As the country’s student debt surpasses $1.6 trillion and borrowers are being repeatedly targeted with predatory, abusive practices, it’s become painfully clear: Borrowers need more rigorous protections.
And California, which alone has amassed over $140 billion of student debt, is now on the front lines in the fight to protect student loan borrowers. Lawmakers in the state have put forward the first legislation in the nation that would create clear, enforceable borrower protections to rein in abuses by student loan companies, including at some of the biggest banks.
Called the California Student Borrower Bill of Rights, California’s bill could pave the way for states across the country that intend to stand up for student borrowers and fight back against the Trump administration’s efforts to shield predatory companies and reduce borrowers’ rights.
So far, the legislation has garnered widespread support from dozens of organizations representing millions of Californians, including students, workers, consumers, older Americans, people of color, and veterans. Earlier this year, Student Debt Crisis and the Student Borrower Protection Center, of which the authors of this piece are a part, joined together to launch the Campaign for California Borrowers’ Rights, advocating for action to protect borrowers.
Big banks, however, have been quietly working behind the scenes to derail these protections and evade scrutiny by state government watchdogs. Bank lobbyists and trade groups have repeatedly pressured California legislators to derail the bill, cut deals, and create loopholes that would deny important protection to consumers who borrow from companies like Sallie Mae, Wells Fargo, and Discover.
You have probably heard about abuses by these big banks—creating millions of fake bank accounts in their customers’ names, deceiving the courts to push families into foreclosure, or forcing unwanted auto insurance onto consumers, costing them millions and leading to their vehicles’ being repossessed. But you may not have heard that these banks have scammed student loan borrowers out of hundreds of millions of dollars, pushing predatory private loans, sticking struggling borrowers with illegal fees, and driving people needlessly into default. Time and again, federal and state law enforcement officials have been forced to step in to halt abuses by these companies.
A look back at big banks’ practices in the student loan market shows us why California lawmakers must act to increase protections for borrowers and boost transparency and oversight of the market.
Wells Fargo illegally harvested late fees from student loan borrowers in distress. In 2016, the nation’s federal consumer financial watchdog brought an enforcement action against Wells Fargo for illegal student loan servicing, halting a scheme by the bank to maximize the late fees charged to borrowers who couldn’t afford their monthly loan payments.
Citibank illegally inflated borrowers’ bills, deceived borrowers about tax breaks, assessed unnecessary late fees, and stuck servicemembers with improper interest charges. In late 2017, the CFPB brought an enforcement action against Citibank for incorrectly charging late fees, overstating the minimum amount owed on borrowers’ billing statements, and deceiving borrowers about their eligibility to deduct student loan interest when preparing federal income taxes. In 2011, a member of the Minnesota National Guard sued Citibank, accusing the bank of penalizing military personnel by placing their loans into “mandatory forbearance,” which can add hundreds of dollars in interest over the life of a loan. (Citibank paid $2.3 million to settle the proposed class action lawsuit.)
Sallie Mae Bank made private student loans that charged borrowers of color more than their white peers, in violation of antidiscrimination laws. In 2014, the FDIC ordered the student lending corporation to pay $96.6 million in penalties and restitution for violating the several consumer protection laws, including the Equal Credit Opportunity Act, a federal law that bans discrimination in consumer lending.
Navient and Sallie Mae Bank cheated tens of thousands of servicemembers out of military consumer protections. As a part of the above settlement in 2014, the US Department of Justice and the FDIC took action against Sallie Mae for cheating servicemembers out of their right to an interest rate reduction under the Servicemember Civil Relief Act, returning $60 million to nearly 78,000 military borrowers. Sallie Mae also executed a scheme to charge borrowers illegal extra late fees when they paid less than they owed on their monthly bill.
Big banks pushed subprime loans to borrowers, sold the loans to investors, and walked away before borrowers defaulted on their debts. These loans, made by US Bank, Bank of America, JPMorgan Chase, and Citizens Bank, were sold to investors through the National Collegiate Student Loan Trusts, and would come to be known as “the worst-performing student loan investment vehicles ever created by Wall Street” and would drive hundreds of thousands of student loan borrowers into financial distress. The trusts themselves, along with the student loan servicers and debt collectors hired to pursue these borrowers remain the target of investigations and enforcement actions by regulators across the country.
Discover Bank inflated borrowers’ billing statements and subjected borrowers to illegal servicing and debt collection calls. In 2015, the CFPB took action against Discover Bank for providing misinformation on borrowers’ billing statements and for making illegal debt collection calls to borrowers.
Sallie Mae Bank made billions of dollars in predatory private loans to student loan borrowers across the country. Sallie Mae Bank made predatory private loans to borrowers it knew could never repay their debts. According to a lawsuit brought by the State of Washington, Sallie Mae’s then-CEO summarized the company’s private student loan underwriting standards in 2007 by saying, “If the borrower can create condensation on a mirror, they need to get a loan this year.” These borrowers defaulted in record numbers, facing fees, damaged credit, and a decade of abuse at the hands of loan servicers and debt collectors.
Banks have a long history of cheating borrowers in the student loan market. It’s time for California to hold banks accountable, set standards, and ban abusive practices. Will California lawmakers fight to protect borrowers—or side with the big banks?