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From Banking and Finance Law Daily, December 3, 2013

CFPB turns focus on student loan servicers

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is expanding its regulatory oversight to certain nonbank student loan servicers. The CFPB currently oversees student loan servicing at the largest banks. Under a newly-issued rule, the bureau now will supervise any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans.

Cordray’s remarks. In a recent press call, CFPB Director Richard Cordray spoke about the need for oversight of the nonbank student loan industry in light of the rapidly rising level of student debt and loan delinquency that “have a domino effect on our economy and on our society.”

Cordray noted that the Department of Education administers the federal student loan programs that comprise more than 85 percent of the market, “and we will continue to work closely with them. By making sure these companies comply with federal consumer law, we can ensure that the marketplace for student loans is operating more effectively.”

“We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers,” Cordray cautioned.

Final rule. The CFPB’s rule will provide oversight of the nation’s student loans, the second largest consumer debt market in the nation, which has seen a rise in borrower delinquency in recent years. The bureau noted in its release that outstanding student debt totals approximately $1.2 trillion and that an estimated seven million student loan borrowers currently are in default.

Under the bureau’s final rule, servicers that handle more than one million borrower accounts will be considered “larger participants.” The Dodd-Frank Act authorized the bureau to supervise nonbank “larger participants” in consumer financial markets as defined in the CFPB’s rules.

The CFPB estimates that it will have authority to supervise the seven largest student loan servicers. Combined, those seven service the loans of more than 49 million borrower accounts, representing most of the activity in the student loan servicing market.

Rise in complaints. The CFPB stressed that the final rule is necessary to provide oversight to a market that has not only grown in size but in the number of consumer complaints about the industry. The recent annual report by the CFPB’s Student Loan Ombudsman identified a wide range of concerns voiced by student loan borrowers in complaints to the bureau, including:

  • Confusion about how to pay off student loans early. Borrowers complained that servicers applied their payments in excess of the amount due across all their loans, not to the highest-interest rate loan that they would prefer to pay off first.

  • Problems with partial payments. Many borrowers complained that servicers often divide up the partial payment and apply it evenly across all of the loans in their accounts, a practice that maximizes the late fees charged to the consumer and can exacerbate the negative credit impact of a single late payment.

  • Loan transferring issues. When borrowers’ loans are transferred between servicers, borrowers say they experience lost paperwork, processing errors that result in late fees, and interruptions of routine communication, such as billing statements.

The CFPB said that through supervision, the bureau will be able to evaluate the extent and scope of problems consumers face when dealing with larger nonbank student loan servicers.

Factsheet. The bureau released a factsheet on the final rule, highlighting key elements of the rule. Most notably:

  • Supervision activities generally will include gathering reports from and conducting examinations of supervised entities.

  • Examiners will ensure that student loan services are in compliance with relevant federal consumer financial laws.

  • The CFPB will make certain that banks and nonbanks are following the same rules.

  • The rule will apply to servicing of both federal and private student loans.

  • The CFPB will supervise the entire life of a private student loan. The bureau currently supervises private student loan origination and debt collection practices.

The factsheet also provides relevant statistics on the student loan market as well as an overview of loan servicer activities.

Blog post. The CFPB has added a post to its blog asking for stories from students on problems they have encountered when dealing with student loan servicers. The bureau is seeking information on what did and did not work for borrowers and requests advice from borrowers to those students just beginning to repay their debt.

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