Unsanitized: Why Relief for Mortgage and Student Loan Borrowers Must Be Automatic

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GotCredit/Creative Commons

Most consumer debt relief requires the borrower seeking help, not the service provider granting it automatically.

First Response

In our uniquely American system, you frequently pay off your consumer debt to a company that doesn’t own your consumer debt. They are called “servicers,” and they handle day-to-day operations on the loans, and funnel the proceeds to the owners. And they’re typically bad. I wrote a whole book about one kind of servicer, the mortgage servicer, and its routine violation of law in the last economic crisis. Student loan servicers, who inexplicably manage student loans for the government (the government can’t take a check? Tell it to the IRS) are just as terrible, frequently hiding the best solutions for the borrower whenever those solutions cut into profits.

In this crisis, the government has offered some relief to debtholders, whether for mortgages or student loans. But all of the relief programs put the burden on the individual, requiring them to reach out to their servicer and seek the relief. Servicers have a fun way to respond to this: they don’t take the phone calls. Borrowers constantly report that they can’t get through to their servicers, and this keeps them from the options they were promised. It also helpfully keeps costs down for the servicers; they’re literally incentivized to have no contact with their customers.

Amazingly, some advocates want Congress to bail out servicers for this terrible behavior. Dozens of consumer advocacy groups pressed financial regulators to save mortgage servicers from “liquidity problems” (they must advance payments to investors whether they get them from borrowers or not), and lawmakers, unbelievably, joined them. Why these people think the agents who committed all the crimes in the last crisis will responsibly use bailout funds now is beyond me. But after holding out, Fannie and Freddie overseer Mark Calabria relented yesterday, giving mortgage servicers help that shockingly doesn’t have the strings the consumer groups wanted attached, like mandating uniform forbearance and no balloon payments on the back end (if you can’t pay X now, you won’t likely be able to pay 6X in 6 months).

Some advocates aren’t easy marks. Seth Frotman, the former Consumer Financial Protection Bureau student loan ombudsman who now runs the Student Borrower Protection Center, has provided me with a memo his team wrote, flipping the script on the normal borrower-led process to seek relief. For student loans, the memo states, “lenders should immediately and automatically implement payment relief measures and protections against late fees, damaged credit, and other negative consequences for all delinquent borrowers across their entire loan portfolios.”

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Failure to do so, Frotman said in an interview with me, will expose loan owners to serious risk. “The servicing infrastructure we’ve built is just totally inadequate to the task,” he said, noting how student loan servicers have shut down call centers and closed phone lines for entire days. “The fundamental premise of any consumer protection law is that you can’t lie to borrowers.”

The structure of the servicing system represents the lie. If people have to wait on the phone for hours and never find a human being to get the relief they were promised—and that they pay for, as borrowers pay a servicing fee on their loans that entitles them to help when they need it—the servicers are lying about this relief. And the liability for that violation of law, which is what it is, flows upward. “If you’re a creditor and these programs are required under law, and service providers aren’t up to the task, the creditor doesn’t get off scot-free,” Frotman explains.

In other words, it’s in the lender’s interest to give blanket relief to everyone. The CARES Act suspended payments on most federal student loans until September 30, and servicers are supposed to automatically implement that. But they had a month to implement the change, meaning they could have taken borrowers’ March payments. If they did, or if they gave borrowers the run-around trying to fix flaws, laws on the books should and likely will be used to protect borrowers. “The level of aggressiveness and interest in the states on these issues is something we did not see” last time, Frotman said, citing California, New York, Illinois, and others that will not hesitate to go after servicers. “People will do exams of these company’s books. For the next three years, they will be asked, ‘how did you help borrowers struggling through the coronavirus crisis?’”

We should not have to beg servicers to get in touch with troubled borrowers; they have a legal obligation to do so. Creditors have a choice: force their servicers to do the right thing now, or suffer the consequences later.

Oh Donna

Yesterday in this space, I pointed out that Donna Shalala had either lied to her hometown newspaper or violated the STOCK Act by failing to disclose stock transactions within 45 days. Last night, Shalala admitted the latter. “She had a misunderstanding about the periodic transaction report process and her need to report the sale of these stocks,” her spokesperson Carlos Condarco told the Miami Herald. Condarco told me 24 hours earlier, “My understanding is that the Congresswoman has filed all the necessary disclosures required under the STOCK Act.”

Not understanding disclosure is a pretty bad look for the member of Congress chosen to force disclosure out of the Treasury Department and Federal Reserve on its lending programs. And this damages the STOCK Act; we only know about Richard Burr and Kelly Loeffler’s looks-a-lot-like-insider-trades because the had to disclose. If any member of Congress can just blow this off without much of a sanction, why would anyone disclose?

