A top official at the Consumer Financial Protection Bureau said student loan companies are at risk of breaking the law if they place people in default when the co-signer of their loan dies or declares bankruptcy, signaling that the CFPB may start legal action.
The CFPB’s latest installment of a report called Supervisory Highlights focuses on segments of the student loan industry. The report documents CFPB examinations of companies that took place in 4Q.
"Auto defaults" can leave borrowers with little choice but to repay the full balance or have their credit ruined. The CFPB report states that the practice occurs in the private student loan market, where banks and other financial firms provide education financing with loan contracts that give them the right to trigger a default, even if the loan is being paid on time. Despite asking lenders to remove the clause from their contracts, CFPB officials say many haven't done so and are skirting the law by unfairly invoking the clause.
Some industry observers have noted that problems often begin with the use of multiple loan servicers, who collect and track payments and communicate with borrowers about the status of loans. A part of the problem is that private student loans are sold and bundled in with other loans, so while one lender may may not engage in auto defaults there is no guarantee that the next owner will do the same. What’s more, the contracts on those securities often come with restrictions that could make it difficult for the company servicing the loan to make adjustments for individual borrowers. CFPB student loan ombudsman Seth Frotman said bureau examiners have identified ambiguous clauses that failed to spell out terms, which can be considered deceptive and unfair and possible violations of the law. "Simply extending promises to the public that auto-default provisions will not be exercised is hollow and incomplete because future loan holders may decide to enforce these clauses,” Frotman said. "If the status quo persists, I am afraid we will continue to hear from borrowers who are subjected to this practice, and we will be having this same conversation for years to come - a situation I believe none of us want.” The CFPB report also stated that unidentified student loan debt collectors threatened borrowers with illegal wage garnishments, to pay for outstanding loans, that would most likely be impossible to execute under Department of Education guidelines. The National Consumer Law Center documented abuses by private collection agencies that ED hires to collect federal student loans in its 2014 report Pounding Student Loan Borrowers: The Heavy Costs of the Government’s Partnership With Debt Collection Agencies.
The CFPB last year detailed problems it found in the student loan collection business. Among the findings:
- Deceptive student loan debt collection practices: Examiners found that some student loan debt collectors made deceptive statements to consumers with defaulted federal student loans. In collection calls and call scripts, examiners found that collectors overpromised the restoration of credit profiles if borrowers participated in a federal student loan rehabilitation program; and collectors misinformed consumers by telling them that they could not participate in the rehabilitation program unless they paid by credit card, debit card, or ACH payments, when, in fact, no such requirement existed.
- Unfair and deceptive overdraft practices: Examiners found that certain banks changed the way in which they assessed overdraft fees – and that the new approaches increased the likelihood that consumers would incur fees that they did not anticipate. The institutions did not explain the changes in a way that consumers could understand and use to avoid overdraft fees. Based on the specific situation at these institutions, examiners found that the banks had carried out unfair and deceptive practices.
- Mortgage origination violations: Examiners found that some loan originators illegally received compensation based on the terms of the loan. Examiners also found that at some loan originators the amounts disclosed on the HUD-1 form improperly exceeded those disclosed on the Good Faith Estimate. Some loan originators advertised the length of payment, amount of payments, numbers of payments, and finance charges without providing the required disclosures. And, the Bureau found weaknesses in compliance management systems that played a significant role in the identified violations.
- Fair lending violations: Examiners found that one or more institutions rejected mortgage applications from consumers because they relied on public assistance income, such as Social Security or retirement benefits, in order to repay the loan. Marketing materials contained written statements regarding the prohibition on non-employment sources of income, and discouraged applicants who received public assistance from applying for credit. This violates the Equal Credit Opportunity Act. CFPB examiners directed that remediation be made to harmed applicants.
- Mishandling of disputes by consumer reporting agencies: Over the past several years, the CFPB has been examining consumer reporting agencies to see how they handle consumer disputes. While Bureau examiners found great improvements in how some handle disputes in its most recent exams, one or more agencies are still failing to consistently forward all relevant consumer information to furnishers. Such inadequate processes can lead to errors in credit files and incorrect dispute investigation outcomes.