Federal Student Loan Servicers Violated Federal Consumer Law, CFPB Report Finds
By Maria Carrasco, NASFAA Staff Reporter
The Consumer Financial Protection Bureau (CFPB) on Thursday released a report that found federal student loan servicers illegally hampered borrowers’ access to federal student loan payment relief and cancellation programs.
The report outlines risks borrowers could have related to major federal loan transfers, since certain federal contractors left the market and 9 million federal student loan accounts transferred from one servicer to another. Additionally, there were a “considerable number of violations'' of federal consumer financial law by student loan servicers in administering the Public Service Loan Forgiveness (PSLF) program, income-driven repayment (IDR) plans, and Teacher Loan Forgiveness (TLF).
CFPB states that servicers regularly provided “inaccurate information and [denied] payment relief to which borrowers are entitled.” The agency also outlines in the report that institutions had improper blanket policies of withholding transcripts to force students to make payments on institutional loans.
“ED is addressing some of these risks through program changes like the PSLF and IDR program waivers, as well as improved vendor oversight,” the CFPB report states. “The extensions to the COVID-19 payment pause for federally owned loans also has given ED somebreathing room to implement these changes. However, the findings documented in this report impact servicers’ entire portfolios, including commercially-owned Federal Family Education Loan Program (FFELP) loans, and CFPB encourages servicers to address the issues across their portfolios.”
In July 2021, the Pennsylvania Higher Education Assistance Agency (PHEAA) and Granite State announced they were ending their contracts with Federal Student Aid (FSA) for student loan servicing, which meant over 9 million accounts would be transferred. CFPB reviewed the transfers of these servicers — naming them transferor servicers and transferee servicers — and tracked pre-transfer monitoring and engagement, real-time transaction testing during the transfers, and reviewed and analyzed after the transfer occurred.
One finding was that many servicers reported that the initial set of information they received during the transfer was insufficient to accurately service loans. Some servicers reported important account information was missing or provided in an unusable format. For example, CFPB identified inaccurate information about certain borrowers’ monthly payment amounts, due dates, and payment plans. CFPB states the root cause was one servicer’s failure to include current repayment schedules for hundreds of thousands of borrowers’ accounts.
A servicer also sent statements to over 500,000 borrowers with inaccurate information about the borrower’s next due date and, separately, the date federal student loans were set to return to repayment. Additionally, servicers reported different numbers of total payments that count toward IDR forgiveness for some borrowers during the transfer process.
Multiple servicers also had operational challenges in managing the number of transfers as they were implementing major program changes — such as the student loan repayment pause and the PSLF temporary waivers. As a result, some servicers were “inadequately staffed,” with call wait times and average processing time for payment relief increasing up to 35 minutes in December 2021.
CFPB recommend servicers update their systems with accurate repayment schedules and other missing information, correct misrepresentations on their websites and provide disclaimers where they did not have complete and accurate account details, and correct the type of forbearance applied to transferred accounts, ensuring that transferred loans are placed into the loan payment pause authorized in the CARES Act, which also provides for no interest accrual.
CFPB also found student loan servicers illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief under PSLF and TLF. Servicers wrongfully denied TLF applications where borrowers had already fulfilled their five years of service, including in instances where borrowers made simple paperwork errors like incorrect date formatting on applications.
“These wrongful denials resulted in substantial injury to consumers because they either lost their loan forgiveness or had their loan forgiveness delayed,” CFPB states. “Consumers who are wrongfully denied may understand that they are not eligible for TLF and refrain from resubmitting their TLF applications. Consumers could not reasonably avoid the injury because the servicer controlled the application process.”
CFPB also found unfair practices among the administration of IDR plans to borrowers, such as servicers improperly processing borrowers’ IDR requests, resulting in erroneous denials or inflated IDR payment amounts. Servicers also provided inaccurate information about recertifying eligibility for IDR plans.
Another unfair practice was that servicers told Parent PLUS borrowers that they were not eligible for an IDR plan or PSLF, when in fact Parent PLUS loans may be eligible for Income-Contingent Repayment and PSLF if the borrower consolidates their loans into a Direct Consolidation Loan.
When it comes to PSLF, CFPB states servicers misled borrowers about the student loan COVID-19 payment suspension and TEPSLF, among other things. For example, one servicer told borrowers they must make payments during the COVID-19 payment suspension for those months to be eligible for PSLF. Other examples of abusive practices include a servicer miscalculating borrowers’ total qualifying payments and estimated eligibility dates and then communicating that wrong information to borrowers pursuing PSLF, and another servicer delaying processing PSLF forms up to a year.
“Broadly, the PSLF violations identified relate to erroneous ECF and PSLF application determinations or servicers deceiving borrowers by providing incomplete or inaccurate information to consumers about the program terms,” CFPB states. “At present, the PSLF waiver can address many of the most significant consumer injuries by crediting certain past periods that were previously ineligible, assuming that consumers receive the benefits of the waiver as designed.”
Publication Date: 10/3/2022
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