Private Student Loans: Clarification from CFPB Could Help Ensure More Consistent Opportunities and Treatment for Borrowers

The Economic Growth, Regulatory Relief, and Consumer Protection Act enabled lenders to offer a rehabilitation program to private student loan borrowers who have a reported default on their credit report. The lender may remove the reported default from credit reports if the borrower meets certain conditions. Congress included a provision in statute for GAO to review the implementation and effects of these programs.

This report examines (1) the factors affecting financial institutions' participation in private student loan rehabilitation programs, (2) the risks the programs may pose to financial institutions, and (3) the effects the programs may have on student loan borrowers' access to credit. GAO reviewed applicable statutes and agency guidance. GAO also asked a credit scoring firm to simulate the effect on borrowers' credit scores of removing student loan defaults. GAO also interviewed representatives of regulators, some of the largest private student loan lenders, other credit providers, credit bureaus, credit scoring firms, and industry and consumer advocacy organizations.

The five largest banks that provide private student loans—student loans that are not guaranteed by the federal government—told GAO that they do not offer private student loan rehabilitation programs because few private student loan borrowers are in default, and because they already offer existing repayment programs to assist distressed borrowers. (Loan rehabilitation programs described in the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) enable financial institutions to remove reported defaults from credit reports after borrowers make a number of consecutive, on-time payments.) Some nonbank private student loan lenders offer rehabilitation programs, but others do not, because they believe the Act does not authorize them to do so. Clarification of this matter by the Consumer Financial Protection Bureau (CFPB)—which oversees credit reporting and nonbank lenders—could enable more borrowers to participate in these programs or ensure that only eligible entities offer them.

Private student loan rehabilitation programs are expected to pose minimal additional risks to financial institutions. Private student loans compose a small portion of most banks' portfolios and have consistently low default rates. Banks mitigate credit risks by requiring cosigners for almost all private student loans. Rehabilitation programs are also unlikely to affect financial institutions' ability to make sound lending decisions, in part because the programs leave some derogatory credit information—such as delinquencies leading to the default—in the credit reports.

Borrowers completing private student loan rehabilitation programs would likely experience minimal improvement in their access to credit. Removing a student loan default from a credit profile would increase the borrower's credit score by only about 8 points, on average, according to a simulation that a credit scoring firm conducted for GAO. The effect of removing the default was greater for borrowers with lower credit scores and smaller for borrowers with higher credit scores (see figure). Reasons that removing a student loan default could have little effect on a credit score include that the delinquencies leading to that default—which also negatively affect credit scores—remain in the credit report and borrowers in default may already have poor credit.

GAO is making two recommendations, including that CFPB provide written clarification to nonbank private student loan lenders on their authority to offer private student loan rehabilitation programs. CFPB does not plan to take action on this recommendation and stated that it was premature to take action on the second recommendation. GAO maintains that both recommendations are valid, as discussed in this report.

As of September 2018, nearly $120 billion in private student loan  balances (that is, all student loans that are not guaranteed by the federal  government) was outstanding in the United States. Private student loans  can supplement federal student loans and other financial aid and help pay  for tuition, fees, books, and living expenses. However, unlike federal  student loans, private student loan lenders may not offer as many flexible  relief options during periods of financial hardship. Borrowers who default  on any type of student loan can face serious consequences, including  damaged credit ratings and difficulty obtaining affordable credit in the  future.

After the passage of legislation in 1992, the Department of Education  established a loan rehabilitation option for federal student loans in default  (generally those 270 days past due). Under this option, borrowers have  the default removed from their credit reports after making nine on-time  monthly payments within 10 months. To facilitate private student loan  borrowers’ access to comparable programs, in 2018 Congress passed  the Economic Growth, Regulatory Relief, and Consumer Protection Act  (the Act), which amended the Fair Credit Reporting Act (FCRA) to allow  financial institutions to offer rehabilitation programs. The Act does not  require financial institutions to offer a rehabilitation program to their  private student loan borrowers, but financial institutions that are overseen  by one of the federal banking regulators must obtain approval of their  program’s terms and conditions from their regulator before offering a  program. Rehabilitation programs provide student loan borrowers who  have previously defaulted on their loan an opportunity to demonstrate to  their lender a renewed willingness and ability to repay the loan by making  a certain number of consecutive, on-time monthly payments. After  completing these payments, borrowers may request that their financial  institutions remove the previously reported default on their student loans  from their credit reports.

Section 602 of the Act includes a provision for us to review the  implementation and effects of private student loan rehabilitation  programs. This report examines (1) the factors affecting financial  institutions’ participation in these programs, (2) the risks that these  programs may pose to financial institutions, and (3) the effects that these  programs may have on student loan borrowers’ access to future credit.

To accomplish these objectives, we reviewed the statements that the  Board of Governors of the Federal Reserve System (Federal Reserve),  Federal Deposit Insurance Corporation (FDIC), and the Office of the  Comptroller of the Currency (OCC) issued to their regulated entities  regarding private student loan rehabilitation programs. We reviewed the  Consumer Financial Protection Bureau’s (CFPB) and National Credit  Union Administration’s (NCUA) legal authorities concerning rehabilitation  programs. We also asked VantageScore Solutions, LLC  (VantageScore)—a credit scoring firm—to conduct an analysis simulating  the effects of derogatory credit marks on student loan borrowers’  VantageScore 3.0 credit score.

In addition, we interviewed representatives from a nongeneralizable  sample of 15 private student loan lenders: five banks and two credit  unions with among the largest private student loan portfolios and eight  nonbank financial institutions (nonbank). The eight nonbanks included  three for-profit nonbank lenders and five nonprofit state-affiliated lenders  (nonbank state lenders). We identified the for-profit nonbank lenders and  nonbank state lenders through discussions with federal agency officials  and a trade association for nonbank state lenders, as well as  documentary sources with data on nonbank private student loan lenders.  Because this sample is nongeneralizable, our results cannot be  generalized to all private student loan lenders.

We also interviewed representatives from a nongeneralizable sample of  seven credit providers (of mortgages, automobile loans, and credit cards)  about potential risks and effects of private student loan rehabilitation  programs. We selected these credit providers based on their size and, to  the extent applicable, their federal regulator to include a mix of entities  overseen by different regulators. Because this sample is  nongeneralizable, our results cannot be generalized to all credit  providers. We interviewed officials from FDIC, the Federal Reserve,  NCUA, OCC, and CFPB about their implementation of the Act’s  provisions on private student loan rehabilitation programs and the  potential risks and effects for financial institutions and student loan  borrowers.

