Tag: CFPB

Corinthian Colleges/Aequitas Capital Management, Inc.

In the late 1970’s and thereafter, the Higher Education Act (“HEA”) was amended to allow greater access to Title IV federal student loans for students attending “for profit” schools.  Most of these for profit schools provide vocational type courses and cater to lower income individuals who may or may not have graduated high school.  NCLC’s Student Loan Law refers to a statement to a Senate committee from a recruiter for a truck driving school in which he said the the only qualifications for getting enrolled with a student loan are that the applicant is breathing, over 18 years old, and has a driver’s license.

Now, not all non profit schools take advantage of the system and their students.  However, as the number of  for profit schools has grown over the last 35 years, the number of abuses in both the granting and collection of student loans has proliferated.  Given the fact that there is no statute of limitations on federal student loans, many unsuspecting young people, who were only trying to learn a trade, find themselves in a tough predicament.

In an attempt to curtail improper action, DOE instituted the 90/10 rule which requires for profit schools to demonstrate that at least 10% of the income comes from sources other than federal student loans.  That would include tuition payments and private loans among other sources.

Corinthian Colleges was a for profit school which was forced into bankruptcy in May, 2014 after DOE cut if off from federal loans because of a myriad of violations.  The Consumer Financial Protection Bureau (“CFPB”)  brought suit against Corinthian for deceptive loans and predatory collection practices involving a scheme between Corinthian and Aequitas Capital Management, Inc.  The scheme was an attempt to circumvent the 90/10 rule.  Corinthian jacked up tuition costs beyond the amounts that students could obtain from federal loans.  Corinthian then made a deal with Aequitas whereby Aequitas would fund private loans peddled by Corinthian to its students under the Genesis Loan program.  These loans had interest rates up to 15% according to an article published in the Washington Post.  https://www.washingtonpost.com/news/grade-point/wp/2015/10/28/government-watchdog-wins-530-million-lawsuit-against-for-profit-corinthian-colleges-too-bad-it-will-never-see-a-dime/  .  The loans were then sold back to Aequitas.  By adding these private loans, Corinthian (at least of paper) was able to comply with the 90/10 rule since private loans along with tuition count toward the 10% outside funding required by DOE for profit schools.

CFPB obtained a default judgment against Corinthian in the bankruptcy court.  In the meanwhile, the SEC placed Aequitas in receivership.  The CFPB sued Aequitas and recently announced a proposed settlement.  Under the terms of proposed settlement, approximately 41,000 students/borrowers may obtain up to $183.3 million in loan forgiveness.  The proposed settlement is subject to approval by the federal court in Oregon.

We will keep you up to date on this matter.  In the meanwhile, any ex-Corinthian students should actively pursue this matter to determine if their loans may be subject to forgiveness.

 

 

Forbearance-Any Good?

According to the regulations, forbearance of federal loans involves a loan holder agreeing to a “temporary” stoppage of payments, an extension of time for making payments or acceptance of less than the full amount due.  The key term in the foregoing definition is “temporary”.

Over the last year, I have had the opportunity to talk with many people who have student loan debt.  A fair amount of them have told me that they could not afford their federal student loan payment, called their servicer, and were put into a forbearance.  Some have told me that they have been in a forbearance for two or three years.  Wrong.

That’s just not me talking.  Recently, the Consumer Financial Protection Bureau (CFPB) sued Navient, the largest servicer of student loans for, among other things, steering borrowers into forbearance rather than analyzing their situation and directing them to a more appropriate repayment plan.  Why is forbearance not appropriate?  Well, first of all, interest accrues during the forbearance period.  That could be up to 5 years for Direct and FFEL loans and three years for Perkins loans. Borrowers come out of forbearance owing sometimes more than 150% of what they owed when they entered forbearance. More importantly, when the borrower leaves forbearance, that interest is capitalized into the unpaid principal.  At that point, the borrower is paying interest on interest.

Why do servicers do this?  Since we have not had testimony in the Navient case, we do not know their rationale or excuse.  However, some of the opinions include that it makes life easier for the servicer- many forbearances are granted over the phone.  Also, many proprietary schools (for profit) place students in forbearance to avoid defaults especially during periods when their default rate is being monitored by the government.

What should you do if you cannot afford your federal loans?   Well, you could consider an income driven repayment plan.  This would make payment affordable (in some cases $0) and you still get credit toward loan forgiveness.

Are there any circumstances where a forbearance is a good idea.  Yes if the forbearance is temporary.  An example would be that you are close to default date, have applied for an income driven repayment plan, and are awaiting a decision which can take up to 90 days.  Rather than slip into default, it would be wise to obtain a forbearance until the decision is made.

Be smart in dealing with your federal student loans.  There are options out there.  Reach out for help.  An experienced student loan attorney can be of real help.

Continuing the Theme

In the last post, we warned the readers to be careful in dealing with servicers who have shown a tendency to push borrowers who are having problems paying back their loans into forbearance rather than giving advice as to how to get into income driven repayment plans.

In 2016, DOE officials, at the request of the Obama administration, sent out memoranda to servicers advising them to be more proactive in helping borrowers manage and/or discharge their debt (“2016 memoranda”).  The problem from the servicers’ point of view is that providing the services requested in the 2016 memoranda would require more sophisticated representatives to deal with the borrower’s issues.  Those reps need to be trained, and then be paid a salary commensurate with their enhanced abilities.  Moreover, the reps will need to spend more time with borrowers to try to arrive at a workable plan.  Bottom line- what the 2016 memoranda requested is much more expensive for servicers and, undoubtedly, will cut into their profit.

Servicing contracts for student loans are awarded on a multi-year basis by the Federal Student Aid Office.  The current contracts are set to expire in 2019.  The general consensus of experts in the area of student loan servicing was that the reforms called for in the 2016 memoranda would be considered seriously in evaluating which companies get  the new contracts.

Navient is in consideration for the 2019 servicing contracts. In January, 2017, the CFPB and the attorneys general of Illinois and Washington filed lawsuits against Navient.  Among the allegations were that Navient did not adequately inform borrowers about more affordable income driven repayment plans, lost paperwork and misapplied payments. The lawsuit, the numerous complaints by individual student loan borrowers to the CFPB ombudsman, and the attendant negative publicity associated therewith, could not enhance their chances of being awarded a new contract. One would think.

But, the pushback is well under way.  About two weeks ago, the National Council of Higher Education Resources, one of the student loan industry’s main lobbyists, set letters to the House and Senate appropriations committees urging that Congress direct the DOE to look at the new servicing contracts to reduce unnecessary and burdensome requirements.  This week, Education Secretary DeVos rescinded the 2016 memoranda stating that the proposed contract process has been beset by moving deadlines, changing requirements and lack of consistent objectives.  DeVos emphasized that the DOE should create a loan servicing environment that provides the highest quality customer service while limiting the cost to taxpayers.  No details on what any of that means. Navient shares increased in value by 2% of the day of DeVos’s announcement.  So, Wall St. is betting on Navient being there when the smoke settles.

According to Rohit Chopra, the former student loan ombudsman at CFPB, the DeVos directive is a big win for companies that have run roughshod over borrowers.

What does this mean to the average student loan borrower?  There may be a restrictions on repayment plans.  But, if that happens, it will be down the line.  On a more practical level, servicers will be given a more free hand to aggressively pursuing student debt.  And don’t expect these servicers to be user friendly.

Our advice is to be pro-active, and to seek help early on in the process.