The Trump administration’s Consumer Financial Protection Bureau (CFPB) suppressed a report with “new evidence” that some of the nation’s largest banks were saddling students “with legally dubious account fees,” according to the bureau’s outgoing ombudsman for student loans.
The ombudsman, Seth Frotman, made this allegation as part of a broad critique included in his resignation letter, which he sent to director Mick Mulvaney on August 27. The bureau has “turned its back on young people and their financial futures” while “protecting bad actors” in the lending business, the letter alleges.
“You have used the bureau to serve the wishes of the most powerful financial companies in America,” Frotman wrote, addressing Mulvaney. “The damage you have done to the bureau betrays these families and sacrifices the financial futures of millions of Americans in communities across the country.”
Frotman’s resignation letter sheds light on a pair of very important problems: a student debt crisis that has put millions of Americans in financial peril at the hands of bad-faith lenders, and the Trump administration’s internal dismantling (with help from GOP legislators) of the Consumer Financial Protection Bureau and complete disregard for consumer protections in general.
“The CFPB has become a cruel joke under the current administration,” said Alan Collinge, founder of Student Loan Justice, in an interview with Truthout. “People being preyed upon by their student loans had better be looking elsewhere for help. At this point, they are pretty much on their own.”
Frotman’s letter reads as an act of desperation from someone who could not do any good from inside the bureau — at least not under the current leadership. By leaving as he did, advocates note, he at least brings attention to the $1.5 trillion student debt crisis and the Trump administration’s policies, which make the problem worse.
“Even now, in his last moments as student loan ombudsman, Frotman used the action to put the interests of student loan borrowers first,” said Natalia Abrams, executive director of Student Debt Crisis, which fights to preserve consumer protections for student borrowers. “His resignation letter sends a strong message that demands accountability from an administration that is neglecting student loan borrowers and has abandoned solutions to the student debt crisis.”
The Consumer Financial Protection Bureau has declined to comment on the matter publicly and did not respond to a request for a comment.
Protecting Bad Actors: Predatory Big Banks
While Frotman’s letter did not offer specifics to back up his allegation that agency leaders suppressed a report documenting how the nation’s biggest banks were “saddling borrowers with legally dubious account fees,” its underlying accusation is clear: The White House is protecting “bad actors” in the form of fraudulent student lenders.
The idea that there might be something sinister going on between Trump and the student loan industry isn’t hard to believe. Under the leadership of Betsy Devos, Trump’s Department of Education has sided with the student loan industry on virtually every major issue. Trump’s budget also calls for drastic cuts to student loan programs, including the Public Service Loan Forgiveness program, which forgives public loans after 10 years of payments if the borrower works for a charity or nonprofit.
Student lenders’ reputation for ripping off consumers is also well established. There have been countless complaints made against them to the Consumer Financial Protection Bureau and elsewhere. The nation’s largest lender, Navient, is being sued by the bureau and the state of Illinois for the kind of manipulations outlined in Frotman’s resignation letter. The Trump administration is openly protecting lenders on both counts. His administration, at Navient’s urging, is trying to shield lenders with federal contracts from state laws — an issue going through the courts now. The Department of Education is accused of stonewalling the federal lawsuit against Navient by blocking the bureau’s access to documents.
“Consumer rights organizations are going to be watching closely to see if Navient, one of the most complained about companies in America, is held accountable for illegal activities,” said Chris Peterson, director of financial services at the Consumer Federation of America.
“This Quiet Crisis”
Frotman’s resignation offered extremely candid declarations about the crisis and the Trump administration’s inaction. Having traveled the country to meet with student borrowers, Frotman said he witnessed “an American Dream under siege,” where individuals were “caught in a system rigged to favor the most powerful financial interests.”
Frotman clearly has strong views on the crisis. A more in-depth look at Frotman’s views is available in the July 2018 issue of the Utah Law Review, where he just published a critique of the American student loan system called “Broken Promises: How Debt-financed Higher Education Rewrote America’s Social Contract and Fueled a Quiet Crisis.” Frotman, who stepped into the ombudsman role in April 2016, has a background in law, according to a bio at the bureau’s website.
“The American higher education system increasingly relies on debt financing as the predominant mechanism by which American families pay for college,” he writes in the law review. “Researchers and policymakers are only now beginning to acknowledge the threat runaway student debt poses to the American social contract — even as millions of borrowers across the country struggle with the consequences of this quiet crisis.”
