WASHINGTON — The Consumer Financial Protection Bureau is stepping up its scrutiny of student loans, particularly those made by for-profit colleges and trade schools that have high rates of default, the newly appointed director of the bureau said Thursday.
The director, Richard Cordray, compared the practices of some parts of the student loan business to those of the subprime mortgage lending machine that contributed to the financial crisis.
“We’re seeing some of the schools anticipating as much as a 50 percent default rate on their students, yet they’re making those loans anyway,” Mr. Cordray said at a press briefing. “We will be looking closely at those loans. We will be looking closely at the tactics by which they are marketed and making sure that the law is being followed.”
Mr. Cordray was appointed as the bureau director by President Obama last week, during a Senate recess, after Republicans blocked the Senate during its last session from bringing his nomination to a vote. A memorandum from the Justice Department’s Office of Legal Counsel released on Thursday concluded that Mr. Obama had the authority to make the recess appointment, an assertion that has been disputed by Republicans.
The consumer bureau had indicated earlier that it was interested in the subject of predatory student loans. In November, the bureau and the Department of Education issued a joint request for information from the public on the private student loan market, a study that was mandated by the Dodd-Frank Act. The deadline to submit comments on the issue is Tuesday.
While that effort is continuing, Mr. Cordray said Thursday that the bureau already had seen evidence of problems in the market for private student loans.
“One of the things we see and have seen is lenders who market loans for borrowers knowing that those borrowers are unlikely to be able to pay those loans,” Mr. Cordray said. “But they may have other incentives that lead them to make those loans nonetheless. We clearly saw that in the mortgage market in the run-up to the financial crisis, when that market got broken.”
Holly Petraeus, the consumer bureau’s assistant director for service member affairs, said in an Op-Ed article in The New York Times in September that private, for-profit colleges often see members of the military “as nothing more than dollar signs in uniform” and use “aggressive marketing to draw them in and take out private loans,” eventually producing higher-than-average default rates.
In response, the Association of Private Sector Colleges and Universities said on its Web site that Mrs. Petraeus’s claims were “not substantiated” and ignored the fact that two-year career colleges “outperform community colleges in terms of graduation rates three to one” while serving a larger percentage of at-risk students — single mothers, less-affluent students, older workers and military personnel.
Mr. Cordray said that the bureau recognized that many students needed loans and that it would focus on cases where students were being misled. “People who get steered into terrible loans will end up falling behind in life,” he said. “That should be of concern to this country.”