Looking Over Servicers' Shoulders

After a slew of complaints about federal and private loan processing and collection, Consumer Financial Protection Bureau seeks oversight of the largest servicers.

March 15, 2013

WASHINGTON -- In the latest step in its attempts to regulate the student loan market, a federal consumer protection agency is proposing that it will start enforcing laws and regulations governing loan servicers for both federal and private student loans.

The Consumer Financial Protection Bureau announced Thursday that it would extend its oversight to student loan servicers -- companies that do not actually loan the money to students, but instead collect the payments from borrowers to send to lenders and are the first line of contact when borrowers are distressed or delinquent. Borrowers don’t choose their servicers, and loans can be transferred from one servicer to another over the life of the loan.

In a proposed rule, the agency, which has the authority to expand the scope of its oversight by identifying "large participants" in consumer financial markets to supervise, said it would begin overseeing student loan servicers that operate independently from banks. (Since it was established, the CFPB has also expanded its areas of oversight to debt collectors and consumer credit reporting agencies.)

The consumer agency has long sought to rein in the private student lending industry, but Thursday’s announcement is its first foray into part of the federal student loan system. Private loans have fewer repayment options, and often higher interest rates, than federal loans, and they’ve frequently been a source of complaints from borrowers.

Private loans, though, make up only a small fraction of student loan debt nationwide. And while federal loans have more flexible repayment options for borrowers in trouble, they’re not immune from complaints. Federal loans are now made directly from the Education Department, but the servicing process is mostly outsourced to third parties. (One of those servicers, ACS, suffered a rash of problems last year, including privacy breaches and a glitch that left borrowers stuck in default for months even as they met requirements to rehabilitate their loans.)

The Education Department has its own regulations for loan servicers, as well as the ability to enforce them. But while the department said it looks forward to working with the bureau in its efforts, the agency -- by seeking oversight over federal servicers as well -- seems to imply the department isn't watching closely enough. In a proposed rule, the Consumer Financial Protection Bureau announced it will seek on its own to supervise servicers that are not banks and have more than 1 million borrower accounts. That will give it oversight powers over the seven largest loan servicers. (The agency already has oversight power over banks that service their own loans.)

Both federal and private loan borrowers often complain that dealing with servicers involves piles of paperwork, occasional delays processing payments, and frequent dead ends and runarounds when trying to answer questions or enroll in programs like income-based repayment. The financial protection agency wants to ensure that servicers are following existing laws and regulations. Under the proposed rule, its staff would check to make sure that the servicer gives a thorough overview of repayment options, enrolls borrowers in repayment programs without delays, and processes payments properly, among other requirements.

The seven largest servicers, as measured by loan volume rather than number of accounts, include the four servicers that manage all new federal student loans: SLM Corp. (Sallie Mae); Nelnet, Inc.; Great Lakes, Inc.; and American Education Services/Pennsylvania Higher Education Assistance Agency (known as FedLoan Servicing).

"We design our payment programs to follow applicable rules and best practices, and are continuously looking for ways to improve and enhance them," said Patricia Christel, a Sallie Mae spokeswoman, in a statement.

The proposed rule is the next step in the Consumer Financial Protection Bureau's goal of overseeing the entire student lending process, from origination through collections and credit reporting, said Richard Cordray, the bureau's director, in a call with reporters Thursday. “Student loan servicers can have a profound impact on borrowers and their families,” Cordray said.

Borrower advocates said they believed that enforcing existing regulations could make a difference for student loan borrowers in distress. “It adds another layer of oversight to both federal and private loan servicers, which we think is needed and important,” said Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance project. The project issued a report Thursday finding that the Education Department’s system for handling complaints about servicers has improved in the past year, but that further improvements are needed. The group cited the consumer bureau as a model.

Some of the consumer agency’s other actions to provide tougher protections for student loan borrowers, such as recommending an option to refinance private student loans and the ability discharge those loans in bankruptcy, would require Congressional action. But Loonin said she believed that the proposed rule, if enacted as written, would make a difference.

“Enforcing the existing laws is a really important piece of the puzzle,” she said. “This can really go a long way.”

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Libby A. Nelson

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