Student Loans Come Due

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Just as the Federal Reserve raises rates and inflation hits a 40-year high, Americans with federal student loan debt will start making payments on the debt after a two-year pause. On Aug. 31, the Department of Education will require 41 million people with student loans to begin paying again. 

According to the Federal Reserve, about one in five Americans have federal student loan debt and they saved $5 billion per month from the forbearance. It’s safe to say that a lot of people are going to struggle to restart those payments again and some of them work for banks.

The good news is that there are new employee programs that can help. One CARES Act provision allowed companies to pay up to $5,250 toward an employee’s student loans without a negative tax hit for the employee. Ally Financial, Fidelity Investments, SoFi Technologies, and First Republic Bank are a few of the many financial companies offering this benefit to employees. First Republic launched its program in 2016, after its purchase of the fintech Gradifi, which helps employers repay their employees’ loans. These programs typically pay between $100 and $200 a month on an employee’s loans, and usually have a cap.

The 2020 Bank Director Compensation Survey shows that 29% of financial institutions offered student loan repayment assistance to some or all employees. Many of those programs discontinued when the student forgiveness program started. In the anticipation of government forbearance coming to a close, now is a good time to think about restarting your program or even developing one. 

Americans now hold $1.59 trillion in student loan debt, according to the Federal Reserve. How did we get here? College got more expensive— much more expensive. 

Earlier this summer, the Federal Reserve and Aspen Institute had a joint summit to discuss household debt and its chilling effect on wealth building. The average cost of college tuition and fees at public 4-year institutions has risen 179.2% over the last 20 years for an average annual increase of 9.0%, according to EducationData.org.

At the same time, wages have not shown much inflation-adjusted growth. ProPublica found in 2018 that the real average wage of workers, after accounting for inflation, has about the same purchasing power it did 40 years ago. And inflation in 2022 has far outpaced wage increases. Some economists speculate that any pandemic-era wage increases are effectively nullified by this rapid inflation.

Not all borrowers are equally impacted. Sixteen percent of graduates will have a debt-to-income ratio of over 20% from their student loans alone, according to the website lendedu.com, while another 28% will have a DTI of over 15%. The 44% of graduates with that level of debt exiting school will face a steep climb to meaningful wealth building. The students that didn’t graduate will have an even harder climb.

Those graduates who struggle with their student loans will be less likely to buy a home or more likely to delay home ownership. They will be less likely to take on business debt or save for retirement. Housing prices have risen in tandem with education prices. The “starter home” of generations past has become unattainable to many millennial and Gen Z debt holders.

More than half of borrowers owe $20,000 or less. Seven percent of people with federal debt owe more than $100,000, according to The Washington Post. Economists at the Federal Reserve say borrowers with the least amount of debt often have difficulty repaying their loans, especially if they didn’t finish their degree. Conversely, people with the highest loan balances are often current on their payments. It’s likely that people with higher loan debt generally have higher education levels and incomes.

The Aspen Institute published a book known as “The Future of Building Wealth: Brief Essays on the Best Ideas to Build Wealth — for Everyone,” in conjunction with the Federal Reserve Bank of St. Louis. It illuminates long-term solutions for financial planning, focusing on policies and programs that could be applied at a national scale. 

In the absence of these national solutions, some employers are taking the matter into their own hands with company policies designed to help employees with student debt. Those banks are making a difference for their own employees and are part of the solution. 

FinXTech’s Need to Know: Debt Collections and Recovery

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The Covid-19 pandemic may have stalled debt collection efforts for two years, but a partial economic recovery — paired with a looming recession — could soon send unprepared borrowers and their loans to collections.

Missed payments on certain loans are already on the rise. The Wall Street Journal reported that borrowers with credit scores below 620 — also known as subprime — with car loans, personal loans or credit cards that are over 60 days late are “rising faster than normal.” Eleven percent of general purpose credit cards were late, as compared to 9.8% in March 2021. Personal loan delinquencies have hit 11.3% versus 10.4% last year, and delinquent auto loans hit a record high of 8.8% in February.

As a result, banks may be seeing an influx in their collections and recoveries activity. It may be an opportune time to enhance and better your bank’s collections practices — doing so could help at-risk borrowers avoid collections altogether, and give your institution the chance to show customers that they are more than the debt they owe. 

Debt collections practices and agencies generally don’t have a good reputation among consumers: A quick Google search will uncover countless 2-star reviews and repulsive anecdotes. And while the Fair Debt Collections Practices Act (FDCPA) protects consumers from harsh, unfair and threatening collections tactics, a good experience with a collection agency is far from guaranteed. 

Banks exacerbate the issue by not conducting proper and continual due diligence on the third-party agencies they work with. With over 7,000 to choose from, this can be difficult to execute, but is a necessary task that could be the difference between retaining a customer and losing one.

A technology company may be able to provide your bank with the high-touch element with consumers during the collections process.

Fintechs have a few things banks might not offer (or have upgraded versions of): Predictive analytics software, APIs, rules-based platforms, self-upgrading machine learning, among others. These technologies can and should be harnessed to find problem loans before they become delinquent and reach consumers within their preferred method of communication. Traditional collection agencies can have difficulties navigating within FDCPA protections — fintechs can use their enhanced technologies to thrive within the compliance. 

Some fintechs even offer their products and services underneath the bank’s brand, which could be a strategic move if providing educational services and resources could get a customer back on track with payments.

Here are three fintechs that can help banks with their collections and recovery efforts.

