Higher Education Financing 101

1. Higher Education Financing 101 Presenters: Ed Brandt, Xerox Education Services, LLC Mark Eden, Iowa Student Loan Tim Fitzgibbon, NCHER Susan High, TG Gary Hopkins, GC Services Vicki Shipley, NCHER 2016 Knowledge Symposium November 7 – 9, Sheraton Downtown, Nashville, TN

2. Agenda • Players and Stakeholders – Vicki Shipley • The Alphabet Soup of Federal Regulators, Laws, and Regulations – Tim Fitzgibbon • Putting the Pieces Together – Vicki Shipley • Guaranty Agency Focus – Susan High • Federal Loan Servicing – Ed Brandt • Private Student Loans – Mark Eden • Default Collection View – Gary Hopkins

3. Players and Stakeholders • Congress • Department of Education (ED) & federal contractors • Consumer Financial Protection Bureau (CFPB) and Treasury • State and local governments • Colleges and universities • Students and families • Lenders, servicers, secondary markets, guaranty agencies, private collection agencies (PCAs) • Other higher education entities

4. The “Alphabet Soup” of Federal Regulators, Laws, and Regulations Tim Fitzgibbon Senior Vice President NCHER

5. Alphabet Soup – Student Loan Regulators • USDE (or ED) – U.S. Department of Education • CFPB – Consumer Financial Protection Bureau • FCC – Federal Communications Commission • FTC – Federal Trade Commission • U.S. Treasury • AG – Attorneys General • SLG – State and Local Governments (ok, I made this one up!)

6. Alphabet Soup – Laws and Regulations • HEA – Higher Education Act • CFR – Code of Federal Regulations • NPRM – Notice of Proposed Rulemaking • DCL – Dear Colleague Letter • UDAAP – Unfair, Deceptive and Abusive Acts and Practices • FDCPA – Fair Debt Collection Practices Act • SCRA – Servicemember Civil Relief Act

7. Alphabet Soup – Laws and Regulations • TCPA – Telephone Consumer Protection Act • DCIA – Debt Collection Improvement Act • TOP – Treasury Offset Program • AWG – Administrative Wage Garnishment

8. U.S Department of Education (ED) • Traditional regulator for the industry, exercising oversight and writing rules based on the Higher Education Act (HEA). • HEA enacted in 1965 as part of the Johnson Administration’s “Great Society” initiatives, it is the cornerstone law that provides authorization for the vast majority of grant and loan aid in higher education. • Regulations spell out intent of law. • Notice of Proposed Rulemaking (NPRM) allows industry input before rules are formally approved. • Dear Colleague Letters (DCL) (aka Dear Partner Letters) provide clarity or detail to enforce HEA statutory or regulatory provisions. Private letters provide sub-regulatory guidance, also to be covered later in this presentation.

9. Consumer Financial Protection Bureau (CFPB) • A new Federal agency created by the Dodd-Frank Act of 2010, the CFPB is celebrating its 5th year in existence. Responsible for writing rules for the FDCPA and enforcing UDAAP. • Broad oversight of all markets where consumer financial services are provided. • A provision of the law permits the CFPB to supervise “large market participants,” as designated by the Bureau, resulting in the CFPB now having supervisory jurisdiction over virtually all of higher education financing, including loan servicers, private loan providers and most debt collectors. Guaranty agencies may or may not fall under the Bureau’s jurisdiction, but to-date the Bureau has not directly interacted with this segment of the legacy FFEL Program.

10. CFPB - continued • The CFPB created a complaint portal for consumers which includes a student loan component. It uses trends identified, in part, by the complaints to help focus its oversight efforts. A CFPB official will review the CFPB Ombudsman’s most recent report on Tuesday morning. • The CFPB was given responsibility to regulate UDAAP, although it is doing so not through defining UDAAP but through enforcement actions, using the “I’ll know it when I see it” approach to defining what is abusive. • The Bureau will propose rules for the FDCPA in the coming months, which will, for the first time, regulate compliance with this main debt collection law. It is likely that first-party collectors will be included under the FDCPA rules, based on UDAAP guidelines. A session Wednesday morning will delve deeper into FDCPA proposed rules. • The Bureau also has influence over the SCRA through its Office of Servicemember Affairs.

