The Consumer Financial Protection Bureau (CFPB) has taken action against debt collectors and servicers who took advantage of student loan borrowers by making illegal garnishment threats and using illegal auto default provisions in loan contracts.
The violations include:
1. CFPB examiners found that one or more debt collectors threatened wage garnishment against federal student loan borrowers who were not eligible for garnishment. The National Consumer Law Center (NCLC) documented abuses by private collection agencies that the U.S. Dept. of Education hires to collect federal student loans in its 2014 report.
2. CFPB examiners found that one or more servicers of private student loans were unfairly invoking “auto-default” clauses to treat both the borrower and the co-signer in default if either of them died or filed bankruptcy. Auto-default clauses allow the servicer to demand payment of the entire loan balance even if all payments on the loan are up to date.
The Department of Education terminated the contracts of five private collection agencies after finding abuses in February 2015, but more needs to be done through enhanced monitoring and guidance for all private collection agencies to ensure they are consistently providing borrowers with accurate information regarding their loans.
Too many student loan borrowers have already been harmed by this abusive practice, which penalizes student borrowers who are current on their payments, simply because the co-signer has died or filed bankruptcy.
NACBA President Ed Boltz said: “This positive step by CFPB puts an end to an outrageous guilty-until-proven-innocent situation where individuals faithfully paying off student loans are thrown into default because of the status of their co-signer. The fact that a co-signer on a student loan has filed for bankruptcy to deal with other debts is in no way a basis for putting into default a student loan that is being paid on time. It is time that the federal government stands up for student loan borrowers who are doing everything right but nonetheless could see their credit ruined as the result of an unrelated action of a co-signer.”
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