lilt

EAST BAY
C_OMMUNfTY

LAW CENTER

April 8,2013
Consumer Financial Protection Bureau

Attention: Rohit Chopra Student Loan Ombudsman 1700 G Street, NW Washington DC 20552

Re:

Request for Informafion Regarding an Initiative to Promote Student Loan Affordability, Docket No. CFPB-2013-0004

Dear Mr. Chopra:

The East Bay Cornrnunity Law Center is one of the largest legal aid providers for low-incorne individuals in the San Francisco Bay Area. Our oilce on the border of Oakland and Belkeley (we are affiliated with the UC BeLkeley Law School) nraintains a broad consuner protection and debt defense practice and regularly sees individuals who are struggling to keep up with their debt obligations. We see numerous clients who ale unable to afford their student loan debt payments, and who need better information and better opfions to repay their loans. We ale drawing on this experience to respond to the Consumer Financial Protection Bureau's request for informalion on options to increase repayment affordability.

Anong out'clients who are burdened with student loan debt, we see comlnon and troublesome recutring problems. Borrowers enter into loans not understanding all of the terms of thei loan agreements. hdividuals are burdened by debts and interest rates that they cannot afl'ord to pay because of unemployment, underenployment, and low wages. Loan providers and servicers are unwilling to negotiate reasonable paymert schemes that allow low-incorne individuals to make affordable payments. We urge the CFPB to continue its work with the Department of Education in pt'omoting consumer education and requiring school-certification of loan amounts to prevent umecessary use of private student loan ploducts. Additionally, we recommend that regulators and policymakels require that private student loan providers and servicers offer loan payment rnodification options, including income-based plans.
Question 1: What are the primary drivers of private student loan borrower distress?

Many of our clients who are delinquent or in default on their student loans, or at risk of becomiug delinquent on their student loans, are in such a position for the simple reason that their income is too low to pay the lequired rnonthly amounts due. When they entered into their student loan agreements, they often did not understand the high monthly paymets they were becornirrg obligated to pay, and they did not arficipate being unemployed or underemployed. Low-ihcome individuals simply cannot afford to both pay fol their basic necessities and maintain ther rnouthly student loan payments, which usually constitute a high pelcerfage of their income.
East Bay Communty Law Center's Neghborhood Justice Clnc 3130 Shattuck Avenue, Berkeley, CA 94705

f 510,548,4064 f 510.849.1536 www,ebclc.org

We see a rattge of debt{o-incorne latios for our clients with federal loans, private loans, and conbinations of both. On the low end, some individuals have debt equivalent to apploxirnately 15% of tlreir incones; rnore fi'equently, the ratio is closer to 100-200%, and can be up to 600% of income. However, if you make $1000/rnonth, a debt worth 15% of your income can make a substantial cut irfo funds required for housing, food, and other necessities.
Further', low-income individuals who are already burdened with numerous consumer debt obligations are likely to have a difficult time staying current on theil student loans. Our clients often seek help with consumer credit debt lawsuit defense or post-judgment assistance, having defaulted on credit cards and other sources of debt. Many of these individuals also have studerf loans. Some have plioritized their student loan payments, thereby accelerating default on their o rel credit accounts. As these othe debts enter collections, or result in judgrnents, individuals' already low incomes are decreased furlher, and payment of student loan debts becomes more difficult. Atnong our clienls, private student loan borrower distress is driven by lack of inforration about loan tenns, unfoteseen changes in education or employment, and inability to negotiate affordable paynent plans. The following stories are representative of the drivers, and consequences, of private student loan distress:

Ana came to EBCLC because she had taken out over' $ 15,000 to attend an unaccredited nursing school. Ana is a single mother and was hoping to earn a nursing degree so she could better provide for her family. She signed the loan documents offered by the school without anyone ever explaining the terms. She was asked to sign more loan documents near the end of the pl'ogram. Again, no one explained the terms and Ana founcl the contact language difficult to understand. It turned out that Ana was required to pay off the full $15,000 before the school would give her the degree. Ana could not affor.d to pay the full $15,000 and thus she could not get her degree and was unable to find ajob. She was not even allowed to get her transcript from the school without paying her loans. Ana and her family were barely surviving on public benefits when we met her.

