Exams lead to remediation for private loan servicers’ unfair practices

This week we announced a series of examination findings documenting private student loan servicers’ failure to comply with the terms of their own loans or modifications. When a financial institution commits to something – whether it’s in a loan note, advertisement, or phone call – we expect it to follow through. That’s why we directed these companies to provide significant remediation amounts for failing to make promised payments to consumers.

The recent edition of Supervisory Highlights documents two ways student loan servicers committed unfair acts or practices in violation of the Dodd-Frank Act by failing to live up to their promises.

Incentive Payments

Companies often use financial incentives to recruit new consumers or encourage certain repayment behavior. For example, a bank might offer one of its borrowers $200 if she refers a friend, and it may offer that friend a $200 welcome bonus to apply for and accept a new loan. Companies use financial incentives to encourage consumers to maintain a checking account with their lender, enroll in auto-debit, or pay off their loans quickly.

Unfortunately, we’ve documented significant failures when it comes time for financial institutions to fulfill their end of the deal. In some cases, these institutions’ systems – their technology or procedures –fail to identify the consumers that earned an incentive. Yet consumers who take advantage of these offers rely on financial institutions to manage the operation of the program effectively.

Some financial institutions denied incentive payments based on terms that were never included in the original deal. In at least one situation, a servicer offered a significant cash payment to borrowers who repaid their loans within a certain period. However, without documenting any such requirement, the servicer denied consumers these payments based on a policy that the incentive payments were contingent on maintaining a checking account at that institution.

COVID-19 Payment Relief

Many financial institutions offered consumers with private education loans payment relief options to reduce or pause their payments in the wake of the COVID-19 pandemic. Some modification agreements allowed consumers to backdate a forbearance. For example, if a consumer made a payment in the month of May and was able to backdate their forbearance to May 1st, this would functionally create a refund for that payment. This benefit could provide much-needed cash for consumers facing the health and job insecurity created by the pandemic. But at least one student loan servicer refunded these payments inconsistently and failed to deliver refunds to some consumers, depriving them of thousands of dollars in financial flexibility when they needed it most.

Whether it’s a promise to pay a consumer to recruit a friend or a commitment to provide payment relief, companies should keep their side of the bargain. Through supervision, we are closely monitoring student loan servicers to ensure consumers are treated fairly and when these companies break the law, the Bureau will hold them responsible.