The New CFPB and Its Faith in the American People

starzec michaelIn early May, Director Mulvaney announced that the CFPB’s student loan division is being shifted to its consumer information unit in an effort to transition the agency to a vehicle that provides consumers information about their legal rights. In the ultimate act of poor timing, this decision was announced at nearly the same time as a Federal Reserve report that announced student loan debt had risen to $1.5 trillion, surpassing auto loans, which clocked in at a paltry $1.1 trillion while credit cards were reported at $977 billion.

Not surprisingly, reaction was negative. Many feared the move would negatively impact efforts to curb abuses in the student loan industry, particularly the pending action against Navient who was accused of steering borrowers into higher payment options without providing other cost-saving options. At the same time, a USA Today editorial opined that student loans were “modern-day debtors prisons,” providing an appropriately Dickensian tableau for the discussion. The writer’s proposal was to reinstate bankruptcy for student loans.

Unfortunately, many commentators, be they professional, political or pundit, who examine public policy issues, focus only on the immediate, individualized results of the status quo. While this ensures maximum emotional impact, it ignores the larger, macroeconomic reasoning for the policy and the effect change might have on millions of consumers.

Consequently, the USA Today editorial would have you believe student loans are non-dischargeable because it purposefully disadvantages students to unfairly benefit lenders. However, a little research, specifically, typing into a search engine “why are student loans non-dischargeable” garnered a Forbes article that answered that question with precision. Congress made discharge of mortgage and student loan debt more difficult because of the societal benefits to promoting home ownership and access to higher education. Without restrictions on bankruptcy, policymakers feared there would be reduced investment capital directed to mortgages or student loans, which keeps them available and affordable. If the loans were immediately dischargeable, lenders might not risk loans to students. As better educated workers command higher salaries and can compete better globally, ensuring affordable education loans would ultimately lead to a better standard of living. Hence, Victorian squalor was not the inspiration for non-dischargeability; it was greater access to the American Dream.

But consider Navient’s dilemma. They are a debt servicing company whose purpose is to recover student loan debt. In that capacity, they are charged to ensure a given debt is paid and, upon default, recover that balance as quickly as possible. However, the CFPB action alleges impropriety because Navient may have directed students into arrangements that had higher payments. Put differently, they were supposed to collect money, just not so much. To be fair, I do not know if Navient’s service agreement required them to offer the option with the lowest payments first. But, all things being equal, this encapsulates the dilemma of our not-so-new regulatory collection universe: Creditors are being asked to be both their client’s and the consumer’s advocate. As a result, we are in the untenable position of having an ethical duty to zealously represent our clients while, at the same time, being required to provide advice to consumers at odds with that ethical duty.

Moving full circle, Mulvaney’s goal to transform the CFPB’s mission into one of education of consumers recognizes this dilemma. But, to my mind, this is an intended side effect to a broader policy goal that could have a national and generational impact. The CFPB’s previous iteration portrayed collections like a black and white 1940s western: The CFPB wore the white hat, banks and attorneys were the vicious cattle rustlers and the consumer was the obligatory damsel tied to the railroad tracks. Under that world view, every consumer was the “least sophisticated consumer” and therefore all consumers were victims. Mulvaney appears to be trying to balance the scales: Not by regulation that only confers permanent victim status on consumers but by education that empowers the consumer to make informed financial decisions. In the end, isn’t that the real aim of college – education to create productive, responsible and rational adult decision-makers? For, as Jefferson famously said: “I know no safe depositary of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education.” Let’s hope that our lawmakers, colleges and the loans made to pay them can do the same.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.