Examiners Uncover Illegal Practices in Student Loan Servicing, Mortgage Origination and Servicing, Consumer Reporting, and Debt Collection Markets
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) released its latest supervision report outlining the illegal practices uncovered by the Bureau’s examiners from May 2015 to August 2015. The Bureau found violations in the student loan servicing, mortgage origination and servicing, consumer reporting, and debt collection markets. The report shows that CFPB supervisory actions resulted in $107 million in relief to more than 238,000 consumers.
“Our supervisory activities in the past few months have returned $107 million to hundreds of thousands of harmed consumers,” said CFPB Director Richard Cordray. “Borrowers should not be mistreated when trying to repay their loans. We will continue to shine light on the problems we observe in areas such as servicing, consumer reporting, and debt collection, and hold companies accountable when they do not treat borrowers fairly.”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has authority to supervise banks and credit unions with more than $10 billion in assets and certain nonbanks. Those nonbanks include mortgage companies, private student lenders, payday lenders, as well as nonbanks the Bureau defines through rulemaking as “larger participants.” To date, the Bureau has issued rules to supervise the larger participants in the markets of consumer reporting, debt collection, student loan servicing, international money transfers, and auto finance.
Today’s report, which is the ninth edition of Supervisory Highlights, generally covers supervisory activities completed between May 2015 and August 2015. The CFPB often finds problems during supervisory examinations that are resolved without an enforcement action. Recent non-public supervisory actions in areas such as mortgage servicing, mortgage origination, deposits, and credit cards have resulted in $107 million in restitution to more than 238,000 consumers. Among the findings in this supervision report:
Student loan servicers allocated payments to maximize fees and failed to give consumers choices about how to apply payments: Typically, servicers handle multiple student loans for each borrower in one combined account. Servicers allow borrowers to make a single payment for all of the loans, and then the servicer allocates the payment among the borrower’s loans to satisfy the monthly payment for each loan. Where the borrower made a payment that was less than the total amount due, CFPB examiners found that one or more servicers allocated the amount proportionally to each loan and all of the borrower’s loans may have been charged late fees and become delinquent. Bureau examiners found that student loan servicers were not telling consumers that they have a choice about how to apply partial payments and did not explain the possible ramifications of the servicer’s allocation methodology. Bureau examiners found this fee-maximizing practice unfairly resulted in higher late fees and harm to borrowers.
Student loan servicers’ unfair practices increased fees and interest for borrowers: In cases where borrowers make automatic loan payments on a recurring basis every month, CFPB examiners found on one or more occasions that malfunctions in servicers’ systems caused payments to be triggered earlier than the scheduled date. This can cause unexpected debits and overdraft fees for consumers. Bureau examiners also observed other cases where pre-authorized auto-debit payments fell on dates when banks were closed and the payments were processed on the next business day, but servicers did not reverse any interest accrued due to the closures.
Student loan servicers deceive borrowers about student loan late fees: For certain federal student loans, Bureau examiners found that student loan servicers were deceiving consumers about late fees, stating that fees might be charged for federal student loans owned by the Department of Education. The Department of Education does not charge late fees on its loans and it tells servicers not to do so.
Mortgage servicers failed to automatically terminate mortgage insurance and reimburse consumers: Examiners found one or more mortgage servicers violated the Homeowners Protection Act by failing to automatically terminate private mortgage insurance for borrowers eligible for automatic termination. For borrowers who are current on their payments, the Act requires servicers to automatically terminate private mortgage insurance when the loan’s principal balance is first scheduled to reach 78 percent of the property’s original value.
Furnishers lacked adequate policies for accurately reporting information to consumer reporting agencies and failed to respond to disputes: Examiners continue to find a lack of reasonable written policies and procedures for accurately reporting deposit account, debt collection, and student lending information to the consumer reporting agencies. The CFPB found that many furnishers did not have systems in place to properly receive, evaluate, and respond to consumer disputes regarding the information provided to consumer reporting agencies. In particular, examiners found that certain furnishers did not notify consumers about the outcome of investigations about disputes over consumer reporting information. In other instances, some furnishers did not notify consumers when they took adverse action against them based on information in their reports.
Debt collectors used illegal tactics to contact consumers: Bureau examiners found at least one debt collector’s employees violated federal law by failing to identify that they were debt collectors during phone calls with consumers. Examiners also found instances where one or more debt collectors illegally continued to contact consumers on the phone at work after consumers verbally told them to stop.
Bureau examiners did observe some positive steps taken by various institutions to improve compliance. For example, certain mortgage servicers have made significant improvements to their compliance audits, which led to prompt correction of problems in many instances. Other mortgage servicers conducted information technology reviews and identified inadequacies, leading them to replace outdated systems. Additionally, certain student loan servicers took positive steps in cases where borrowers try to pay off their entire loan or account with a large lump sum but fall short of the total amount. In these instances, examiners observed that some servicers alert borrowers about unpaid balances, which can prevent them from accruing interest, having problems with their credit reports, or facing potential delinquency or default.
In this edition of Supervisory Highlights, the CFPB also announced that it has revised its exam appeals process. The revisions reflect experience gained in the appeals process so far, and are aimed at improving efficiency, consistency, transparency, and fairness to supervised institutions.
Where CFPB examiners find violations of law or other significant problems or weaknesses, they alert the institutions to their concerns and outline necessary remedial measures. When appropriate, the CFPB opens investigations for potential enforcement actions. The CFPB expects all entities under its supervision to respond to customer complaints and identify major issues and trends that may pose broader risks to their customers.