Tag: CFPB

New College Regs: Accusation = Sentence

It’s no secret that war has been declared on for-profit colleges. The question is whether the war is justifiable. I don’t think it is—the evidence strongly suggests that all of higher ed is broken—but I also think it is very hard for the public, in any individual case, to know whether a college accused of wrongdoing is really awful, or the target of politicians trying to make names for themselves. But just accusing a school of predatory behavior hurts it, generating lots of bad press, encouraging more suits and investigations, and usually resulting in schools settling with government accusers without admitting guilt, maybe to stop the PR and financial bleeding, maybe because they think they’re guilty and that’s the best they can get. Regardless, there is clearly an imbalance of power between taxpayer-funded accusers and the accused.

New federal regulations look like they’ll make the problem of accusation-equals-sentence worse. The Wall Street Journal has a lengthy piece looking at the broad potential ramifications of the regs, but one part of the US Department of Education regulation summary caught my eye: Schools would have to automatically “put up funds, in the form of letters of credit (LOCs), that total at least 10 percent of the amount of Title IV funds received by the school over the previous year” if “a state or federal government entity such as an attorney general, the CFPB, or the FTC brings a major suit against the school.” In other words, the moment any government entity, including the unchained Consumer Financial Protection Bureau, accuses a school of wrongdoing, the punishment begins.

This punishment could easily trigger a cascade of trouble, with the need for a letter of credit scaring off investors, bad publicity scaring off students, and a school suffering financially as a result. That school could then be targeted by the Department of Education for being even more of a financial risk, and the death spiral would become inescapable. This is not too far off from what seems to have happened to Corinthian College. Corinthian was, importantly, ultimately found guilty of fraud, but that rare guilty verdict was rendered after Corinthian was no more and had no one to defend it in court.

It is, to be sure, hard to feel too sorry for the for-profit sector. It does have poor outcomes, and is heavily dependent on students paying with government dough. That said, there is also a good bit of evidence that it is no worse, controlling for student challenges, than other higher ed sectors. And it is very easy to imagine politicians—human beings likely as self-interested as the average for-profit school owner or employee—going after for-profit schools because it is politically easy.

These proposed regulations look like they will stack the deck even more against for-profit colleges.

More Unconstitutional Executive Branch Actions

Imagine that your company’s board chairman, against the wishes of the board of directors and in contravention of the corporate charter, hires an interim CEO. Despite that illegal action, the interim CEO disciplines you in some manner. Would that discipline be any more legitimate if, two years later, the board finally agrees to hire the CEO, who then retroactively approved his own previous actions?

This is what’s happened at the highest levels of government. When Congress created the Consumer Financial Protection Bureau (CFPB) as part of the larger Dodd-Frank financial reform, it specified that the director was to be appointed by the president “by and with the advice and consent of the Senate.” This placed what’s called an Appointments Clause limitation on the director’s position. Four years ago, President Obama named Richard Cordray the CFPB director—after Elizabeth Warren’s expected appointment met significant political resistance—during what the president erroneously believed was a Senate recess. (You’ll recall that the Supreme Court unanimously invalidated the National Labor Relations Board appointments Obama made at the same time.)

Marketplace Lending: Regulation Ahead?

The Consumer Financial Protection Bureau (CFPB) recently announced that it would start accepting consumer complaints about marketplace lending.  Marketplace lending, previously known as “peer to peer” or “P2P” lending, emerged in the aftermath of the financial crisis.  A combination of tightening credit markets and low interest rates created a perfect marriage between consumers looking for loans and investors looking for profit.  In its first incarnation, peer to peer lending served as an online matchmaking service, allowing prospective borrowers to post requests for loans to be reviewed by individuals willing to make those loans.  “Peer to peer” referred to the fact that the lenders were ordinary people, just like the borrowers.  The loans are non-recourse, meaning that if the borrower fails to repay, the lender is simply out of luck.  Although these would appear to be risky loans, in fact, the default rate has been surprisingly low: 4.9 percent at market-leader Prosper as of the end of 2014, and 5.3 percent at the other leader, Lending Club, during the period between Q1 2007 and Q1 2015.

