The U.S. Consumer Financial Protection Bureau will begin monitoring a wider range of student loan servicers in early 2014.
On Dec. 3, 2013, the CFPB announced a new rule that will extend its supervisory authority beyond just big banks who issue student loans, allowing it to monitor smaller private servicers. In the interest of borrowers who file complaints regarding customer service tactics and collection practices by loan servicers, the bureau will begin scrutinizing all companies that manage student loans on behalf of lenders, according to the New York Times.
Addressing the service
Previously, the bureau had established regulatory authority over student loan servicing by big banks, but the majority of currently outstanding student debt is serviced by non-bank companies. As such, the new rule - due to take effect March 1, 2014 - fills a major void in the CFPB's student loan-servicing oversight. Given that an estimated 7 million borrowers in the United States are in default on their student loans and student debt now totals around $1.2 trillion, the expanded regulation should come as welcome news for many.
The servicers that will experience increased scrutiny include those sending out statements, tracking and collecting payments and those processing loan deferment requests. Servicers charged with reporting borrower activity to credit reporting agencies and fielding borrower questions will also fall under CFPB jurisdiction. In many circumstances the servicer, while not the originator of the loan, serves as the main source of contact for the borrower - a factor that serves as the primary impetus for these changes.
The new rule aims to ensure that all servicers comply with applicable federal consumer protection laws, including the Fair Credit Reporting Act, and to protect borrowers from any practices deemed abusive or harassing. Analysis from the CFPB will range from on-site examinations to collecting data from the servicers themselves.
"We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers," Richard Cordray, director of the CFPB, told the Times.
Specific targets
Any nonbank servicer that manages at least one million accounts will be subject to oversight. The bureau's goal was to obtain regulatory authority over the country's seven largest loan servicers of both private and federal loans. The efforts will also be closely coordinated with the U.S. Education Department, which originates the majority of student loans.
Those seven servicers represent most of the activity within the student loan servicing market, according to the bureau, with more than 49 million borrower accounts between them. Sallie Mae is by far the largest and most influential, based on data from the Student Loan Servicing Alliance.
"As the largest servicer of student loans, we have been engaged with the CFPB in the review of our lending, servicing and collection operations," said Sallie Mae spokeswoman Patricia Christel.
CFPB student loan ombudsman Rohit Chopra recently asked servicers to publicly disclose details of their payment processing protocol as one of the preliminary steps to the bureau's future oversight.
Among the most common complaints received by the CFPB from consumers were difficulties in getting payments properly applied to their balance on prepayment attempts and inaccurate application of payments to high-interest loans. Delays were frequently encountered by borrowers who tried to transfer their debts between different servicers, with payment processing issues resulting in fees and damaged credit scores. The issues are often compounded by the fact that refinancing options on student loans are limited, leaving borrowers to either pay down their loans early or transfer to a separate servicer - either of which requires immediate and accurate processing.
"Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules," Cordray said.
New year, new oversight
In its summary of the regulatory amendments, the CFPB stated that the specifics of its examination processes will vary based on the market and the entity in question, but that proceedings will generally include on-site examination accompanied by an initial conference with the servicer's management. Records and other information will likely be requested at that time, and a preliminary review will be conducted based on the records received.
"While on-site, examiners spend a period of time holding discussions with management about the entity's policies, processes, and procedures; reviewing documents and records; testing transactions and accounts for compliance; and evaluating the entity's compliance management system," read the CFPB summary. "As with any Bureau examination, examinations of nonbanks may involve issuing confidential examination reports, supervisory letters, and compliance ratings."
The expanded regulation could prove to be a boon to the economy in the long run, as the level of outstanding student loan debt in the country has been cited as a major factor in the economic viability - or lack thereof - exhibited by the current post-graduate demographic. The next wave of homebuyers, in particular, has yet to present itself due in large part to the amount of student debt it possesses.