The Consumer Financial Protection Bureau recently took action against Citibank, N.A. for its student loan servicing practices. The CFPB outlined its charges against Citibank, the nation’s fourth largest bank, with over $1.4 trillion in assets in a press release.
The consumer watchdog said Citibank misled borrowers into believing that they were not eligible for a valuable tax deduction on the interest they paid on certain student loans. The company incorrectly charged late fees and added interest to the student loan balances of borrowers who were still in school and eligible to defer their loan payments, the complaint says.
Citibank also misled consumers about how much they had to pay in their monthly bills and failed to disclose required information after denying borrowers’ requests to release loan cosigners. For such transgressions, the CFPB is ordering Citibank to end these practices and to pay $3.75 million in redress to consumers and a $2.75 million civil money penalty.
This isn’t the first time Citibank has come under fire. In 2015, the bank was ordered to pay $700 million in relief to borrowers for allegedly illegal credit card practices. Worse still, it had to pony up a $7 billion settlement with the Justice Department to make amends for what then-Attorney General Eric Holder called “egregious misconduct” in the years leading up to the 2008 financial crisis.
Where did Citibank go wrong this time?
Federal law allows some student loan borrowers to deduct up to $2,500 worth of student loan interest paid on “qualified education loans” annually. On its website and periodic account statements, Citibank made statements that suggested borrowers had not paid qualified interest, or that the borrowers were not eligible for the qualified interest tax deduction, the CFPB says. Consequently, borrowers did not seek this tax benefit, even though they may have been able to benefit from it.
Another offense was incorrectly charging late fees and interest on loan balances to students who were still in school. In reality, many students are eligible for in-school deferments, which postpone repayment until six months after they are no longer enrolled in school. Citibank erroneously canceled in-school deferments for certain borrowers based on inaccurate information about their enrollment status, according to the CFPB. In doing so, Citibank charged late fees when the borrowers did not make payments, even though payments should not have been due. Citibank also erroneously added interest to the loan principal, and failed to refund late fees and erroneously charged interest after discovering that in-school deferments had been terminated in error.
The CFPB said that Citibank serviced some loans for “mixed-status borrowers”, who had multiple student loans with Citibank, some of which were on repayment status, while other loans were in deferment status. While loans were in deferment, no payment was required, though borrowers had the option to make payments on those loans. For mixed-status borrowers with student loans in or approaching repayment, Citibank overstated the minimum amount due on the mixed-status account statements, the agency claims.
According to the CFPB, many consumers applied for student loans from Citibank with a cosigner to help guarantee the loan. Some of these borrowers later requested that these cosigners be released for some or all of their student loans with Citibank. When Citibank received an application from a student loan borrower to release a cosigner and place the loan in the borrower’s name only, Citibank would make a determination based on information in the borrower’s credit report and score. When Citibank denied a cosigner release application, it failed to provide the borrower with all of the information required under the Fair Credit Reporting Act.
What you don’t know can cost you
While the CFPB has Citibank in the hot seat, it’s yet more proof that student loan borrowers have to remain vigilant when it comes to managing their student loan debt. Student loan servicers and lenders alike have been proven time and again to fail borrowers in this area, unfortunately.
‐Jamie Wharton, marketing coordinator for Earnest
“For a situation like the one with Citibank to be avoided, it’s important that student loan borrowers are aware of the rights they have, so they know when they’re being taken advantage of,” says Jamie Wharton, marketing coordinator for Earnest, a student loan refinancing lender. “It’s crucial for borrowers to know what their options are when it comes to paying back loans, like increasing payments, refinancing, or setting up auto-payments to avoid costly late fees.”
Stanley Tate, an attorney with St. Louis, Missouri-based Tate Law, which specializes in student loan debt, forgiveness and consolidation, offers this advice for borrowers.
“Know whether your loans are federal or private and whether your loans are in deferment, forbearance, or repayment,” he says. ““If your loans are federal, then you have the right to certain income driven repayment plans, forgiveness and cancellation programs, deferments and forbearances.”
Tate says another issue he sees is that people believe they should be able to automatically remove themselves or someone as a cosigner. “If you’re a cosigner, typically, the only way you can get removed is if the other co-signer is deemed credit worthy [by having a] positive payment history, credit score, employment, etc.,” he adds.
This article from LendingTree.com, the parent company of DepositAccounts, explains more about releasing a cosigner from a loan.