Finally, we interviewed officials from the Department of Education and the  Federal Trade Commission, which oversee the federal student loan  rehabilitation program and credit reporting industry, respectively. We also  interviewed representatives of four consumer reporting agencies (CRA);  the two credit scoring firms that develop credit score models with  nationwide coverage, Fair Isaac Corporation (FICO) and VantageScore;  banking, credit reporting, and student loan lending and servicing industry  groups; and consumer advocacy organizations. We determined that all of  the data and data sources we used in this report and the analyses  conducted by VantageScore were sufficiently reliable for reviewing the  implementation and effects of private student loan rehabilitation  programs. See appendix I for a more detailed discussion of our scope  and methodology.

We conducted this performance audit from July 2018 to May 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Private student loans are not guaranteed by the federal government.  Generally, private lenders underwrite the loans based on the borrower’s  credit history and ability to repay, and they often require a cosigner.  Private student loans generally carry a market interest rate, which can be  a variable rate that is higher than that of federal student loans. As of  September 30, 2018, five banks held almost half of all private student  loan balances. Other private student loan lenders include credit unions  and nonbanks:

Credit unions originate private student loans either directly or  indirectly through a third party.

Nonbanks include both for-profit nonbank lenders and nonbank state  lenders. For-profit nonbank lenders can originate, service, refinance,  and purchase loans. Nonbank state lenders promote affordable  access to education by generally offering low, fixed-rate interest rates  and low or no origination fees on student loans.

As of September 2018, outstanding private student loan balances made  up about 8 percent of the $1.56 trillion in total outstanding student loans  (see fig. 1). The volume of new private student loans originated has  fluctuated, representing about 25 percent of all student loans originated in  academic year 2007–2008, 7 percent in 2010–2011 (after the financial  crisis), and 11 percent in 2017–2018.

Consumer Reporting for Private Student Loans

FCRA, the primary federal statute that governs consumer reporting, is  designed to promote the accuracy, fairness, and privacy of information in  the files of CRAs. FCRA, and its implementing regulation, Regulation V,  govern the compilation, maintenance, furnishing, use, and disclosure of  consumer report information for credit, insurance, employment, and other  eligibility decisions made about consumers. The consumer reporting  market includes the following entities:

CRAs assemble or evaluate consumer credit information or other  consumer information for the purpose of producing consumer reports  (commonly known as credit reports). Equifax, Experian, and  TransUnion are the three nationwide CRAs.

Data furnishers report information about consumers’ financial  behavior, such as repayment histories, to CRAs. Data furnishers  include credit providers (such as private student loan lenders),  utilities, and debt collection agencies.

Credit report users include banks, employers, and others that use  credit reports to make decisions on an individual’s eligibility for  products and services such as credit, employment, housing, and  insurance.

FCRA imposes duties on data furnishers with respect to the accuracy of  the data they furnish. Data furnishers are required to, among other  things, refrain from providing CRAs with information they know or have  reasonable cause to believe is inaccurate and develop reasonable written  policies and procedures regarding the accuracy of the information they  furnish. The Act entitles financial institutions that choose to offer a private  student loan rehabilitation program that meets the Act’s requirements a  safe harbor from potential inaccurate information claims under FCRA  related to the removal of the private student loan default from a credit  report. To assist data furnishers in complying with their responsibilities  under FCRA, the credit reporting industry has adopted a standard  electronic data-reporting format called the Metro 2® Format. This format  includes standards on how and what information furnishers should report  to CRAs on private student loans.

The information that private student loan lenders furnish to CRAs on their  borrowers includes consumer identification; account number; date of last  payment; account status, such as in deferment, current, or delinquent  (including how many days past due); and, if appropriate, information  indicating defaults. An account becomes delinquent on the day after the  due date of a payment when the borrower fails to make a full payment.  Private student loan lenders’ policies and terms of loan contracts  generally determine when a private student loan is in default. While  private student loan lenders may differ in their definitions of what  constitutes a default, federal banking regulator policy states that closed- end retail loans (which include private student loans) that become past  due 120 cumulative days from the contractual due date should be  classified as a loss and “charged off.” Private student loan lenders can  indicate that a loan is in default and they do not anticipate being able to  recover losses on it by reporting to CRAs one of a number of Metro 2®  Format status codes. Participation in a private student loan rehabilitation  program entitles borrowers who successfully complete the program to  request that the indicator of a student loan default be removed from their  credit report, but the delinquencies leading up to the default would remain  on the credit report. Figure 2 shows an example of credit reporting for a  borrower who defaults on a private student loan and completes a  rehabilitation program.

A credit score is a measure that credit providers use to predict financial  behaviors and is typically computed using information from consumer  credit reports. Credit scores can help predict the likelihood that a  borrower may default on a loan, file an insurance claim, overdraw a bank  account, or not pay a utility bill. FICO and VantageScore are the two firms  that develop credit score models with nationwide coverage. FICO  develops credit score models for distribution by each of the three  nationwide CRAs, whereas VantageScore’s models are developed across  the three CRAs resulting in a single consistent algorithm to assess risk.  FICO and VantageScore each have their own proprietary statistical credit  score models that choose which consumer information to include in  calculations and how to weigh that information. The three nationwide  CRAs also develop credit score models derived from their own data.

There are different types of credit scores, including generic, industry- specific, and custom. Generic scores are based on a representative  sample of all individuals in a CRA’s records, and the information used to  predict repayment is limited to the information in consumer credit records.  Generic scores are designed to predict the likelihood of a borrower not  paying as agreed in the future on any type of credit obligation. Both FICO  and VantageScore develop generic credit scores. FICO and  VantageScore generic scores generally use a range from 300 to 850, with  higher numbers representing lower credit risk. For example,  VantageScore classifies borrowers in the following categories: subprime  (those with a VantageScore of 300–600), near prime (601–660), prime  (661–780), and super prime (781–850). A prime borrower is someone  who is considered a low-risk borrower and likely to make loan payments  on time and repay the loan in full, whereas a subprime borrower has a  tarnished or limited credit history. FICO and VantageScore generic scores  generally use similar elements in determining a borrower’s credit score,  including a borrower’s payment history, the amounts owed on credit  accounts, the length of credit history and types of credit, and the number  of recently opened credit accounts and credit inquiries.

