CFPB Report Highlights Issues with Military Loan Servicing

By Allie Arcese, Sr. Director of Strategic Communications & Engagement

Quick Takeaways:

  • Problems with student loan servicing and difficulties obtaining interest rate reductions (rates capped at 6 percent) under the Servicemembers Civil Relief Act (SCRA) have been issues since 2012, when the bureau published a report documenting complaints from military borrowers.
  • After learning of the complaints, the U.S. Department of Justice and the Federal Deposit Insurance Corporation in May 2014 ordered student loan servicers Sallie Mae and Navient to provide $60 million in compensation to more than 77,000 servicemembers who had been denied their benefits under SCRA.
  • Still, the bureau has received complaints from more than 1,300 servicemembers since October 2012 about difficulties with loan servicers, including denied deferments, a lack of understanding around the elements of SCRA and struggles with disability discharge.

By Allie Bidwell, Communications Staff

Military student loan borrowers are still struggling to obtain federal benefits, despite increased attention to the issue by lawmakers and federal agencies.

The report – written by Hollister Petraeus, assistant director of the bureau’s office of servicemember affairs, and Seth Frotman, acting student loan ombudsman – draws on the more than 1,300 complaints the bureau has received since it last reported on the issue in October 2012. Servicemembers said that they still have problems securing interest rate reductions, which are guaranteed under the Servicemembers Civil Relief Act, from their loan servicers. The borrowers also reported problems with receiving military deferment – an option for active-duty members who get deployed – and with obtaining loan discharges for severely disabled or deceased borrowers.

“We continue to receive complaints from military student loan borrowers detailing a range of breakdowns and roadblocks,” said Consumer Financial Protection Bureau (CFPB) Director Richard Cordray, in a statement. “Our deployed servicemembers should be able to focus on their military mission and spend precious free time talking with loved ones, not wrangling over problems with student loan servicers.”

Under the Servicemembers Civil Relief Act, military borrowers are entitled to have their student loan interest rates capped at 6 percent. But for years, some loan servicers have either denied military borrowers their rights, or failed to properly implement the interest rate cap. In May 2014, the Justice Department and the Federal Deposit Insurance Corporation came to a settlement with Sallie Mae and Navient requiring the two groups to pay servicemembers millions of dollars in compensation and restitution for failing to apply their interest rate reductions and improperly applying late fees. According to the settlement, some servicers incorrectly told military borrowers that they had to be deployed in order to receive the interest rate reduction.

Some of the same problems have persisted, the CFPB report found. Servicemembers told the bureau, for example, that their loan servicers did not explain the required qualifications to defer their loans and did not give a reason why requests for deferment were denied.

Federal law also allows military borrowers with service-connected disabilities to apply to have their loans discharged under certain conditions, and allows for federal loans to be forgiven upon the death of a borrower. Private lenders are not required to offer either option, however. But many borrowers submitted complaints to the bureau that detail problems with obtaining those benefits. Parents who co-signed loans made to military borrowers have in some cases been left responsible for repaying the loans even if the borrower was killed in action, the report said.

“Borrowers noted that the process of requesting loan forgiveness was not transparent, varied depending on the servicer or the owner of their loan and, when loan forgiveness was denied, that the criteria used for this decision was never disclosed,” the report said. “For families mourning the loss of a child killed in combat, these detours and dead-ends can prolong an already painful process.”

In other cases, even when the discharge was awarded, some servicers applied it in a way that did not correctly reflect the discharge, resulting in damage to the borrowers’ credit scores. In one case the bureau examined, a borrower said his servicer reported to the credit bureaus that his loan had been “assigned to government,” or defaulted, rather than discharged.

“Left uncorrected, such errors can potentially set service-disabled veterans up for financial ruin,” the report said.

Servicemembers have also submitted complaints to the bureau that their servicers make it difficult to make payments on their loans while they’re away from home and require several phone calls, paperwork and other instructions. They said in the report the loan servicers who answered customer service lines were unprofessional and provided conflicting information about payment processing and how to get out of default.

Breakdowns in communication between servicers and borrowers can result in failure to make on-time payments, the report said. Many of the issues servicemembers reported to the bureau also resulted in negative credit reporting, which can affect servicemembers’ ability to maintain certain security clearances, the report said.

“Servicemembers should not have to find themselves distracted from their military assignments by a mishandled payment, an unanswered deferment request, or a botched transfer,” the report said. “Their time should be spent focusing on their mission, with their limited precious free time spent communicating with their families and loved ones, not fixing servicer errors or worrying about the additional repercussions of potential negative credit reporting.”



Publication Date: 7/9/2015

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