CFPB Seeks to Increase Oversight of Nonbank Student Loan Servicers

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Proposed rule to protect nearly 50 million Americans with student loan debt.

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In response to borrower delinquency rates that have surpassed all-time highs, the Consumer Financial Protection Bureau (CFPB) has proposed a new rule to tighten supervision for servicers of both federal and private student loans.  Although existing regulations govern the practices of major banks engaged in loan servicing, the lack of oversight over nonbank institutions has emerged as a significant regulatory gap.

The proposed rule seeks to bring large nonbank loan servicers into compliance with existing regulatory standards previously applicable only to banks, creating a uniform regulatory landscape to protect borrowers.  As authorized by the Dodd-Frank Act, the CFPB’s new rule will apply to nonbank entities constituting “larger participants” under the statute—those handling more than one million accounts per year.

The new rule would impact 49 million current borrower accounts, as well as the one in five Americans that are out of school but still hold student loan debt.  Lending institutions—both federal and private—frequently hire loan-servicing companies to manage the collection of payments and perform other administrative tasks.  Borrowers typically have no choice as to what servicing company they use, and the CFPB has received increasing numbers of borrower complaints in recent years about servicing companies’ practices.

The CFPB has suggested that the proposed rule responds directly to borrower concerns collected in a report published last year.  Many borrowers have submitted complaints about the quality and quantity of information they receive from loan servicers.  For example, some borrowers report significant difficulty gathering reliable information about their account balances, as well as clarification on the terms and conditions of their loan agreements.

Other prevalent concerns the report identifies include “dead ends” and “runarounds.”   Borrowers run into “dead ends” when they struggle to connect with servicing personnel who have the knowledge to respond to their needs; for example, a consumer may be transferred to several different departments and speak to many different staff members, none of whom is able to provide adequate advice.  On the other hand, borrowers may face” runarounds” when servicers make administrative errors, some of which may result in late fees to the borrower.

The CFPB’s proposed rule seeks to address these concerns by requiring an intensive review of servicers’ practices “to evaluate the risks they may pose to consumers and assess their compliance with federal consumer financial law.” For each nonbank institution under supervision, the CFPB plans to engage in data analysis and monitoring, with the option to pursue enforcement actions as necessary.  The agency will also complete an extensive review of each servicer’s compliance with consumer financial regulations barring unfair or abusive practices.

Ultimately, the agency hopes that the proposed rule, once made final, will provide more consistency to the regulation of the rapidly growing student loan market by bringing nonbank institutions within the scope of the agency’s regulatory authority.  If promulgated, the rule will permit the Bureau to monitor the “entire life” of a loan, as the proposed oversight will stand alongside existing authority to supervise loan originators and debt collectors.

CFPB Director Richard Cordray expressed the Bureau’s willingness to work with the Department of Education to continue developing effective policies on student loans. Department of Education Secretary Arne Duncan expressed enthusiasm for such initiatives, commenting: “We look forward to working with them on their efforts to ensure that loan servicers are protecting student loan borrowers.”

The CFPB will accept public comments on the proposed rule until May 28th, 2013.