FICO has developed industry-specific scores for the mortgage,  automobile finance, and credit card industries. These scores are  designed to predict the likelihood of not paying as agreed in the future on  these specific types of credit. In addition, credit providers sometimes use  custom credit scores instead of, or in addition to, generic credit scores.  Credit providers derive custom scores from credit reports and other  information, such as account history, from the lender’s own portfolio. The  scores can be developed internally by credit providers or with the  assistance of external parties such as FICO or the three nationwide  CRAs.

Federal Oversight of Private Student Loans

CFPB has supervisory authority over certain private student loan lenders,  including banks and credit unions with over $10 billion in assets and all  nonbanks, for compliance with Federal consumer financial laws. CFPB  also has supervisory authority over the largest CRAs and many of the  entities that furnish information about consumers’ financial behavior to  CRAs. To assess compliance with Federal consumer financial laws,  CFPB conducts compliance examinations. According to CFPB, because  of its mission and statutory requirement regarding nonbank supervision, it  prioritizes its examinations by focusing on risks to consumers rather than  risks to institutions. Given the large number, size, and complexity of the  entities under its authority, CFPB prioritizes its examinations by focusing  on individual product lines rather than all of an institution’s products and  services. CFPB also has enforcement authority under FCRA regarding  certain banks, credit unions, and nonbanks and broad authority to  promulgate rules to carry out the purposes of FCRA.

The prudential regulators—FDIC, Federal Reserve, NCUA, and OCC— oversee all banks and most credit unions that offer private student loans.  Their oversight includes routine safety and soundness examinations for  all regulated entities. These examinations may include a review of  operations, including policies, procedures, and practices, to ensure that  private student loans are not posing a risk to the entities’ safety and  soundness. Prudential regulators also have supervisory authority for  FCRA compliance for banks and certain credit unions with $10 billion or  less in assets.

No Banks Are Offering Rehabilitation Programs, and Authority Is Unclear for Other Lenders

Banks and Credit Unions Are Not Offering Rehabilitation Programs, but Federal Banking Regulators Have Established Approval Processes

As of January 2019, none of the five banks with the largest private  student loan portfolios that we contacted offered rehabilitation programs  for defaulted private student loans. In addition, officials from the federal  banking regulators told us that as of March 2019, no banks had submitted  applications to have rehabilitation programs approved. Representatives  from three of the five banks we contacted told us they had decided not to  offer a rehabilitation program, and the other two had not yet made a final  determination.

Representatives from these five banks provided several reasons they  were not offering rehabilitation programs for private student loans.

Low delinquency and default rates. All five banks’ representatives  stated that they had low default rates for private student loans, so the  demand for these programs would be low for each bank.

Availability of predefault payment programs. Representatives of all  five banks said they already offer alternative payment programs, such  as forbearance, to help prevent defaults, and two of them explicitly  noted this as a reason that a rehabilitation program was unnecessary.

Operational uncertainties. Most of the banks’ representatives were  not sure how they would operationalize rehabilitation programs. One  bank’s representatives said that they sell defaulted loans to debt  purchasers and that it would be difficult to offer rehabilitation  programs for loans that had been sold. Representatives of two other  banks said that the banks’ systems are not able to change the status  of a loan once it has defaulted, so they were not certain how their  systems would track rehabilitated loans. Another bank’s  representatives said that they did not know how rehabilitated loans  would be included for accounting purposes in developing their  financial statements.

Reduced borrower incentives to avoid default. Representatives  from two banks said they believed the option to rehabilitate a  defaulted loan might reduce borrowers’ incentives to avoid default or  to enter a repayment program before default.

Risk of compliance violations. One bank representative said a  rehabilitation program could put the bank at risk for violations of unfair  and deceptive acts and practices if borrowers misunderstood or  misinterpreted how much the program would improve their credit  scores. Representatives from this bank and another explained that  they did not know how much the program would improve credit  scores, limiting their ability to describe the program’s benefit to  borrowers.

Representatives from three of these banks and other organizations,  however, noted that there could be advantages for banks to offer private  student loan rehabilitation programs. Representatives from the banks said  these programs could help banks recover some nonperforming debt, and  one of these representatives stated the program could be marketed to  borrowers as a benefit offered by the bank. A representative of a  consumer advocacy group said a rehabilitation program could improve a  bank’s reputation by distinguishing the bank from peer institutions that do  not offer rehabilitation for private student loans.

Because NCUA is not one of the federal banking regulators by statutory  definition, officials said the Act does not require credit unions to seek  approval from the agency before offering a rehabilitation program. NCUA  officials told us examiners would likely review private student loan  rehabilitation programs for the credit unions that choose to offer them as  part of normal safety and soundness examinations. The two credit unions  we spoke with—which are among the largest credit union providers of  private student loans—told us they do not plan to offer rehabilitation  programs. One of these credit unions cited reasons similar to those  offered by banks, including a low private student loan default rate that  suggested there would be a lack of demand for a rehabilitation program.  The other credit union explained that it was worried about the effect of  removing defaults from credit reports on its ability to make sound lending  decisions. NCUA officials also noted that as of January 2019, they had  not received any inquiries from credit unions about these programs.

OCC, FDIC, and the Federal Reserve have issued information regarding  the availability of private student loan rehabilitation programs to their  regulated entities, including how they would review applications. In doing  so, the agencies informally coordinated to ensure that the statements  issued would contain similar information on rehabilitation programs. The  three agencies’ statements explained that their regulated entities must  receive written approval to begin a program and that the relevant agency  would provide feedback or notify them of its decision within 120 days of  receiving a written application. The agencies will review the proposed  program to ensure that it requires borrowers to make a minimum number  of consecutive, on-time, monthly payments that demonstrate renewed  ability and willingness to repay the loan.

Uncertainty Exists about Nonbank Lenders’ Authority and What Information Should Be Removed from a Credit Report

Uncertainty exists regarding two issues with private student loan  rehabilitation programs. First, some nonbank private student loan lenders  are not certain that they have the authority to implement these programs.  Second, the Act does not explain what constitutes a “default” for the  purposes of removing information from credit reports.