Formally, the penalty is a mere $200 per violation. But as Jeff Hauser of the Revolving Door Project notes, Shalala just got a plum assignment for which she has already shown herself woefully unequipped. “Donna Shalala cannot credibly serve as the oversight hawk the American people need if she herself fails to meet straightforward disclosure obligations,” Hauser told me. “Pelosi's choice of Shalala was inexplicable on Day One, and before the end of Week One, it has become entirely untenable. Pelosi must name a real oversight hawk to this panel without delay.”

Can’t Anyone Play This Game

The Senate agreed to an interim pandemic response bill yesterday, and hours later, Mitch McConnell made clear that that was not the interim bill but the last one for a while. “Given the extraordinary numbers that we’re racking up to the national debt… we need to be as cautious as we can be,” McConnell said, signaling that any future legislation (unless there’s a judge he can sneak through) would not be done by unanimous consent. Elderly senators are unlikely to come to work until it’s safe, and Washington’s under a stay at home order until mid-May.

By now I’m used to Lucy-with-the-football moments from the Democrats, but this one is truly depressing. Republicans made a big flashing signal that they only wanted to replenish the small business lending program. They proposed and tried to pass a bill that had only that in it. Democrats objected, but pushed pretty softly, assuming this was an “interim” bill and saving all their powder for the next one. Now McConnell is saying there won’t be a next one, not for a long time.

So what’s in this interim-but-not-interim bill? Here’s the text, a skinny 25 pages for $484 billion. The small business program is virtually unchanged. Here’s what we’re learning about that program. Nearly half of the relief went to forgivable loans worth over $1 million per “small” business. International modeling companies got loans. Companies that overcharged veterans for medical care got loans. Over 100 publicly traded companies with access to capital markets got loans, including 29 with over $100 million in annual revenue. One owner who admits to running a profitable businesss, who got a large loan, admitted that the program “amounts to legalized fraud.” Big banks, who bungled the program, clearly favored larger clients to win larger fees, and are being sued over it.

There are more problems, like only allowing 25 percent of the loans to go to expenses like rent if you want them to be forgiven. That knocks out any business in a high-rent community, and it’s why you see Los Angeles or New York with such a low number of loans. That’s poor one-size-fits-all program design.

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It would be super-easy to fix all this, as Tim Wu notes: just give small business money to actual small businesses, and allow some businesses to spend more on fixed expenses based on their neighborhood’s rental rates. In other words, fix the language Congress put in itself. But that would require admission of a mistake, so Congress just added some money, and set aside a trivial amount for smaller lenders that the first batch of loans may have already met. If Joe Biden knows your program is bad, it’s bad. But he’s blaming the Trump administration, not Congress, where the blame belongs.

The rest is $75 billion for hospitals (including big hospital chains, with no conditions; administrators can suck this up in salaries and pad profits) and $25 billion to surge testing a couple months too late. Amazingly, more testing, when the only way you can credibly reopen the economy is with more testing, is seen as a Democratic “concession.”

What’s not in there: payroll support, vote by mail guarantees, postal service funding, expanded health insurance, workplace standards, rent relief, state and local government money, you name it. They didn’t even fix the thievery of CARES Act payments by banks and private debt collectors. All of that is put off to a future process Republicans have no interest in pursuing. The leverage is completely gone. Even Bob Greenstein of the Center on Budget and Policy Priorities doesn’t like this bill.

Meanwhile, Nancy Pelosi has the House on virtual lockdown, with nobody contributing to this disaster. Pelosi and Schumer maybe like governing without those meddling elected representatives involved. This is a collapse of the Democrats and the democratic process. Pelosi is a lame duck, done in 2022. That should be accelerated.

Today I Learned

• Here’s my appearance on Democracy Now yesterday, talking about a variety of matters. (Democracy Now)
• A death from the coronavirus has been confirmed on February 6 in Santa Clara County, California, a month before the first official death. (New York Times)
• Medical supply imports starting to come back. (S&P Global Market Intelligence)
• There’s just no doubt that deaths are at least double the official record. One analysis already shows this for the UK. (Financial Times)
• An antibody survey in Los Angeles also shows far more infections. (Los Angeles County)
• Nineteen people involved in the April 7 elections in Wisconsin have since tested positive for the virus. (Talking Points Memo)
• A working paper finds that Sean Hannity viewers were more likely to die from COVID-19 due to his misinformation. (University of Chicago)
• Motivated local governments are putting in place safe voting measures like mailing everyone a ballot. This could force entire states to act. (The Intercept)