POLITICS
08/01/2013 08:28 pm ET

Justice Department Investigates Student Loans To Military Personnel

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The U.S. Department of Justice is investigating whether student loan companies are cheating active-duty soldiers as the historically lightly regulated industry braces for unprecedented federal scrutiny.

Eric Halperin, special counsel for fair lending in DOJ's Civil Rights Division, on Wednesday told the Senate Veterans' Affairs Committee that federal prosecutors are actively probing whether companies failed to reduce interest rates on student loans carried by members of the armed forces once they entered active duty.

Companies that collect payments on student loans, known as servicers, are required to cut rates to no more than 6 percent upon request by soldiers entering active duty under the Servicemembers Civil Relief Act. Interest rates on some private student loans can run well into the teens, according to the Consumer Financial Protection Bureau. Most recent federal student loans carry interest rates of 6.8 percent and 7.9 percent.

Violations can carry criminal penalties. It's unclear whether the probe targets the entire industry or centers on a few companies. A DOJ spokeswoman declined to comment.

Problems in student loan servicing may eclipse the issues that have plagued the home loan market, the CFPB has said. The Government Accountability Office estimates there were at least 15,000 instances of financial institutions failing to properly reduce servicemembers' mortgage interest rates under the military members law and more than 300 illegal foreclosures, according to Holly Petraeus, CFPB servicemember affairs assistant director. Companies, including Bank of America and JPMorgan Chase, have paid millions of dollars to settle federal claims that they cheated servicemembers on home loans.

“I think the problem may be greater with student loans than it was with mortgages because I believe many more young servicemembers enter active duty with student loans than with a mortgage,” Petraeus said in October.

The Justice Department’s investigation follows months of warnings from the CFPB about wrongful servicing practices that have pervaded the student loan industry, particularly apparent violations of the servicemembers law, known as SCRA. Borrowers have lodged thousands of complaints with the consumer bureau over poor servicing of their student loans. The CFPB has issued reports detailing the nature of the complaints and promised to take enforcement action.

“While some lenders and servicers are addressing concerns about difficulties faced by military borrowers, the problem has not gone away,” CFPB officials Rohit Chopra and Kristen Messina said Thursday. “Regrettably, we continue to receive complaints from servicemembers with student loans having trouble accessing benefits under the SCRA.”

The CFPB acknowledged that since it published a report on the issue in October, some companies have addressed servicing problems facing military families. But “not all have done so,” the agency warned.

Problems in the student loan industry have gotten the attention of top leaders at the Pentagon, where commanders routinely deal with servicemembers undergoing financial difficulties due to potential errors by their loan companies.

“We must never forget that our men and women serving in uniform are willing to put their lives on the line in order to defend this nation. Their service and their sacrifice should not be made harder for them when it comes to repaying their student loans,” former Secretary of Defense Leon Panetta said in October. “Because of their sacrifice, it should be easier, not tougher for servicemembers to be able to pay off their college debt.”

A recent survey of the armed forces found that 41 percent of servicemembers said they are paying off education-related loans. The average amount of student debt carried by active-duty members of the military who graduated college in 2008 was $25,566, according to the CFPB.

Panetta said in October that a recent CFPB report on problems in the sector had him concerned that student loan companies may not just be confusing servicemembers, but violating the law in their approach to debtors.

The CFPB said in a report Thursday that it “will continue to coordinate with the Department of Justice regarding these potential violations.”

According to regulators, servicemembers have complained that loan companies wouldn’t reduce their interest rates unless their loans were in forbearance or deferment -- a violation of the law. Others complained of having to navigate unnecessary hurdles, such as being forced to obtain more paperwork proving they’re in active duty than is required by law.

Private student loans, which comprise less than 15 percent of the $1.2 trillion in outstanding student debt, have long been subject to the 6 percent cap on rates under the servicemembers law. A 2008 provision extended that protection to federal student loans.

The cap on interest rates could mean thousands of dollars for the typical servicemember with student loans.

The CFPB estimates that a servicemember with $39,000 in debt whose rates are not reduced in accordance with the law may have to pay more than $12,000 in extra costs over a 10-year period.

The student loan industry had faced little oversight until the 2010 law overhauling U.S. financial regulation created the CFPB. The Obama administration and Democratic lawmakers had called for a new federal agency to protect borrowers from abusive lenders and other financial companies.

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