The federal Consumer Financial Protection Bureau said Tuesday it is weighing new rules governing the $1.3 trillion student loan market after releasing a stinging report documenting "widespread failures" in an industry largely overseen by the Obama administration.
The consumer bureau's report describes student loan servicing, or the business of collecting borrowers' monthly payments and counseling them on their repayment options, as riddled with unfair and Kafkaesque practices. Many borrowers are trapped at companies that don't give them basic information, often mislead them, assess unexpected fees, make it hard for them to correct errors and frequently push them into default, the report says.
The CFPB's report is particularly harsh in its examination of federal student loans, where many of the most egregious practices occur and are regulated and supervised by the U.S. Education and Treasury departments, and signal that the bureau will take a more aggressive stance in rooting out wrongdoing in the federally backed market that President Barack Obama himself has promised to fix.
Analysts said the CFPB's report may portend government lawsuits and penalties, and higher costs for publicly traded companies such as Navient Corp. The Education and Treasury departments said in a joint statement with the CFPB that all three were committed to fixing the errors that plague student loan servicing. Navient shares fell more than 4 percent Tuesday in otherwise flat markets. Patricia Christel, a company spokeswoman, didn't respond to a request for comment.
With delinquencies and defaults on the rise, the consumer bureau has said increasing levels of distress may hurt economic growth if households are forced to pare back spending and other borrowing, such as for home mortgages or new small businesses.
"When student loan servicers slip up and cut corners to protect their profits, this isn’t just bad for borrowers, it’s bad for all of us," said Rohit Chopra, formerly the consumer bureau's top student loan official.
Nearly one in five of the roughly 41 million Americans with student loans are in default, according to the CFPB. Several million more are delinquent. Beyond those numbers are millions who watch their balances grow as they delay payments under approved plans.
The White House has said it wants to help borrowers better manage their obligations, but has left the task largely to the oft-criticized Education and Treasury departments.
The consumer bureau said the Education Department's loan contractors may be at least partly responsible for millions of student loan defaults, reflecting years of underinvestment by the student loan industry and neglect by the federal government, most prominently the Education and Treasury departments, in properly policing what has become an industry rife with conflicts of interest and sloppy practices.
Borrowers generally can't choose which company services their loans, leaving most to contend with companies that often mistreat them.
Maura Dundon, senior policy counsel at the Center for Responsible Lending and an expert on student loans, said the numerous failings identified by the CFPB surprised even her. "It’s really worse than I thought," Dundon said.
The report "underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers," said Richard Cordray, CFPB director.
But the consumer bureau's rules, if developed, would take at least 18 months before they're finalized and several months beyond that before they're in force. The CFPB first highlighted problematic practices in student loan servicing in a 2012 report to Congress, meaning some five years will have passed from the time the bureau first identified mass mistreatment of borrowers until companies are held accountable for violations under new rules.
"By the time we get to that point, it'll be too late," said Chris Hicks, who leads the Debt-Free Future campaign at the advocacy group Jobs With Justice.
So many borrowers don't know that they could reduce their payments under existing federal plans or get their debts discharged that Hicks has held seminars in more than a dozen cities to inform borrowers about their options. Sometimes hundreds of people attend, Hicks said. Many found out they could've been saving hundreds of dollars a month for the past few years.
New rules governing the $1.3 trillion market "would be the gold standard," Dundon said, but it's crucial that the bureau exercise its existing authority to levy penalties or sue companies that are mistreating borrowers. Dundon added that the Education and Treasury departments should also take lessons from the bureau's report to fix the government's contracts with loan specialists and ensure they're being complied with.
"We can't wait," Dundon said.
For their part, servicers largely told the CFPB that borrowers need to be better informed about their finances and that servicers themselves are victims of an overly complex system designed by Congress and the Education Department. Two of them, Navient and the Pennsylvania Higher Education Assistance Agency, told the CFPB they supported uniform rules governing all student loans.
The CFPB's portrait of an industry that's largely hurting borrowers and taxpayers may be overstated. For example, the consumer bureau said the Education and Treasury departments' failure to produce data on student loans they guarantee or own has impeded the government's ability to supervise the market.
