Providing Debt Relief for Clients Throughout the State of New York

Illegal Debt Collecting Practices

The Consumer Financial Protection Bureau recently released a report that has resulted in the remediation of $14.3 million to consumers. Approximately 228,000 consumers were the victims of violations in the student loan market. These violations included illegal automatic defaults by student loan servicers and illegal garnishment threats by debt collectors performing services for the Department of Education. The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the CFPB to monitor the practices of banks, credit unions and certain nonbanks. Nonbanks include mortgage companies, student loan lenders, and payday lenders.

The report issued includes actions taken by the CFPB from September 2015 to December 2015. The CFPB found that several student loan servicers illegally automatically defaulted on certain private student loans. These auto defaults are triggered by private lenders if a co-borrower files for bankruptcy or dies. These defaults cause the entire amount of the loan to become due and could occur regardless of whether the primary borrower was current on all payments. The auto default clauses in the private loan promissory notes were determined to be unfair because “a reasonable consumer would not likely interpret that clause in the contract to mean they would default based on their co-borrower’s bankruptcy.” Additionally, in certain cases the primary borrowers were not given notice that their loans were in default.

The report also states that one or more banks or credit unions failed to update financial information that was supplied to credit reporting companies. In certain cases, even after consumers had paid off their accounts in full, the information sent to credit reporting was not updated to reflect the change in status. The failure to report this information could negatively affect the credit health of these consumers and could prevent them from opening new accounts. By law, these institutions are required to have reporting systems in place that accurately and regularly update information about consumer in their records. Additionally, they are required to report accurate information to credit reporting companies and other financial institutions.

Under the Fair Debt Collection Practices Act, a debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. On several occasions, debt collectors misrepresented themselves to be from the Department of Education when performing collection services of defaulted student loans. The collectors then threatened consumers with wage garnishment and presented them with inaccurate information about when the garnishment would begin. In most cases, the borrowers that these threats were made against were not eligible for garnishment under the Department of Education’s guidelines.

According to CFPB Director Richard Cordray, “It is deeply concerning that our examiners found private loan borrowers being hit with automatic defaults when their co-borrowers go bankrupt. The problems plaguing the student loan market can have a domino effect on borrowers’ financial futures. The CFPB has made it a priority to police this market so that borrowers are not treated unfairly or illegally dead-ended into default.”

http://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf