Several private student loan contracts include clauses that allow the lender to requirement the full loan balance if a borrower’ s co-signer dies or files for bankruptcy, leading lenders to place loans in “ auto-default” even if the borrower hasn’ t made any missteps, according to the Consumer Financial Defense Bureau’ s mid-year report issued this week.
CFPB does not say in the report how often lenders actually demand a borrower’ s full loan stability, but said it’ s noticed an uptick in complaints around the issue over the last two years. And 90 percent of private student loans had been co-signed in 2011 – and though contracts allow borrowers to remove co-signers from a loan, it can be a complicated and difficult process.
Consumer Bankers Organization President and CEO Richard Quest denied that placing borrowers straight into “ auto-default” is common in a statement. Hunt said he believes it’ s a “ rare incidence, ” according to an excerpt posted by POLITICO.
WASHINGTON (AP) — Some education loan borrowers who had a parent or grandparent co-sign the note have found that they must immediately pay the loan in full if the relative dies.
The Consumer Financial Protect Board says lenders have clauses in their contract that explain this may happen, but many borrowers are not aware of all of them.
The agency’s ombudsman, Rohit Chopra, said complaints associated with this issue are growing more common because the practice is catching so many customers by surprise. Some borrowers told to pay back the loan completely have been making timely payments, Chopra said.
While it’s unclear how prevalent it is; Chopra said it appears to be the practice among many private student loan lenders. It offers affected borrowers not just when the co-signer has died, but when the co-signer has declared bankruptcy.
“We do have some concerns that will with an aging population and with lengthy terms on certain private student education loans, that this could actually increase over time, ” Chopra said.
The issue doesn’t impact federal student education loans, which are more commonly issued than personal student loans. In the private loan business, 90 percent of loans had been co-signed in 2011, and having a co-signer can often lead to a lower interest rate, a written report released Tuesday by the bureau said. Before the financial meltdown of 2009, private loans were more commonly issued, but many borrowers still owe cash on them. They generally have higher interest rates than federal loans.
In response, Richard Hunt, president plus CEO of the Consumer Bankers Organization said in a statement that the members work with their customers “carefully and compassionately” and it is common exercise for the lenders to release co-signers through loan obligations.
“We are not aware of lenders accelerating the payment of a loan in good position upon the death or permanent disability of a co-signer as a common practice and believe it to be a rare occurrence, ” according to the statement.
Chopra, however , said even as many financial companies advertise the ability to release a co-signer from a mortgage, they make it complicated to do so. He didn’t specify the number of complaints the agency received.
The report said the practice may occur because some lenders depend on third parties that automatically induce a default “regardless of person circumstances. ”
“While these acceleration options may have the best business purposes, it seems that private student lenders and servicers may not often be acting in their own self-interest by accelerating balances and placing loans in default, ” the report said.
The co-signing issues impacting private student loans are generally distinct from those associated with loans such as a mortgage because collateral like a house is just not put down to obtain the loan.
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