Carla co-signed on private student loans for her daughter to attend law school. Her daughler dropped out of law school and was unable to pay back the loans. Carla was on a fixed pension that she supplemented by deliverirrg newspapers at the time of her daughter's default. Carla also could not afford to pay back the loans. 'Ihe lender was unwilling to work with her to create an affordable payment plan and instead sued her. Although Carla's incoure was protected, she had equity in the house she lived in. Now, in letitement, she is in danger of a forced sale of her home because the lendel will not work with hel to establish an affordable payrnent plan. Cristina has over $70,000 in student loan debt, consisting of both fedelal and private studerf loans. Cristina makes a low wage, and has been unable to keep up with all ofher loan payments. Cristina defaulted on one ofher private loans and was at risk of defaulting

East Bay Community Law Center's Neighborhood Justice Clnic 3130 Shattuck Avenue, Berkeley, CA 94705

510.548.4064

f 510.849.1536

www.ebclc,org

on others. A debt collector sued Cristina in June of2012. As she fought her lawsuit, she made efforts to get back into good standing on her other loans, but she was unable to negotiate sufficiently affordable repayment plans. Unforlunately, Cristina's total monthly loan paynents were too high; her incorne did not suppod her basic life necessities and all her loan payments. Cristina was rccently sewed with two additional lawsuits for collection of private student loans. Af age 32, Cristina is facing possible judgrnent in three lawsuits. Ifshe loses these cases, she will be subject to wage garnishment and bank levies, likely for decades, until the judgments are paid off. Additionally, her retired father has been sued for her debts. After he failed to rcspond to the lawsuit, a defult judgment was entered against hitn.

Question 2: How do borrowers in distress fypically stay current with their private studcnt loans? To what extent do borrowers reduce consumption or adjust living arrangements to meet obligations?
Many private student loan borrowers have already forgone "nonessential expenses" and are still unable to rneet their loan obligations. EBCLC serves low-income members of the cornmunity, and out clients who are in distress on their student loans cannot reduce consumption further to meet their loan obligations. Many of thern have no savings, are already living in relatively lowcost rental units, and have no entertainment or "nonessential expenses" ir their budgets. For individuals with public and private sludent loans, the availability offederal income-based is not enough to fix the unaffordability oftheir overall loan burdens. Clients who have both federal and private student loans are usually unaware of their options for reducing monthly payments on federal student loans. It is conlnon for our clients to not even know whether they have private or public student loans - this is true for clients who are caughl up with paynents as well as behind on payments. Increased consumer education efforls regarding federal student loans would help reduce individuals' monthly payntents, fieeing up sotne income for private student loan payments. IJowever, fol many low-incorne individuals the costs of private loan monthly payments would still be too high to afford. Private and public student loan burdens can cause individuals to accumulate other debt to make ends meet and continue making loan payments. We have seen clients prioritize student loan payments, causing them to miss payments on other debts, which they then default on and are sued for. Student debt commitments canjeopardize a borrower's ability to negotiate payment plans and resolve their other debts. This furlher compounds their fnancial hardship and makes continued payrnent of their student loans rnore difficult.

Question 3: Wht options currently exist for borrowers to permanently or temporarily lower monthly payments on private student loan obligations? To whaf extent have these affordable repayment options cured delinquencies?
There ate often no options for individuals to lower their montl y payments on their private student loan obligations. Whether negotiating with banks and servicers, private institutioris that
East Bay Community Lw Center's Neighborhood Justice Clinic 3130 Shattuck Avenue, Berkeley, CA 94705

510.548.4064

510,849,1536 www.ebclc.org

provide their own student loans, or collectors of debts that have been sold into ABS pools, our clienfs are unable to get reasonable payment plans.

Many individuals are not able to negotiate payment options until after they have missed loan paynents or defaulted on their loans, when they are already suffering financial hardship and lack bargaining power. The offered paymerf plans are frequently insufficient or include clauses that are unacceptable. One client was tlueatened with a Iawsuit to collect his student loan if he refused to provide the bank direct access to his checking account, for rnonthly withdrawals of $105, with no obligation of accounting by the bank. I'Ie was unable to afford these monthly payments, and was uncomforlable providing direct access with no accounting.
As advocates for low-income individuals in a consumer legal services practice, we are troubled by the lack of options for poor people with private student loan debt. The debts ale relatively large and our clients are often young and unable to make the monthly payments required by tlie lender. They do not meet the undue hardship requirement for bankruptcy and, while clairns of exemption rnight plotect their assets in the short term, private student loan judgments will haunt thetn for years. Lenders will not work with poor borrowers to negotiate an affordable payment plan. Our young clients want to pay, but simply cannot afford the high monthly payrnent. They are unemployed or underemployed and frustrated and scared about their financial futures. They universally had no idea of the financial burden they took on when they bomowed the rnoney, as all student loan borrowers do, to irnprove their hnancial future. Instead, they have ended up unernployed with onerous loans.

