CFPB Student Loan Report Focuses on Co-Signer Issues

CFPB Student Lending

On April 22, the CFPB released its mid-year report on student loan complaints, which summarizes approximately 2,300 private student loan complaints and 1,300 debt collection complaints related to student loans submitted to the Bureau between October 1, 2013 and March 31, 2014. The report focuses on complaints from private student loan borrowers with co-signers. The CFPB reports that 90% of the student loans extended in 2011 were co-signed. The report references complaints from borrowers who have faced “obstacles” when seeking to obtain a release for a co-signer, including those who have been denied co-signer releases for unknown reasons or for technical reasons, which the CFPB believes eventually can lead to unexpected defaults. Based on an unidentified number of consumer complaints, the CFPB’s Student Loan Ombudsman Rohit Chopra believes “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledges that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. However, he cautions that these acceleration clauses present risks for financial institutions where borrowers have been making timely payments, including with regard to (i) reduction of interest income, (ii) reduced recovery of principal, (iii) poor customer experience, and (iv) reputation risks from utilizing debt collection protocols in the face of a family tragedy. The report offers potential alternatives to “auto-defaults” upon co-signer death and bankruptcy, including assessing the borrower for co-signer release and maintaining the existing payment schedule, providing the opportunity to identify a new co-signer, or providing the borrower time to refinance the loan.