WASHINGTON—The CFPB Tuesday released a report outlining widespread servicing failures reported by both federal and private student loan borrowers.
Consumers describe companies using a wide range of “sloppy, patchwork practices” that can create obstacles to repayment, raise costs, cause distress, and contribute to driving struggling borrowers to default, the CFPB stated.
The Bureau said it has made it a priority to take action against companies that are engaging in illegal servicing practices, and that ongoing work includes addressing many of the problems outlined in the new report. The Bureau said it also intends to explore potential industry-wide rules to increase borrower protections.
This work builds on an interagency framework for market-wide reform released today in coordination with the U.S. Department of Education and the U.S. Department of the Treasury, the CFPB explained.
“With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical,” said CFPB Director Richard Cordray. “Today’s report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.”
Student loans make up the nation’s second largest consumer debt market, which has grown rapidly in the last decade. The total volume of outstanding student loans has more than doubled, rising from less than $600 billion in 2006 to more than $1.2 trillion today. One in four student loan borrowers are currently in default or struggling to stay current on their loans, despite the availability of income-driven repayment options for the vast majority of borrowers.
“Servicers are a critical link between borrowers and lenders. They manage borrowers’ accounts, process monthly payments, and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. The servicer is often different than the lender, and a borrower typically has no control over which company services a loan,” the agency stated.
In May, the CFPB launched a public inquiry into student loan servicing practices that may make paying back loans a stressful or harmful process for borrowers. The CFPB also sought input on potential solutions to improve service for student loan borrowers in repayment. In response to the public inquiry, the Bureau received over 30,000 public comments, which informed the recommendations in the report.
As millions of student loan borrowers struggle to repay their student loans, many consumers reported to the CFPB that servicers are failing to provide the basic level of service necessary to meet borrowers’ needs, the Bureau stated. “Consumers and other stakeholders report problems such as servicers losing paperwork or misapplying payments. Borrowers say that when errors arise, they find it difficult to have them corrected. Many federal and private loan borrowers report experiencing serious problems accessing affordable repayment options or other repayment alternatives to avoid default. These anecdotes in combination with findings in the CFPB’s examinations and investigations of servicers lead the Bureau to be concerned that problems are widespread.”
To address the harmful servicing practices identified through the Bureau’s public inquiry, the new report includes recommendations for policymakers and market participants to improve borrower outcomes and reduce defaults. These recommendations stem from public comments received by the CFPB and a Joint Statement of Principles on Student Loan Servicing, released Tuesday by the CFPB, the U.S Department of the Treasury, and the U.S. Department of Education.
The principles offer a roadmap for student loan servicing reform, including a call to establish clear and consistent industry-wide standards. The Joint Statement of Principles includes the following recommendations:
- Create consistent, industry-wide standards for the entire servicing market: While student loan servicing is subject to a number of state and federal laws, the market lacks consistent standards that cover the servicing of all private and federal student loans. Currently there is a patchwork of student loan servicing practices across the market, which includes loans held by private investors, banks, and the federal government. Although the terms of these products can vary, the process of repaying these debts is similar for all student loan borrowers. Consistent standards for quality service for all borrowers can help ensure that consumers know what to expect from their student loan servicer and that distressed borrowers can access available assistance.
- Hold servicers accountable: Regulators must continue to act to protect borrowers if errors occur or if servicers break the law. Consumers should be able to access adequate customer service to answer questions and resolve errors. “Today’s framework also calls for continuing to build coordination among federal and state agencies around the enforcement of federal and state consumer financial laws, higher education laws and regulations, and federal servicing contracts made by the U.S. Department of Education,” the agency said.
- Provide access to clear, timely information: Borrowers expect student loan servicers to inform them about repayment options and help them enroll in alternative payment plans. This framework calls for information provided by servicers to be accurate and actionable, ensuring borrowers are empowered to make choices that encourage borrower success and mitigate defaults.
- Improve publicly available data: Little information is publicly available about the performance of student loans, the utilization of specific repayment options such as income-driven repayment plans for federal student loans, and the outcomes for borrowers enrolled in these plans, the CFPB said. “Today’s framework calls for greater transparency, including periodic publication of servicer-level data on loan performance.”