NEW YORK (MainStreet) — Over 40 million borrowers with student loans to pay off count on student loan servicers to help them stay current on their debt. Borrowers coping with unemployment or other hardships rely on servicers for loan modifications, alternative repayment plans or loan forbearances. But the Consumer Financial Protection Bureau (CFPB) found that some servicers were exploiting borrowers by engaging in illegal practices in its report called Supervisory Highlights, released on October 28.
“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.”
CFPB examiners found that one or more student loan servicers were engaged in a number of unfair or illegal practices. 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—then the servicer allocates the payment for each loan. But the CFPB found that some servicers were allocating payments to maximize late fees.
When borrowers made payments that were less than the total amount due, the CFPB found that servicers allocated the amount proportionally to each loan—so that borrowers were charged a minimum late fee on all of their loans. Some loans were pushed into delinquency, a practice deemed unfair under the Dodd-Frank Act. Some servicers inflated the amount of minimum payments, leading borrowers to pay larger amounts than were actually due. CFPB examiners also found that some servicers were charging illegal late fees when on-time payments were received during the grace period. In addition, some servicers were failing to provide accurate tax information borrowers need to deduct student loan interest payments from their income tax, contravening the Dodd-Frank Act.
The CFPB found that servicers impeded borrowers from accessing this information —a baffling circumstance, since it is hard to understand what the servicers stood to gain from this. This practice may have caused some borrowers to lose up to $2,500 in tax deductions. Examiners found that some student loan servicers resort to a standard practice used by rogue debt collectors everywhere—making collection calls early in the morning and late at night. One or more student loan servicers routinely made debt collection calls to delinquent borrowers during times when those calls are prohibited—before 8 a.m., 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—all violations of the Dodd-Frank Act. However, when it came to identifying individual student loan servicers that were examined, the CFPB report did not name names. The CFPB estimates that there is $1.2 trillion in outstanding student loan debt, with more than 7 million Americans in default. The CFPB’s has an online Repay Student Debt tool to assist borrowers in paying off their loans. It also provides a sample letter for private student loan borrowers seeking affordable payments from their lender, also on its Website.
--Written by John Sandman for MainStreet