News Analysis
Heavy burden
Student loan servicing under the spotlight
Average US student debt levels have now swelled to a record US$30,000 plus, sparking concern that the US economy could be negatively affected by constrained home ownership and long-term consumption growth. At the same time, high-profile legal cases relating to the difficulty of debtors to discharge their debt through bankruptcy and the recent CFPB versus Navient case suggest that student debt could be pushed further under the spotlight.
Joe Cioffi, partner at Davis & Gilbert, says that while the discharging of debt through bankruptcy isn't a major concern yet, the focus on student debt as a general economic concern is increasing. "There have been cases that have received attention, like the Murphy case in the First Circuit, where the issue was ultimately settled and there are others where the debt has been discharged. I think too there is more pressure building to recognise the issue of student debt, but there's not yet a trend of growing leniency," he observes.
Cioffi points out that the ease with which a debtor can discharge the debt might not be the main issue, as such. "I wouldn't call dischargeability an actual issue just yet. There has been increased focus recently, however, on the 'undue hardship' standard, which has to be proved to get discharge through bankruptcy. That standard doesn't make a great deal of sense anymore."
He continues: "It made more sense when it was used as a safeguard against early discharge back when the law allowed student loans to be dischargeable or dischargeable after a certain point. This is now perceived to be almost impossible, although some courts have issued some favourable opinions for borrowers. In general, it's very difficult for people to qualify."
However, the ongoing court case between the CFPB and Navient could potentially add weight to the case of student debtors, who might want to use bankruptcy to deal with their debt burden. The CFPB last week announced that it is suing Navient for "systematically and illegally failing borrowers at every stage of repayment". The Bureau is seeking to recover significant relief for borrowers harmed by what it terms as illegal servicing failures.
Illinois Attorney General Lisa Madigan also filed a lawsuit last week against Navient and its subsidiaries Navient Solutions, Pioneer Credit Recovery, General Revenue Corp and Sallie Mae Bank, alleging widespread abuses across all aspects of its business. Cioffi suggests that these cases raise worrying comparisons with mortgage servicers that found themselves unable to cope in the 2008 financial crisis.
"Delinquencies in student loans may now expose issues with servicer operations and if the Navient claims gain traction, we could find servicers are exacerbating borrower problems through their conduct," he explains.
For its part, Navient says the allegations of the Illinois Attorney General and CFPB are unfounded and the timing of these lawsuits "reflects their political motivations". The firm says it welcomes clear and well-designed guidelines that all parties can follow; instead, the suits improperly seek to impose penalties based on new servicing standards applied retroactively and against only one servicer.
Navient adds that the regulator-asserted standards are inconsistent with Department of Education regulations and will harm student loan borrowers, including through higher defaults. Further, the firm points to its well-established track-record of helping student loan borrowers succeed in repayment.
In terms of the knock-on effect on student loan ABS, cases like the CFPB versus Navient are unlikely to help the sector's fortunes. Cioffi says: "There is the potential for future downgrades...there is the issue down the line that we could see more lawsuits like the Navient one come to light and particularly servicers could see more lawsuits against them."
He believes that Parent Plus loans could also be a cause for concern, as focus grows on the plight of parents in their 60s or above lumbered with a mountain of immovable debt. This could potentially lead to "ABS with less Parent Plus loans, or none at all".
For the time being, however, it's likely that there will be at least increased scrutiny from investors and growing concerns about the underlying collateral. Similarly, cases like the Navient one could lead to a "cooling off period by ABS issuers/investors, as they wait to see how it plays out," Cioffi concludes.
25/01/2017 10:32:33
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