11. CFPB - continued • The CFPB is unique in that its director is appointed for a five-year term and, until recently, could only be removed by the President for cause. The CFPB gets its funding through the Federal Reserve System, which is outside of Congressional appropriations. • A recent DC District Court decision determined that the above “for cause” provision is unconstitutional, therefore allowing a sitting President to remove the CFPB director for any reason – similar to the heads of other federal agencies. • Many want to see the Bureau’s single-leader structure changed to a five-panel Board of Commissioners, and its funding to fall under Congressional appropriations.

12. Federal Communications Commission (FCC) • Primary role in loan servicing and debt collection oversight stems from enforcement of the Telephone Consumer Protection Act (TCPA) • TCPA is a law created in 1991 primarily to protect consumers from unwanted telemarketing calls to their landline or cellular telephones. • The FCC’s rules implementing the TCPA are grossly outdated and fail to take into account the overwhelming market share now owned by wireless customers – particularly in the student loan space. Recent rulemakings continue to frustrate open communication between business and customers, including student loan servicers and collectors and their student loan borrower customers.

13. FCC - continued • The FCC recently released a final rule implementing a change to the TCPA which allows the use of autodialers to call borrowers on their cell phones, without prior express consent, when collecting debt owed to or guaranteed by the U.S. Government. • The new rule allows only three call attempts per 30-day period, and only oneattempt to a wrong-party call, basically gutting the intent of the change in the law. • NCHER is pursuing a provision in the rule allowing individual federal agencies to seek a waiver to the overly-restrictive rules. A session Wednesday morning will take a closer look at TCPA reform.

14. Federal Trade Commission (FTC) • The FTC enforces UDAAP violations (some overlap with the CFPB) and is a prudential regulator for many non-bank financial institutions. • The FTC enforces many of the traditional banking laws, including the Truth-in-Lending Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Community Reinvestment Act, and Regulation Z. • The FCC also works closely with the nation’s Attorneys General to coordinate consumer protection enforcement.

15. U.S. Treasury • While not directly a student loan industry regulator, the U.S. Treasury implements the Debt Collection Improvement Act (DCIA). This governs how federal agencies and their vendors collect defaulted debt. A Treasury official will address the Treasury’s role in collecting Federal debt, including student loans. • TOP – Treasury Offset Program captures tax refunds of defaulted debtors. • AWG – Administrative Wage Garnishment allows federal agencies and their agents to garnish wages without the need for a court proceeding. • IRS Skip-Trace Database – allows federal agencies and their agents to access IRS address data to locate defaulted borrowers.

16. U.S. Attorneys General • Many of the nation’s Attorneys General became active in the student loan market following the actions of New York Attorney General Andrew Cuomo, who aggressively pursued lenders and guaranty agencies in the mid 2000’s for alleged illegal inducements in student lending. • AG oversight in the student loan market is resuming in areas such as for-profit schools and student loan debt relief scams.

17. State and Local Government Oversight • State oversight of consumer lending is not new, as all states have some form of laws and regulations governing consumer lending. • Recently, more states are passing laws related to student loan servicing, requiring servicers to be licensed to practice in their state. Connecticut and California are recent entrants in this practice, and the District of Columbia is considering a licensing requirement. • Some cities require licensing of servicers and debt collectors (e.g. New York City and Chicago) and more are sure to follow, as fees and fines bring in money to the city coffers. • A session on state laws and regulations is being offered on Tuesday afternoon.