Uncertainty about Nonbank State Lenders’ Authorities

With regard to nonbank state lenders, uncertainty exists about their  authority under FCRA to offer private student loan rehabilitation programs  that include removing information from credit reports. As discussed  previously, for financial institutions such as banks and credit unions, the  Act provides an explicit safe harbor to request removal of a private  student loan default from a borrower’s credit report and remain in  compliance with FCRA. However, the Act does not specify that for-profit  nonbank lenders and nonbank state lenders have this same authority.  Representatives of the five nonbank state lenders we spoke with had  different interpretations of their authority to offer rehabilitation programs.  At least two nonbank state lenders currently offer rehabilitation programs,  and their representatives told us they believed they have the authority to  do so. Another nonbank state lender told us its state has legislation pending to implement such a program. In contrast, representatives of two  other nonbank state lenders told us they were interested in offering a  rehabilitation program but did not think that they had the authority to do  so. In addition, representatives from a trade association that represents  nonbank state lenders noted that confusion exists among some of their  members and they are seeking a way to obtain explicit authority for  nonbank lenders to offer rehabilitation programs for their private student  loans. Two trade associations that represent nonbank state lenders also  told us that some of their members would be interested in offering these  programs if it was made explicit that they were allowed to do so.

CFPB officials told us the agency has not made any determination on  whether it plans to clarify for nonbanks—including for-profit nonbank  lenders and nonbank state lenders—if they have the authority under  FCRA to have private student loan defaults removed from credit reports  for borrowers who have completed a rehabilitation program. CFPB  officials said that the agency does not approve or prevent its regulated  entities from offering any type of program or product. Unlike for the  federal banking regulators, the Act did not require CFPB to approve  rehabilitation programs offered by the entities it regulates. However,  CFPB does have general FCRA rulemaking authority. It generally also  has FCRA enforcement and supervisory responsibilities over its regulated  entities, which includes certain entities that originate private student  loans. This authority allows the agency to provide written clarification of  provisions or define terms as needed. As a result, CFPB could play a role  in clarifying for nonbanks whether they are authorized under FCRA to  offer private student loan rehabilitation programs.

Federal internal control standards state that management should  externally communicate the necessary quality information to achieve the  entity’s objectives. Without clarification from CFPB on nonbanks’  authority to offer private student loan rehabilitation programs that allow  them to delete information from the borrower’s credit report, there will  continue to be a lack of clarity on this issue among these entities.  Providing such clarity could—depending on CFPB’s interpretation—result  in additional lenders offering rehabilitation programs that would allow  more borrowers the opportunity to participate, or it could help ensure that  only those entities CFPB has interpreted as being eligible to offer  programs are doing so.

No Standard for What Constitutes a “Default”

Statutory changes made to FCRA by the Act do not explain what  information on a consumer’s credit report constitutes a private student  loan “default” that may be removed when a borrower successfully  completes a rehabilitation program. According to the three nationwide  CRAs and a credit reporting trade association, the term “default” is not  used in credit reporting for private student loans. As discussed previously,  private student loan lenders use one of a number of Metro 2® Format  status codes to indicate that a loan is in default (i.e., they do not  anticipate being able to recover losses on the loan). Representatives of  the CRAs and a credit reporting trade association said that private  student loan lenders will need to make their own interpretation of what  information constitutes a default for the purposes of removing information  from a credit report following successful completion of a private student  loan rehabilitation program.

The statements issued by FDIC, the Federal Reserve, and OCC on  rehabilitation programs do not explain what information constitutes a  private student loan “default” that may be removed from borrowers’ credit  reports upon successful completion of a rehabilitation program. Officials  from FDIC, the Federal Reserve, and OCC explained that they do not  have the authority to interpret what constitutes a private student loan  default on credit reports because the responsibilities for interpreting  FCRA fall under CFPB. CFPB officials told us they are monitoring the  issue but have not yet determined if there is a need to address it.

Given CFPB’s rulemaking authority for FCRA, it could clarify the term  “default” for private student loan lenders. In doing so, CFPB could obtain  insight from the prudential regulators and relevant industry groups on how  private student loan lenders currently report private student loan defaults  on credit reports and on how to develop a consistent standard for what  information may be removed. According to federal internal control  standards, management should externally communicate the necessary  quality information to achieve objectives. This can include obtaining  quality information from external parties, such as other regulators and  relevant industry groups. Without clarification from CFPB, there may be  differences among private student loan lenders in what information they  determine constitutes a “default” and may be removed from a credit  report. Variations in lenders’ interpretations could have different effects on  borrowers’ credit scores and credit records, resulting in different treatment  of borrowers by credit providers. This could affect borrowers’ access to  credit or the terms of credit offered, such as interest rates or the size of  down payments required on a variety of consumer loans. In addition, as  mentioned previously, the credit reporting industry follows a standard  reporting format to help ensure the most accurate credit reporting  information possible. Without clarification on what information may be  removed from credit reports following successful completion of  rehabilitation programs, differences in lenders’ interpretation could  introduce inconsistencies in credit reporting data that may affect their  accuracy.

Private Student Loan Rehabilitation Programs Would Likely Pose Minimal Risks to Financial Institutions

Programs Are Expected to Pose Little Safety and Soundness Risk for Banks and Credit Unions

Rehabilitation programs for private student loans are expected to pose  minimal additional risk to banks’ and credit unions’ safety and soundness.  Prudential regulators require that banks and credit unions underwrite  student loans to mitigate risks and ensure sound lending practices, and  OCC guidance specifies that underwriting practices should minimize the  occurrence of defaults and the need for repayment assistance. Lenders  generally use underwriting criteria based on borrowers’ credit information  to recognize and account for risks associated with private student loans.

According to officials from OCC, FDIC, and the Federal Reserve and  representatives from the major bank and credit union private student loan  lenders we spoke with, lenders participating in private student loan  rehabilitation programs would face minimal additional risks for several  reasons:

Loans are already classified as a loss. Loans entering a  rehabilitation program are likely to be 120 days past due and to have  been charged off, and thus they would have already been classified  as a loss by banks and credit unions. OCC officials told us a program  to rehabilitate these loans would, therefore, pose no additional risks to  the safety and soundness of institutions that offer them.

Default rates are low, and loans typically use cosigners.

