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CFPB: Private student loans share problems plaguing mortgage service industry

Eileen Ambrose

7:00 AM EDT, October 16, 2012

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Thousands of consumers have complained to the Consumer Financial Protection Bureau about loan servicing and loan modification problems. Gripes include mistakes by servicers in applying payments, trouble fixing errors, an overabundance of paper work and the inability to find anyone at the servicer to help.

Another mortgage mess story?

No, this is about private student loans — although the regulator notes that both industries share similar problems.

The Consumer Financial Protection Bureau released its annual report on private loans. Student loans overall exceed $1 trillion, and private loans make up more than $150 billion of that.  And $8 billion in private loans — representing more than 850,000 loans — are in default.

The agency says it has handled about 2,900 consumer complaints between March and September. The median age of borrowers — meaning half are older and half younger —is 29. And the median amount of financial relief when given: $1,572.

Sallie Mae, the largest student loan servicer, had the most complaints. Of the 2,473 complaints mentioning companies, 1,145 – or 46 percent — are about Sallie Mae. American Education Services came in second with 296 complaints.

The majority of the complaints — 65 percent — deal with issues about repayment, such as billing, deferments, fraud and credit reporting. And 30 percent involve problems with being unable to pay.

The report said that the most common complaint involved negotiating a repayment plan, and the frustration of finding the right person to speak to.

Another big complaint — the inability to refinance to a lower rate. Students end up paying higher interest rates because they have little or no credit history when they take the loans out. But even after they graduate and get jobs, they can’t refinance to a lower rate, the CFPB said.

Struggling borrowers also said that they make “good faith” payments of less than the amount owed — sometimes at the encouragement of the servicer’s staff — and find that they still end up in delinquency or default.

And borrowers complained of ugly surprises. One borrower was making payments, but when his co-signer – a recently divorced parent  – filed for bankruptcy, the loan was deemed in default. Borrowers complained of the way the lender handled payments, including one case where the borrower set up automatic payments with the lender and still was dinged with late fees.

Loans are often resold, which makes things more complicated and confusing for borrowers.

And this is outrageous — active duty service members who are entitled to a lower interest rate sometimes have trouble getting it.

The list goes on and on.

In a telephone conference call Monday, CFPB’s Rohit Chopra, the report’s author, said these complaints are early warnings that can help regulators understand the extent of the problems.

He noted that some complaints come from a backlog of borrowers who have been searching for help for years. And some of the disclosure problems raised by these old cases, he said, have already been addressed under federal law that took effect two years ago.

The CFPB recommends that Congress find ways to increase the availability of modifying and refinancing private loans. It also suggests Treasury and government  agencies explore whether the same fixes for the mortgage servicing industry could apply to student loans.