CFPB Under Fire for Its Handling of Student Loan Fraud

Student loan fraud

The Department of Education announced that it will no longer work with the Consumer Financial Protection Bureau (CFPB) when it comes to combating student loan fraud.

The latest announcement comes on the heels of other moves by the Department of Education, headed by Secretary of Education Betsy DeVos, to undo Obama-era policies.

Why is the Department of Education cutting ties with the CFPB?

In 2011 and 2014, the Department of Education entered into two Memorandums of Understanding with the CFPB. These were designed to allow for cooperation in gathering information about loan servicing complaints and enforcing actions against servicers for some of their practices.

A letter sent to CFPB Director Richard Cordray accused the bureau of overstepping boundaries in pursuing cases of student loan fraud. The letter was signed by Kathleen Smith, the acting assistant secretary of the Office of Postsecondary Education, and A. Wayne Johnson, the new COO of the Federal Student Aid office.

The Department of Education claimed CFPB complaints related to Title IV federal student loans should be directed to the Department within 10 days of receipt. Instead, the letter claims, the CFPB was taking matters into its own hands.

“The CFPB’s intervention in this area adds confusion to borrowers and servicers who now hear conflicting guidance related to the Title IV student loan services for which the Department is responsible,” read the letter.

What is the CFPB response?

“We are surprised and disappointed to learn the Education Department is planning to terminate our Memoranda of Understanding, which established the foundation for some very successful collaborations,” said David Mayorga, a CFPB spokesperson, in a statement sent to Student Loan Hero.

“We have not previously heard any concerns as we have worked together to make sure that all student loan borrowers are treated fairly, with respect and dignity,” he added.

In the past, the CFPB has gone after student loan servicers for practices that they feel are harmful to borrowers. Additionally, the CFPB has shed light on practices by servicers that keep high-risk borrowers from enrolling in affordable repayment plans.

By ending information-sharing with the CFPB, the Department of Education could head off efforts by the CFPB to enforce actions on student loan servicers that aren’t acting in the best interests of borrowers.

“The Consumer Bureau has statutory responsibilities to protect student loan borrowers — like all consumers — from practices that violate the laws we enforce and we would like to continue to work with the Education Department toward our shared goals,” Mayorga said.

Will this move help student loan borrowers?

The Department of Education claimed ending cooperation with the CFPB will aid in protecting borrowers. Further, in an Aug. 31 statement announcing new hires, DeVos claimed that protecting students is a top priority.

However, since the Department of Education began rolling back policies from the Obama administration, there has been an uptick in complaints against student loan servicers. But ending cooperation with the CFPB is part of the Department of Education’s plan to protect borrowers, and some agree with the move.

Representative Virginia Foxx (R-N.C.) agreed with the move to stop cooperation, according to Inside Higher Ed. Foxx insisted that the partnership with the CFPB was doing more harm than good:

“[I]t was a mistake for the Obama administration to have the Department of Education let the CFPB abuse its privilege on these matters,” she said in a statement.

Meanwhile, consumer advocates decried the decision to cut the CFPB out of complaints related to student loan fraud.

The National Consumer Law Center (NCLC) said the 2011 memorandum was ordered to help the Department of Education, which was failing at its mandate to adequately protect consumers.

The memorandum was designed “to collaborate to ensure coordination in providing assistance to and serving borrowers seeking to resolve complaints related to their private education or federal student loans.”

An NCLC statement said, “The claim that the CFPB ‘unilaterally’ expanded its oversight role over servicers and collectors of federal student loans is unfounded … DeVos is prioritizing the interests of predatory for-profit schools, debt collectors, and trouble student loan services over the interests of student loan borrowers.”

The NCLC also pointed to the hiring of industry insiders for top positions in the administration.

A. Wayne Johnson, head of the Financial Student Aid office, is a former student loan CEO. Julian Schmoke, whom will lead the student aid enforcement unit, worked as an administrator for a university fined for fraudulent practices.

Student loan borrowers must learn their rights

You will still likely be able to file CFPB complaints about student loan servicers — for now. Efforts from members of Congress to reduce the power of the CFPB are underway, however.

The CFPB is increasingly isolated and is, according to Inside Higher Ed, one of the few federal agencies to step up enforcement under the Trump administration.

If the government is stepping away from consumer protection, it’s vital for student loan borrowers to understand their rights and educate themselves on their options.

Here are some resources that can help you understand your rights:

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