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The CFPB has announced actions taken yesterday against Pennsylvania Higher Education Assistance Agency (PHEAA) and National Collegiate Student Loan Trusts (the Trusts) for multi-year servicing failures. Trusts purchase and securitize student loans, and PHEAA services the loans. The CFPB alleges that the defendants failed to respond to borrowers seeking relief from student loan payments, including during the COVID-19 national emergency. The CFPB yesterday filed proposed stipulated final judgments, which, if entered by the court, would require the Trusts and PHEAA to pay $400,000 and $1.75 million in penalties, respectively, to the CFPB’s victims relief fund. They would also pay nearly $3 million in redress to harmed borrowers.

During the leadup to the financial crisis, there was a boom in subprime-style student lending. Student lenders worked with investment bankers to turn student loans into securities. The National Collegiate Student Loan Trusts were an infamous example of this type of securitization. They are a group of fifteen securitization trusts organized under Delaware law. The Trusts acquire, pool, and securitize student loans, which they then service. As of February 2024, the Trusts collectively held approximately 163,000 private student loans with approximately $907 million in outstanding balances.

Pennsylvania Higher Education Assistance Agency, which is commonly known as American Education Services or AES, is a student loan servicer with its principal office in Harrisburg, Pennsylvania. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly $17.8 billion. It has been the primary servicer for active loans held by the National Collegiate Student Loan Trusts since at least 2006.

This is the CFPB’s second public enforcement action against the National Collegiate Student Loan Trusts. The CFPB earlier filed a lawsuit against this web of investment vehicles alleging, among other things, that the Trusts brought improper debt collection lawsuits for private student loan debt that they could not prove was owed or that was too old to sue over. The Trusts claimed that, as trusts, they were not covered under the Consumer Financial Protection Act. In March 2024, the United States Court of Appeals for the Third Circuit ruled the National Collegiate Student Loan Trusts are covered persons under the Consumer Financial Protection Act. That case remains pending in federal court.

In yesterday's case, the CFPB alleges that the defendants violated the Consumer Financial Protection Act. The CFPB’s complaint alleges that from 2015 until 2021, thousands of borrower requests—often seeking forms of payment relief—went unanswered. These included requests for co-signer release, extension of forbearance or deferment, loan settlement or forgiveness, Servicemember Civil Relief Act benefits, or other forms of payment or interest rate reduction.

The defendants failed to properly respond to borrower requests for years, including during the COVID-19 pandemic. Thousands of borrowers sent requests during the pandemic seeking forbearance on loans held by the National Collegiate Student Loan Trusts. However, many of those requests were mishandled. Specifically, the defendants harmed consumers by:

• Failing to ensure responses to borrower requests
• Failing to provide accurate information to borrowers
• Incorrectly denying forbearance requests

If entered by the court, the orders would require:

• Payment of nearly $3 million in redress to borrowers
• Correct outstanding requests
• Pay fines totaling $2.15 million

RELATED DOCUMENTS:

• The CFPB's Complaint
• Proposed Stipulated Final Judgment and Order as to the National Collegiate Student Loan Trusts
• Proposed Stipulated Final Judgment and Order as to Pennsylvania Higher Education Assistance Agency

The FDIC, OCC and Federal Reserve Board have jointly announced their issuance of a guide to support community banks in managing risks presented by third-party relationships.

Third-party relationships present varied risks that community banks are expected to appropriately identify, assess, monitor, and control to ensure that their activities are performed in a safe and sound manner and in compliance with applicable laws and regulations. These laws and regulations include, but are not limited to, those designed to protect consumers and those addressing financial crimes.

The guide offers potential considerations, resources, and examples through each stage of the third-party relationship and may be a helpful resource for community banks. While the guide illustrates the principles discussed in the third-party risk management guidance issued by the agencies in June 2023, it is not a substitute for that guidance.

• Third-Party Risk Managment: A Guide for Community Banks
• OCC Bulletin 2024-11
• FIL-20-2024

The FDIC has released its May 2024 list of banks examined for CRA compliance. Of the 56 banks listed, one headquartered in Salt Lake City, Utah, that "focuses its lending efforts on financing tiny homes" and "did not lend in its assessment area" received a "Substantial Noncompliance" rating. Another bank, headquartered in Rhinebeck, New York, received a "Needs to Improve" rating. Fifty-two of the banks earned "Satisfactory" ratings.

We congratulate First Bank of the Lake, Osage Beach, Missouri, and Union Bank, Morrisville, Vermont, for receiving evaluation ratings of "Outstanding."

The Federal Housing Finance Agency has issued its annual report on single-family guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises). Guarantee fees are intended to cover the expected credit losses, administrative costs, and cost of capital that the Enterprises incur when they acquire single-family loans from lenders. The report analyzes loans acquired by the Enterprises in 2022 by product type, risk class, and lender delivery volume, including a comparison to similar data from loans acquired in 2021.

Significant findings in the report indicate:

• For all loan products combined, the average single-family guarantee fee increased by 4 basis points to 61 basis points in 2022. The upfront portion of the guarantee fee, which is based on credit risk attributes (e.g., loan purpose, loan-to-value ratio, credit score), increased by 3 basis points to 17 basis points, on average, in 2022. The increase in upfront fees was driven by a shift from a predominantly refinance market to a predominantly purchase market.​
• The average guarantee fee in 2022 on 30-year fixed-rate loans rose by 3 basis points to 63 basis points, while the average guarantee fee on 15-year fixed-rate loans was unchanged at 42 basis points.