18. Higher Education Financing 101Putting the Pieces Together Vicki Shipley Senior Advisor NCHER

19. Change by Design • Higher Education Act (HEA)—the law governing federal aid • Created by Congress; generally provides broad intent and not much detail • Regulations • Created by ED via the negotiated rulemaking process • Policies and procedures • Created by ED and participants to administer programs

20. The Hierarchy of Guidance Law Regulations Sub-Regulatory Guidance Common Forms Common Manual

21. Law Higher Education Act (HEA)

22. Types of Bills • Authorization Bill – Establishes or continues government programs or policies and sets limits on how much money may be spent on them • Appropriation Bill – Provides actual funds to carry out authorized program or policies, or provides funds to operate the government • Reconciliation Bill– Makes changes to law required to meet pre-set spending levels made in a previous budget resolution. If the instructions pertain to only one committee in a chamber, that committee reports the reconciliation bill. If the instructions pertain to more than one committee, the Budget Committee reports an omnibus reconciliation bill.

23. Higher Education Act (HEA) • HEA is the law governing all of the federal aid programs • November 8, 1965 - HEA was signed into law by President Johnson • The "financial assistance for students" is covered in “Title IV” of the HEA • October 16, 1968 – Interstate lenders are permitted to make loans under the Federally Insured Student Loan Program (FISLP)

24. Key Dates • August 10, 1993 – Student Loan Reform Act of 1993 as part of the Omnibus Budget Reconciliation Act is signed and replaces the Direct Loan Demonstration Program with an expanded pilot intended to “phase-in Direct Loans from 1994-1998.” • June 30, 2010 – Following the passage of the Health Care and Education Reconciliation Act of 2010 on January 5, 2010 – no subsequent FFEL program loans permitted to be made after June 30, 2010.

25. HEA Reauthorization • Reauthorization is required each 5-7 years; “technically” should have occurred in 2014 • Election and other priorities have slowed down the process, but work continues behind the scenes • Broad themes include: simplification, accountability, transparency • Final reauthorization bill not until 2017 (or later?) • Remember—changes may still occur through other vehicles (e.g. reconciliation bills)

26. Historical Timeline of Major Student Aid Legislation

27. Federal Regulations Interpreting a law

28. Federal Regulations • After a law is passed, regulations are developed that provide details to interpret the law. • Regulations have the “force of law.” • ED cannot enact law, only Congress can. However, failure to comply with regulations can result in financial liabilities, fines, limitations, etc.

29. What is the Federal Register? • Federal Register is medium ED uses to notify the public of official agency actions: • Intent to establish negotiated rulemaking committee • Development of forms • Notice of Proposed Rulemaking (NPRM) • Final Rule

30. Negotiated Rulemaking (Neg Reg) • HEA requires ED to utilize negotiated rulemaking process to develop regulations • ED selects committee members based on their experience and expertise in the issues being discussed • Goal of committee is to prepare proposed regulations and reach “consensus” on every issue; NPRM will reflect agreed upon language • If consensus is not achieved, ED can publish NPRM with language that reflects its positions

31. Identifying an NPRM

32. Key NPRM Elements • NPRM; “where” (1) • Preamble • List of regulations discussed in NPRM; “what” (2) • Brief summary statement; “why” (3) • Public comment deadline; “when” (4) • Address to send comments; “who” (5) • Proposed regulatory language

33. Final Rule • After reviewing all comments received on the NPRM, ED publishes a Final Rule • Preamble summarizes ED’s responses to NPRM comments received • Any changes that resulted from the comments are noted • If ED did not make changes to the final regulations as recommended in the comments, ED will explain its reasons

34. The Regulatory Process at a Glance

35. Code of Federal Regulations (CFR) Title 34 = Education 34 CFR 682 • Part 600: Institutional Eligibility • Part 668: Student Assistance General Provisions • Part 682: FFELP • Part 685: FDLP

