The Consumer Financial Protection Bureau (CFPB) proposed a rule last week that would allow it to federally supervise certain nonbank student loan servicers for the first time. The rule would bring new oversight to a rapidly growing market that has seen a rise in borrower delinquency in recent years.
“The student loan market has grown rapidly in the last decade, and servicers are now facing the stress of an increasing number of delinquent borrowers,” said CFPB Director Richard Cordray. “Our rule would bring new oversight to the student loan market and help ensure that tens of millions of borrowers are not treated unfairly by their servicers.”
A copy of the proposed rule can be found at: http://files.consumerfinance.gov/f/201303_cfpb_nprm_larger-participants-student-loan-servicing.pdf
The Bureau currently oversees student loan servicing at larger banks. Today’s proposed rule would expand that supervision to certain nonbanks. The rule would define certain nonbank student loan servicers as “larger participants” and would allow the Bureau to oversee their activity for compliance with federal consumer financial laws. The Bureau would ensure that banks and nonbanks are following the same rules in the student loan servicing market. The vast majority of student loan servicing is conducted by nonbank servicers. This would be the third market in which the Bureau has defined larger participants, after consumer reporting and debt collection. The proposed rule would give the Bureau visibility into the complete cycle of private student loan debt, from origination through servicing to debt collection and credit reporting.
Under the rule, any nonbank student loan servicer that handles more than 1 million borrower accounts would be subject to CFPB supervisory authority. With that threshold, the Bureau estimates that it would have authority to supervise the seven largest student loan servicers. Combined, those seven service the loans of 49 million borrower accounts, representing most of the activity in the student loan servicing market.
The proposed rule would cover servicing of both federal and private student loans. Federal student loans are commonly serviced by private companies, and any of those companies that handle more than 1 million borrower accounts would be subject to the Bureau’s supervisory authority. The CFPB will continue to coordinate closely with the U.S. Department of Education, which conducts reviews of companies handling loans in accordance with the federal student aid program.
Student loan servicers are responsible for collecting payments from borrowers on behalf of loan holders and sending the payments to the loan holders. Student loan borrowers rely on servicers to process payments accurately, to perform associated activities like providing statements and other billing information, and to answer inquiries about their accounts. A servicer is often different than the lender itself, and a borrower has no control or choice over which company services a loan.
Many servicers perform their functions well. But the Bureau’s recent report on private student loan complaints highlighted some concerns that some borrowers have reported. Some borrowers say that, in trying to pay back their loans, they face:
Confusion: According to some borrowers, they often have a hard time figuring out how much they owe. These borrowers report they do not receive the information they need about their loans and they are often confused by the terms and conditions of their loan. Other borrowers are frustrated by being charged unexpected fees. Some also complain about conflicting instructions from different employees of the same servicer – or worse, when their loan has been sold or their servicer has changed, not even knowing who to pay.
Dead ends: Some borrowers report dealing with servicing personnel who seemed to be unaware of resources available to borrowers. Some borrowers complain of getting transferred to multiple departments, reaching personnel who are not responsive or empowered to provide clear answers. Borrowers also complain about being unable to reach appropriate service staff to correct a mistake in how a payment was applied to their account.
Runarounds: Some borrowers report paperwork getting lost and errors not always getting fixed. And, according to some borrowers, payments are not always processed on time. They say some servicers take several days to process payments and borrowers end up paying interest on the outstanding principal during that processing time.
Supervision will allow CFPB to evaluate the extent and scope of these issues by directly examining the larger student loan servicers. The student loan market has grown rapidly in the last decade and is now facing the stress of increasing numbers of borrowers who are struggling to stay current. That increase translates to more work for servicers that need to be up to the job.
When problems arise because of servicing concerns, student loan borrowers may end up in trouble. They may miss a payment, owe more money because of additional interest on principal, or face future difficulties with credit because of a poor payment history. The Bureau would be reviewing servicers’ activities to evaluate the risks they may pose to consumers and assess their compliance with federal consumer financial law.
The Bureau issued education loan examination procedures, which address both student loan origination and student loan servicing, in December 2012. The CFPB has also recently published a report on the student loan marketplace, the Annual Report of the CFPB Student Loan Ombudsman, and The Next Front, which addresses student loan servicing issues faced by military families. Many of the complaints the CFPB has heard are highlighted in these reports. In addition, the CPFB has partnered with the U.S. Department of Education on many initiatives to help student loan borrowers, like the Financial Aid Shopping Sheet.
The public will have 60 days to comment on the proposed rule after it is published in the Federal Register.