When the housing market collapsed under the wave of sub-prime mortgage foreclosures in 2007, Congress passed the Dodd-Frank Act and established the Consumer Financial Protection Bureau (CFPB). This new, nearly omnipotent agency immediately began work on revising mortgage servicing rules to protect distressed borrowers from losing their home. The new rules required servicers to proactively establish contact with past due borrowers and offer all possible alternatives to default, in particular loan modifications. This forced servicers to make investments in people, process and technology to improve borrower communication.
Fast forward to today, and the CFPB has a new focus, student loan servicing, which is the second largest category of household debt after home mortgage with more than $1.2 trillion in outstanding balances. Last week, the agency published the annual report of its student loan ombudsman, which highlighted breakdowns in the federally established student loan rehabilitation programs for delinquent loans. In the press release announcing the report, CFPB Director Richard Cordray said:
“The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default. Today’s report shows that far too many of these borrowers continue to fall through the cracks of a flawed student loan system.”
One of the biggest cracks in the system involves qualifying the borrower for an income driven repayment (IDR) plan which would modify the terms of their loan to match the monthly payment with their ability to pay. The ombudsman’s report describes multiple problems with communication between the borrower, the loan servicer and their collection agents resulting in confusion about the status of the borrower’s request for assistance, and how much, where and when they should pay to cure their default and rehabilitate their loan.
This sounds familiar
While the CFPB has yet to propose new student loan servicing rules to address these problems, if history is any predictor, our experience in mortgage suggests they soon will. That’s because the ombudsman’s report reads eerily similar to the language the CFPB used to introduce their mortgage servicing rules, rules that Nuance helped servicers address with a hosted solution for proactively engaging with distressed borrowers who apply for assistance with their loan.
Among other things, mortgage servicers use the Nuance solution to introduce the borrower to the single point of contact (SPOC) assigned to their account, notify them of any documentation required to evaluate their loan modification request, and if approved, send them friendly reminders before the due date for their modified payment. That last step is critical, because just like rehabilitating a defaulted student loan, converting a trial mortgage modification to a permanent one requires the borrowers to make their reduced payments on time.
Servicers should be proactive
As student loan servicers try to get ahead of these problems by implementing similar communication capabilities, an important consideration is the age of the borrower. According to a study by the Urban Institute, unlike the mortgage crisis where the median borrower was 48-52 years of age and most comfortable communicating by phone, the average student loan borrower is 23-27 years old. This strongly suggests the student loan servicer must use digital communication channels popular with Millennials such as text messaging, email and push notifications in addition to phone calls to engage with this younger cohort. Bridging this generation gap is a strength of the Nuance proactive engagement platform. A single solution coordinates outreach across all these channels, leveraging explicit and implicit communication preferences to ensure the information the borrower needs gets to them the way they want.