CFPB update on student loan complaints continues to highlight co-signer release issues

by Ballard Spahr LLP
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The CFPB has issued a “Mid-year update on student loan complaints” that analyzes the approximately 3,100 private student loan complaints received by the CFPB between October 1, 2014 and March 31, 2015. The update also analyzes the approximately 1,100 debt collection complaints related to student loans during the same period. There is no indication as to whether there was any overlap in these complaints which, in any event, represent a miniscule percentage of student loan borrowers. According to the CFPB, it received 34 percent more private student loan complaints during this period as compared to the same period last year, perhaps not surprising given the efforts it has made over the past year to stimulate complaints. Like the CFPB’s April 2014 update, the new report highlights issues related to co-signer releases.

The CFPB’s analysis and findings include:

  • In December 2014, the CFPB sent letters to “certain market participants about current industry practices and policies related to co-signed private student loans.” (A sample of the letter is included as an appendix to the update.) The CFPB received six responses “from respondents representing many corporate forms, including large depository institutions and third-parties servicing loans held by banks or in a securitized pool.” The CFPB does not indicate what portion of the industry these respondents represent. It found that of the borrowers who applied for a co-signer release from the six respondents, 90 percent were rejected, with the most common reason for the rejection being the borrower’s failure to meet certain pre-application requirements such as making a specified number of on-time payments. According to the CFPB, the approval criteria “were rarely communicated in a transparent fashion.”
    We find that conclusion surprising, since in our experience marketing materials for these programs specifically disclose the need for on-time payments and a credit check. Moreover, the conclusion seems questionable in light of a footnote noting that approval rates were higher among respondents that received fewer applications, which suggests that many of the borrowers in question simply would not be considered creditworthy. The CFPB commented that the “absence of a clear articulation of specific factors that are considered when evaluating a borrower for a co-signer release raises questions about whether lenders have reasonable requirements for borrowers seeking to obtain this commonly-advertised  benefit.” But these factors are articulated, as noted above, and we see no reason why lenders should have to disclose the specific credit criteria they use in making loans, which, as we understand it, are typically the same criteria they use in doing the “credit check” for what is essentially a refinance of an existing loan.
  • Based on its review of an unidentified “selection of private student loan contracts,” the CFPB found that the contracts generally contained co-signer-related auto-default provisions. There is no explanation as to what “generally” means. The CFPB then commented that while respondents to its information request “claimed that they no longer place loans in default when a co-signer dies or files for bankruptcy and the borrower is otherwise in good standing,” this practice “is generally not memorialized in loan agreements.” It noted that student loan complaints cited the continued use of auto-default clauses by “some market participants” to place a loan in default upon a co-signer’s death or bankruptcy even if the borrower was paying as agreed. Since the CFPB does not investigate complaints, we are hard pressed to understand how it knows that the borrowers were paying as agreed and could be expected to continue to do so.
    The CFPB also commented that the decision to retain auto-default clauses in private student loan contracts “may create risks for consumers if loans are sold or securitized.” According to the CFPB, in such circumstances, “the contractual arrangements and incentive structures can create the conditions for servicers to limit their discretion and enforce the provisions-even if it is not in the long-term interest of the bondholders-unless servicers are sufficiently indemnified.” This represents a tremendous speculative leap that still fails to address why it would be unreasonable for a lender or holder to make a credit decision based on the death or bankruptcy of the person on whose creditworthiness the lender relied in making the loan.
  • The CFPB discussed “unexpected factors” used by the respondents to disqualify borrowers from co-signer releases, such as accepting an offer to postpone payments through forbearance or making prepayments (with the CFPB noting that the prepayment scenario “may be a violation of federal law in some circumstances.”) Aside from stating these facts, the CFPB neglects to explain why it would be reasonable for a borrower to conclude that he or she had made the required number of consecutive on-time payments when the borrower stopped making payments altogether.
  • Other co-signer complaints noted by the CFPB included the inability of co-signers to access key documents such as billing statements and notices of missed payments and “significant bureaucratic barriers and red tape” encountered by co-signers when attempting to make payments on co-signed loans. However, the CFPB says nothing about the extent to which cosigners can obtain this information on the servicer’s website and it continues to ignore the fact that the payment allocation routines it finds objectionable (and which can necessitate manual processing) are the same ones promoted by the Department of Education.
  • Changes suggested by the CFPB to address co-signer release issues include more transparent communication regarding co-signer release criteria, warning borrowers about actions that may lead to disqualification for a release, notifying borrowers when they have met the criteria for a release, and making release applications more accessible. (In April 2014, the CFPB also issued a consumer advisory about co-signer releases that included sample letters to be sent to servicers, with one to be used by borrowers seeking information about a release and the other by co-signers seeking a release.)
  • The update also includes a section entitled “Roadblocks to Refinance” that discusses problems faced by borrowers when seeking to pay off loans in full (such as difficulty in obtaining accurate payoff information or paying off high-rate loans when a servicer handles multiple loans). To address these concerns, the CFPB suggests that servicers offer electronic means to request payoff statements and change processing policies to make it easier for borrowers seeking to refinance to provide advance prepayment instructions in anticipation of proceeds from a refinance provider.

The update concludes with the comment that its analysis and findings were shared with Director Cordray “who expressed concern that student lenders and servicers may not be making even the most modest investments to improve their processes to ensure appropriate levels of customer service.” Given the  superficial nature of much of the analyses and the limited factual support for many of the findings, we can only say that we are disappointed by such remarks.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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