"Ready for dinner"
When the first set of consumer relief metrics from the National Mortgage Settlement were released last week, they confirmed what we already knew – that big banks’ mortgage servicing arms paid a “penalty” through routine activities, many of which do nothing to help borrowers stay in their homes. For example, of the raw dollar amount of $38.7 billion in mortgage relief, as much as $27 billion of that came from short sales, where the servicer allows a sale for less than the mortgage is worth, freeing the borrower from making up the difference. This is better than a foreclosure, but as Kevin Whelan of the Home Defenders League said in a statement, “Only on Wall Street can you push someone out of their home and call it relief.”
The lack of economic pain in the settlement for Wall Street is obvious as well. Just a sliver of the total went to actual write-downs of principal, which represents a loss the bank would certainly have taken anyway if they pushed the borrower into foreclosure. This punishment doesn’t constitute a deterrent for the crime, which explains why so little has changed in mortgage servicing. Court cases crop up every day detailing a parade of horrors foisted on homeowners, including illegally breaking into their homes. Without a real cost for shoddy servicing, there’s no incentive to fix the industry.
And that doesn’t only extend to mortgages. A little-noticed report last week from the Consumer Financial Protection Bureau found multiple problems with student loan servicers, companies that process monthly student loan payments. Over the past fiscal year, CFPB received 3,800 complaints from student loan borrowers, 87 percent of them directed at eight servicing companies – including Salle Mae, Wells Fargo, Citi and JPMorgan Chase. And as the report states, “Many of the private student loan complaints mirror the problems heard from consumers in the mortgage market following the wake of the financial crisis.”
As with mortgages, the companies that process student loan payments don’t necessarily own the student loans. They receive a small fee from the loan owners for doing the subcontracted work. Any additional fees they impose on the borrower are theirs to keep. And this provides the same kind of mismatched incentives that we’ve always seen in the mortgage market – the servicer profits from maximizing suffering on the student loan holder, and has no financial interest in helping them.
For example, student loan borrowers who run into trouble and need a loan modification to avoid default find their servicers to be uniquely unhelpful; half of the complaints came from loan modification seekers. Though an alternative payment plan would benefit the lender and increase overall collections, the servicer is reluctant, because their fees are derived from the unpaid balance. If the balance gets cut in a modification, servicers lose money. So they frustrate the process for the borrower, leading to an increase in the default rate.
Borrowers who try to pay off their loans early, to reduce their total interest paid over the life of the loan, find difficulty in getting the exact amount they would need to send to pay off the loan. In addition, extra payments designed to pay down principal are not applied properly. Servicers apply overpayments inconsistently, sometimes using them to satisfy future monthly installments or to pay off fees and interest first instead of principal. This does not help borrowers reduce their interest burden. The entire process of paying off loans early is fraught with confusion on where the money goes after the borrower turns it in to the servicer.
Borrowers often have several loans that they consolidate into a single account. The loans have different balances and interest rates. It would make financial sense for the borrower to pay off the loans with the highest interest rate first. But even when they send payments with explicit instructions to that effect, the servicer often does not follow the instructions, applying the payments in any way it sees fit. When borrowers who cannot afford the minimum payment submit partial payments, servicers also shuffle the money around to create as many late fees as possible across multiple loans, which also negatively impacts the borrower’s credit score. This leads to higher costs for the borrower – and bigger profits for the servicer.
Borrowers have complained of being charged late fees even when they made their monthly student loan payment on time. They find that online payments take up to 10 days to clear their banks and post to their student loan accounts, triggering late fees. Borrowers often cannot find their payment history online to double-check their student loan accounts. They have had their mailed-in payments lost by the servicer. And when the servicer transfers the loan, selling the servicing rights to another company, chaos ensues. Servicers often don’t tell the borrower that their servicer has changed and they need to remit payment to another company. By the time they find out about the change, they’re hit with late fees. Payment processing policies also vary from servicer to servicer, tripping up borrowers who encounter higher monthly payments or interest rates.
Rohit Chopra, the CFPB’s ombudsman for student loans, believes that recent CFPB regulations in the mortgage servicing industry could potentially be applied to the student loan servicing industry. But that actually makes the proper point – student loan servicing is so predatory because mortgage servicing undertook the same practices without any major sanctions. Nobody went to jail for mortgage servicing behavior, and the monetary penalty, as noted above, was negligible. If there’s no real cost for breaking the law, everyone will do it. Student loan servicers learned this lesson well.
The problem may be located in the relatively new practice of servicing itself. When lenders outsource their collections departments to companies with no financial interest in the loans themselves, you will inevitably see them try to maximize profits without putting the borrower’s well-being first. The situation will only improve through reestablishing the incentives, so that better treatment of the customers makes financial sense for everyone involved. If that means dissolving servicing relationships, and having the lender with primary interest in the loan making direct decisions on payment schedules and loan modifications and the rest, so be it.
Otherwise, you invite the kind of shoddy behavior subjected on borrowers of all types of loans, from mortgages to student debt. A legitimate regulator determined to protect consumers like the CFPB can provide some relief. But the past performance of regulators on mortgage servicing has been pretty toothless. And that’s why student loan servicers believe they have a license to steal.