CFPB gaining wider clout over student-loan servicers

Companies operating outside of the banking system that process student loan payments will be subject to federal examinations for the first time, the Consumer Financial Protection Bureau said Monday.

Starting March 1, the government watchdog will regulate the seven largest student-loan servicers that process payments for more that 49 million borrower accounts — representing a majority of the market. Sallie Mae, Nelnet, Great Lakes and Ed Financial are some of the firms that will come under the new supervision rule.

Examiners at the bureau will begin assessing whether these nonbank student-loan servicers are complying with federal consumer financial law, including providing borrowers with accurate information and disclosures. They also will investigate whether servicers are applying payments as promised and not charging borrowers unnecessary fees.

The CFPB already supervises banks that process student loan payments, but it will have broader jurisdiction over the servicing industry once the new rule to expand oversight takes effect. The rule affects one out of every five households in the country, according to the CFPB.

The bureau estimates that Americans owe about $1.2 trillion in education debt. Student-loan servicers manage borrowers’ accounts and process their monthly payments. Problems often arise when borrowers fall behind on their payments and seek alternative repayment plans, such as a modification of loan terms or deferment, according to the bureau.

“As the recession decimated the job market for young graduates, a growing share of student-loan borrowers reached out to their servicers for help. The problems they have encountered bear a striking resemblance to the problems faced by homeowners in the run-up to the financial crisis,” said CFPB Director Richard Cordray, on a call with reporters Monday.

Cordray said the bureau has received grievances from borrowers who have had trouble making prepayments or partial payments on their loans. Borrowers also have complained that when their loans were transferred between servicers, the paperwork was often lost and processing errors were made that resulted in late fees.

Advocacy groups are calling on the CFPB and Congress to make student-loan servicers establish a single point of contact for questions and complaints from borrowers, which would require a new rule or legislation. Many are eager to see whether the bureau will be aggressive in using its authority to end deceptive and abusive collection and servicing practices.

“We want to see the CFPB use its supervisory authority to look at the business practices of student-loan servicers. Where they see abuse, unfairness or deception, we want them to step up and just make it outlawed,” said Suzanne Martindale, a lawyer with Consumers Union.

During Monday’s call with reporters, Cordray said the bureau “will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student-loan borrowers.” But he did not specify, nor would bureau officials disclose, whether the CFPB intends to issue any new rules to govern the market.

Industry groups have anticipated the expansion of the bureau’s supervisory authority since the CFPB announced its intentions in March.

Sallie Mae spokeswoman Patricia Christel said the company, the nation’s largest student-loan servicer, has been “engaged with the CFPB in the review of our lending, servicing and collections operations.” She called the new rule “a formality” because the bureau already has the authority to join the Federal Deposit Insurance Corp. in examining the company, which services loans for banks that are regulated by the bureau.

“We’ve been providing high quality, borrower-centric student-loan servicing for more than 35 years and look forward to continuing to work with the CFPB to ensure borrowers receive the best possible service,” Nelnet spokesman Ben Kiser said in an e-mail.

Danielle Douglas-Gabriel covers the banking industry for The Washington Post.
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