The Consumer Financial Protection Bureau issued a report Tuesday highlighting illegal actions uncovered from supervising the student loan servicing market.

CFPB examiners found problems with companies engaging in illegal practices such as charging unfair late fees and harassing debt collection calls. 

The CFPB estimates there is $1.2 trillion in outstanding student loan debt, with more than 7 million Americans in default.

"Students are already struggling with crushing amounts of loan debt," said CFPB Director Richard Cordray. "Student borrowers deserve better than illegal practices as they work to pay back their loans. All borrowers should be treated fairly by loan servicers, and through our supervision program, we intend to hold them accountable for how they treat borrowers."

The areas identified by the CFPB are likely to be the focus of potential enforcement actions against student loan servicers and banks supervised by the CFPB.

The study follows another report released earlier in the month that analyzed consumer complaints and found some student loan borrowers were being "driven into default" with very few alternatives.

In its most recent report, the CFPB faulted servicers for allocating payments in a way designed to maximize fees. Typically, servicers handle multiple loans for a borrower and combine them into a single account so a borrower can make one payment. But the CFPB said it found that when a borrower paid less than their minimum amount due, the payment was allocated proportionately across all loans, resulting in several late fees. The agency said servicers should have instead allocated the payment so that it satisfied the minimum requirement of at least some of the loans.

More than 40 million Americans with student debt depend on student loan servicers to serve as their primary point of contact about their loans.

Borrowers contact student loan servicers in order to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. While supervising for compliance with federal consumer financial laws, CFPB examiners also found that one or more student loan servicers were:

• Making illegal debt collection calls to consumers, at inconvenient times: Examiners found that one or more student loan servicers routinely made debt collection calls to delinquent borrowers early in the morning or late at night. For example, examiners identified more than 5,000 calls made at inconvenient times during a 45-day period, which included 48 calls made to one consumer. Supervision found these phone calls to be unfair under the Dodd-Frank Act.

• Misrepresenting minimum payments: CFPB examiners found that one or more servicers inflated the minimum payment that was due on periodic statements and online account statements. These inflated numbers included amounts that were in deferment and not actually due, which CFPB examiners found to be deceptive.

• Charging illegal late fees: CFPB examiners found one or more servicers were unfairly charging late fees when payments were received during the grace period. Like many other types of loans, many student loan contracts have grace periods after the due date. If a payment is received after the due date, but during the grace period, the promissory note stated that late fees would not be charged. Supervision identified charging late fees during the grace period as unfair and deceptive under the Dodd-Frank Act.

• Misleading consumers about bankruptcy protections: CFPB examiners found that some servicers told consumers student loans are not dischargeable in bankruptcy. While student loans are more difficult to discharge in bankruptcy than most other types of loan, it is possible if the borrower affirmatively asserts and proves “undue hardship” in a court. Servicer communications with borrowers asserted or implied that student loans were never dischargeable. 

• Failing to provide accurate tax information: CFPB examiners found cases where student loan servicers failed to provide consumers with information essential for deducting student loan interest payments on their tax filings. The servicers impeded borrowers from accessing this information and misrepresented information on the consumers' online account statements. This practice may have caused some consumers to lose up to $2,500 in tax deductions. Examiners found this failure to provide accurate information to be unfair and deceptive under the Dodd-Frank Act.  

Examiners, according to the report, also found that some mortgage servicers failed to provide critical consumer protections required by the new CFPB servicing rules that took effect earlier this year.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has authority to supervise banks with over $10 billion in assets and certain nonbanks.

Those nonbanks include mortgage companies, private student loan lenders and payday lenders, as well as nonbanks the CFPB defines through rulemaking as "larger participants."

To date, the CFPB has issued rules to supervise the larger participants in the debt collection, consumer reporting, international money transfer and student loan servicing markets.

The CFPB report generally covers supervisory activities between March and June. It highlights problems in two specific markets: student loan servicing and mortgage servicing. Servicers are companies that collect payments on a loan, respond to customer service inquiries and perform other administrative tasks associated with maintaining a loan.

Mortgage Servicing

Mortgage servicing problems have plagued borrowers and caused many to lose their homes to illegal foreclosures. In January, new CFPB mortgage servicing rules took effect to protect homeowners from servicing surprises and runarounds. The new rules implemented strong protections for struggling borrowers.

The CFPB also has issued two supervisory bulletins warning mortgage servicers about servicing transfer violations. While supervising for compliance with federal law, Bureau examiners found that some servicers:
• Failed to oversee service providers: Institutions contract with service providers for a number of reasons. They may use service providers to develop and market additional products or services or to provide expertise. The Bureau’s servicing rules specifically require servicers to have policies and procedures to oversee servicer providers. When institutions do not oversee their activities, service providers that are unfamiliar with consumer financial protection laws can harm consumers.

• Unfairly delayed permanent loan modifications: Before finalizing a permanent loan modification, a servicer may first require a borrower to complete a trial modification. Once the borrower has successfully completed the trial modification, the servicer should then covert it into a permanent loan modification. Where there were delays in this conversion, examiners found that consumers were harmed because they did not promptly receive the benefits of the terms of the permanent modification.
• Deceived consumers about status of permanent loan modifications: Examiners found that one or more servicers sent certain borrowers permanent modification agreements, which they signed and returned. The servicers, however, did not execute them.

Instead, after a significant period of time, the servicers sent borrowers updated agreements with materially different terms. These misrepresentations about the available terms affected the borrowers’ payments, whether they would accept the modification, and how they could budget based on their expected payment.

Examiners also found problems in other markets. Some consumer reporting agencies had weak systems in place to track and resolve consumer complaints. At least one debt collector was imposing illegal fees on consumers and threatening consumers with litigation it did not intend to pursue. The CFPB expects all entities under its supervision to respond to customer complaints and identify major issues and trends that may pose broader risks to their customers.

The report aims to share information that all industry participants can use to ensure their operations remain in compliance with federal consumer financial law. In all cases where CFPB examiners find problems, they alert the company to their concerns and outline necessary remedial measures. When appropriate, the CFPB opens investigations for potential enforcement actions.

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