CFPB Cracking Down on Banks, Other Financial Companies for “Auto Defaults”

In March 2016, the Consumer Financial Protection Bureau (CFPB) released its latest supervision report where the exams of banks and nonbanks resulted in the remediation of $14.3 million to approximately 228,000 consumers. In its examinations covering the last months of 2015, CFPB examiners found one or more student loan servicers engaged in an unfair practice by automatically defaulting on certain private student loans.

As the CFPB highlighted last year, some private student loan promissory notes contain an “auto default” clause that lenders trigger to immediately demand payment on the entire loan amount if a co-borrower files for bankruptcy or dies. Examiners found one or more student loan servicers made the entire loan due when a loan’s co-borrower filed for bankruptcy, regardless of whether the borrower was current on all payments. These auto defaults were unfair because a reasonable consumer would not likely interpret that clause in the contract to mean they would default based on their co-borrower’s bankruptcy. Further, one or more servicers did not notify the borrower that the loan was in default.

Get the full report here