Student loan watchdog quits in protest, says largest banks are 'ripping off students'

Susan Tompor | Detroit Free Press

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Student loan borrowers, already struggling to deal with big dollars in debt, have yet another reason to be nervous.

The top federal consumer watchdog for student loans is resigning effective Sept. 1.

"The American dream is under siege," wrote Seth Frotman, assistant director and student loan ombudsman for the Consumer Financial Protection Bureau, in his resignation letter.

Frotman, the latest high-level departure from the CFPB, said borrowers are trapped in a broken student loan system but the administration is protecting lenders and big business.

As part of his heated comments, Frotman said new evidence has come to light showing that the nation's largest banks were "ripping off students on campuses across the country by saddling them with legally dubious account fees."

But he charged that the bureau leadership has suppressed publication of a report on the problem relating to the bank fees.

"You choose to leave students vulnerable to predatory practices and deny any responsibility to bring this information to light," Frotman wrote in his resignation letter.

Frotman had highly critical remarks when it came to the consumer bureau's acting director Mick Mulvaney, claiming that the bureau's new political leadership has "repeatedly undercut and undermined" staff working to assist student loan borrowers who may have been harmed by bad actors.

"After 10 months of your leadership, it has become clear that consumers no longer have a strong, independent Consumer Bureau on their side," Frotman wrote in a letter dated Aug. 27.

The consumer bureau oversees the $1.5 trillion student loan market under the Dodd-Frank Act.

Advocates for student borrowers called Frotman's resignation "deeply troubling."

In recent years, the federal consumer watchdog has been known to take on predatory lending practices, bad loan servicing practices and the nation's largest for-profit colleges, including ITT Tech, Corinthian Colleges and Bridgepoint Education.

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More than 60,000 student loan borrowers have submitted complaints or questions since 2012 to the CFPB, many times leading to resolutions that involved thousands of dollars back to individuals.

Persis Yu, staff attorney at the National Consumer Law Center and director of NCLC’s Student Loan Borrower Assistance Project, said borrowers rely on the bureau to "ensure that they are not being ripped off and abused by their lender, servicer, or debt collector."

"Student loan borrowers need a watchdog that will listen to the evidence and put borrowers’ interests above big business," Yu said in a statement.

Yu said via email that the bureau has sent a "strong signal" that it would be less likely to protect student borrowers when it reorganized operations and tucked the Office of Students and Young Consumers into the more general Office of Financial Education.

"The risk to borrowers is that known abusive and illegal practices will continue unchecked, and that even when the CFPB has taken action, that the Bureau will not actively pursue full relief for the borrowers who were harmed," Yu told me.

"Borrowers need to know that someone is looking out for their interests and not just big business," Yu said.

She noted that the bureau had previously uncovered systemic abuses in student loan servicing, prompting important reforms to the industry.

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It also uncovered problems with the U.S. Department of Education’s implementation of income-driven repayment plans.

The watchdog bureau's work eventually lead to a lawsuit against student loan servicer Navient for practices that caused borrowers to pay thousands of additional dollars on their federal student loans and added years to their repayment, she said.

“For years, the National Consumer Law Center has documented servicer and debt collector abuses that can cost borrowers thousands of dollars and years of repayment," Yu said.

Christopher Peterson, director of financial services at the Consumer Federation of America, said in a statement that Frotman’s resignation comes on the heels of Mulvaney’s decision to close the CFPB’s Office for Students and Young Consumers, the only federal entity dedicated entirely to protecting student borrowers and young adults from abusive financial practices.

"The truth is that the President’s consumer protection agenda is a dumpster fire,” Peterson said in a statement.

“The administration has seized control of an independent consumer watchdog and is strangling one of the only agencies in Washington dedicated to looking out for the rights of ordinary Americans.”

Under Frotman’s leadership, advocates noted that the CFPB helped to return more than $750 million to student borrowers and end a variety of financial schemes that preyed on young people.

"The loss of a strong advocate for borrowers increases the risk to borrowers," said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

Kantrowitz said the Trump Administration has taken a several steps that student advocates have characterized as anti-borrower.

Among such efforts, the U.S. Department of Education has stopped sharing borrower complaints with the CFPB.

The U.S. Department of Education also wants to make it tougher to get federal college loans forgiven using the argument that the school cheated you out of a good education by misleading you about job prospects or engaging in fraud.

The Trump Administration also has proposed repealing the Public Service Loan Forgiveness program and ending Subsidized Federal Stafford Loans and the Grad PLUS Loan Program.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter @Tompor.