Private-Student Lenders Draw CFPB Review Over Debt Refinancing

The Consumer Financial Protection Bureau plans to review loan modifications offered by private student lenders, a business that the agency has said victimized some borrowers with subprime-style debt.

The bureau wants to know what kinds of refinancing options lenders such as Wells Fargo & Co. and JPMorgan Chase & Co. offer borrowers who have trouble making their regular payments, it announced in a statement Thursday.

“Many consumers have asked why their private student lenders won’t make a deal,” Rohit Chopra, the CFPB’s student loan ombudsman, wrote in a blog post. “After all, if lenders and servicers offered lower payments during a tough time, borrowers could avoid default and lenders could get fully repaid over the long run –- a win-win for all.”

In addition to Wells Fargo and JPMorgan, lenders involved in the private student-loan market include Sallie Mae, Citizens Financial Group Inc., PNC Financial Services Group Inc., Discover Financial Services and SunTrust Banks Inc.

The CFPB said it plans to use the information it collects for consumer education and analysis of the market. While the regulator may make some of the data public, it said it won’t name specific lenders.

Long-Term Debt Trap

In a 2012 study, the CFPB concluded that private student loans made before the financial crisis had created a long-term debt trap for borrowers. Private loans account for about 15 percent of the $1 trillion market.

Private lenders have argued that they have a lower default rate than U.S. government loans, which comprise 85 percent of the market. Richard Hunt, president of the Consumer Bankers Association, has said in congressional testimony that private loans have a 3 percent default rate, one-sixth the rate of government loans because they make sure the debt can be repaid.

U.S. Senator Elizabeth Warren, a Massachusetts Democrat, has criticized banks for not doing more to refinance student loans. At a July Senate hearing, she said student debt generally doesn’t go away when someone declares bankruptcy, in part because banks have lobbied against such an exemption.

“Banks by comparison get the benefit of the bankruptcy exclusion and don’t offer much of anything in exchange to help struggling borrowers,” Warren said.

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