Having created numerous requirements for mortgage servicers in recent years (including the new requirements discussed below), the CFPB is now also focusing heavily on servicing practices in the second largest class of U.S. consumer debt – student loans. In 2015, together with the Department of Education and the Department of the Treasury, the CFPB launched a public inquiry into student loan servicing practices, resulting in a lengthy September 2015 report detailing widespread servicing failures and recommendations for reform. In February this year, Director Richard Cordray stated that student loan servicing is one of the key areas where the where the CFPB intends to make substantial progress in the next two years. And in July 2016, the Department of Education, in consultation with the CFPB, announced a policy direction describing its expectations for federal student loan servicers (DOE Guidance).
Following quickly on these activities, the CFPB announced two significant actions in August: (1) the August 18, 2016 release of the CFPB's midyear report on student loan complaints, which highlighted borrower difficulties in applying for income-based repayment, and (2) the August 22, 2016 announcement of an enforcement action against Wells Fargo in connection with student loan servicing practices.
1. CFPB Releases Midyear Report on Student Loan Servicing Issues
On August 18, 2016, the CFPB's Student Loan Ombudsman released its midyear report (the "Report") on student loan complaints. Since 2012, the CFPB has accepted complaints from borrowers experiencing difficulty in connection with private student loans, and in February 2016 quietly began accepting complaints from borrowers with federal student loans,1 which had previously been collected only by the Department of Education. As the overwhelming majority of student loan debt is federal, the CFPB will likely be receiving a vast amount of new data to use in its guidance and enforcement efforts. The Report covers the period between October 1, 2015 and May 31, 2016, and analyzes 3,500 private student loan complaints, 2,400 federal student loan servicing complaints, and approximately 1,500 debt collection complaints related to private and federal student loan debts.
Reflecting the new data on federal student loan servicing, the Report focuses on servicing problems that complicate consumers' ability to take advantage of income-based repayment plans for federal student loans. Beginning in 2009, federal law provides many federal student loan borrowers the right to apply for set monthly loan payments based on their income. Given the staggering average student debt and the prevalence of lower wages, loan payments based on a borrower's income can make payments more manageable and avoid forbearance and default. Income-based repayment plans could even set monthly payment amounts as low as $0 per month for borrowers who are unemployed or earn low wages. According to the CFPB's findings, however, a significant number of borrowers complained about drawn-out processing and wrongful rejection by loan servicers when applying for income-based repayment.
The CFPB's Report highlights a number of hurdles borrowers face when applying for income-based repayment. The CFPB found that borrowers are losing out on lower monthly payments or starting the clock late toward loan forgiveness because their income-based repayment applications sit for weeks or months when the overall process should take about two weeks. Borrowers also face wrongful repayment rejection, where the servicer rejects the application for income-based repayment because of missing information or lost paperwork without notifying the borrower or providing a chance to rectify the problem. Borrowers must also re-certify their income and family size annually to keep their income-based repayment, forcing borrowers to face the same obstacles each year. The CFPB also found that the processing delays could cost those less financially stable over $2 per day that their application is delayed.
The Report also includes a sample "Fix It Form" that the CFPB recommends servicers use to facilitate communication with borrowers who have already submitted income-based repayment applications. In particular, the CFPB suggests servicers use the form for borrowers who are required to provide alternative documentation of income or who provide a written attestation stating they have no income.
Throughout the Report, the CFPB references the DOE Guidance as a roadmap and explicitly suggests that servicers look to the DOE Guidance when considering process improvements. While the DOE Guidance applies specifically to federal student loan servicing, both federal and private student loan servicers are encouraged to review the document. As explained below, the CFPB has already referenced the DOE Guidance standards in connection with its most recent private student loan servicing enforcement action.
2. CFPB Student Loan Servicing Enforcement Action Against Wells Fargo
On August 22, 2016 the CFPB announced an enforcement action against Wells Fargo in connection with its private student loan servicing practices. The consent order requires Wells Fargo to pay a $3.6 million civil penalty, provide $410,000 in relief to affected borrowers, and take steps to improve its billing and payment processing practices.
In the consent order, the CFPB alleged that Wells Fargo charged illegal late fees to certain borrowers who made payments on the last day of their grace period or made multiple partial payments instead of a single monthly payment. The CFPB also stated that Wells Fargo failed to update and correct inaccurate, negative information that it reported to the credit bureaus about borrowers who made partial payments or overpayments.
In addition to these more straightforward issues, the CFPB focused heavily on Wells Fargo's practices in connection with processing partial payments. The CFPB alleged that if a borrower with multiple loans made a partial payment without specifying how it should be allocated, Wells Fargo would spread the payment over all of the borrower's loans, with the effect of minimizing the number of loans kept current and maximizing late fees. The CFPB alleged that the bank engaged in unfair and deceptive practices by (1) failing to disclose its partial payment allocation methodology and the fact that borrowers had the right to allocate payments; (2) allocating partial payments in a manner that maximized late fees; and (3) representing that none of a borrower's loans would be advanced if they made a partial payment, despite the fact that borrowers could have allocated payments to fully cover one or more loans.
As part of the consent order, the CFPB required Wells Fargo to allocate partial payments so as to make full payment on the maximum number of a borrower's loans, unless instructed otherwise by the borrower. This requirement is consistent with the DOE Guidance, which the CFPB explicitly referenced in the press release announcing the enforcement action. As mentioned above, the DOE Guidance applies only to federal student loan servicing, but private student loan servicers should carefully study its requirements, given that the CFPB may expect private student loan servicers to adopt similar standards.
Earlier this year, several major private student loan servicers publicly disclosed that they had been notified they were under investigation by the CFPB. Although not all investigations result in an enforcement action, the CFPB's recognition of student loan servicing as a priority, its widespread investigations into several major student loan servicers, and its work with the DOE on new servicing standards, means that the enforcement action against Wells Fargo is likely only the first in a series of upcoming actions. Student loan servicers with questions about the DOE Guidance and/or CFPB investigations and enforcement are encouraged to reach out to Venable's CFPB Task Force.
Margaret Kelly is a law clerk and is not yet admitted to practice law.
[1] The CFPB accepts complaints only about servicing issues for federal student loans. Complaints related to other issues continue to be received by the Department of Education.