The banking industry has weathered its fair share of scandals in recent years — including the recent Wells Fargo outrage, where employees were creating phony accounts and hitting customers with fees for accounts that they did not even know existed. The question seems to be not whether there will be another scandal in the financial sector — but when it will hit and what it will involve this time.
So how can we predict what the next banking scandal will be? While it is impossible to say for sure, one hint that something may be wrong in an area is the number of consumer complaints about that issue. Anyone who watches the market or who works in risk management should carefully monitor these statistics — as they may be the harbinger of the next banking crisis.
Taking a Closer Look at the Complaints
The Consumer Financial Protection Bureau (CFPB) was established in 2011 as part of the Dodd-Frank Wall Street Financial Reform and Consumer Protection Bill. Its role is to oversee the financial sector, including banks, credit unions, security firms, payday lenders, mortgage services, debt collectors, foreclosure relief services and other financial businesses within the United States.
It accepts complaints from Americans across the country through its website, Twitter and even YouTube. Its role is to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.” Per Director Richard Cordray, its current priorities are mortgages, credit cards and student loans. The CFPB was responsible for exposing and fining Wells Fargo for the above-mentioned fraudulent activity.
With a federal agency now in charge of oversight for the consumer financial services industry, we are now able to get a clear picture of the areas that are most problematic for banks, lenders and other financial providers. Anyone can submit a complaint with the CFPB — and the statistics on these complaints may provide clues about coming financial scandals.
Of course, not every complaint submitted to the CFPB is valid — something that must be considered when examining this data. However, when complaints about a certain topic rise exponentially in a short period, it may be the proverbial canary in the coal mine: a warning that something isn’t quite right.
One clear trend in the CFPB database shows that big banks garner the most complaints — far outpacing community banks and other types of financial companies. The top three areas of complaints are debt collection, mortgages and credit reporting. This isn’t surprising, given that these three issues are ones that tend to be most stressful and problematic for consumers. However, there is one area that has seen an explosion in the number of complaints filed: student loans.
In just a one year period, the number of complaints about student loans shot up by 78 percent — with approximately 1,250 complaints in August 2016 alone. This is significant, as it is the month that the CFPB acted against Wells Fargo for its practices in serving student loans. Servicing student loans is the process of collecting monthly payments, informing borrowers of their options and counseling them on repayment plans. Because there are not consistent rules in place about student loan services, this area has a high potential for abuse.
With the recent publicity about the action against Wells Fargo for its student loan servicing practices, it isn’t surprising that the complaints about student loans rose accordingly. But we must also consider the possibility that because borrowers are largely unprotected against potentially predatory lenders, these complaints are valid — and may be a sign of a coming scandal.
College graduates carry more student loan debt than ever before. Student loans are the second largest source of household debt, after mortgages, and many of those loans are privately owned. Students are often required to take out private loans if they have exceeded the limits of federal student loans and cannot otherwise fund their education. With variable interest rates and complex loan terms, it is possible that banks and companies servicing these loans are doing so in a manner that is unfair to debtors — and that students who are already being overwhelmed by high monthly student loan payments have had enough.
While we do not know the content of the student loan complaints filed with the CFPB, or whether the complaints are fair or accurate, the CFPB has recently launched an investigation into student loan servicing practices. This is a strong sign that the agency plans to establish stronger rules to protect students from a mishmash of rules that could leave them vulnerable to financial abuse. Until that time, we can continue watching the CFPB statistics for any hints of a coming financial scandal in the student loan market or any other sector.
Author: Jeff Gitlen
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