(photo: Kyle James / wikimedia)

The Consumer Financial Protection Bureau released an eye-opening report on student lending late last week that got me thinking about a simple truth I think I had overlooked previously. I’ve documented for well over a year the extent to which mortgage servicers make their profits almost entirely through ripping off their customers, adding on unnecessary fees, and basically using opaque processes to skim money off the top.

It turns out that other loan servicers, in other contexts, do exactly the same thing. And while I maybe should have expected that, I didn’t fully see it until this CFPB report. Look how they summarize the conduct of student loan servicers:

Surprises cause borrower confusion: Private student loan borrowers told the CFPB that after they graduate, some have a hard time figuring out how much they owe. Borrowers complain that they may not receive the information they need about their loans when repayments begin, and are caught off guard by unexpected terms and costs. Some surprises include unknown or misunderstood terms and conditions, accounts changing hands, unauthorized payments, and unexpected forbearance fees. With limited information to anticipate and avoid these surprises, some borrowers end up in trouble.

Borrowers report getting the runaround from servicers: A common theme found in the complaints is the difficulty some borrowers face when trying to contact their servicer. Borrowers report having difficulty taking advantage of the incentives promised to them before they signed up for the loan. Then, whether it is looking for clear and accurate information about bills, trying to find payment options, or simply trying to get payments processed properly, some borrowers complain about getting the runaround. This may include payments credited late or unevenly, faulty record-keeping, and inadequate assistance from servicing staff. The report finds that the service problems in private student loan servicing reported by borrowers mirrors the experiences borrowers have reported in mortgage servicing.

Borrowers face refinancing dead-ends: The report found that another theme of the complaints was that responsible borrowers find themselves locked into loan terms they cannot negotiate out of – no matter what their circumstances. Despite efforts to make good on their loans, some borrowers stated that they ended up in distress with limited or no options for deferrals, forbearance, or interest-rate changes. According to the complaints, even some co-signers who were promised that they would be released from responsibility after a period of on-time payments, may find themselves trapped in the loan. The results can be disastrous for some borrowers, especially ones new to the job market and struggling to find work.

So student loan borrowers cannot get clarity on the amount owed. They find surprise costs and unexpected loan terms. Their loans change hands without them knowing about it. They have difficulty contacting the servicer. The record-keeping is dubious. They cannot modify the terms of the loan, as the servicer will not agree to any new options.

This is the mortgage servicing market, grafted onto the student loan servicing market. The same problems keep cropping up. Servicers exist in a power relationship with their borrowers; they have all the power, and they use it to drive the borrower into more and more debt. This borders on being counter-productive, since a default, much like a foreclosure, has negative long-term consequences. In the short term, the servicer gains through additional fees and loses big through modification. So jerking around the borrower becomes the primary option.

The exact same thing happens in auto financing, which has even less regulation and oversight (CFPB doesn’t have full control overseeing most auto lending, sharing it with the Federal Trade Commission, but they are moving more and more into that space nonetheless). We see hidden fees, changing terms and predatory behavior throughout the auto finance process.

Lax regulation has basically created a circumstance where consumer loans exist as invitations to rip people off. CFPB is a cop coming very late to that beat, and they have a lot of ground to cover.

Here’s the full CFPB report on student lending.