Representatives from the five major banks and two credit unions told  us that private student loans generally perform well and have low  rates of delinquencies and defaults. Aggregate data on the majority of  outstanding loan balances show that the default rate for private  student loans was below 3 percent from the second quarter of 2014  through the third quarter of 2018. Lenders also generally require  borrowers of private student loans to have cosigners—someone who  is liable to make payments on the loan should the student borrower  default—which helps reduce the risk of the loan not being repaid.  Since the academic year 2010–2011, the rate of undergraduate  private student loan borrowers with cosigners has exceeded 90  percent.

Private student loan portfolios are generally small. Private student  loans make up a small portion of the overall loan portfolios for most of  the banks and credit unions we spoke with. For four of the five major  banks with the largest portfolios of private student loans, these  constituted between about 2 percent to 11 percent of their total loan  portfolio in 2017. The fifth bank’s entire portfolio was education  financing, with private student loans accounting for about 93 percent  of its 2017 portfolio. For the two credit unions we contacted, private  student loans constituted about 2 percent and 6 percent of their total  assets in 2018.

Private student loan rehabilitation programs may create certain  operational costs for banks or credit unions that offer them. However, no  representatives of the five banks and two credit unions with whom we  spoke were able to provide a cost estimate since none had yet designed  or implemented such a program. Representatives from four banks and  one credit union we spoke with said that potential costs to implement a  rehabilitation program would be associated with information technology  systems, designing and developing new systems to manage the program,  increased human resource needs, additional communications with  borrowers, credit reporting, compliance, monitoring, risk management,  and any related legal fees. In addition, like any other type of consumer  loan, banks and credit unions could face potential risks with private  student loan rehabilitation programs, including operational, compliance, or  reputational risks. For example, a representative of one bank cited  operational risks such as those that could stem from errors in credit  reporting or inadequate collection practices for rehabilitated private  student loans.

Rehabilitation Programs Are Expected to Have Little Effect on Financial Institutions’ Ability to Make Prudent Lending Decisions

One concern about removing information from credit reports—as  authorized in connection with the Act’s loan rehabilitation programs—is  that it could degrade the quality of the credit information that credit  providers use to assess the creditworthiness of potential borrowers.  However, the removal of defaults from credit reports resulting from loan  rehabilitation programs is unlikely to affect financial institutions’ ability to  make sound lending decisions, according to prudential regulator officials  and representatives from three private student lenders and three other  credit providers with whom we spoke. OCC and FDIC officials and  representatives from two of these private student lenders noted that  because rehabilitation programs leave the delinquencies leading up to the  default on borrowers’ credit reports, lenders would still be able to  adequately assess borrower risk. In addition, representatives from one  automobile lender and one mortgage lender said that over time, the  methods they use to assess creditworthiness would be able to detect  whether rehabilitated private student loans were affecting their ability to  identify risk patterns in credit information and they could adjust the  methods accordingly.

Representatives from the Federal Reserve provided three additional  reasons why they expected that rehabilitation programs would have little  effect on banks’ and credit unions’ lending decisions. First, under the  statutory requirement for private student loan rehabilitation, removal of a  default from a borrower’s credit report can only occur once per loan. A  single default removal would be unlikely to distort the accuracy of credit  reporting in general. Second, they said that borrowers who have  successfully completed a rehabilitation program by making consecutive  on-time payments have demonstrated a proven repayment record, and  therefore they likely represent a better credit risk. Finally, because  participation in the private student loan rehabilitation program is expected  to be low, its effect on the soundness of financial institutions’ lending  decisions is expected to be minimal.

Private Student Loan Rehabilitation Programs Would Likely Result In Minimal Improvements in Borrowers’ Access to Credit

Effect of Rehabilitation Programs on Most Borrowers’ Access to Credit Would Likely Be Small

The effects of private student loan rehabilitation programs on most  borrowers’ access to credit would likely be minimal. A simulation  conducted by VantageScore found that removing a student loan default  increased a borrower’s credit score by 8 points, on average. An 8 point  rise in a borrower’s credit score within VantageScore’s range of 300 to  850 represents only a very small improvement to that borrower’s  creditworthiness. Therefore, most borrowers who successfully completed  a private student loan rehabilitation program would likely see minimal  improvement in their access to credit, particularly for credit where the  decision-making is based solely on generic credit scores.

Factors Credit Providers Consider Prior to  Lending  Credit providers assess a borrower’s  creditworthiness based on several factors,  including the following:

Generic credit scores: Credit providers  can rely solely on generic credit scores,  such as those developed by Fair Isaac  Corporation and VantageScore Solutions,  LLC, to make lending decisions. Credit  providers generally do not provide credit  to borrowers whose scores do not meet a  minimum threshold.  Industry-specific credit scores: Certain  types of credit providers, such as  mortgage lenders, automobile loan  lenders, and credit card issuers, may use  industry-specific credit scores rather than  generic credit scores to make lending  decisions. This is because these scores  may help them better predict lending risks  specific to their industry.  Internal credit reviews: Credit providers  can customize methods unique to their  institution that review different aspects of  borrowers’ credit information, such as  debt-to-income ratios, employment  history, and borrowers’ existing  relationships with the institution. Credit  providers may also develop custom credit  scores that are tailored to their specific  needs and include factors they have  deemed important in predicting risks of  nonpayment. Credit providers incorporate  their own internal data in these scores as  well as information contained in  borrowers’ credit reports.

The effect of a rehabilitation program on credit scores will likely be  somewhat greater for borrowers with lower credit scores, and smaller for  borrowers with higher credit scores. For example, the VantageScore  simulation suggests that borrowers in the subprime range (with scores of  300–600) could see score increases of 11 points, on average, while  borrowers in the prime (661–780) and super prime (781–850) ranges  could see increases of less than 1 point, on average (see fig. 3). The  effect of removing a default from a credit report varies among borrowers  because a credit score is influenced by other information in a borrower’s  credit report, such as other outstanding derogatory credit markers, the  length of time since the default, and other types of outstanding loans.

Reasons that removing a student loan default may improve a borrower’s  credit score and access to credit only minimally include the following:

Delinquencies remain in the credit report. A key reason that  removing a student loan default has a small effect on a credit score,  according to VantageScore officials, is that the delinquencies leading  to that default remain in the credit report for borrowers who  successfully complete rehabilitation programs. Adding a delinquency  in the simulation decreased a credit score by 61 points, on average.  Thus, the simulation suggests that the increase in a credit score from  removing a student loan default is not as substantial as the decrease  from adding the initial delinquency.

