CFPB Supervision Report Highlights Risky Practices in Student Loan Servicing

Examiners Also Uncover Violations of Mortgage Servicing Laws

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today issued a report highlighting illegal actions uncovered by the Bureau’s supervision of the student loan servicing market. Bureau examiners found that companies engaged in illegal practices like charging unfair late fees and harassing debt collection calls. Bureau examiners 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.

“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.”

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 Bureau defines through rulemaking as “larger participants.” To date, the Bureau has issued rules to supervise the larger participants in the debt collection, consumer reporting, international money transfer, and student loan servicing markets.

Today’s report, which is the fifth edition of Supervisory Highlights, generally covers supervisory activities between March and June 2014. The report 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. Further, loan servicers disburse loans, process deferments and forbearances, and maintain loan records. Servicers are also responsible for working with struggling borrowers to find repayment options.

Student Loan Servicing

More than 40 million Americans with student debt depend on student loan servicers to serve as their primary point of contact about their loans. When facing unemployment or other financial hardship, 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, Bureau examiners found that one or more student loan servicers were:

• Allocating payments to maximize late fees: Typically, servicers handle multiple student loans for each borrower in one combined account. Servicers allow borrowers to make a single payment for all of the loans, and then the servicer allocates the payment among the borrower’s loans to satisfy the monthly payment for each loan. Where the borrower made a payment that was less than the total amount due, CFPB examiners found that one or more servicers allocated the amount proportionally to each loan. That resulted in borrowers getting charged a minimum late fee on all of their loans and all of their loans becoming delinquent. Supervision cited these fee-maximizing practices as 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.

• 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.

• 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. Examiners identified communications of this nature as deceptive under the Dodd-Frank Act.

• 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.

Mortgage Servicing

In the wake of the financial crisis, mortgage servicing problems have plagued borrowers and caused many to lose their homes to illegal foreclosures. In January 2014, 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 has also 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.

Today’s 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.

Today’s edition Supervisory Highlights is available at: https://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf

The CFPB estimates that there is $1.2 trillion in outstanding student loan debt, with more than 7 million Americans in default. Student loan borrowers who are struggling with student debt can use the CFPB’s Repay Student Debt tool to navigate their options. Earlier this month, the CFPB also published a sample letter for private student loan borrowers to seek an affordable payment plan.