WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today announced that its recent supervisory work has found that some student loan and mortgage servicers are violating the law by failing to provide struggling borrowers with legal protections. CFPB examiners found that some student loan servicers failed to refund charges imposed on borrowers who had been wrongly denied the right to defer payments while enrolled in school. The report also found that some mortgage servicers did not deliver the required foreclosure protections to borrowers seeking to save their homes, mishandled escrow accounts, and sent incomplete bills. The report also announced that non-public supervisory activities have led to the recovery of about $6.1 million for 16,000 consumers harmed by auto loan originators.
“We found that some mortgage and student loan servicers are violating the law by failing to provide protections to borrowers,” said CFPB Director Richard Cordray. “Their slipshod practices are putting borrowers at risk of financial failure and we will hold them accountable."
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has authority to supervise banks and credit unions with more than $10 billion in assets and certain nonbanks. These include mortgage companies, private student lenders, payday lenders, and others defined as “larger participants.” Today’s report, the 15th edition of Supervisory Highlights, covers supervisory activities generally from September-December 2016, and shares observations in the areas of student loan servicing, mortgage servicing, mortgage origination, and fair lending.
Student Loan Servicing
Student loan servicers are the primary point of contact about loans for the more than 44 million Americans with student debt. It is a Bureau priority to end illegal practices in student loan servicing. Previously, the Bureau that borrowers encounter servicing problems driven by incomplete, inaccurate, or untimely reporting of student data. This can cost some borrowers hundreds of dollars or more. In February, the CFPB warned student loan borrowers to take steps to protect themselves from costly student enrollment status data errors. The Department of Education has also warned that these errors can lead to higher loan costs for borrowers and may contribute to student loan delinquency and defaults. In today’s report, Bureau examiners found that student loan servicers:
- Routinely acted on flawed information: Most student loan borrowers have a right to
postpone payments, called a deferment, while they are enrolled in school. But
CFPB examiners found that one or more student loan servicers routinely acted on
incorrect information about whether the borrower was enrolled in school. This
faulty information was in student data reports used to manage millions of
borrowers’ accounts, and was provided by National Student Clearinghouse, an
enrollment data reporting company.
- Failed to reverse charges wrongly imposed on
borrowers in school: Because of data errors, one or more student loan
servicers routinely failed to reverse certain charges even after it knew it had
wrongly ended a deferment. These charges included improper late fees and
capitalization of unpaid interest, which occurs when interest that accumulates
on a student loan is added to the principal balance.
Mortgage servicers collect payments from the mortgage borrower and forward those payments to the owner of the loan. They typically handle customer service, collections, loan modifications, and foreclosures. Supervision continues to see serious issues for consumers seeking alternatives to foreclosure, or loss mitigation, at certain servicers. Issues identified during recent CFPB examinations include problems with foreclosure protections, premature foreclosure filings, mishandling of escrow accounts, and incomplete periodic statements. Bureau examiners found one or more servicers:
- Kept borrowers in the dark on foreclosure
alternatives: One or more servicers failed to identify the additional
documents and information borrowers needed to submit to complete a loss mitigation application to avoid foreclosure. They then denied the
applications for not including those documents. Supervision directed these
servicers to enhance policies, procedures, and monitoring to address the
- Prematurely launched the foreclosure process:
Servicers cannot take certain steps toward foreclosure once they receive a
complete loss mitigation application from a borrower more than 37 days before a
foreclosure sale. For instance, servicers cannot make first notice of a
foreclosure if a borrower has submitted a complete application for a loan
modification or other foreclosure alternative that is still pending review.
Bureau examiners found that one or more servicers failed to properly classify
applications as complete after receiving the information, and failed to give
required foreclosure protections to those consumers.
- Mishandled escrow accounts: One or more
servicers used funds from escrow accounts to pay insurance premiums on
unrelated loans. This created shortages in the escrow account and forced higher
monthly payments onto consumers. Supervision directed the servicer to give
redress to affected consumers, and adopt policies and procedures to ensure that
insurance payments are made properly from escrow accounts.
- Issued incomplete periodic statements: Servicers
must provide regular statements that include the amount and due date of the
next payment; a breakdown of payments by principal, interest, fees, and escrow;
and recent transactions. Examiners found one or more servicers used vague
language like “Misc. Expenses” and “Charge for Service” when describing certain
costs. These insufficient descriptions failed to comply with the rule.
Supervision directed the servicer to modify its descriptions to help consumers
understand their fees and charges.
In the lead-up to the financial crisis, many consumers ended up in risky mortgages because lenders did not check to see if they could afford to pay back the loan. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders must make a reasonable effort to figure out if a consumer can repay the mortgage before making the loan. Today’s report looks at how CFPB examiners assess compliance with the Ability-to-Repay rule, including requirements on how a lender verifies a consumer’s ability to repay a mortgage loan. This includes whether a creditor’s decision relies on verified assets and not income, and whether it can be based on the size of the down payment for a consumer who otherwise lacks verified income or assets.
Today’s report also notes that CFPB examiners alerted one or more companies to spikes in complaint volume, prompting the companies to develop remedies. It also discusses the CFPB’s continued development and implementation of a program to directly examine key service providers to help reduce risks to consumers when a company outsources certain activities to those providers. In today’s report, the CFPB also reminds companies that creating incentives for employees and service providers to meet sales and other business goals can lead to consumer harm if those incentives are not properly managed. In addition, the report includes details about updated and expanded publicly available surname data from the U.S. Census Bureau for use in models that may be combined with geography data in CFPB analysis of fair lending practices.
The report highlights that non-public supervisory activities have led to the recovery of about $6.1 million for 16,000 consumers harmed by illegal practices by auto loan originators. The CFPB’s recent supervisory activities led to or supported five recent public enforcement actions, resulting in over $39 million in consumer remediation and another $19 million in civil money penalties. Today’s report shares information industry can use to comply with federal consumer financial law. In cases where CFPB examiners find problems, they alert the company and outline necessary remedial measures. This may include paying refunds or restitution, or taking actions to stop illegal practices, such as new policies or improved training or monitoring. When appropriate, the CFPB opens investigations for potential enforcement actions.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.