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Op/Ed: Student Borrowers Will Continue to Struggle Despite the CFPB’s Efforts

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The financial services industry erupted earlier this month, soon after the Consumer Financial Protection Bureau published a set of proposed rules for limiting the use of forced arbitration clauses by broad range of entities, including certain providers of financial products and services.

This longstanding practice, whose origin dates back to 1925, of incorporating language that requires consumers and others to waive their constitutional right to a jury trial is attracting a lot of attention these days because of concerns that it favors the interests of lenders over debtors, schools over students, services firms over customers, and even employers over employees.

Arguably, the most cherished and, at the same time, abhorred aspect of this contractual provision is how it prevents groups of (allegedly) unjustly treated parties from filing class-action lawsuits for damages.

The CFPB wants to change that.

Once the 90-day commentary period has lapsed and the bureau’s final rules are put into place, the first of these will prohibit the prospective use of litigation-limiting “arb-clauses” in certain consumer transactions. (Unfortunately, those who have existing contracts with this language will continue to be bound by its terms.)

The second serves as a sanity check of sorts. It stipulates that those companies and institutions that will become subject to the bureau’s new rules will also be required to “submit specified arbital records to the Bureau” at specific intervals.

In other words, the CFPB wants to know that what it ultimately implements is having the intended effect. If that’s not the case, presumably the bureau will consider revising the rules it set forth.

One of the many consumer financial products that the Dodd-Frank legislation authorizes the CFPB to regulate is private student loans. The bureau oversees the entities that originate these loans, along with the firms that administer the resulting contracts on their (originators and entities to which the loans may later be sold) behalf.

That’s great, except for the fact that private loans comprise barely 10% of outstanding education-related debts. So the obvious question is: What effect, if any, will the bureau’s new rules have on firms that service federal student loans, the 90% over which the CFPB has no regulatory oversight?

I ask because buried within its proposed rulemaking document, on the bottom of page 193, is a request for comments on whether businesses created by governmental entities (the State of Pennsylvania is the footnoted reference) should be exempted from these new rules as they are from other consumer protection laws such as the Fair Credit Reporting Act.

It’s an important question, not least because the Department of Education subcontracts a certain portion of its loan administration work to such firms (the Higher Education Loan Authority of the State of Missouri, or MOHELA, is one example).

But we’re just scratching the surface.

What about all the other loan servicing companies? They may not share MOHELA’s parentage, but they and others like them are collectively servicing more than $300 billion in Federal Family Education loans and nearly $1 trillion in Federal Direct loans.

To what extent are these firms similarly shielded? Let me ask this: Do you recall reading about any class action suit that was filed against any of these companies where the plaintiffs prevailed? Neither do I, and here’s why: federal preemption.

As the Center for Responsible Lending points out in its July 13, 2015 letter to Consumer Financial Protection Bureau Director Richard Cordray, although private student lenders and their agents (subcontracted loan servicers, in this instance) rely on the forced arbitration clauses that are embedded within the contracts that govern their transactions, certain federal student loan servicers have successfully “invoked preemption under the Higher Education Act (1965) to get lawsuits based on state-law claims dismissed.”

Once his case is tossed out of court, the consumer-plaintiff isn’t even entitled to seek recompense through arbitration.

Although the ED has signaled its intent to restrict the use of arb-clauses in college enrollment contracts (used to protect the institution against later challenge) and private lenders, it has yet to call on lawmakers to amend the Higher Education Act — which Congress is in in the process of overhauling — with regard to the matter of the broad protections the Act grants to servicers.

The fact that 90% of all student loans — involving some 40 million borrowers — are somehow off-limits for the regulator that was created to protect consumers is bad enough. But to prevent these student debtors — whether individually or in groups — from the legal recourse that is due them is indefensibly unjust.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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