Betsy DeVos, consumer watchdog agency are failing student loan borrowers, lawsuit says

The federal lawsuit makes a point to include the Consumer Financial Protection Bureau, which student advocates say is "shirking their legal obligation."

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By Erik Ortiz

A lawsuit filed Monday in federal court is not only going after the Education Department, but America's federal consumer watchdog agency as well — accusing it of abandoning its authority to oversee companies that service federal student loans.

The Consumer Financial Protection Bureau is "shirking" its legal obligation and changing federal public policy so that it only has supervisory authority over "issues related to student loans owned by private creditors, including private student loans, but not over the 81 percent of loans that are held by the federal government," according to the suit filed in California.

As a result, the plaintiffs say, millions of student borrowers are at risk of being subjected to fraud or financial errors.

Kathy Kraninger speaks during a Senate Banking Committee confirmation hearing in Washington on July 19, 2018.Andrew Harrer / Bloomberg via Getty Images file

Democracy Forward, a nonpartisan, liberal-leaning legal organization, filed the suit on behalf of Student Debt Crisis, a nonprofit advocacy group. Named in the suit are the consumer bureau and its director, Kathy Kraninger, as well as the Education Department and its secretary, Betsy DeVos.

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The filing, which follows a string of legal action against the Education Department for its handling of student loans, makes a point to include the Consumer Financial Protection Bureau — the brainchild of Sen. Elizabeth Warren of Massachusetts, now a Democratic presidential candidate, and established under the Obama administration a decade ago in the wake of the Wall Street financial crisis.

Student advocates warn that the growing $1.6 trillion student debt crisis, which outranks credit card and auto loan debts, is having a serious effect on consumers' financial health and without reform, could be a larger drag on the U.S. economy.

DeVos and Kraninger are "ignoring student loan industry abuses at a time when stronger consumer protection laws are desperately needed," Natalia Abrams, executive director of Student Debt Crisis, said in a statement.

Seth Frotman, the executive director of the Student Borrower Protection Center, a consumer advocacy group supporting the lawsuit, added that the Trump administration's "failure to do its job exposes a trillion-dollar blind spot at the heart of our economy."

"These practices are alarmingly similar to the lax oversight of the mortgage market before its meltdown," added Frotman, who was the student loan ombudsman at the Consumer Financial Protection Bureau before resigning in 2018 and accusing the Trump administration of curbing the agency's authority to look into the student loan industry.

The bureau did not immediately return a request for comment Monday about the lawsuit.

Education Department spokeswoman Angela Morabito said the department does not comment on pending litigation.

Student advocates say an independent and unencumbered Consumer Financial Protection Bureau is necessary for ensuring that the nine companies currently contracted to handle federal student loans are operating with students' best interests in mind.

The latest lawsuit comes as the fate of the bureau is in the hands of the Supreme Court, which said it will hear a case challenging the bureau's constitutionality. A California law firm claims the agency has too much power because its director can only be removed by a president "for inefficiency, neglect of duty, or malfeasance in office."

The bureau has also been spurned by conservative lawmakers who believe it has more latitude than necessary.