in front of other regulators. Two months later, the federal panel that oversees accrediting agencies recommended shutting down ACICS, and the department announced last week that it would terminate federal recognition of the accreditor.

Aside from the ACICS case, Lacey said it was hard to imagine the agency’s enforcement activities otherwise being seriously reined in on for-profits. 

“It is hard for me right now to imagine anyone feeling a lot of heat for going after this industry,” Lacey said. “It is so unpopular. The narrative is too good for cracking down on for-profits. It’s very hard to sell the counternarrative.”

And although the CFPB has had a busy summer, more enforcement actions involving student loan servicing companies may be forthcoming before the year is over. CFPB has issued NORA notices -- providing notification to institutions that agency staff intend to recommend a potential claim to the director -- to Xerox, First Marblehead and Navient, according to investor filings issued by those companies.

Lev said all of those cases “seem ripe for resolution.”

The agency said it does not comment on potential enforcement actions.

Student loans ombudsman Seth Frotman, who assumed that role after Chopra’s departure, said the bureau has done considerable work setting up the first federal supervisory program to oversee student loan servicers’ compliance with the law and to root out harmful practices.

“We are working to create a market that better protects student loan borrowers,” he said.

Frotman said that serious problems remain for the CFPB to tackle in the student loan servicing sector. He said breakdowns in student loan servicing have left millions of student borrowers without protections against default that they are guaranteed by law. His predecessor has often compared the patterns in the industry to those in the mortgage sector before subprime mortgage crisis. And Frotman didn’t shy away from making the same comparison himself.

“You can make the case that in certain regards what is happening in terms of student loan breakdowns is even more acute and more troubling than what you saw in the mortgage space,” Frotman said.