Private Loans, Public Complaints

PennPIRG Education Fund

The Consumer Financial Protection Bureau (CFPB) was established in 2010 in the wake of the worst financial crisis in decades. Its mission is to identify dangerous and unfair financial practices, to educate consumers about these practices, and to regulate the financial institutions that perpetuate them. 

To help accomplish these goals, the CFPB has created and made available to the public the Consumer Complaint Database.  The database tracks complaints made by consumers to the CFPB and how they are resolved. The Consumer Complaint Database enables the CFPB to identify financial practices that threaten to harm consumers and enables the public to evaluate both the performance of the financial industry and of the CFPB.

This report is the second of several that will review complaints to the CFPB nationally and on a state-by-state level. In this report we explore consumer complaint trends in the private student loan sector with the aim of uncovering patterns in the problems consumers are experiencing with their student loans.

Private student loans (PSLs) are far more risky for consumers than federal student loans, which are typically subsidized at a fixed interest rate and offer options for debt consolidation. Private student loans may offer variable interest rates, may not allow for debt consolidation, and, unlike other forms of private consumer debt, are not legally dischargeable through bankruptcy proceedings. PSLs account for about 7 percent of the overall student financial aid market, and the current debt owed by consumers in the United States on their private student loans is estimated to be approximately $165 billion.

Since the Consumer Financial Protection Bureau began collecting data on private student loans in March 2012, the CFPB has recorded more than 4,200 complaints about private student lenders.

·         Sallie Mae was by far the most complained-about private student lender. However, its share of total complaints to the CFPB was lower than its estimated 50 percent share of the private student loan market. AES/PHEAA and Wells Fargo were the second-most and third-most complained-about private lenders. Ten U S. private student lenders account for about 90 percent of all complaints to the CFPB.

·         Repayment of loans (including fees, billing, deferment, forbearance, fraud, and credit reporting) was by far the most common subject of complaints to the CFPB. Loan repayment was the subject of nearly 65 percent of complaints filed.

·         In most cases, lenders that received the largest total number of complaints also ranked toward the top for complaints across all three issues tracked by the CFPB (issues related to getting loans, inability to pay and loan repayment). AES/PHEAA, for example, was second in both complaints about loan repayment and problems resulting from inability to pay (such as issues related to default, debt collection, and bankruptcy), as well as second in complaints overall.

Complaints about lenders vary by state, and state residents vary in their tendency to reach out to the CFPB.

·         Excluding Sallie Mae, whose size and dominance of the PSL market renders comparison to other lenders difficult, AES/PHEAA was the most complained-about lender in 28 states. Wells Fargo was the most complained-about private lender (other than Sallie Mae) in seven states, while Citibank was most-complained-about in three and Discover in one.

* Sallie Mae was the most complained about lender in every state other than Alaska and Minnesota (tied for first). Information on ties can be found in Appendix X.

·         Student loan borrowers in Northeastern states are most likely to complain about PSL lenders, while borrowers in the Midwest and South are least likely. The District of Columbia had the highest complaint-to-borrower ratio, followed by New Hampshire, Connecticut, Massachusetts, New York, Maryland, and Vermont.

·         The variation in the ratio of complaints to student borrowers by state may reflect differences in the propensity of residents of each state to rely on private student loans. States with higher average student loan debt tend to have borrowers who complain more frequently about private student lenders to the CFPB. Private student loans are primarily used by high-debt borrowers.

·         The District of Columbia, Vermont, Massachusetts, Connecticut, Maryland, New York and New Jersey all ranked among the top 10 for complaints per 100,000 borrowers in both categories of issues that attracted large numbers of complaints to the CFPB (problems related to inability to pay and loan repayment). However, some states experienced large numbers of complaints in one category but not the other. Rhode Islanders were seventh-most-likely to complain about problems resulting from an inability to pay, for example, but were 40th in complaints about loan repayment. Pennsylvanians were in the top ten for complaints about loan repayment, but 22nd in complaints about problems resulting from inability to pay.

The CFPB is making a significant difference for student borrowers facing difficulty with their financial institutions.

·         The CFPB has helped enable more than 330 consumers to receive monetary compensation to resolve their student loan complaints, with a median amount of monetary relief of $700 and maximum relief of over $75,000. More than 500 additional consumers have had their complaints closed with some form of non-monetary relief.

·         Lenders vary greatly in the degree to which they respond to consumer complaints with offers of monetary relief. Almost 15 percent of consumers complaining to the lender Discover received offers of monetary relief, compared with slightly fewer than 2 percent of complaints regarding Nelnet.

·         About 20 percent of responses received from banks to complaints filed with the CFPB were deemed unsatisfactory by consumers and were subject to further dispute. 

·         Of lenders with more than five overall complaints, the lender with the greatest proportion of disputed responses was First Loan Associates LLC, with 40 percent of complaint responses disputed by consumers. Of these same lenders, PNC Bank had the highest proportion of complaints resolved without dispute, with less than 6 percent of complaint responses disputed.

The Consumer Financial Protection Bureau’s Consumer Complaint Database is a key resource for consumer protection. To enhance the effectiveness of the CFPB in addressing consumer complaints:

• The CFPB should make the Consumer Complaint Database more user-friendly by adding, among other data, more narrative information and detailed information about consumer complaints, including how they were resolved, and the reasons for and outcomes of any disputes, with specific monetary relief amounts, if any, included. The CFPB should also conduct more frequent analyses of trends and give users the tools to undertake their own analyses of the data. In addition, the CFPB should make it easier for analysts to link the Consumer Complaint Database to other banking databases.
• The CFPB should expand public awareness of how to file complaints and access the Consumer Complaint Database by working with the prudential regulators to disseminate information about the complaints process to banking customers.

• The CFPB should develop free applications (“apps”) for consumers to download to smartphones to access information about how to complain about a firm and how to review complaints in the database.

To improve the effectiveness of the CFPB, the agency should:

·         Move quickly to implement strong consumer protection rules based on additional research into the opaque and heavily concentrated student loan market, in order to protect student loan borrowers from predatory practices.

·         Where problems are identified, use the information gathered from the database, from supervisory and examination findings, and from other sources to require a high, uniform level of consumer protection, through guidance and rules, to protect consumers and ensure that responsible industry players can better compete with those who are using harmful practices.

 * As of August 6, 2013