Private student loan borrowers should be provided with the opportunity either to negotiate realistic payrnent plans, or to peg payment plans to their income. Providers should offer an income-based l epayment option, sirnilar to the Income-Based Repaynent program for federal studenl loans. Seruicers should have a designated pool of personnel who are authorized to work with borrowers to modify payment plans in times of financial hardship. All servicels should be required to notify borowers of the option of income-based repayment or other hardship-based modifications. This would allow bonowers to avoid missing payments and defaulting in the first place. Once a borrower has gone into default, he or she needs more affordable opfions so that the debt can be resolved without litigation. After a borrower has missed a payment, the servicer should bc required to inimediately notify her of cleating a rnodified payment plan. Servicers must provide adequate customer service and technical systems to move bouowels to affordable plans in a tirnely rnanner.
Question 7: What re some examples of loan modification programs sponsored by a public cntity or the private sector that have been successful? Which features ofthese programs might be applicable to a student loan affordability program? Which features of these programs might not bc appropriate for a student loan affordabiliff program? In coftrast to the experience ofindividuals with private student loans, individuals with federal loans are strongly benefrted by consolidation, rehabilitation, and income-based payrnent options - the CFPB should ulge the extension ofsuch options to private student load bonowels.
East Bay Community Law Center's Neighborhood Justice Clinic 3130 Shattuck Avenue, Berkeley, CA 94705

510.548.4064

f 510.849.1536

www.ebclc.org

For low-incorne borrowers of federal student loans, loan consolidation and Incore-Based Repaymenl plans are very helpful to staying current on payments. With high debt-to-itlcome latios, low-income borrowers cannot affold standad repayrnent plans, but can afford incomebased payments. Consolidation can help reduce the risk of missed payments by simplifying the number of payees and payments that must be made each month. We have helped clients consolidafe loans and set up accounts for affordable income-based monthly withdrawals. If we could do the same for private loan borrowers, they would be financially and logistically able fo more easily make payments.
One conceru with this approach is that under an income-based plan, low-income borrowers may nevel pay offthe loan principal. However, an income-based option can give people the oppounity to survive periods of un- or under-employment, maintain good edit, become more financially stable, and eventually increase their income so that full payment ofthe loans becomes viable. Furlher protective measures would reduce the risk of large numbers of borowers with private loan incorne-based payrnents that will never be paid off. Consumers should be educated about the hazards ofprivate student loans. Private loans should not be available without school certification and a required statement of a student's remaining unutilized federal loans. Regulation of lending practices, including high variable interest lates, is needed.

Private student loan boruowers should also be given the opportunity to rehabilitate their loans after they have gone into default. Bonowers who have defaulted on their loans, whether because of unernploymerf, unforeseen medical costs, or other fnancial hardships, ought to have the oppounity to rehabilitate after making a certain number ofconsistent, affoldable payments, as under the federal loan rehabilitation program. This would benefit lenders, by avoiding the costs ofcollection. Rehabilitation benefits consumers by allowing them to lectify their credit, avoid being subject to debt collection and litigalion, and giving thern the opportunity to fully repay their loans when they ale financially able to do so.

Further Notes
Though this CFPB inquiry focuses on developing affordable loan payment options, we would also like to note that student loan debtors should be given the oppofiunity to discharge their debt in bankruptcy. We have had clients successfully resolve tleil debts in bankruptcy, but continue to be haurfed by an unaffordable private student loan. The burden ofthis is furlher compounded by the unwillingness oflenders to negotiate fair and affordable payment plans.

Additionally, we increasingly see clients sued by third-party debt collectors. This raises concems about robo-signing and irnproper proof of assigmnent. Such practices put bouowers at risk for unfair debt collection practices, being held accountable for incorrect student loan amounts, and abusive litigation. A judgrnent on plivate student loan debt may cause substantial damage to an individual's credit, ability to accumulate savngs, consumption ofgoods or services past their basic needs, and ability to own a home.

East Bay Community Law Centeis Neighborhood Justice Clinic 3130 Shattuck Avenue, Berkeley, CA 94705

510.548.4064

510,849.'1536 www,ebclc.org

We thank the Bureau for its ongoing work in protecting student loan borowers, and for ploviding us the opportunity to participate n subrnitting information on the current shortcomings ofthe private student loan narket.
Sincerely,

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Superuising Attomey

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mryan@ebclc.org s10-269-6612

East Bay Communty Law Center's Neghborhood Justice Clinic 3130 Shattuck Avenue, Berkeley, CA 94705

5'10.548.4064

f 510.849.1536

www.ebclc,org