Four Things Your Student Loan Servicer Should Do

30 Sep 2015 | Author: | No comments yet »

Consumer Regulator Considers Student Loan Rules To Fix ‘Widespread Failures’.

The federal Consumer Financial Protection Bureau said Tuesday it is weighing new rules governing the $1.3 trillion student loan market after releasing a stinging report documenting “widespread failures” in an industry largely overseen by the Obama administration.The sloppy, haphazard work of student loan servicers, the middlemen who collect and apply payments, is creating obstacles to repayment, raising costs and driving borrowers into default.Paying off student loans is much harder than it has to be for many borrowers, echoing obstacles faced by struggling homeowners in the lead up to and wake of the financial crisis, according to a government report released Tuesday.Federal regulators are preparing to overhaul the way millions of student borrowers’ loan payments are processed in an effort to avoid a repeat of problems that plagued borrowers during the mortgage meltdown.

The consumer bureau’s report describes student loan servicing, or the business of collecting borrowers’ monthly payments and counseling them on their repayment options, as riddled with unfair and Kafkaesque practices. Many borrowers are trapped at companies that don’t give them basic information, often mislead them, assess unexpected fees, make it hard for them to correct errors and frequently push them into default, the report says. The CFPB’s report is particularly harsh in its examination of federal student loans, where many of the most egregious practices occur and are regulated and supervised by the U.S. Education and Treasury departments, and signal that the bureau will take a more aggressive stance in rooting out wrongdoing in the federally backed market that President Barack Obama himself has promised to fix. It is both because of my own personal experience, and because I understand that many Americans at times require access to small-dollar loans to make ends meet, that I firmly believe consumers must maintain access to regulated payday loans.

The Obama administration has instituted broad initiatives to give students more options for repaying their federal loans, expanding programs that cap monthly payments to a percentage of earnings. Education Department and Treasury Department, on Tuesday said they are working together to strengthen servicing protections for student-loan borrowers. “We feel there are various practices in [this] industry that are subpar, very much like mortgage servicing practices have been very subpar,” said CFPB director Richard Cordray while testifying in front of the House Financial Services Committee on Tuesday. “We are looking at trying to figure out how to clean that up.” Any new rules would likely have an impact on borrowers of all ages, including parents and other adults who have cosigned for students’ loans. To assume that those of us in Washington, the vast majority of whom have never faced a similar predicament, know which types of financial products best fit consumers’ needs is both patronizing and counterproductive. The bureau received over 30,000 comments from borrowers, servicers and other stakeholders through a public request for experiences with and solutions to improve loan servicing.

They ask that servicers provide accurate and actionable information to borrowers, make more data available about loan performance and other metrics, and are held accountable when they don’t serve borrowers well. Finally the agencies also note the need for a clear and consistent framework for how servicers are supposed to treat borrowers, something that’s not currently available. “We are seeing far too many student borrowers in distress in recent years, suggesting clear opportunities for improving this system and making it more navigable for borrowers through new tools, better information, and better servicing techniques,” Sarah Bloom Raskin, deputy secretary of the Treasury Department, said in a speech at a National Foundation for Credit Counseling conference Monday. Instead, the bureau’s oversight is in student servicing, an industry comprised of fewer than 10 major firms including banks, which handle payments on both federal and private student loans. Others said they ran into trouble trying to lower the interest on their private loans, a charge confirmed by accounts from refinancing companies that received inaccurate payoff statements.

Loan defaults among students can have a domino effect on other parts of the economy because they result in lower credit scores for student borrowers as well as cosigners, limiting their access to mortgages and other financing. Florida’s law prohibits a borrower from taking out a second payday loan to cover the original loan, often termed as “rollovers,” and limits a customer to a single advance of $500 or less. Among the biggest issues being raised by the CFPB is that some servicers aren’t providing struggling borrowers with adequate information about affordable repayment options—in particular income-driven repayment plans—and those borrowers can end up in default as a result. The agencies say they will make sure borrowers have access to the information they need to responsibly repay their loans; protections to be treated fairly and assurances that servicers will be held accountable for their behavior.

