Student Loan Services: Scary Mistakes

NEW YORK (MainStreet)—On the heels of the October 16 report that analyzed complaints coming in to the Consumer Financial Protection Bureau from borrowers of private student loans, the CFPB wants a do-over of the disclosures and modification programs being made available by private student loan servicers.

A good deal of the 3,800 private student loan complaints that the CFPB examined from last September to October 2012 were the result of payment processing snafus, particularly when attempts were made to pay off the debt early or set up a recurring structure which led to fees. The CFPB said that borrowers with multiple loans who tried to pay off the one with the highest interest rates saw the payments applied to all loans instead.

According to the report, private student loan borrowers face payment processing pitfalls that can lead to increased costs, prolonging payments and sinking credit scores.

"Repaying a student loan should be simple," CFPB Director Richard Cordray told The American Banker. "When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability."

The servicing market overall has contracted significantly since the start of the 2008 financial crisis as most federal loans, just over 90%, are made by the federal government. The private servicers themselves have come under pressure and may be thinking outside the box when it comes to looking for ways to wring as much revenue as they can from a customer base that has been shrinking.

While word of the report was included in the CFPB's annual report to Congress, some observers found its pro-active tone unexpected.

"CFPB has the authority to force changes, but my impression is they prefer voluntary industry compliance," said Mark Kantrowitz, senior vice president of Edvisors Network, a network of Websites that provides intelligence on student loans.

But the reduced circumstances of many borrowers may have influenced the CFPB's pronouncements. Kantrowitz added, "Borrowers do not always seem to be aware of their options and sometimes this is due to a lack of transparency by the servicers."

Probably as a result, the CFPB is also issued a consumer advisory to help certain borrowers make their payment preferences known to servicers, in the hope that they can take better control of their student loans.

The CFPB's student loan ombudsman Rohit Chopra compared the modifications the CFPB is advocating to those already being made in the home mortgage industry—an area that is getting attention from the CFPB, the only federal agency created by the 2010 Dodd-Frank Act.

--Written by John Sandman for MainStreet

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