Alert October 29, 2013

CFPB Issues Report on Private Student Loan Payment Processing

The CFPB Student Loan Ombudsman issuedreport on more than 3,800 complaints that the CFPB received from private student loan borrowers between October 1, 2012 and September 30, 2013. The most common type of complaint related to obstacles faced by borrowers attempting to adjust the repayment terms of their loans in times of financial hardship. The report noted a significant number of complaints regarding payment processing, including but not limited to the application of payments in excess of the minimum amount due in a confusing manner or in a manner that does not maximize benefit to the borrower, the application of underpayments so as to maximize fees charged to borrowers and delays in processing that result in late charges to the borrower. The report also noted confusion when loan servicing is transferred to another servicer.  In its discussion of the complaints, the Ombudsman called attention to a joint statement by several federal banking agencies encouraging financial institutions to work with private student loan borrowers facing financial hardship, and stated that it expected lenders and servicers to deploy a number of new modified repayment programs to do so (see August 6, 2013 Alert).

Borrowing from recent changes to mortgage servicing and credit card servicing practices, the Ombudsman also suggested several steps to address issues surrounding payment processing and confusion upon a change in servicer. For example, the Ombudsman suggested providing notices prior to and following a change in servicer, ensuring the timely transfer of documents and information to new servicers, providing borrowers with timely written payoff statements, establishing more robust error-resolution procedures, and contacting a borrower after a missed payment in order to prevent default, among other suggestions. Finally, the report noted that the Ombudsman is considering whether it should recommend to the Congress, CFPB Director Richard Cordray and the Secretary of the Department of Education, among others, that certain recent reforms to the servicing of credit cards and mortgages be made officially applicable to the student loan market.