RSSThe Consumer Financial Protection Bureau is clamping down on student loan lenders and servicers that automatically default on loans when a co-signer declares bankruptcy or dies.
The agency said in its latest supervision report that such defaults are an unfair practice. The majority of private student lenders have contracts which include so-called auto-default clauses, whereby a lender or servicer accelerates a default if a co-signer declares bankruptcy or dies, even if the primary borrower continues to make on-time payments. The agency said it has ordered at least one unnamed servicer to cease the practice. Others have voluntarily done so since the CFPB first highlighted such default clauses as a problem in early 2014.
“It is deeply concerning that our examiners found private student loan borrowers being hit with automatic defaults when their co-borrower goes bankrupt,” CFPB Director Richard Cordray said in a press release. “The problems plaguing the student loan market can have a domino effect on borrowers’ financial futures. The CFPB has made it a priority to police this market so that borrowers are not treated unfairly or illegally.”
The CFPB has broad authority under the Dodd-Frank Act to regulate “unfair, deceptive and abusive practices,” commonly known as UDAAP. The CFPB said auto-defaults were unfair because “a reasonable consumer” would be unlikely to interpret that such a clause in their student loan contract would put them in automatic default if a co-borrower declared bankruptcy. Perhaps worse, one or more servicers failed to notify the student that their loan was in default, the bureau said.
Because private student loans are often sold and securitized, some companies’ promises to eliminate auto defaults are not being upheld. During the past 18 months, the CFPB has continued to hear from borrowers with loans that have been sold or securitized and the borrowers ended up in default. Also, CFPB examiners found that student loan debt collectors have used false, deceptive or misleading representations when collecting on defaulted federal student loans. Though federal student loans are now held with the Education Department, the CFPB has oversight of the private servicers that still service those loans as well as the lenders that originated them.
The CFPB’s report to Congress found that more than 5 million, or 30 percent, of borrowers with older loans are behind on payments or in default. Those loans still make up a third of all the student loan borrowers to date, totaling more than $370 billion in debt outstanding, the agency said. More than 43 million Americans owe roughly $1.3 trillion in student loan debt, the second-largest class of consumer debt behind mortgages.