Ultimately, the CFPB has the authority to institute market-wide servicing standards, which several servicers, including Navient and Pennsylvania Higher Education Assistance Agency, support. But because servicers don’t have a financial incentive to spend extra time enrolling clients in these plans, they may fail to do so, putting the borrower at risk of defaulting. Finally, if a borrower cannot repay a loan, the law provides for a 60-day grace period, during which the consumer must take part in credit counseling and set up a repayment schedule.

As part of its efforts, CFPB is considering steps that would put a halt to practices that have been compared with the robo-signing problems that led to banks being fined billions of dollars during the foreclosure crisis five years ago. She also noted that only 2.1 percent of the company’s borrowers were more than 271 days delinquent, 11 percent below the next best performing servicer.

It’s not uncommon for borrowers’ loans to transfer from servicer to servicer and one company noted that after a particularly large transfer of 2.5 million accounts, they experienced a problem with more than 20% of the new accounts. The purpose of this regulation, CFPB asserts, is to eliminate “debt traps” by requiring lenders to ensure that customers can repay their loans through a variety of regulations. In some cases, payments that borrowers had already made to the old servicer didn’t transfer with the accounts, so the new servicer sent them a bill for something they already paid. The agency is in the middle of creating a new Web site for borrowers to file complaints and provide feedback about federal student lenders, servicers and collection agencies.

To be sure, the commissioner of the Florida Office of Financial Regulation has, on numerous occasions, insisted that the cost of compliance with the CFPB’s proposed rules would far exceed any revenue received, rendering the service completely impractical. So many borrowers don’t know that they could reduce their payments under existing federal plans or get their debts discharged that Hicks has held seminars in more than a dozen cities to inform borrowers about their options. The company, which didn’t admit or deny wrongdoing, was accused of engaging illegal debt-collection tactics and denying borrowers information about how they could receive federal income-tax benefits. A quote from a borrower noted in the report: “When my loan was switched to being serviced by [company], I had checked my loan information on the Dept. of Education website a few days before my payment was due to be automatically withdrawn. It is estimated that currently one in five households depend on payday loans and other forms of short-term credit to cover unexpected emergencies or ordinary living expenses.

For their part, servicers largely told the CFPB that borrowers need to be better informed about their finances and that servicers themselves are victims of an overly complex system designed by Congress and the Education Department. Military borrowers face particular hurdles getting access from their servicers to special protections guaranteed to them under the law, according to the report. SLM -0.86 % , or Sallie Mae last year, has been under CFPB investigation since last year and is also being investigated by a number of state attorney generals, including Illinois and Washington, and in a probe by the New York Department of Financial Services. If we assume, as we must, that the principle of supply and demand will continue to hold true in the absence of payday loans, those same Americans will unquestionably be forced to turn to more costly and potentially unlicensed alternatives that are beyond the reach of regulators.

The company declined to comment, but in a recent regulatory filing said that it “continues to believe that its acts and practices relating to student loans are lawful and meet industry standards,” adding it “is committed to resolving any potential concerns.” Several recent studies, including one conducted by the Federal Reserve Bank of New York, confirms this notion, finding that in states where payday loans are prohibited households bounce more checks, complain more to the Federal Trade Commission about lenders and debt collectors, and have filed for Chapter 7 bankruptcy protection at a higher rate. These companies offer to help borrowers enroll in repayment programs for a fee, even though borrowers can actually enroll in these repayment programs through the government or their servicers for free.

These statistics demonstrate what many of us already believe to be true — that a reduced payday credit supply results in increased credit problems — the exact phenomenon the CFPB seeks to avoid with its proposed rule. But “existing evidence … suggests that current servicing practices may not meet the needs of borrowers or loan holders, including, in the case of federal loans held by the Department of Education, the needs of taxpayers,” the consumer bureau said. Payday loans have served as a valuable safety net to countless individuals, and eliminating them outright would fail to provide financial protection to those who need it most. • Alcee L. The CFPB didn’t identify Xerox in its report — sources did — and Dorie Nolt, an Education Department spokeswoman, didn’t respond to a request for comment. Servicers also don’t inform borrowers of their eligibility for generous plans that allow them to make payments based on their earnings, erroneously process their paperwork or needlessly delay reviewing them, and give borrowers billing statements with inaccurate information, the CFPB said.

The CFPB also said that many borrowers with severe disabilities weren’t told about their eligibility to have their federal debts forgiven under existing law, even after the borrowers told their servicers about their circumstances.

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