CFPB Examiners Uncover Illegal Auto Defaults of Student Loans and Other Violations
WASHINGTON, D.C. –Today the Consumer Financial Protection Bureau (CFPB) released its latest supervision report where the exams of banks and nonbanks resulted in the remediation of $14.3 million to approximately 228,000 consumers. In its examinations covering the last months of 2015, the Bureau found violations in the student loan market, including illegal automatic defaults by student loan servicers and illegal garnishment threats by debt collectors performing services for the Department of Education. Examiners also found instances of international money transfer companies violating the CFPB’s new remittance rule, banks providing inaccurate information to credit reporting companies about customer checking accounts, and debt collectors illegally contacting consumers.
“It is deeply concerning that our examiners found private student loan borrowers being hit with automatic defaults when their co-borrower goes bankrupt,” said CFPB Director Richard Cordray. “The problems plaguing the student loan market can have a domino effect on borrowers’ financial futures. The CFPB has made it a priority to police this market so that borrowers are not treated unfairly or illegally dead-ended into default.”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has authority to supervise banks and credit unions with more than $10 billion in assets and certain nonbanks. Those nonbanks include mortgage companies, private student loan lenders, and payday lenders, as well as nonbanks the Bureau defines through rulemaking as “larger participants.” To date, the Bureau has issued rules to supervise the larger participants in the markets of debt collection, consumer reporting, international money transfers, student loan servicing, and auto finance.
Today’s report, which is the 10th edition of Supervisory Highlights, generally covers supervisory activities completed between September 2015 and December 2015. Among the findings:
- Illegal automatic defaults of student loans: CFPB examiners found one or more student loan servicers engaged in an unfair practice by automatically defaulting on certain private student loans. As the Bureau , some private student loan promissory notes contain an “auto default” clause that lenders trigger to immediately demand payment on the entire loan amount if a co-borrower files for bankruptcy or dies. Examiners found that one or more student loan servicers made the entire loan due when a loan’s co-borrower filed for bankruptcy, regardless of whether the borrower was current on all payments. These auto defaults were unfair because a reasonable consumer would not likely interpret that clause in the contract to mean they would default based on their co-borrower’s bankruptcy. Further, one or more servicers did not notify the borrower that the loan was in default.
- Illegal garnishment threats by student loan debt collectors: Examiners determined that one or more debt collectors used false, deceptive, or misleading representations when performing collection services of defaulted federal student loans for the Department of Education. The debt collectors threatened garnishment against certain borrowers who were not eligible for garnishment under the Department of Education’s guidelines. The debt collectors also gave borrowers inaccurate information about when garnishment would begin, creating a false sense of urgency.
- Violations of the new remittance rule: This is the first Supervisory Highlights to report on exams of banks and nonbanks in the remittance market. The CFPB’s rule governing international money transfers became effective in October 2013. The new protections for consumers who send money abroad include disclosure requirements, error resolution requirements, and cancellation rights. Overall, CFPB examiners found that remittance transfer providers have implemented necessary changes to comply with the CFPB’s rule. But in some cases, at least one provider gave incomplete, and sometimes inaccurate, disclosures to consumers. At least one provider also failed to cancel transactions within the required timeframe. And at least one provider failed to promptly credit consumers’ accounts when errors occurred.
- Illegal inaccuracies with deposit account information provided to credit reporting companies: The CFPB examiners found that one or more banks or credit unions failed to update checking account information they had supplied to the checking account reporting companies. For example, when consumers paid charged-off accounts in full, one or more banks or credit unions would update their records but would not update the change in status and send that information to the credit reporting companies. Not updating an account to “paid in full” status could negatively affect a consumer’s attempt to open a new checking account. Federal law says that depository institutions must have systems in place regarding accuracy when they pass on information to checking account reporting or other credit reporting companies.
- Failure to honor written requests by consumers to cease debt collection communications: The CFPB found at least one debt collector that failed to comply with the Fair Debt Collection Practices Act requirement to stop contact. Federal law says that after a consumer notifies a debt collector in writing that he or she refuses to pay a debt or wants a debt collector to stop contacting them, the collector must, with few exceptions, stop. Bureau examiners found at least one debt collector failed to honor this requirement. The failures resulted from system errors, such as mistakes during manual data entry.
Where CFPB examiners find violations of law or other significant problems or weaknesses, they alert the institutions to their concerns and outline necessary remedial measures. When appropriate, the CFPB opens investigations for potential enforcement actions. 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 CFPB often finds problems during supervisory examinations that are resolved without an enforcement action. Recent non-public supervisory actions and self-reported violations at banks and nonbanks resulted in $14.3 million in remediation to approximately 228,000 consumers. These non-public actions have occurred in areas such as mortgage origination, deposits, and debt collection. When examiners find violations of law, the Bureau directs entities to change their conduct and remediate consumers as applicable.
The Consumer Financial Protection Bureau (CFPB) 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 www.consumerfinance.gov.