The CFPB’s Request for Information
On May 14, 2015, the Consumer Financial Protection Bureau (CFPB) held a field hearing on student loans in Milwaukee, Wisconsin and issued a Request for Information (RFI) about student loan servicing practices. The RFI is in response to a Presidential Memorandum that instructed the Secretary of Education, in consultation with the Secretary of the Treasury and the Director of the CFPB, Richard Cordray, to submit a report to the President addressing a variety of issues related to student loan servicing. The Presidential Memorandum, the RFI, and Director Cordray’s remarks at the field hearing suggest that the executive branch is considering comprehensive regulation of the student loan servicing industry, and that the proposed regulations will likely mirror recent regulations enacted to address problems in the mortgage and credit card servicing industries.
Nationwide, the CFPB estimates that Americans hold more than $1.2 trillion in student debt, which makes student loan debt the second-largest source of consumer debt in the United States behind mortgages. Loan servicers play an important role in this marketplace. Although student loans are typically originated through the Department of Education or private lending institutions, the lenders rarely service the loans after origination. Instead, lenders—including the federal government—contract with private third-party companies to service the loans. These servicers are borrowers’ sole point of contact for most questions about repaying their student loans. Servicers are responsible for receiving and posting payments, enrolling students in alternative payment arrangements, identifying and counseling borrowers in financial distress, and other customer service functions. The RFI notes that these functions are similar to the services provided by mortgage and credit card servicers.
Unlike the mortgage and credit card industries, however, student loan servicing companies are not subject to comprehensive federal regulation. Although the CFPB has statutory authority under the Dodd-Frank Act to regulate most student loan servicers, Director Cordray noted in his remarks that “there is currently no comprehensive statutory or regulatory framework that provides uniform standards for the servicing of all student loans.” The RFI indicates that the CFPB, in conjunction with the Departments of Education and Treasury, is strongly considering changing that course, and propounding regulations that will have a considerable impact on how student loan servicing companies operate for the foreseeable future.
The RFI identifies a number of potential systemic problems with student loan servicing, and seeks public comment from market participants regarding issues that the CFPB has identified through consumer complaints. These issues include: (1) delays in payment posting, which can result in increased accrued interest; (2) application of overpayments across all loans, instead of to the loans with the highest interest rates; (3) application of partial payments in a manner that maximizes late fees; (4) failure to correct payment processing or other errors in a timely fashion; (5) lost paperwork submitted to process applications for forbearance or alternative payments plans; and (6) issues related to servicing transfers, including failure to notify borrowers of servicing transfers, interruptions in receiving billing statements and other communications, and imposition of late fees when borrowers send payments to their prior servicers.
In addition to the foregoing, the RFI focuses on the payment arrangements between lenders and loan servicing companies. Student loan servicers are typically paid a flat monthly fee for each account serviced, and the fee does not rise or fall based on the level of service provided. The CFPB is concerned that these contracts create economic incentives for servicers to spend as little time as possible on each account, and to keep borrowers in repayment for as long as possible.
The RFI also seeks public comment regarding application of consumer protection regulations in the mortgage and credit card industries to student loan servicing. Based on the perceived similarities between student loan servicing and other consumer loan servicing, the RFI suggests that implementation of regulations designed to protect consumers in the mortgage and credit card markets may be the appropriate response to the purported problems in the student loan servicing market. For example, recent mortgage servicing regulations have addressed issues such as timely resolution of account errors, prompt payment credits, records retention, and requirements that servicers implement policies and procedures related to early intervention for delinquent borrowers. The mortgage servicing rules also require that servicers provide written notice before servicing is transferred, and prohibit servicers from charging late fees on payments made to prior servicers within 60 days of the effective date of the transfer. In the credit card context, recent regulations have required that servicers provide billing statements at least 21 days before the due date, and that servicers apply excess payments to the highest-interest balance first. Director Cordray made clear in his remarks that he believed the “[p]rotections offered to consumers with credit cards and mortgages might help improve the quality of student loan servicing as well.”
Potential Areas of Future Regulation and Enforcement
The RFI suggests that the CFPB will prioritize regulating the student lending industry, which may have long-term consequences to student loan servicing companies and lenders. The CFPB’s RFI suggests that student loan servicers and lenders may face future regulation and enforcement actions in the following areas:
- Student loan payment processing. The CFPB is particularly concerned about payment processing, including errors that may affect borrowers’ credit histories, application of payments to multiple balances, and late fees. Following the end of the public comment period, the CFPB may promulgate regulations that require servicers to apply excess payments to high interest rate balances first, and that servicers apply partial payments in a manner that minimizes late fees.
- Servicing Transfers. Student loan servicers and lenders can also expect regulations related to servicing transfers. Borrowing from recent regulations in the mortgage industry, the CFPB may impose regulations requiring servicers to provide written notice before and after servicing is transferred, and that servicers implement policies and procedures designed to ease the transition between servicers. In addition, the CFPB may prohibit servicers from charging late fees to borrowers who remit payments to their old servicers within a specified period of time after the transfer.
- Delinquent Borrowers. The CFPB may require that student loan servicers implement policies and procedures regarding early intervention for delinquent borrowers, similar to the requirements that are part of the mortgage servicing rule.
- Payment Arrangements. Lenders and student loan servicing companies may also face regulations regarding payment arrangements, potentially impacting the compensation model where student loan servicers are paid a flat monthly fee per loan account.
- Student Choice in Servicers. Director Cordray signaled in his remarks that he believes that consumers “have no control or choice over the company they are dealing with to manage their loans.” Accordingly, the CFPB may consider regulations designed to provide more consumer choice in selecting a loan servicer.
- Tracking of Customer Complaints. As it has done in regulating other industries, the CFPB may also require that servicers keep records of all borrower disputes, and how each dispute was resolved.
Responses to the Request for Information are due by July 13, 2015, and may be submitted here, using the docket number CFPB-2015-0021. Consumer Finance Enforcement Watch will continue to follow this matter and report on the outcome of the CFPB’s inquiry, as well as any proposed regulations.