New reports have emerged that Citigroup Inc. is under investigation by the Consumer Financial Protection Bureau (“CFPB”) regarding its student loan servicing practices. Although Citigroup did not specifically name the agency conducting the investigation, it is likely that the CFPB is leading the charge as it recently investigated Discover for similar practices. If regulators find that Citigroup conducted unlawful student loan collection practices, it could be severely penalized.
Citigroup filed a report with the Securities and Exchange Commission (“SEC”) stating that federal regulators have begun an investigation into the way it conducts its student loan servicing. Citigroup’s filing states that it is cooperating fully with regulators and points out that similar loan servicing practices have been the focus of an enforcement action against “at least one other” financial institution in the recent past. The filing further states that, “In light of that action and the current regulatory focus on student loans, regulators may order that Citibank, N.A. remediate customers and/or impose penalties or other relief.”
Citigroup sold off most of its student loan accounts in September 2010. It sold its majority holding in Student Loan Corp. to Discover in a deal that offloaded $4.2 billion in private loans and $3.4 billion in securitized loans. Student Loan Corp then agreed to sell $28 billion of federal student loan accounts and related assets to Sallie Mae. Despite Citigroup’s dumping of the majority of its student loan accounts, the company still kept about $8.7 billion of both private and federal loans and planned to gradually sell those over time.
The specific loan servicing practices under investigation, at least with respect to the Discover case, have to do with lenders overstating minimum payments that a borrower must repay, confusing borrowers with respect to collections, failure to notify borrowers of their rights and general communications between lenders and borrowers. Discover was also dinged for contacting borrowers early in the morning and late at night regarding collection matters. Discover was ordered to pay $18.5 million in refunds and other fines.
The federal government has recognized that federal student loan debt, which currently totals more than $1.36 trillion, is increasingly stressful and troublesome for young people. These young adults, generally fresh out of college, are particularly vulnerable to unscrupulous loan servicing practices. In response to ever increasing student debt and other forms of debt, the government established the CFPB four years ago in an effort to increase oversight of consumer financial products.