The loans have performed so well that the market quickly attracted institutional investors and more sophisticated business models.  As the two leading providers of marketplace loans today, Prosper and Lending Club use the same (somewhat complex) model.  The companies issue notes to investors that are obligations of the issuing company. Simultaneously, WebBank, a Utah-based FDIC-insured bank, originates a loan which is sold to the company. The company pays for the loan with the proceeds from the sale of notes to investors. The loan is disbursed to the borrower. The borrower repays the funds in accordance with the terms of the loan. And the payments from the borrower are used to pay the purchasers of the company’s notes. The payment of the notes is explicitly dependent on the borrower’s repayment of the loan.

Since marketplace lending has gained momentum, there have been concerns about its regulation – expressed both by those who worry that it’s completely unregulated (not true, but there have been no new regulations specifically targeting the industry), and by those–like me–who worry that its innovation will be smothered while the industry is still in its infancy.

How the CFPB Distorts the Facts about College Loans

Last month, the Consumer Financial Protection Bureau – a rogue creation of Dodd-Frank – released the first annual report from its private student loan “ombudsman.” And boy, does the report illustrate how far off the rails government has gotten.

Start with the focus: private student loans. These and for-profit colleges have gotten huge, damning attention from Washington – and much of the higher ed commentariat – over the last few years. But even if they were true devil’s spawn, private loans are absolutely not the main problems in higher ed.

Even at their very brief peak in 2007-08, private student loans constituted only 12.5 percent of total student aid. In 2011-12 they were just 2.6 percent. The vast majority of funds have always come from other sources, first and foremost the federal government. Yes, it is primarily “aid” from Washington that lets colleges raise their prices with impunity, and enables students to take on substantial debt for often less-than-substantial studies.

Government, not private lending, is the Lex Luthor here. But to be fair, private lending is the CFPB’s bailiwick, so you can’t blame the agency for putting out the report. You can sure as heck, though, blame politicians for creating a bureau whose job seems simply to be pointing fingers at private companies.

You can also blame the CFPB for the content of its report, which is simply a summary of complaints the bureau has received from disgruntled borrowers. Fairly early on it even states that “the report does not attempt to present a statistically significant picture of issues faced by borrowers” (as if its findings are empirical at all). Unfortunately, it goes on to say that the report “can help to illustrate where there is a mismatch between borrower expectations and actual service delivered.”

Actually, no it can’t. At least not reliably. All it can tell you is what people complained to the CFPB about. It can’t tell you if the complaints had bases in fact. It can’t tell you if complaint-lodgers were really just motivated by a desire not to pay. And it can’t tell you what the lenders’ sides of the stories are.

Okay, it probably could do the last thing, but it seems the ombudsman chose not to. There is not an ounce of response from any lender to the anecdotes that essentially are this report. In other words, the report seems to be doing exactly what the bureau’s opponents feared CFPB would do: functioning as an unaccountable propaganda machine against private companies. And don’t be surprised to hear this report invoked repeatedly by Sen. Tom Harkin (D-IA) and other profit-haranguers as damning proof that private student lenders are out of control.

Sadly, the prominent role of government in student lending is ignored even when it is obvious from data on private lending. As one table shows, 46 percent of complaints received were about loans connected to Sallie Mae, and 12 percent about loans from American Education Services, an offshoot of the Pennsylvania Higher Education Assistance Agency (PHEAA).

Sallie Mae, of course, is the student-loan cousin of Fannie Mae and Freddie Mac, the federal creations at the heart of bad mortgage lending. And PHEAA? “Created in 1963 by the Pennsylvania General Assembly, PHEAA has evolved into one of the nation’s leading student aid organizations.”

Yup, more than half of the complaints about ostensibly private lending were really about government-created lenders. But don’t expect to find even a footnote in the report hinting that government might be the real problem.

It’s hard not to conclude that the major goal of the CFPB is to bash private companies, and in so doing justify more and more government control of the economy. If that’s the case, and if this report is any indication, then the CFPB is doing its job. Too bad that job serves the public so poorly.

Cross-posted from SeeThruEdu.com