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From Banking and Finance Law Daily, October 16, 2013

CFPB issues annual report analyzing complaints from private student loan borrowers

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau Student Loan Ombudsman has released a report analyzing complaints the CFPB has received from private student loan borrowers. According to the report, private student loan borrowers face payment processing pitfalls that can lead to increased costs, prolonged repayments, and harm to their credit profiles. The CFPB has released a consumer advisory to help borrowers communicate their payment preferences to servicers, so they can take better control of their student loans.

“Repaying a student loan should be simple,” said CFPB Director Richard Cordray. “When servicers process payments to maximize fees and penalties, they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”

Annual report.  Before the financial crisis, the private student loan market boomed and today many borrowers are struggling to pay back their loans. According to CFPB analysis, of the borrowers graduating at the time of the financial crisis with more than $40,000 in student debt, 81 percent used private loans. Private student loans generally have higher and variable interest rates and may not allow borrowers to easily manage their payments in times of hardship.

The most common complaint that the CFPB received was about payment processing pitfalls when consumers tried to take control of their loans, including when borrowers attempted to pay off their loans early or pay them off in a certain sequence. The report highlights:

  • prepayment stumbling blocks;

  • partial payments snags;

  • servicing transfer surprises.

Consumer advisory. The CFPB also issued a consumer advisory to help borrowers instruct servicers on how to process their payments by providing a sample template. This advisory is meant to assist those borrowers that have several loans with the same loan servicer and they do not provide instructions on how to process the money sent in each month. This decision is generally made by the servicer, but this is not always in the consumer’s best interest. The advisory includes sample instructions to the servicer, such as instructing them to always direct any extra payments toward the highest-rate loan, saving consumers the most money.

MainStory: TopStory Loans

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