The U.S. Senate Banking Subcommittee on Financial Institutions and Consumer Protection held a hearing earlier this week, “Private Student Loans: Providing Flexibility and Opportunity to Borrowers?”
In our testimony, we called on Congress and regulators to act now to provide relief for student borrowers who were harmed by irresponsible private student lenders and to ensure that the private student loan market that emerges from the credit crisis is fair and efficient.
We emphasized that lenders have moved on since the crash of predatory student lending, but borrowers have not. Unfortunately, the lender representative at the hearing, Jack Remondi, President and COO of Sallie Mae, failed to take responsibility for the company’s past predatory practices. The sad reality is that lenders like Sallie Mae that had no problem saying “yes” to risky loans are having no problem saying “no” when these borrowers need help.
Mr. Remondi accurately pointed out that his company has tightened lending practices and is now engaging in much more responsible lending. This is heartening news for borrowers going forward, but it does nothing for borrowers harmed by the rampant predatory practices of the past. Further, there is no assurance that private student lenders won’t seize the earliest opportunity to return to their predatory ways as soon as the credit market loosens up.
NCLC and other groups urged lenders for years to stop abusive lending. These pleas were igonored for the most part. Predatory student lending has mostly ended (at least for now) not because of borrower outcry, but because the economy crashed and the easy money dried up. (Even now, many for-profit schools are making loans that are some of the worst products we’ve seen).
To be clear, the crash was not a “natural”, unpreventable event. It did not happen because an asteroid randomly struck the earth. Rather, the crash occurred because of lender practices. The private loan market generated huge profits for lenders and investors largely because originators sold the loans with the intention of packaging them for investors. Prior to the credit crisis, private student lenders engaged in many of the same predatory practices as occurred in the subprime mortgage market. Not surprisingly, the industry began to crash once it could no longer rely on passing off dubious loans through the securitization process. The CFPB details many of these practices in the private student loan report it released just before the hearing.
Lenders shattered the lives of countless student borrowers seeking to better their lives through education. Now the lenders don’t want to help repair the damage. This is outrageous.
There was a time a few years ago when lenders like Sallie Mae admitted to mistakes. In discussing the company’s lending to “non-traditional” students, Sallie Mae CEO Al Lord said in a June 5, 2008 interview that “[i]t was obviously a mistake and I’m not going to step away from responsibility because I was either chairman or CEO when those loans were made. We got a little too confident in our own view that credit scores are of limited meaning for undergraduates. Maybe as early as 2004, we started lending with less selectivity. The culture of the company has been a FFELP [federal guaranteed loan program] culture for 35 years. That meant you made every loan to every student. I guess with 35 years of experience of saying yes, we were just not very good at saying no.”
Mea culpas like this do not do much for troubled borrowers, but they at least show a lender taking some responsibility for its actions. Based on Mr. Remondi’s testimony, the company no longer even feels that it’s necessary to mention the past. This is unacceptable.
We cannot wait for the lenders to provide sufficient relief on their own. Among other policy reforms, lenders must be required to offer loan modifications and other relief in certain circumstances. Loan modifications that enable a student to make payments on a loan rather than completely defaulting are in both the students’ and the lenders’ best interests, but as we have seen in the mortgage market, sometimes industry needs a push to come up with a win-win solution.
We present many more recommendations for reform in our testimony, including restoring bankruptcy rights for student loan borrowers, requiring loss mitigation, cancellations for death and disability, flexible repayment, and enforcing fair debt collection laws.
