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From Banking and Finance Law Daily, September 29, 2015

Regulators join forces to strengthen student loan servicing protections

By Andrew A. Turner, J.D.

A roadmap for student loan servicing reform, including a call to establish clear and consistent industry-wide standards, has been issued by the Consumer Financial Protection Bureau, the Treasury Department, and the Department of Education in a Joint Statement of Principles on Student Loan Servicing and a CFPB report outlining widespread servicing failures reported by both student loan borrowers. The CFPB said that it intends to explore potential industry-wide rules to increase borrower protections.

The regulators agreed to align efforts to strengthen protections for student loan borrowers and seek to ensure that student loan servicing is consistent, accurate and actionable, accountable, and transparent. The CFPB drew upon these four general principles in formulating recommendations for student loan servicing reform:

  • Consistent. When considering ways to improve the quality of service delivered to student loan borrowers, policymakers should ensure that any standards consider variations in product features, terms, borrower protections, and borrower preferences, but, to the extent practicable, be consistent across all loan types.

  • Accurate and actionable. When contemplating standards of conduct related to the disclosure of information about loan terms, features, and consumer protections, policymakers and market participants should ensure that any disclosure approaches consider borrowers’ need for both accurate and actionable information.

  • Accountable. Recognizing that servicing errors may occur, even in a well-functioning student loan market, servicers should expect to be accountable for their conduct. Policymakers should consider steps to ensure borrowers have access to appropriate mechanisms to resolve errors. Furthermore, when violations of law occur, federal and state agencies should identify issues, correct conduct, and obtain remediation for borrowers.

  • Transparent. Significant improvements in market transparency may permit student loan borrowers, market participants, regulators, and law enforcement agencies to better understand the student loan market in order to identify emerging risks and effectively target resources to address problems, encourage borrower success, and mitigate defaults.

Student loan servicing practices. In May, the CFPB launched a public inquiry into student loan servicing practices that may make paying back loans a stressful or harmful process for borrowers. The CFPB also sought input on potential solutions to improve service for student loan borrowers in repayment.

The CFPB received over 30,000 public comments from individual borrowers, student loan market participants, and other stakeholders identifying a range of student loan servicing practices that may pose risks for borrowers seeking to repay student debt. The CFPB report considers these comments in analyzing student loan servicing practices, policies, and procedures.

Borrower benefits and consumer protections. Commenters describe problems related to servicers’ disclosure of, facilitation of enrollment in, and recertification for alternative repayment programs and other borrower benefits, including income-driven repayment plans for federal loans. Commenters also suggest that servicers’ practices related to these programs may contribute to borrowers forfeiting eligibility for certain benefits, increase costs over the lifetime of loans, and result in loan defaults.

Servicing transfers. Commenters state that servicing transfers, which have been a widespread feature of the student loan market since early in this decade, may result in processing problems, leading to surprise fees, damaged credit, lost repayment benefits and loan records, among other problems.

Customer service and error resolution. Commenters discuss how breakdowns in customer service and barriers to resolving servicers’ errors can cause performing borrowers to fall behind or drive delinquent borrowers into default.

Payment processing. Commenters identify a range of specific practices related to processing payments that may cause significant problems for borrowers seeking to repay student loans.

Practices that affect specific borrower segments. Commenters identify servicing practices specific to military families and older borrowers. In addition, commenters describe how illegal practices by certain student loan “debt relief” companies prey on low-income and economically-vulnerable student loan borrowers.

MainStory: TopStory CFPB Loans

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