Credit scoring treats student loans differently. Some credit score  models place less emphasis on student loans than on other types of  consumer loans in predicting the risk of nonpayment. One credit  scoring firm and two CRAs we spoke with said that student loans  have a lower weight than other types of consumer loans in their  generic credit scoring algorithms. They explained that there are fewer  student loans than other types of consumer loans in the sample they  use to develop the score, and student debt has proved to be less  important statistically at predicting credit risk in their models. Student  loans also may have less weight in predicting defaults in industry- specific or custom models of scores. A representative of one credit  scoring firm said the algorithm for an industry-specific credit score that  predicts the risk of nonpayment on a credit card may place less  emphasis on a student loan than the algorithm for a generic credit  score that is meant to predict risk more broadly. Further, CRA officials  we spoke with said that because their custom credit scoring models  are specific to clients’ needs, the models may not include student  loans as a predictor of default at all, or they may place greater  emphasis on student loans, depending on the clients’ needs.

Borrowers in default typically already have poor credit. Borrowers  who complete a rehabilitation program have a high likelihood of  having other derogatory credit items in their credit report, in addition to  the student loan delinquencies that led to the default, according to a  study conducted by a research organization, several CRAs, and one  credit provider with whom we spoke. The VantageScore simulation  also showed that borrowers who had at least one student loan  delinquency or default in their credit profile had an average of five  derogatory credit items in their profile. Because student loan defaults  and student loan delinquencies are both negative credit events that  affect credit providers’ credit assessment methods, the removal of one  student loan default from a borrower’s credit report likely will not make  a large difference in how credit providers evaluate the borrower.

Programs May Hold Additional Benefits as Well as Disadvantages for Borrowers

Consumer advocates and academic studies cited potential benefits of  rehabilitation programs apart from their effect on credit scores and access  to credit:

Borrowers defaulting on private student loans issued by nonbank  state lenders could have wage garnishments stopped after  successfully completing a rehabilitation program.

Rehabilitation would stop debt collection efforts against a private  student loan borrower.

Participating in a loan modification program for one loan may help  borrowers better meet their other loan obligations, according to  studies we reviewed. For example, one study found that  participation in mortgage modification programs was associated with  lower delinquency rates on nonmortgage loans.

However, programs may also have some disadvantages or pose  challenges to borrowers, according to representatives from consumer  advocacy groups and academic sources:

A rehabilitation program may restart the statute of limitations on loan  collections, according to representatives of consumer advocacy  groups. Borrowers who redefault following entry into a rehabilitation  program near the end of the statute of limitations on their debt could  have collection efforts extended on these loans.

Programs may extend adverse credit reporting. Generally, negative  credit information stays on consumer reports for 7 or 10 years;  therefore, depending on when a borrower enters into a rehabilitation  program, a payment on the loan might prolong the adverse credit  reporting for that account.

The lack of income-driven repayment programs offered to borrowers  in the private student loan market means that borrowers who  complete rehabilitation programs may have a high likelihood of  redefaulting on their loans.

Because removing adverse information from credit reports does not  change a borrower’s underlying creditworthiness, improved credit  scores and access to credit may cause borrowers to borrow too much  relative to their ability and willingness to pay. For example, one  study found that for consumers who had filed for bankruptcy, their  FICO scores and credit lines increased within the first year after the  bankruptcy was removed from their credit report. However, the  study found the initial credit score increase had disappeared by about  18 months after the bankruptcy was removed and that debt and  delinquency were higher than expected, increasing the probability of a  future default.

Private student loan rehabilitation programs can provide an opportunity  for private student loan borrowers to help repair their credit reports.  However, some nonbank state lenders have different interpretations of  whether FCRA authorizes them to offer such programs. During our  review, CFPB had not determined if it would clarify these uncertainties for  nonbank state lenders and other nonbank private student loan lenders.  Providing such clarity could—depending on CFPB’s interpretation—result  in additional lenders offering rehabilitation (allowing more borrowers the opportunity to participate), or help to ensure that only entities deemed  eligible by CFPB to offer programs are doing so.

In addition, the Act does not explain what information on a consumer’s  credit report constitutes a private student loan “default” that may be  removed following the successful completion of a private student loan  rehabilitation program. Without clarification from CFPB—after consulting  with the prudential regulators and relevant industry groups—on what  information in a credit report constitutes a private student loan default that  may be removed, lenders may be inconsistent in the credit report  information they remove. As a result, variations in lenders’ interpretations  could have different effects on borrowers’ credit scores and credit  records, which could affect how they are treated by credit providers and  could also result in inconsistencies that affect the accuracy of credit  reporting data.

We are making the following two recommendations to CFPB:  The Director of CFPB should provide written clarification to nonbank  private student loan lenders on their authorities under FCRA to offer  private student loan rehabilitation programs that include removing  information from credit reports. (Recommendation 1)

The Director of CFPB, after consulting with the prudential regulators and  relevant industry groups, should provide written clarification on what  information in a consumer’s credit report constitutes a private student  loan reported “default” that may be removed after successful completion  of a private student loan rehabilitation program. (Recommendation 2)

We provided a draft copy of this report to CFPB, the Department of  Education, FDIC, the Federal Reserve, the Federal Trade Commission,  NCUA, OCC, and the Department of the Treasury for review and  comment. We also provided FICO and VantageScore excerpts of the  draft report for review and comment. CFPB and NCUA provided written  comments, which have been reproduced in appendixes II and III,  respectively. FDIC, the Federal Trade Commission, OCC, and the  Department of the Treasury provided technical comments on the draft  report, which we have incorporated, as appropriate. The Department of  Education and the Federal Reserve did not provide any comments on the  draft of this report. FICO and VantageScore provided technical  comments, which we have incorporated, as appropriate.

