The Consumer Financial Protection Bureau’s student loan ombudsman has shared concerns over predatory practices in student loan repayment programs, comparing them to those that led to the mortgage crisis several years ago.
Student loan debt relief scams reportedly have been on the rise since June 2014 when the Department of Education expanded loan repayment options. Many of the scams prey on vulnerable borrowers as well as African-American and Hispanic families. “What really concerns us is that the issues and practices we see are eerily similar to what happened in the wake of the mortgage meltdown, where we saw a number of scammers doing comparatively what they’re doing now in the student loan context," Seth Frotman told Think Progress. "What we’ve seen is that many of the same practices, and many of the same entities, have sort of migrated over and have now really set their targets in the student loan space." Much of the blame lies with student loan servicers - such as American Education Services, Navient and Great Lakes, Frotman said. The servicers are supposed to ensure that borrowers are aware of their debt repayment options."The [CFPB] is taking a hard look at shoddy student loan servicing practices that fail to help borrowers get into plans that can set them up for success and protect them from default. That has been lacking and what we have seen instead are scammers stepping into that gap. Unfortunately, these scams prey on the most vulnerable borrowers," Frotman said.
State regulators across the U.S. increasingly have been cracking down on student loan servicers.
Illinois Attorney General Lisa Madigan recently said she has had enough of false claims and empty promises. She filed several lawsuits against student debt relief companies in the past year and called on the Education Department to create a training and certification program for credit counselors, similar to what the Department of Housing and Urban Development has for housing counselors.
In doing so, she said, people having a hard time repaying student loans can find trusted advisers in their states, rather than turning to scam artists.
Complaints to the CFPB that servicers are providing inconsistent information, misplacing their paperwork or charging unexpected fees are all rising.
"Student loan servicers should be providing this assistance, but they are failing to adequately counsel borrowers about available options," Madigan wrote the the Education Department. "This vacuum of information and legitimate assistance has provided an opportunity for scammers to fill the gap.”
The CFPB shut down student debt relief company College Education Services (CES) in December and separately filed a lawsuit against Student Loan Processing over charges the firm illegally charged upfront fees and engaged in deceptive marketing. At the time, the CFPB issued a consumer advisory warning of signs that a company offering student loan debt relief may be a scam.
The CFPB claimed that CES, based in Tampa, Fla. before it closed, reaped millions of dollars in upfront fees by advertising to defaulted student loan borrowers through websites and online ads. Among the charges, CES allegedly falsely guaranteed to reduce a loan's monthly payments by up to 50% and to secure a new federally backed consolidated loan within a short time frame.
Florida Attorney General Pam Bondi joined in the action against CES and its predecessor, College-Defaulted Student Loan LLC.
In a separate lawsuit, the CFPB said Student Loan Processing.US in California and owner James Krause, falsely led consumers to believe the company was affiliated with the Education Department and charged upfront fees for federal loan repayment services. The company allegedly charged a monthly fee on repayment plans that some students would have qualified for free. The alleged activities dated back to at least July 2011.
"The company uses a logo that resembles a government seal, stamps 'Official Business' on its mail to consumers, and cites federal law prohibiting mail tampering to create the impression that the marketing material is sent or endorsed by the federal government," the CFPB said in a press release.
Krause, in a statement, stood by the services his company offers. Student Loan Process.US "has cooperated with the CFPB investigators for more than a year, and we are surprised they are proceeding with this action," he said. "Without our help, most of our clients would not even be aware that the Department of Education student loan consolidation programs exist."