Private lenders are revising student loan contracts to ensure borrowers are not placed in default when the co-signer of their loan dies or declares bankruptcy. In a letter obtained by The Washington Post, Consumer Bankers Association President Richard Hunt informed Consumer Financial Protection Bureau (CFPB) director Richard Cordray that the 10 member banks who offer student loans, including Wells Fargo, PNC Bank, Discover and Sallie Mae, have changed their policy on these type auto defaults.
The banks will no longer trigger a default when a co-signer dies, while most will do the same in the event of a bankruptcy. The same policy will apply with existing loans.
Earlier this year, the CFPB warned bankers that they were at risk of breaking the law by automatically placing people who were current on their loans in default. The practice occurs in the private student loan market, where banks and other financial firms provide education financing with loan contracts that give them the right to trigger a default, even if the loan is being paid on time. Auto defaults leave borrowers with no choice but to repay the entire balance of the loan or ruin their credit, making it difficult to purchase a home or car.
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