In its written response, CFPB stated that it does not plan to act on our first  recommendation to provide written clarification to nonbank private student  loan lenders on their authorities under FCRA to offer private student loan  rehabilitation programs. CFPB stated—and we agree—that the Act does  not regulate the authority of private student loan lenders that are not  included in FCRA’s definition of a “financial institution,” nor direct financial  institutions that are not supervised by a federal banking agency to seek  CFPB’s approval concerning the terms and conditions of rehabilitation  programs. However, CFPB’s written response does not discuss the  authority of private student loan lenders that potentially fall outside  FCRA’s definition of a financial institution to offer rehabilitation programs  that include removing information from credit reports. As we discuss in  the report, uncertainty exists among nonbank private student loan lenders  regarding their authority to implement such programs. We maintain that  although the Act does not require CFPB to act on this issue, CFPB could  play a role in clarifying whether FCRA authorizes nonbanks to offer  rehabilitation programs that enable the lender to obtain legal protection  for removal of default information from a credit report. CFPB intervention  is warranted given the lack of clarity in the private student lending industry  and is consistent with CFPB’s supervisory authority over nonbank  financial institutions and its FCRA enforcement and rulemaking  authorities. We do not suggest that CFPB play a role in approving  rehabilitation programs. As we note in the report, clarification of  nonbanks’ authorities could result in additional lenders offering  rehabilitation programs and providing more consistent opportunities for  private student loan borrowers, or it could help ensure that only those  entities authorized to offer programs are doing so.

With respect to our second recommendation on providing written  clarification on what information in a consumer’s credit report constitutes  a private student loan reported default that may be removed after  successful completion of a private student loan rehabilitation program,  CFPB’s letter states that such clarification is premature because of  ongoing work by the Consumer Data Industry Association. The letter  states that after that work is completed, CFPB will consult with the  relevant regulators and other interested parties to determine if additional  guidance or clarification is needed. As we stated in the report, we are  aware of the work of the Consumer Data Industry Association to update  the credit reporting guidelines for private student loans. We maintain that  this work presents a good opportunity for CFPB to participate in these  discussions and to work in conjunction with the industry and other  relevant regulators to help alleviate any contradiction between what  CFPB would determine in isolation from any determination made by  industry. Further, such participation would allow CFPB to weigh in on  legal and policy issues from the start, potentially avoiding any need for  future rulemaking. In addition, CFPB’s involvement in this determination  and issuance of clarification would help ensure more consistent treatment  among borrowers participating in private student loan rehabilitation  programs, as well as consistency in credit reporting information.

NCUA’s written response stated that federal credit unions were  authorized to offer rehabilitation programs for private student loan  borrowers prior to the Act and that federal credit unions are not required  to obtain review and approval from NCUA to offer such programs. The  letter notes, however, that the Act requires federal credit unions that offer  such programs to remove private student loan defaults from consumer  credit reports if borrowers successfully complete a rehabilitation program.  NCUA noted that even though removal of the default may result in a  relatively small credit score increase, this can benefit credit union  members. NCUA stated that it stands ready to assist CFPB in  implementing the report’s two recommendations.

We are sending copies of this report to CFPB, the Department of  Education, FDIC, the Federal Reserve, the Federal Trade Commission,  NCUA, OCC, the Department of the Treasury, the appropriate  congressional committees and members, and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or cackleya@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) the factors affecting financial  institutions’ participation in private student loan rehabilitation programs,  (2) the risks that these programs may pose to financial institutions, and  (3) the effects that these programs may have on student loan borrowers’  access to future credit.

To examine the factors that affect financial institutions’ participation in  private student loan rehabilitation programs and how the federal banking  regulators are implementing the Economic Growth, Regulatory Relief, and  Consumer Protection Act’s (the Act) provisions on private student loan  rehabilitation programs, we reviewed the statements issued by the three  regulators tasked with approving the loan rehabilitation programs of their  regulated entities—the Board of Governors of the Federal Reserve  System (Federal Reserve), Federal Deposit Insurance Corporation  (FDIC), and Office of the Comptroller of the Currency (OCC)—as well as  OCC’s examiner guidance. We also interviewed officials from these  regulators about their time frames for issuing statements, what topics the  statements cover, and how they coordinated in issuing the statements.  We reviewed the legal authorities of the Consumer Financial Protection  Bureau (CFPB) and National Credit Union Administration (NCUA)—which  oversee nonbank private student loan lenders and most credit unions that  issue private student loans, respectively—concerning private student loan  rehabilitation programs and the legislative history of the Act’s provisions  on the programs. Finally, we interviewed officials from NCUA and CFPB  about their authorities related to implementing the Act’s provisions on  private student loan rehabilitation programs and whether they planned to  take any actions related to the provisions.

In addition, we interviewed representatives from a nongeneralizable  sample of 15 private student loan lenders: the five largest bank lenders,  two of the largest credit union lenders, and eight nonbank financial  institutions (nonbank). The eight nonbank lenders included three for-profit  nonbank lenders and five nonprofit state-affiliated lenders (nonbank state  lenders). We asked these lenders about their decisions to offer private  student loan rehabilitation programs, risks and costs associated with the  programs, and the effects that such programs could have on their lending  decisions. We identified the five largest bank lenders by reviewing data  from MeasureOne—a private data analytics company that studies the  private student loan market—and discussions with officials from the  Federal Reserve, FDIC, OCC, and CFPB. We assessed the reliability of  data from MeasureOne through discussions with representatives from the  company on the methodology used to develop its estimates and its  internal controls. We determined that this data source was sufficiently  reliable for selecting a sample of private student lenders to interview  about participation in rehabilitation programs. We reviewed these five  banks’ 2017 10-K reports (annual financial filings with the Securities and  Exchange Commission) to verify the size of their student loan portfolios.

We selected the two credit unions to interview by reviewing 2018 NCUA  data on credit unions’ portfolios to identify two credit unions that were  among the largest credit union private student loan lenders. To select the  for-profit nonbank lenders, we used suggestions from officials at CFPB,  OCC, and the Department of Education, as well as reports from private  sources that contained information on nonbank private student loan  lenders. We selected nonbank state lenders based on information that  indicated they were operating or interested in offering rehabilitation  programs. Sources of this information included the Education Finance  Council’s 2018–2019 NonProfit & State-Based Education Loan  Handbook, an interview with the Education Finance Council, and  information received from a 2013 CFPB Request for Information  Regarding an Initiative to Promote Student Loan Affordability. Because  this sample is nongeneralizable, our results cannot be generalized to all  private student loan lenders.

To examine the risks, if any, that private student loan rehabilitation  programs pose to financial institutions, we reviewed bank and credit union  regulator policies and guidance on private student lending. We also  analyzed data on delinquency and default rates of private student loans.  To do this, we reviewed industry data from MeasureOne and the 2017 10- K filings for the five banks whose representatives we interviewed. We  assessed the reliability of MeasureOne’s performance data through  discussions with representatives from the company on the methodology it  uses to develop these metrics and its internal controls. We determined  that this data source was sufficiently reliable for assessing the  performance of banks’ portfolios of private student loans.

