Given the parallels between the current student loan debt crisis (including the CFPB, Illinois and Washington’s recent lawsuits against Navient) and the foreclosure crisis of 2010-14, now is a good time to reflect on the lessons learned from past experience. From our experience negotiating comprehensive deals with regulators, advising companies on how to comply in an ever-shifting regulatory landscape, and litigating cases in front of judges and juries suspicious of members of our industry and tired of the ensuing volume of litigation that resulted from the crisis, four lessons stand out:
- Technical compliance is not enough. For years, companies operating in highly regulated industries believed that so long as their conduct was not in direct breach of a law or express regulation, they would not be punished by a regulator. That seemed like a pretty safe assumption in an environment operating under the rule of law. However, it quickly proved to be dangerously untrue during the foreclosure crisis. Both courts and enforcement agencies had little patience with large companies that, at least in their minds, were exploiting “loopholes” or engaging in bad (or at least sloppy) business practices to the detriment of their customers and the public, regardless of whether it was in actual violation of an express law. Instead, the industry was urged to adopt a broader culture of compliance – with threats of enforcement actions under amorphous laws like UDAAP or similarly hazy common law causes of action to encourage that compliance. Student lenders would be wise to recognize that historical practices of complying with actual stated laws and policies may not be enough to keep them out of trouble.
- Regulators care about borrower complaints. In the mortgage servicing world, servicers long viewed the entities paying them to service or sub-service the loans as their customers. While it might have been a best practice to offer effective responses and solutions for complaints from borrowers, that appeared to be a lower priority than responding to issues arising with the investors, who could make life very difficult with an ill-timed repurchase demand or by insisting that the servicer eat the loss on a non-performing loan. But in the foreclosure crisis, regulators flipped that relationship. Reasoning that borrowers had no choice in who serviced their loans—and thus lacked the free market threat of moving their business elsewhere if they received lousy service from the loan servicer—regulators paid close attention to consumer complaints and even shaped regulatory agendas and priorities around them. Student loan servicers should realize that the perception of working hard to do what’s best for borrowers (and not necessarily lenders) is what regulators are looking for.
- Federal regulators believe that disclosure is the best remedy for everything. During the foreclosure crisis, federal regulators such as the CFPB and DOJ appear to have taken to heart the famous quote from Justice Louis Brandeis: Sunshine really is the best disinfectant. Regulators wanted to see mortgage lenders and servicers disclosing everything—every possible fact that could conceivably affect a borrower’s decisions about taking out a loan and repaying it, and especially the facts that might work to bolster a lender or servicer’s bottom line. The common wisdom is that if a mortgage loan servicer is in the slightest doubt about whether a practice is in the borrower’s best interest, then it should be disclosed, and done so in a text and format that is understandable to an unsophisticated borrower. While that requirement may seem aspirational, the same regulators are almost certain to look at student lending practices the same way.
- Regulators may follow the crowd, but lenders and servicers should not. Finally, the foreclosure crisis taught us that while regulators may tend to follow the crowd and “piggyback” in their regulatory and enforcement actions, lenders and servicers should resist the natural inclination to reflexively adopt industry-wide practices. As evident from the National Mortgage Settlement, as well as the numerous examinations and lawsuits that preceded and followed it, both state and federal regulators have proven to be more than happy to let another entity take the lead on conducting an investigation, only to swoop in when it’s time to negotiate a settlement. But in those negotiations, it was no excuse for companies to claim that their purportedly bad or sloppy practices were standard in the industry at the time. Indeed, the mere fact that 49 states and the federal government agreed to a national settlement requiring payment of billions of dollars with all of the largest mortgage servicers indicates that following the crowd was more of a liability than a defense. Lenders and servicers of student loans should expect similar coordinated investigations, enforcement actions, and lawsuits, as well as a similar lack of sympathy for claims that the targets were merely employing practices that were standard or typical in the industry at the time.
Given the current state of the student loan market and the regulatory framework governing it, student loan lenders and servicers would be well advised to consider the lessons learned during and after the foreclosure crisis. Student loan servicers should not wait for broad servicing standards to be promulgated before considering whether they might need to make compliance adjustments to their business. Considerable efforts should be spent analyzing and responding to consumer complaints, and ensuring that disclosures are clear, conspicuous, and truthful should be a top priority. Finally, student loan lenders and servicers should keep their ear to the ground and track practices that are deemed to be problematic by regulators through supervisory or enforcement actions. Just because everyone does something the same way in no way guarantees that it won’t cause you problems down the road.