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Servicers Serve the Interests of the Lender, NOT the Student Loan Borrower

posted by david lander

I have enormous respect and appreciation for the CFPB and the wonderful and talented and committed folks who work there. Thus I am mystified that in their efforts to improve servicing of student loans and directing of student loan at-risk borrowers to the window that would help them, they continue to misunderstand the basic nature of capitalism and its profit motive and the borrower-lender relationship. Certainly, the fatally flawed structuring of the credit counseling industry by the credit card lenders in the 1970’s and the still ongoing dismal efforts of mortgage loan servicers to “help” borrowers in default should have taught us the lessons that those who serve the lender cannot and may not and will not serve the interests of the borrower. Capitalism does not work that way whether the lender is a traditional profit incented financial institution in the case of credit card and mortgage loans or a mix of private and public lenders as in the case of student loans. Think IRS and SBA for other government collector examples. If the notion of inclusive capitalism or Robert Reich’s notion of saved capitalism takes hold, perhaps it will invent a way for this to work, but today such efforts are poisonous because they delay creative solutions and punish borrowers and the American economy both of which desperately need such solutions to thrive. Of course servicing must be improved as much as possible and it is tempting to try to rely on the servicers since they are the ones with contacts with the borrowers, but servicers are collectors by another name. It is well past time to stop putting our faith in the collectors. There is currently no high quality network of financial counselors who can help student loan borrowers at risk.All of us including the Department of Education and the CFPB need to start work immediately to develop that effective network and make certain that this crucial job is not delegated to mediocre providers without sufficient quality or quality controls. More on that in a later post.

Comments

The lender-borrower nexus was severed within hours of student borrowing the money with the the sale of the paper. This is one of many of the fatal flaws in the GSE Business Model.

We know it well from the hijacking of the mortgage industry by the player/partners in the the GSE Business Model. George Soros called all of it's player/partners "hopelessly conflicted".

Cordray knows it well from his experience and actions in Ohio. We need to kill this model and go back to what works----- when a lender has an interest in the borrower----- the old fashioned way.

Perhaps consumer loans (as opposed to regular business loans) should be non-assignable.

Certainly, this might result in problems with lender liquidity. But it would insure that the borrower gets to continue dealing with the same entity that made the loan.

I have signed a number of mortgages. I have always wanted to put a non-assignment clause in, but I knew it would be a deal-breaker. In the alternative, I might have wanted to be able to choose or reject a service-provider, but, again, it would probably have been a deal-breaker.

In all, I think assignability of loans probably reduces the rate, perhaps by a few points. So making consumer loans non-assignable would likely raise the cost of loans to consumers.

I suppose the right term would be non-negotiable.

The student wants to get a jd. the lender ignores borrowers qualifications as he sells the debt within hours severing all interest in collecting the debt.fundamentally missing the lender's "skin in the game". A FATAL flaw.

Allan,
I know of one mortgage lender that promises that it will never surrender servicing rights of the loan. This might be a more productive approach than non-assignability of the loan, which would indeed screw up loan financing. The CFPB might do us all a favor if it rated servicers, permitting consumer-friendly competition along these lines. Right now, servicers compete on low low cost to their clients--who are not the borrowers. It would be nice if they had to compete on the basis of actual, uh, service.
(On the other hand, the Middle Passage Airlines model seems to be working pretty well, even when consumer have alternatives and some information.)

David Lander knows of what he speaks. He was in on the ground floor of "credit counseling" in the '70s and was one of the first professionals to say out loud that "CCC" in most communities was a not-well-disguised collection agency for credit card issuers. He represented lenders, servicers and borrowers in private practice. He is on the volunteer boards of several organizations that are searching for a counseling model that can help student loan borrowers in this complex environment. He is too modest to say any of these things about himself.

Mr. Scrooge,

In my experience as a borrower, the most important thing is the loan servicer... But what happens if the loan servicer goes under or is bought? Then the borrower is in the same position as before.

I liken the role of a "servicer" to that of a debt collector on steroids. The is no lender/borrower dna in the relationship thus it is fatally flawed.

Reply to the past couple of comments.
1. Thanks to Keith Lundin a wonderful judge and commentator.
2. If a servicer goes under then normally another servicer is substituted. If the original servicer is in a bankruptcy, section 365 may be activated.
3. Well said. I agree that one of the difficulties in developing effective regulations for servicers is that the role not sufficiently analysed nor understood.

"3. Well said. I agree that one of the difficulties in developing effective regulations for servicers is that the role not sufficiently analysed nor understood."

You mean that you would like to make sense out of nonsense.

What is missing here is common business sense in Wall Street's attempt to make a silk purse out of a sows's ear.

I'm no fan of about any servicer of any ilk you care to name, but the problem isn't with the servicers themselves any more than it was with MERS. MERS was designed as a tax dodge/clearinghouse, and it performed that duty very well (at least until its members turned it into something like the warehouse at the end of Raiders of the Lost Ark). When it was pressed into the job of holder/enforcer, though, things unraveled. Servicers are similar. They were designed to provide a collection service to primary and secondary lenders. Expecting them to "counsel" the people they're collecting from is a recipe for failure. Real counselors have to be independent and have arm-twisting authority over lenders.

I don't see how making loans nonnegotiable fixes the misuse of servicers. Any lender has skin in the game, whether it's primary or secondary. If you think a primary lender is more likely to manage a loan based on a "personal relationship," I regret to inform you that Bailey Brothers Building and Loan died over three decades ago and isn't coming back. For example, the leading local auto lender is America First Credit Union (yes, a credit union), and it self-services. Every move it makes, including "working with" debtors, is with the intent of getting paid or clearing the way to repo/judgment. It works no differently than the payday lenders who come though my small claims court (who also self-service, BTW), and if you file bankruptcy and still have accounts with AFCU, that setoff will come hard and fast.

The fatal flaws in the system are numerous, but they are far upstream. Why are for-profit schools allowed to operate on student loans that are bankruptcy-exempt? Why are loans generated with no view to ultimate debt load and ability to service that debt? Why are schools given these financial advantages with so little monitoring of their services (and I'm not talking just about for-profits)? Why do we have a credentialing system that requires a bachelors-degree-plus just to blow your nose? Any fix for our student debt problem will require a complete overhaul of our education system.

Make no mistake about it the fatal flaw struck upstream is the government guarantee of the GSE Business Model's debt.

A business model that simply does not work for a million reasons is you have a problem getting by the first reason (the guarantee). Partner/players/investors eyes become glazed over by the effects of the heroin like ability to suck on the breasts of the federal treasury.

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