The Consumer Financial Protection Bureau (CFPB) has sued a major student loan servicer as detailed by the complaint filed in Pennsylvania federal court.
What happened
The CFPB's complaint alleges that the servicer created obstacles to student loan repayment in a multitude of ways that amounted to allegedly unfair, abusive and deceptive practices.
The CFPB alleges that the company failed to follow the directions of borrowers with regard to repayments, repeatedly misapplied or misallocated payments, made the same errors repeatedly and neglected to correct mistakes. According to the CFPB's complaint, the servicer allegedly steered borrowers toward paying more than they needed to on their loans, and guided borrowers into forbearance agreements in lieu of a new repayment plan. Under federal law, borrowers have the right to apply for a repayment plan with a lower monthly payment. Instead of informing consumers about this option, the CFPB says the servicer would suggest forbearance, where borrowers take a break from making payments but interest continues to accrue. Between January 2010 to March 2015, the company earned $4 billion in interest for borrowers enrolled in multiple, consecutive forbearances, the CFPB claims.
The servicer likewise allegedly failed to adequately inform borrowers in income-driven repayment plans about their obligation to recertify their income and family size on an annual basis. Many borrowers failed to renew their enrollment on time and lost their lower monthly payments as a result, the CFPB said, and this practice also allegedly led to losing other protections such as interest subsidies and progress toward loan forgiveness.
The complaint also alleges that borrowers seeking to release a co-signer from a loan faced obstacles and were confronted with allegedly deceptive information from the servicer. Although the servicer stated that a borrower could apply to release a co-signer after a certain number of consecutive, on-time payments were made, the CFPB alleges that the company reset the clock when a borrower prepaid a monthly installment.
Finally, the CFPB claimed that the servicer potentially harmed the credit of disabled veterans by misreporting to the credit reporting companies that severely and permanently disabled veterans who had their loans forgiven under the federal Total and Permanent Disability discharge program had instead defaulted on their loans.
The CFPB is purporting to enforce claims based on these alleged facts under its claimed authority to prosecute unfair, abusive or deceptive practices. The CFPB's complaint also includes a claim for violation of Regulation V in the servicer's credit reporting practices.
Why it matters
The CFPB has kept a close eye on student loans, publishing a report on the industry in 2015 that featured a framework for reform, followed up by a study in 2016 that found eight million borrowers are in default on more than $130 billion in student loans, a problem the CFPB perceives as exacerbated by what it views as poor loan servicing. "For years, [the servicer] failed consumers who counted on the company to help give them a fair chance to pay back their student loans," CFPB Director Richard Cordray said in a statement. "At every stage of repayment, [the servicer] chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because [the servicer] illegally cheated them and today's action seeks to hold them accountable." Whether the Trump administration will continue to prosecute the action is unclear as of this writing. The servicer has publicly denied the allegations.
