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U.S. consumer agency slams student loan servicers, eyes reforms

Consumer Financial Protection Bureau Director Richard Cordray speaks in Washington, October 17, 2014. REUTERS/Larry Downing

WASHINGTON (Reuters) - The U.S. consumer watchdog reported widespread failures in the servicing of student loans on Tuesday and urged new rules to protect borrowers.

Among the problems cited by the Consumer Financial Protection Bureau: inaccurate loan statements; refinancing delays that kept borrowers in high-rate loans; lost payments; and surprise late fees.

"With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical," Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.

The problems with loan-servicing practices can make it harder for students to repay loans, raise costs and drive some borrowers into default, the bureau said.

Student loans are the second-largest U.S. consumer debt market, which has more than doubled from less than $600 billion in 2006 to more than $1.2 trillion currently, the bureau said.

Companies that service loans are often different than the lender. They manage accounts, process payments and communicate with the borrowers, who have no control over which company services their loan, it said.

The CFPB worked with the Treasury and Education departments on recommendations for reforming the loan-servicing market.

The recommendations include creating consistent, industry-wide standards for the market, holding servicers accountable if they break the law and providing clear, timely information on repayment options or alternative payment plans.

The report identified problems that occurred when loan servicers changed. More than 10 million borrowers had their servicers change in the last five years, resulting in lost payments, unexpected late fees and other issues for some.

The bureau has grappled with student loan servicing problems. In July, the banking arm of Discover Financial Services (DFS.N) agreed to pay $18.5 million in consumer refunds and penalties to settle allegations of illegal practices tied to its student loan servicing business.

The CFPB said Discover Bank overstated the minimum amounts due on billing statements and took unfair actions in debt collection, such as calling borrowers early in the morning or late at night.

(Corrects typographical error in 9th paragraph)

(Reporting by Doina Chiacu; Editing by Bill Trott and Steve Trousdale)