Is the CFPB committing regulatory overreach?

The Consumer Financial Protection Bureau (CFPB) is touted as one of the crowning achievements of the Dodd-Frank Act. But a new CFPB report on student loans is highly flawed, raising doubts about its regulatory reach over the private student-loan market.

The CFPB was created to bring all consumer financial products under one regulatory umbrella. It oversees everything in the financial sector that affects consumers — from credit cards, to mortgages, to auto and student loans. In its short history, the agency has responded so quickly and forcefully to allegations of consumer harm that few have questioned its expanding authority or overlapping jurisdiction with other federal regulators.

Last week, the CFPB issued its third annual report on student loan complaints. The agency first created a platform for student loan complaints in 2012, and embarked on a massive solicitation for general comment on private student loans in 2013. Shortly after, CFPB brought private non-bank loan servicers under its oversight authority.

{mosads}At first glance, the report paints a picture of student borrowers victimized by unscrupulous private lenders and loan servicers. Complaints regarding loans and loan servicers are up 38 percent year over year, with many complaints indicating private lenders and servicers “provided no options [to modify repayment plans], leading the borrower to default.” Complaints against student loan giant Navient (formerly Sallie Mae) were up a staggering 48 percent, with the entire rise dubiously occurring in the month of December. An unwary reader could easily conclude that the private student-loan market is the heart of the student debt crisis, squeezing hardworking young college graduates of every dollar.

But a closer look reveals the report is fundamentally flawed. Although such a database is valuable for identifying concerns and promoting accountability, it should never be used as stand-alone justification for new regulation or policy. Yet that is exactly what this report does — it is basing policy recommendations simply on a compilation of unsubstantiated complaints.

Worse, the report is misleading in two big ways. First, the report makes the private student-loan market seem entirely to blame for the growing student debt crisis. And second, it offers no analytical evidence that private student lenders are unwilling to work with struggling borrowers.

Here are some facts on the private student-loan market: A July 2014 report by MeasureOne on private student loans found that private debt totaled $93 billion — just 7.8 percent of all student loans. The overwhelming majority of student debt is held or guaranteed by the federal government. Further, the combined default rate of the top six private student lenders, who account for 70 percent of outstanding private debt, was just 3 percent, with 74 percent in repayment. This performance is significantly better than the federal loan portfolio, which has a three-year cohort default rate of 13.7 percent.

The report also provides scant information on the pool of borrowers that submitted complaints. For example, what was the average debt level compared to the national average? The majority of borrowers owe less than $15,000, even though total average debt per borrower is over $29,000. The report’s only illustrative example that involved a debt total was over $50,000.

The implication of the CPFB report is that it wants student loan borrowers to have the same treatment across public and private debt. Yet, putting the desirability of this aside, that raises important questions regarding private lenders and servicers the CFPB fails to answer. For example, is it the private lender or servicer’s responsibility to provide financial literacy training before providing the loan, or during repayment? Should private lenders and servicers be required to work with borrowers even when they lack the proper financial documentation? Would the CFPB support automatic wage garnishment for private student loans, as is being proposed to simplify income-based repayment for federal loans?

To be sure, rising student debt burdens are cause for concern. My own research shows young college graduates continue to struggle in today’s economy, with their real earnings falling again in 2013. Completion of postsecondary education remains essential to lifetime success, and with outstanding student debt topping $1.2 trillion, I believe the entire student aid system needs reform.

But without a fuller picture of the crisis, the report loses credibility — and along with it, the ability to make recommendations. For example, changes to the bankruptcy code in 2005 make it almost impossible for private student loans to be discharged in bankruptcy. The report’s proposal to reassess that exception has merit. But this idea gets buried in the report’s biased account of the nefarious doings of private lenders and servicers.

The CFPB’s report does a great job stoking popular feeling against private lenders and servicers as a rationale for its growing regulatory reach. But because it does not identify a market failure or provide substantiated evidence of systemic abuse, its reach into the private student loan market is cast into doubt.

In short, there may be a good case that our troubled student loan system needs stronger regulatory oversight. The CFPB’s latest report, however, failed to make it.

Carew is the director of the Young American Prosperity Project at the Progressive Policy Institute.