Student loan complaint update highlights IDR plan application issues

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The CFPB’s Student Loan Ombudsman has released a new “Mid-year update on student loan complaints” that highlights issues related to income-driven repayment plan (IDR) application issues.

The update covers complaints submitted from October 1, 2015 through May 31, 2016.  During that period, the CFPB handled approximately 3,500 private student loan complaints and approximately 1,500 debt collection complaints related to private and federal student loans.  The CFPB began handling complaints related to federal student loan servicing in February 2016 and handled more than 2,400 such complaints during the period covered by the update.  (Previously, such complaints were directed to the Department of Education (ED).)

Although the CFPB has repeatedly said that it does not verify the accuracy of complaints, the update appears to treat all complaints as valid.  The update discusses borrower complaints involving delays in the processing of IDR applications (which includes recertifications) allegedly caused by servicers.  It then goes on to describe various adverse consequences that can result from such delays, including capitalization of interest, delayed access to interest subsidies, and decreased potential loan forgiveness.  The update also discusses problems reported by consumers related to IDR application rejections, such as the rejection of incomplete applications from “otherwise eligible borrowers” without providing an opportunity to remedy deficiencies and the rejection of applications due to the use of forbearance.

The “Ombudsman’s discussion” section of the update includes several recommendations (but carries the standard caveat that the discussion “represents the Ombudsman’s independent judgment and does not necessarily represent the views of the [CFPB].”)  The Ombudsman suggests “market participants may wish to consider immediate action to address the specific problems identified in this report.”  According to the Ombudsman, specific elements of the policy direction issued last month by the ED to Financial Student Aid related to student loan servicing practices “offer an approach that market participants may wish to consider to better serve their most vulnerable customers and to strengthen IDR processing.”  The Ombudsman describes the “specific, limited circumstances” set forth in the policy direction for denying enrollment in IDR plans and observes that “[a]ll other deficiencies that would otherwise cause an application to be denied should instead render the application incomplete, and the policy directive indicates the servicer should actively engage with the borrower to complete the application.”

The Ombudsman also suggests that “servicers seeking to strengthen communications related to certain types of incomplete applications may wish to provide borrowers with clear and actionable instructions to complete IDR applications.”  To that end, the CFPB has issued a prototype “Fix It Form” that “may be particularly helpful for borrowers seeking to enroll in an IDR plan who must submit Alternative Documentation of Income (ADOI) or provide a written attestation that they have no income.”  According to the Ombudsman, the form “offers one approach for servicers seeking to take immediate action to improve the level of service they provide to their customers applying for IDR.”  The form “documents any deficiencies with borrowers’ IDR applications and communicates to borrowers about how to address the deficiencies and get their applications back on track.”  The CFPB also published a blog post that informs consumers how they can use the Fix It Form when submitting an IDR application and includes a link for consumers to download the form.

The Ombudsman also calls for immediate action by policymakers to publish identifiable, servicer-level performance data related to the handling of IDR applications, such as recertification rates, processing time, approval and denial rates, and delinquencies and default following IDR plan enrollment and recertification denial.  As the Ombudsman notes, the ED, in its policy direction, called for the publication of servicer-level performance data covering a wide range of practices, including enrollment in IDR and other repayment plans.

Given its past practices, servicers need to be aware that the CFPB may well be signaling its firm intention to use its UDAAP authority in both examinations and enforcement actions to accelerate the timetable for changes in IDR servicing, changes that the ED has conceded require amendments to its existing contracts.  In that regard, footnote 4 in the update is particularly telling.  Footnote 4 provides an abbreviated history of the CFPB’s involvement with what it refers to as “auto-default” provisions, provisions under which a student loan would be in default if either the borrower or the cosigner filed for bankruptcy.  In its June 2015 mid-year update, the Ombudsman expressed concerns about alleged “auto-default” provisions in loan agreements.  Subsequently, as reported in the CFPB’s Winter 2016 Supervisory Highlights, which covered examinations completed between September 2015 and December 2015, examiners determined that one or more student loan servicers engaged in unfair practices in enforcing such provisions.

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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