For these five banks, we also used the 10-K filings to estimate the volume  of the portion of their portfolios that was composed of private student  loans. We also compared private student loan default rates to default  rates of other types of consumer loans, including mortgages, credit cards,  and automobile loans. To do this, we used data from FDIC’s Statistics on  Depository Institutions database to analyze indicators of asset quality for  mortgages, credit cards, and automobile loans from 2013 through 2017.  We assessed the reliability of FDIC’s Statistics on Depository Institutions  database by reviewing related documentation and conducting testing for  missing data, outliers, or any obvious errors. We determined that this data  source was sufficiently reliable for assessing the performance and risk of  banks’ portfolios of private student loans and other types of consumer  loans. We also interviewed officials from the Federal Reserve, FDIC,  NCUA, and OCC about the types of costs and risks that could be  associated with private student loan rehabilitation programs. In addition,  we interviewed representatives of our nongeneralizable sample of 15  private student loan lenders about the potential risks and costs of offering  rehabilitation programs.

To assess potential risks of private student loan rehabilitation programs  for other types of financial institutions, we interviewed a nongeneralizable  sample of seven credit providers about how these programs could affect  their ability to make sound lending decisions. We focused on financial  institutions that offer mortgage loans, automobile loans, and credit cards.  According to data from the 2016 Survey of Consumer Finances, these are  the most common types of debt consumers hold. We selected a  nongeneralizable sample of banks and nonbank financial institutions that  provide these types of credit. We selected the bank credit providers using  data from FDIC’s Statistics on Depository Institutions by identifying the  mortgage and automobile loan lenders and credit card issuers that were  among the largest holders of assets in these lending categories as of the  fourth quarter 2017.

To identify nonbank financial institution lenders, we reviewed an industry  report to identify some of the larger nonbank mortgage lenders, and we  reviewed a list prepared by CFPB of larger industry participants in the  automobile finance market industry. We judgmentally selected the final  sample of these credit providers based on their size and, to the extent  applicable, their federal regulator to obtain a diversity of opinions. We  determined that industry reports, CFPB’s list of larger industry  participants, and 10-K filings were sufficiently reliable for selecting a  sample of nonbank financial institutions to interview about risks posed by  rehabilitation programs. Because this sample is nongeneralizable, our  results cannot be generalized to all credit providers. We also interviewed  representatives of four industry groups and two trade associations that  work with these credit providers and student loan borrowers on the types  of risks and costs that rehabilitation programs could create for lenders.

To examine the effects that private student loan rehabilitation programs  may have on student loan borrowers’ access to future credit, we  conducted a literature search for studies that empirically analyzed the  effects on credit scores and access to credit of adverse credit events,  such as foreclosures or bankruptcies; loan modifications, broadly defined;  and removal of accurate but adverse information from credit reports, such  as a bankruptcy. We identified these studies through our initial  background search, targeted searches of the EconLit database, and a  search of the Federal Reserve Bank of New York Center for  Microeconomic Data publications, and through bibliographies of studies  we reviewed.

We also asked VantageScore Solutions, LLC (VantageScore)—a credit  scoring firm—to conduct a quantitative analysis simulating the effect of  adding a student loan delinquency to and removing a student loan default  from a borrower’s credit profile on its VantageScore 3.0 credit score. The  analysis was conducted using a sample of VantageScore’s data that it  obtained from the three nationwide CRAs and that represents actual  credit profiles of borrowers. VantageScore analyzed data for borrowers  with at least one outstanding student loan with a balance greater than $0.  Table 1 contains the results of the simulation and information on the  number and characteristics of borrowers whose credit profiles were  analyzed. The results of the simulation are specific to changes in the  VantageScore 3.0 credit score. The simulated results represent averages  for borrowers whose credit profiles were analyzed and are meant to be  illustrative. Additionally, because this was a simulation, it is unlikely that  any one borrower’s credit profile exactly matches the average profiles  used in the simulations.

The results of the VantageScore analysis only apply to VantageScore 3.0  credit scores in the 2014–2016, 2015–2017, and 2016–2018 cohorts of  borrowers and may not be generalized to other VantageScore credit  scores, to Fair Isaac Corporation (FICO) credit scores, or for different  cohorts in different years. While we present only the results of the most  recent cohort (2016–2018) in our report, VantageScore simulated the  analysis across three cohorts to determine whether the results varied  substantially over time. The results for all three cohorts were similar.  Through reviewing documentation and conducting interviews, we  determined that the data used by VantageScore to conduct this analysis  were sufficiently reliable for simulating the effects of derogatory credit  marks on borrowers’ credit scores. FICO declined our request to develop  a similar analysis.

To examine how a rehabilitation program may affect borrowers’ future  access to credit, we interviewed officials from CFPB, the Department of  Education, FDIC, the Federal Reserve, Federal Trade Commission,  NCUA, OCC, and the Department of the Treasury. We also interviewed  representatives of the four consumer reporting agencies that collect and  report information on student loans (Equifax, Experian, Innovis, and  TransUnion) and the two credit scoring firms that develop credit score  models with nationwide coverage (FICO and VantageScore). We also  interviewed representatives from the 15 private student loan lenders and  seven credit providers described above, as well as banking, credit  reporting, and student loan lending and servicing industry groups and  consumer advocacy organizations.

Appendix II: Comments from the Consumer Financial Protection Bureau

Appendix III: Comments from the National Credit Union Administration

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Jill Naamane (Assistant Director),  Christine McGinty (Analyst-in-Charge), Jill Lacey, Courtney LaFountain,  Jon D. Menaster, Tovah Rom, Jessica Sandler, Eric Schwab, and Aisha  Shafi made key contributions to this report. Also contributing to this report  were Melissa Emrey-Arras, Debra Prescott, and Jena Sinkfield.

In May 2018, the Fair Credit Reporting Act was amended to allow some financial institutions—including banks—to voluntarily offer rehabilitation programs for borrowers who default on private student loans.

Borrowers who complete these programs can request to have the default removed from their credit reports, which could slightly improve their access to credit. Other financial institutions are also interested in offering these programs, but are not certain of their authority to do so.

We recommended that the Consumer Financial Protection Bureau clarify which types of financial institutions have the authority to implement these programs.