WASHINGTON The Consumer Financial Protection Bureau is urging policymakers to revamp the disclosure requirements and modification programs of private student loan servicers, similar to changes already enacted in the mortgage industry.
In a report issued Wednesday, the agency said that student loan borrowers seeking to pay off or reduce their loan costs are being duped into higher fees and longer repayment periods that ultimately harm their credit profiles.
In response, the CFPB said servicers should be required to issue more transparent and timely disclosures.
"I'm concerned that the same chaos and confusion we saw in the mortgage market may be repeating itself in the student loan market . . . many borrowers are facing stumbling blocks, snags and surprises when repaying their private student loans ," said Rohit Chopra, the CFPB's student loan ombudsman, during a conference call with reporters. "Recent reforms to credit cards and mortgage servicing may provide clues on how to make student loan servicing work better."
Student debt has been an increasing concern for the CFPB, economists and policymakers because of its rapid growth and high default rates. The CFPB which has made aggressive steps this year to monitor the private student loan market recently said that there are 7 million student loan borrowers who have defaulted in a market with more than $1.2 trillion in outstanding student loan debt.
While the servicing market overall has shrunk dramatically and a majority of the loans are federal rather than private, the CFPB argues that private loans typically come at a greater cost with higher and variable interest rates.
Many of the 3,800 private student loan complaints that the CFPB reviewed from October 2012 through September were related to payment processing issues, particularly when the borrower tried to pay off the debt early or set up a certain periodic payment structure but incurred a fee to do so. The CFPB said that in cases with multiple loans, borrowers trying to pay extra on the one with the highest interest rate instead saw their payments spread out across all loans.
"Paying off the highest rate first could help borrowers get to the finish line more quickly but too often payments are split up and applied in a way that the servicer sees fit, slowing down repayment and leading to more interest accrual," Chopra said. "While faster repayment is good for a borrower, it often means less profit for the lender or servicer and this is concerning since Congress amended the Truth in Lending Act in 2008 to ensure penalties are not imposed for early repayment of a private student loan."
The CFPB also found that nearly half of the complaints were from struggling borrowers who could not get a modification or reduce monthly payments without incurring additional fees. In certain cases, student loan servicers applied payments in such a way that struggling borrowers did not meet the minimum payment on multiple loans, incurring multiple late fees.
Chopra said that these complaints further indicated there are systemic issues throughout the entire servicing process that need to be addressed by all regulators.
"When you see the same complaint with a very similar fact pattern again and again and again, it tends to suggest that there may be a systemic problem in perhaps the technology system, perhaps customer service processes, whatever it may be" with the servicer, Chopra said. "Many of the issues that we've raised -- particularly on the payment allocation -- do not appear to be isolated . . . and some of the examination work that the agencies have done suggest that this may be impacting a much larger number of consumers than simply those who've filed an official complaint with the CFPB."
The CFPB also noted a continuation of servicing transfer issues resulting in lost paperwork, processing errors that accrued late fees and miscommunication with the borrower over items as simple as billing statements. In its report, its second annual analysis of the student loan market, the agency went a step further than last year by issuing a consumer advisory that gives borrowers a template to use when they're receiving the runaround from a servicer in trying to pay off a loan or reduce payments.
"Repaying a student loan should be simple," said CFPB Director Richard Cordray in a press release. "When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability."
The agency has already issued a proposal to expand its authority under the larger participant rulemaking to supervise nonbank student loan servicers. Chopra said the CFPB will make a final decision on that plan by the end of this year.
"The CFPB is actively engaged to take steps to ensure that the student loan market does not inflict broader damage on the economy," he said.
In the meantime, Chopra said they would keep an eye on what servicers affiliated with banks under its purview are doing to work with struggling student loan borrowers.
"We're seeing much more interest in our discussion with lenders and services to offer more programs potentially because investors are also looking for them to improve their performance," Chopra said. "There will be many new programs by the beginning of 2014 and we're going to monitor this sector very closely and share the results with other regulators, the Department of the Treasury, the Department of Education and others."