TrueAccord has two products of interest to banks: Retain and Recover. Retain is a proactive solution for delinquent accounts that works with borrowers to keep the account from moving to collections. Retain primarily uses text, email and voicemail and communication methods, as preferred to cold calling.

When Retain fails to resolve the payment with a customer, banks can turn to TrueAccord’s Recover solution. Recover is primarily a self-servicing software, meaning that customers engage with Recover, and not the bank, to find a solution. Again, communication is through SMS, Facebook messaging, emails or text.

In addition, TrueAccord is a licensed collections agency.

Birmingham-based FIntegrate offers a software-as-a-service (SaaS) solution — Fusion CRS — for delinquency collections through charge-off recoveries and delinquency management. The software tracks and manages any type of account in any status, including but not limited to: commercial real estate loans, Small Business Administration loans, Paycheck Protection Program loans, deposit and share drafts, and consumer loans that are in repossession, bankruptcy, foreclosure, or have negative balances or become real estate owned.

Fusion CRS also assigns tasks, creates rules-based sequences and monitors special collection cases and statuses. It automatically generates letters, emails, texts, phone calls or other means of communication to account holders and other involved entities (such as a repossession or insurance company).

Collections technology can’t operate without customer information, which is where a company like Intellaegis can help. Its masterQueue product harnesses big data to gather, organize and track available data on a borrower. MasterQueue collects public record data and open source information from the web to track the borrower’s digital footprint and pinpoint a borrower’s whereabouts, online activity and associates.

The software then scores the data that represents the likelihood of locating the borrower based on its quantity and quality — users can then go down the list and attempt contact.

Consumers are spending more than during the pandemic, and debt levels are increasing in tandem even as rates rise and a potential recession looms. Technology can not only help banks handle the influx of overdue and delinquent accounts, but can aid in preserving and enhancing vulnerable relationships with customers as well.

A Momentous Court Decision May Hurt Bank Lending Powers

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bank-regulation-7-22-15.pngIn a recent decision that has sent shockwaves through the banking industry, a federal appellate court in New York has ruled that, for usury purposes, non-bank buyers of charged-off credit card debt are not allowed to step into the shoes of a national bank that originated and sold the debt. We think the ruling in Madden v. Midland Funding, LLC (May 25, 2015) is flat wrong because it contradicts 182 years of well-settled law, disrupts secondary markets, and interferes with the core powers of a national bank to sell its loans to third parties.

The Decision
Saliha Madden, a New York resident, opened a credit card account with Bank of America, a national bank. Bank of America assigned the account to FIA Card Services, N.A., a national bank located in Delaware. When Madden defaulted on the loan, FIA sold it to an unaffiliated debt collector. The collector sought to collect the loan from Madden at the 27 percent interest rate permitted by Delaware law. Madden filed a class action suit against the collector alleging violations of New York’s criminal usury statute that prohibits interest rates exceeding 25 percent.

The district court ruled for the collector, based upon the National Bank Act’s preemption of state usury laws for a national bank, which is permitted to charge any interest rate authorized by its “home” state. On appeal, the Second Circuit reversed. The appellate court reasoned that the collector was not “a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and application of the state law on which Madden’s claims rely would not significantly interfere with any national bank’s ability to exercise its powers under the NBA.” Since the NBA’s federal preemption did not protect the collector, charging 27 percent interest on the loan violated New York’s usury law.

Why the Decision is Wrong
The Second Circuit erred when it concluded that application of New York’s usury law to the loan sold to the collector did not “significantly interfere” with the powers of a national bank. The NBA declares that a national bank has power “to make contracts” and to “carry on the business of banking by discounting and negotiating promissory notes…or other evidences of debt.” “Negotiating” means selling, assigning and transferring.

Applying New York’s usury statute to a loan sold by a national bank significantly interferes with the national bank’s powers to make enforceable loan contracts and to sell those contracts. That’s what banks do. In effect, the court held that a national bank’s loan contracts may not be valid and enforceable in accordance with their terms by an assignee that is not an agent or affiliate of the national bank, and such an assignee commits criminal usury if it charges the contracted interest rate. This conclusion clearly interferes with a national bank’s powers under the NBA, raising doubt about the enforceability of its loan contracts and decreasing the marketability and value of every loan in its portfolio.

When Congress gave a national bank the power under Section 85 of the NBA to export interest rates and preempt conflicting state statutes, it did not intend to have that power severely compromised if the national bank exercises its power under Section 24 of the NBA to sell its loans. If a state usury law is preempted when a national bank originates a loan, it remains preempted for the life of the loan, regardless of whether the national bank retains or sells the loan. In the 1978 case Marquette National Bank of Minneapolis v. First of Omaha Service Corp., the Supreme Court affirmed that the NBA preempted Minnesota’s usury law, noting that a non-bank entity took assignment of delinquent credit card accounts from the national bank and, as part of collecting the accounts, collected interest on the loans.

The Second Circuit decision conflicts with other circuit court decisions and long established precedent. In the 1833 case Nichols v. Fearson, the Supreme Court recognized the “cardinal rule” of usury that “a contract which, in its inception, is unaffected by usury, can never be invalidated by a subsequent…transaction.”

Concluding Thoughts

  • The court’s decision seems result–oriented: bad facts (debt collectors) make bad law.
  • The decision calls into question the enforceability of loans that have been securitized.
  • The flawed reasoning of the decision would also apply to loans sold by state-chartered banks and federal savings banks.
  • The debt collector is seeking a rehearing before the full Second Circuit, which we hope grants that request.