Earlier this month, the Consumer Financial Protection Bureau announced a consent order with student loan servicer Conduet Education Services. CES agreed to pay a fine of $3.9 million for irregularities in its business operations as well as adjust the principal balances of the affected loans and make restitution to borrowers who paid off loans with an incorrect balance.
The CFPB found that CES violated the Consumer Financial Protection Act by engaging in “unfair, deceptive and abusive acts or practices” with regard to the student loans they serviced. As borrowers completed applications for forbearance, deferment and income-based repayment programs, CES had to adjust the monthly invoices and in some cases adjust the principal owed on the loan. Though most loans were automatically adjusted, a significant number of loans had to be adjusted manually.
According to the bureau, CES began in 2005 to fall behind on the processing of manual adjustments to principal amounts due to the fact that it did not have enough properly trained loan processors. Loans awaiting manual processing were placed in a queue to await attention. Over time, tens of thousands of loans sat in the queue with incorrect principal balances.
Internal memos from CES as early as 2009 revealed that the company knew of the backlog but failed to take steps to alleviate the issue. In addition, they failed to notify borrowers that their balances had yet to be adjusted. Some borrowers paid off loans with incorrect balances. Some loans with incorrect balances were transferred to other servicers. Some borrowers had difficulty obtaining consolidation loans because those applications required accurate payoff amounts that CES could not supply in a timely fashion.
CES eventually disclosed the issue to the bureau and embarked upon a remediation plan to adjust loans still in the queue and to make restitution where borrowers had repaid too much. After 3 years, loans for over 200,000 borrowers were adjusted, but more irregularities were found.
“CES did not make required adjustments to account for circumstances such as deferment, forbearance or the borrowers’ entrance into an Income-Based Repayment program,” the bureau stated. “Loans that required adjustments were placed into queues, and such adjustments were not made, in some cases, for years. As a result, some borrowers paid off loans with inaccurate balances, and some borrowers were unable to consolidate their loans while they waited, sometimes for months, for CES to adjust their principal balances.”