CFPB Moves to Free Student Loan Borrowers from Defaults Caused by Co-Signers

The Consumer Financial Protection Agency Tuesday released a report on the private student loan market in the U.S. that emphasized the need for reform in the way lenders treat certain co-signer agreement clauses, going so far as to urge borrowers to seek co-signer releases.

The CFPB’s report, ostensibly a mid-year report on student loan complaints, addresses specific co-signer issues reported by borrowers. Most private student loans require a co-signer since the primary borrower is typically a young person with no credit history. But if a co-signer dies or goes into bankruptcy, co-signer clauses in the contract can trigger automatic defaults or a demand for payment in full even if the loan is being actively repaid on time.

The federal agency noted that approximately 90 percent of private student loans were co-signed in 2011. Many private student lenders advertise an option to release a borrower’s co-signer after a certain period of time of on-time payments. But complaints from private student loan borrowers describe the obstacles they face when seeking to obtain these releases.

Borrowers face bureaucratic barriers when seeking to release their co-signer, even though this benefit was advertised before the loan was taken out and could help avoid auto-default, according to the report. Consumers continue to complain that the rigid and opaque standards for co-signer release make for a mysterious process.

For example, consumers note that required forms are often not available on websites or in an electronic form. In addition, servicers do not seem to be proactively notifying consumers about the specific requirements to process a release.

The report was issued by the CFPB’s Student Loan Ombudsman, Rohit Chopra. It was written based on an analysis of more than 2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loan debt submitted between October 1, 2013 and March 31, 2014.

In a conference call with reporters Monday, Chopra noted that complaints about co-signer releases were trending upward and the trend was broad in scope.

“We’re seeing increasing complaints on this, and it’s not related to one individual market player,” said Chopra.

The report said that the situation is not good for anyone involved, including lenders.

“For a borrower who has proven to be a responsible paying customer and is facing the death of a parent or grandparent co-signer, debt collection calls demanding the full balance with limited explanation will probably not be welcomed,” the report reads. “This might substantially reduce the willingness of the borrower to pursue other credit products with the financial institution.”

In conjunction with the report, the CFPB released a consumer advisory urging student loan borrowers to look into co-signer releases. The advisory contained a downloadable sample letter borrowers can send to lenders to obtain a release. The agency also provided a sample letter for co-signers who wish to be released from agreements.

The report provided a breakdown of student loan debt collection complaints over the six-month period, revealing which companies received the most complaints and the issues most prevalent to consumers.

Consumers filing debt collection complaints about student loans were far more focused on communication tactics (28 percent of complaints) than consumers with other debt types (19.5 percent). Far fewer student loan borrowers, however, reports being contacted about a debt they claim is not theirs (27 percent vs. 41 percent for all debt types).