The Office of the Comptroller of the Currency (OCC) yesterday released a list of CRA performance evaluations that became public in April. The list contains only national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings. The possible ratings are outstanding, satisfactory, needs to improve, and substantial noncompliance.

Of the 13 evaluations made public in April, one located in Los Angeles, California, is rated needs to improve, 11 are rated satisfactory, and one is rated outstanding. We congratulate MidFirst Bank, Oklahoma City, Oklahoma, on its outstanding CRA rating.

Yesterday, SBA Administrator Isabel Casilla Guzman announced a new rule that will remove restrictions on SBA loan programs that currently prevent many returning citizens, including those on parole and probation, from being eligible for SBA-backed loans to start or grow a business. As part of this rule change, the SBA will also remove questions on criminal history from its applications. Individuals who are currently incarcerated and those who have previously defrauded the government will remain ineligible.

In addition to removing restrictions on loan programs for the returning citizen population – including the nearly 4 million Americans on parole or probation – the final rule will also standardize most criminal history eligibility rules across SBA loan programs, which collectively provide more than $40 billion in capital annually to small businesses. The rule change will have no negative impact on the loan repayment process, and the SBA will continue to diligently perform fraud checks on all loan applications in accordance with its Risk Mitigation Framework. Lenders will also continue to evaluate individual loan applications for approval. In that context, lenders can evaluate criminal history on an individualized basis—as part of the full review of a loan application and consistent with federal, state, and local law. Lenders can deny loans based on evidence of an unacceptable credit risk.

No link to the new rule was provided with the press release.

The Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac (the Enterprises) published new Reconsideration of Value (ROV) policies after months of collaboration with FHFA and the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration. A Reconsideration of Value is a request to an appraiser to re-assess the appraised value of a property due to potential appraisal reporting deficiencies or inappropriate selection of comparable properties, or based upon additional information the appraiser should consider.

In June 2023, as part of the Interagency Task Force on Property Appraisal and Valuation Equity, FHFA and HUD established a working group to develop consistent ROV standards. The Enterprises’ new policies provide clear requirements for lenders to disclose and outline the ROV process for consumers, standardize communication to appraisers, and establish ROV response expectations. Lenders will also be required to refer appraisers to local, state, and federal agencies for violations of anti-discrimination laws.

The Department of Housing and Urban Development, through the FHA, announced a new FHA requirement for lenders participating in its Single Family program that will enable borrowers to request a re-assessment of the appraised value of their property if they believe that the appraisal was inaccurate or biased.

• Fannie Mae Selling Guide Announcement
• Freddie Mac Bulletin
• FHA ROV Mortgagee Letter

The first 2024 issue of Consumer Compliance Outlook has been released, and is available on the Federal Reserve System’s Consumer Compliance Outlook webpage. Included in this issue are articles on:

• Overview of Private Flood Insurance Compliance Requirements
• Consumer Compliance Requirements for Commercial Products and Services
• Compliance Spotlight: Resources to Combat Increased Check Fraud
• Recent Supervisory Data for Institutions the Federal Reserve Supervises
• and more

The CFPB on Tuesday published research that suggests consumers tend to pay more for products that have more complex pricing structures. The report is based on experiments with multiple rounds of buyers and sellers interacting in simple markets, and found that participants tended to pay more when prices were broken into sub-parts and were harder to understand. The research, said the CFPB, has implications for understanding how junk fees impede fair and competitive pricing in markets like auto loans or mortgages, where consumers have to evaluate extended warranties, add-ons, closing costs, and a wide variety of other fees instead of an all-inclusive price.

While not expected to exactly mirror real-world transactions, the CFPB found in these experiments that more complex pricing generally led to more detrimental outcomes for consumers:

• Higher total prices: Sellers' total asking prices were 60 percent higher in markets with 16 sub-prices than in those with one price.
• Comparing prices was more difficult: Buyers were 15 times more likely to select a higher-priced option in markets with 16 sub-prices than in those with one price.
• Consumers paid more overall: Transaction prices were 70 percent higher in markets with 16 sub-prices than in those with one price, on average.

The CFPB has previously highlighted how the use of complex terms and pricing can pose challenges for consumers. In many instances, consumers face complex pricing when shopping for financial products and services including credit cards, checking and savings accounts, mortgages, and auto loans.

• Price Complexity in Laboratory Markets

The Federal Housing Finance Agency reports that U.S. house prices rose in February, up 1.2 percent from January, according to the FHFA's seasonally adjusted monthly House Price Index. House prices rose 7.0 percent from February 2023 to February 2024. The previously reported 0.1 percent price decrease in January remained unchanged.

For the nine census divisions, seasonally adjusted monthly price changes from January 2024 to February 2024 ranged from +0.4 percent in the West South Central division to +3.0 percent in the New England division. The 12-month changes were all positive, ranging from +3.7 percent in the West South Central division to +10.8 percent in the Middle Atlantic division.

“U.S. house prices rebounded with an increase in February, after declining slightly in January” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics. “All nine census divisions experienced price appreciation over the last 12 months, with New England and Middle Atlantic divisions posting double digit growth.”