36. Sub-Regulatory Guidance Implementation of Law and Regulations

37. Sub-Regulatory Guidance • Guidance that provides direction or advice as to a decision or course of action that needs to be taken • ED issues guidance; does not go through Neg Reg • ED interprets both the law and regulations; issues guidance on how they believe both should be implemented and how programs should be administered • Sub-regulatory guidance includes: • Dear Colleague Letters (DCL) • Electronic Announcements • Private Letters

38. Dear Colleague Letters (DCL) & Electronic Announcements

39. Common Forms Implementation of Law and Regulations

40. Common Forms • Federal forms have an expiration date and are reviewed and updated regularly by ED • General public and Federal agencies have opportunity to comment on new and revised forms • The ‘OMB No.’ refers to the Office of Management and Budget. The current forms will remain valid for use until the new forms are approved by OMB and implemented.

41. Industry Participation To assist industry partners: • Neg Reg Workgroup participates in Neg Reg process, reviews all NPRMs and develops industry comments • NCHER Program Regulations & Policy Committee develops: • Side-by-side analysis documents for NPRM and Final Rule • Integrated regulations that utilize ‘Tracked Changes’ feature to show actual changes proposed/made to current regulations • Best practices documents, as needed

42. Industry Participation • NCHER forms workgroups to review any common forms up for revision and offer suggested edits to ED; representation from lenders, servicers, guarantors and other interested parties • Suggested edits sent to ED for consideration • Proposed changes range from technical corrections (e.g. correct spelling; grammar) to substantive (e.g., supported by common practice, regulation, or sub-regulatory guidance)

43. Helpful policy resources • ED: www.ifap.ed.gov • Federal Registers, Dear Colleague Letters, e-Announcements • NCHER: http://www.ncher.us/default.asp? • E-Library is a collaborative effort to provide the latest and most complete source of reference materials relating to higher education financing and the federal loan programs. • Daily Briefing

44. Guaranty Agency Focus Susan High Director, Collections TG

45. List of Guarantors • American Student Assistance • College Assist • Educational Credit Management Corporation • Finance Authority Of Maine • Florida Department Of Education - OSFA • Great Lakes Higher Education Corporation • Illinois Student Assistance Commission • Kentucky Higher Education Assistance Authority • Louisiana Office of Student Financial Assistance • Michigan Guaranty Agency • Missouri Department of Higher Education • Montana Office of the Commissioner of Higher Education • National Student Loan Program • New Hampshire Higher Education Assist. Foundation • New Jersey Higher Education Student Assistance Authority • New Mexico Student Loans • New York State Higher Education Services Corporation • North Carolina State Education Assistance Authority • Northwest Education Loan Association • Oklahoma College Assistance Program • Pennsylvania Higher Education Assistance Agency • Rhode Island Higher Education Assistance Authority • South Carolina Student Loans • Texas Guaranteed • USA Funds • Utah Higher Education Assistance Authority • Vermont Student Assistance Corporation

46. Traditional Role of the Guarantor • Administer the FFEL program • Promote Student Access and Success • Monitor and perform student status changes • Perform Default Prevention/Aversion • Audit and pay claims to lenders • Collect on defaulted student loans – outstanding defaulted portfolio of approximately $32 billion as of FY 2015.

47. Value-Added Services • College Access Services for Students, Families and Schools • Early outreach • Financial Aid Nights • Financial Literacy Services for Students, Families and Schools • Promote budgeting, responsible borrowing and money management • Training Services for Schools • Compliance Services

48. Consequences of Default • Collection Costs • Administrative Wage Garnishment • Negative Credit Reporting • Treasury Offset Program • Loss of Title IV Benefits • State Related Programs and Holds

49. Repayment Options • Paid In Full • Rehabilitation • Consolidation • Compromise • Standard Repayment • Temporary Schedules

50. Rehabilitation • With the 1992 reauthorization of student loan programs, found in the Higher Education Act of 1965 as amended and the Code of Federal Regulations, the rehabilitation program was created to provide borrowers with a way to restore their credit and regain eligibility for any remaining Title IV benefits.