CFPB’s student loan ombudsman issues his annual report

The Consumer Financial Protection Bureau's student loan ombudsman, Rohit Chopra, issued his annual report today. Here is the executive summary:

* In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress established an ombudsman for student loans within the Consumer Financial Protection Bureau. The CFPB began accepting student loan complaints in March 2012.

* This report analyzes and discusses complaints submitted by consumers from October 1, 2012, through September 30, 2013. During this period the Bureau received approximately 3,800 private student loan complaints. Eighty-seven percent of all complaints were directed at eight companies. This is not surprising, given that the private student lending and servicing markets are highly concentrated.

* Opaque or inaccurate payment processing emerged as a significant trend in complaints received during the reporting period. It is unlawful for any private student lender to impose a penalty on a borrower making an early payment or making a payment in excess of the minimum amount due. However, borrowers remitting extra payments in order to pay off their loans more quickly find that payments are not always properly allocated.

* Just under half of all private student loan complaints received were related to consumers seeking a loan modification or other option to reduce their monthly payment in a time of distress.

* In last year’s report, we noted a range of inappropriate – and potentially unlawful – practices directed at military families seeking to repay private student loans. This year’s complaints suggest that some lenders and servicers have attempted to correct their deficiencies concerning the Servicemembers Civil Relief Act (SCRA); however, problems persist for many men and women in uniform repaying student debt.

* Many of the private student loan complaints mirror the problems heard from consumers in the mortgage market following the wake of the financial crisis. Recent changes to mortgage servicing and credit card servicing practices may shed some insight on possible approaches to remedy student loan servicing concerns.

The agency's press release provides more information about the report's findings:

report analyzes more than 3,800 private student loan complaints,
comments, and other input from borrowers between October 1, 2012 and
September 30, 2013. The
most common complaints submitted to the CFPB were about payment
processing pitfalls when consumers try to take control of their loans,
including when borrowers attempt to pay off their loans early or pay
them off in a certain sequence. The report highlights:

 Prepayment Stumbling Blocks: Since
options to refinance high-rate private student loans are limited, many
consumers attempt to pay off their loans in order to reduce the amount
of interest owed over the life of the loan. But many consumers express
confusion about how to pay off their loans early. For example,
borrowers complained that payments in excess of the amount due are
applied across all their loans, not the highest-interest rate loan that
they would prefer to pay off first.

 Partial Payment Snags: When
borrowers have multiple loans with one servicer and are unable to pay
their bill in full, many servicers instruct borrowers to make whatever
payment they can afford. Many complaints described how servicers often
divide up the partial payment and apply it evenly across all of the
loans in their account. This maximizes the late fees charged to the
consumer and it can exacerbate the negative credit impact of a single
late payment.

 Servicing Transfer Surprises: When
borrowers’ loans are transferred between servicers, borrowers say they
experience lost paperwork, processing errors that result in late fees,
and interruptions of routine communication, such as billing statements.
Consumers complained that payment-processing policies can vary depending
on the servicer. And, consumers said when they make decisions on the
previous servicer’s practices, they can get penalized.

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