The Consumer Financial Protection Bureau has been more aggressive about student loans, and now they’re warning companies about unfair automatic defaults.
When a loan co-signer dies or declares bankruptcy, some private companies place the borrower into automatic default. The CFPB is warning that such action is illegal and the companies could face legal action, according to The Washington Post.
“CFPB student loan ombudsman Seth Frotman told [Consumer Bankers Association conference] attendees that examiners identified ambiguous clauses that failed to spell out the terms, which could be considered an unfair and deceptive practice in violation of the law. In some cases, he said, consumers only discovered the fate of their loans when loan servicers, the middlemen who collect and apply debt payments, refused to accept any money or they were contacted by a debt collector,” Danielle Douglas-Gabriel wrote.
The CFPB has targeted deceptive student loan practices, shady student financial service companies, and offers information about services and repayment options for loans. With student loan debt totaling $1.2 trillion, and as most loan defaults occur when borrowers hold low amounts of debt, the bureau seems to be moving more aggressively to prevent future problems from spiraling.
Given the federal takeover of student loans since 2010, private loans comprise about 13 percent of the total student loan market, about $150 billion. However, federal loans still can be serviced by private companies.
In a 2014 report, the bureau found that 90 percent of private loans had co-signers. To get better interest rates for borrowers, and assurance for the lender, co-signers have become instrumental. Complaints have focused on automatic defaults and the inability for co-signers to be released from the loan, even though provisions in the loan contract made such a release possible.
As those complaints have lingered and private loan companies haven’t made more efforts to address the problem, the CFPB has taken it upon themselves to force change.