Frotman mentions the role of the bureau in the publication as well.
“Over the last six years, the CFPB has shown a widening disconnect between the protections touted in press releases and the reality forty-four million people face on the ground,” he wrote. “When struggling borrowers fall victim to a rigged system, they are treated like tax cheats and deadbeat parents as they are driven to poverty through garnishment and offsets.”
Student borrowers who are victims to this system are treated like second-class citizens, he argues, noting student debt has fewer consumer protections than other forms of debt associated with credit cards, autos or housing.
Indeed, the lack of consumer financial protections put student loan borrowers under tremendous stress. Unlike most consumer debt, student loan debt is very difficult to discharge through bankruptcy. Tuition has outpaced the rate of inflation for a generation, and federal programs to defray costs are woefully out of date.
There are income-based repayment options, passed in 2010 under President Obama, that are available for public loans. But administrative burdens and a lack of awareness about these programs has kept their utility to a minimum. “The programs are shamelessly constructed in a way that kicks people out of them,” Collinge said.
“Debt That Flows Through This Broken System”: Dismantling a Consumer Watchdog
The Consumer Financial Protection Bureau was the brainchild of Sen. Elizabeth Warren, then an economic adviser to President Obama and chair of a panel overseeing the Troubled Asset Relief Program. It was based off ideas from her 2007 essay “Unsafe at Any Rate” — a play on a historic Ralph Nader essay from the 1950s, “Unsafe at Any Speed,” which led to major reforms for consumer protections in the auto industry. At the time, Warren was a tenured law professor at Harvard who had not yet made known her political aspirations.
“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street,” her essay pointed out. “But a Financial Product Safety Commission could eliminate some of the most egregious tricks and traps in the credit industry.”
Warren slammed Mulvaney in response to the news of Frotman’s resignation from the bureau she is so closely associated with:
The @CFPB has returned $750 million to scammed student borrowers. But today, the agency’s top student loan watchdog resigned – because @MickMulvaneyOMB is siding with greedy student loan companies over students and military families. Disgraceful. https://t.co/ct92JofPMO
— Elizabeth Warren (@SenWarren) August 27, 2018
Richard Cordray, the agency’s first director and the Democratic Party candidate for Governor of Ohio, also condemned Mulvaney in a tweet:
As CFPB director, I returned more than $750 million to student loan borrowers, but Squatter Mulvaney has abandoned them. He’s transformed the agency into a charity for powerful financial companies – at the expense of our students.https://t.co/xoK1pA83SP
— Rich Cordray (@RichCordray) August 27, 2018
The bureau was officially passed as part of the Dodd-Frank legislation, the post-meltdown financial reform legislation passed in 2010, which has been gutted by Congress and the White House in many ways since. It was supposed to provide some form of credible oversight of financial products, although critics argued it was weakened in the legislative process. It has recovered $12 billion to 27 million consumers, according to the American Prospect.
“The CFPB was never great, but even the marginal good they were doing has been swamped. Under the current administration, the alligators have been given watch over the eggs,” Collinge said.
Indeed, since being elected, Trump has defanged the agency bit by bit. In April, The Associated Press reported that under Trump the bureau had “not recorded a single enforcement action against banks, credit card companies, debt collectors or any finance companies whatsoever.” In June, the acting director asked the staff to cut spending by 20 percent. It has stopped publishing consumer complaints as well — Mulvaney called the database “Yelp for financial services, sponsored by the federal government.”
This slow bleeding of the agency is taking a toll on the student loan crisis, which may be as badly in need of consumer watchdogs as any financial product.
“In the past 10 months, the CFPB’s top objectives were hijacked by the Trump administration and those bent on deregulating bad-acting student loan companies,” observed the Student Debt Crisis, following Frotman’s resignation.
While this happens, students continue to suffer. “The burden of student debt can ravage communities,” Frotman wrote in his Utah Law Review article last month. “Individual lives are disrupted; families become buried under the financial consequences of unmanageable student debt; and this devastation ripples across their communities. The stakes are high and the consequences are enormous for neighborhoods, communities, states, and the nation — all driven by a cycle dependent on the debt that flows through this broken system and spurred on by the tired assumptions that set the country down this path.”