But "existing evidence ... suggests that current servicing practices may not meet the needs of borrowers or loan holders, including, in the case of federal loans held by the Department of Education, the needs of taxpayers," the consumer bureau said.
Or many of the problems may be the result of errors by just a few companies. In one case the consumer bureau highlighted, an unidentified student loan servicer told the bureau that more than 20 percent of the roughly 2.5 million borrower accounts it received from Xerox, which once serviced loans for the Education Department under the ACS brand name, contained myriad problems such as incorrect loan balances, misapplied payments and improper servicing.
The CFPB didn't identify Xerox in its report -- sources did -- and Dorie Nolt, an Education Department spokeswoman, didn't respond to a request for comment. Kevin Lightfoot, a Xerox spokesman, said the company wouldn't address "unspecified assertions from anonymous sources that we feel are not indicative of the services we provided student loan borrowers."
The CFPB's report lays bare several ways in which student loan servicers are failing borrowers and lenders -- and taxpayers when it comes to federal loans -- and unnecessarily putting distressed borrowers at greater risk of default.
For example, servicers often leave some borrowers worse off by not telling them that interest will accrue when they delay payments. Servicers also don't inform borrowers of their eligibility for generous plans that allow them to make payments based on their earnings, erroneously process their paperwork or needlessly delay reviewing them, and give borrowers billing statements with inaccurate information, the CFPB said.
Borrowers and their advocates said they have encountered difficulties trying to enroll in federal income-based repayment plans, which the Obama administration has championed as a way to arrest the rise in student loan distress.
The CFPB also said that many borrowers with severe disabilities weren't told about their eligibility to have their federal debts forgiven under existing law, even after the borrowers told their servicers about their circumstances. Borrowers who work in public service, who are eligible to have their federal debts forgiven after 10 years of payments, told the consumer bureau that they were subject to breakdowns that will limit debt forgiveness and ultimately forces them to make unnecessary payments.
Americans with student loans sometimes can't access something as basic as a history of their payments, or see how their monthly payments were applied to principal and interest, the CFPB said. Servicers' employees often provide inaccurate or conflicting information.
In fact, it has become so hard for borrowers to find out how much they'd have to pay if they wanted to pay off their loans by a certain date that Social Finance Inc., the marketplace lender known as SoFi that refinances student loans, has spent money developing a program to help their customer service agents walk borrowers through the steps of getting this information from other loan servicers, SoFi chief executive Mike Cagney told the consumer bureau.
"This should be table stakes, yet it’s not today," Cagney said.
Borrowers also told the consumer bureau that loan servicers ignored their requests, the CFPB said, and they often encountered runarounds when trying to fix errors in their loans or appeal a servicer's decision. The problem also occurs in federal loans, where the Education Department makes it a point to not term pleas for help from borrowers as "complaints," according to a November department report.
The consumer bureau said the complaints it has received raise concerns that loan servicers are focused on "minimizing the length of customer contacts with little regard for resolving borrowers’ issues."
Loan servicing failures, in turn, have led to the growth of student debt-relief scams that charge borrowers hundreds of dollars for help in enrolling in plans that the Education Department pays its loan servicers to provide for free.
Distressed borrowers are "particularly susceptible" to scams, the CFPB said, echoing a Monday speech by Deputy Treasury Secretary Sarah Bloom Raskin that criticized student loan servicers for their shoddy practices.
New rules under consideration at the consumer bureau include more aggressive outreach by student loan servicers when borrowers first start to miss payments and a requirement that they consider borrowers for certain payment plans before placing their accounts in default. The consumer bureau also is weighing giving borrowers more rights when they dispute decisions on their loans or attempt to fix errors.
In the meantime, borrower advocates such as Hicks said they hope the consumer bureau and other federal agencies will use their existing authorities to clean up a market they say has been neglected for far too long and caused too many preventable defaults.
"It's 2015 and it's absurd we have to tell student loan servicers they need to give correct information to people," Hicks said.