The CFPB’s Student Loan Ombudsman has released a report entitled “Mid-year update on student loan complaints” that highlights issues related to co-signers of private student loans. In particular, the report focuses on “obstacles” faced by borrowers in obtaining co-signer releases and automatic defaults that occur upon a co-signer’s death or bankruptcy.

The CFPB reports that it received more than 2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loan debt between October 1, 2013, and March 31, 2014. We hope those numbers are accurate, since the CFPB also states that it previously received 1,418 complaints during the period between October 1, 2012 and March 31, 2013, even though last year’s mid-year update indicated that the CFPB received 2,002 complaints during that period of time.

While stating that the co-signer issues discussed in the report rely “primarily on complaints received by the CFPB,” it appears those complaints were not limited to those received during the period covered by the report.

With regard to co-signer release “obstacles,” the CFPB states that, despite creditors advertising an option for borrowers to obtain a co-signer release after a certain period of on-time payment, borrowers face “barriers” when pursuing such a release. According to the CFPB, such “barriers” include the unavailability of required forms on websites or in electronic form and a lack of clear information about standards for obtaining such releases. In addition, the CFPB notes that “consumers’ complaints suggest that servicers do not seem to be proactively notifying consumers about the specific requirements to submit a request for a release.”

Frankly, we are a bit skeptical about those observations. In our experience, creditors do indicate how to obtain the necessary application for a cosigner release, and often all that is required is an email or a telephone call using a toll-free number. Moreover, creditor websites and marketing materials do indicate the prerequisites that need to be met, such as graduation from the school and the number of on-time payments that are required. They also indicate that the borrower will have to satisfy the creditor’s standards of creditworthiness. For obvious reasons, creditors do not disclose their credit criteria for a cosigner release any more than they disclose their criteria for initial loan approval. But any borrower whose request is denied should receive an adverse action notice spelling out the reasons for the denial.

With regard to “automatic” defaults upon a co-signer’s death or bankruptcy, the CFPB acknowledges that many private student loan contracts permit – but do not require – a creditor to declare a default and accelerate the loan balance when such events occur. That should come as no surprise, since the creditworthiness of the co-signer was likely the basis for the loan terms that were approved in the first place and since this is a common practice with all co-signed loans, and not just student loans. In fact, failing to include a provision of this sort would undoubtedly be viewed as an unsafe or unsound banking practice.

The CFPB goes on to report, that notwithstanding the express terms of their loan contracts, “many” consumers nevertheless assume that a co-signer’s death will result in the release of the co-signer’s obligation to repay. There is no indication as to how “many” consumers have such a belief or why it would be reasonable for a consumer to believe that the death of someone whose creditworthiness was the basis for the loan being granted in the first place should have this effect, particularly when their loan contracts provide otherwise. It also reports that “many” borrowers nevertheless also complain about bankruptcy-triggered defaults and resulting debt collection calls and reporting of defaults to credit bureaus, a consequence that we would expect that the attorney handling the bankruptcy filing would have brought to the co-signer’s attention. According to the CFPB, consumers also complain that they are no longer able to receive billing statements, pay their loans online, or request additional information on their loans during their cosigner’s bankruptcy proceedings. But these complaints may well concern actions that are the result of the impact of the automatic stay that operates when there is a bankruptcy filing.

The report advises private student lenders and servicers that because they “may not always be acting in their own self-interest by accelerating balances and placing loans in default” upon a co-signer’s death or bankruptcy, such practice “warrants review by investors and senior management.” According to the CFPB, the risks faced by financial institutions from declaring defaults “regardless of individual circumstances” are a reduction of interest income, reduced recovery of principal, poor customer experience and reputational injury. The CFPB outlines alternative approaches lenders or servicers can take, such as determining “whether the borrower qualifies for a co-signer release and [whether] maintaining the existing payment schedule would be beneficial for all parties.” While acknowledging that it does not know the extent to which lenders or servicers regularly use these alternatives, which would seem to mean that it also does not know the extent to which lenders or servicers declare defaults, the CFPB nevertheless comments that “reasonable observers might ask why these options are not more commonly employed” and that “acceleration seems to be used by the bulk of industry participants.” 

In addition to the report, the CFPB also issued a consumer advisory that advises borrowers and co-signers they “should look into what’s called ‘co-signer release,’” and if the lender offers a release, tells borrowers that they “will want to ask about this benefit and remove your co-signer as soon as you are eligible.” The advisory includes two sample letters to be sent to servicers, with one to be used by borrowers seeking information about a release and the other by co-signers seeking a release. Both letters ask the servicer to conduct a review of the borrower’s account to determine if the account is eligible for a co-signer release and provide an explanation if the servicer determines that the account is not eligible.