The Consumer Financial Protection Bureau (CFPB) issued a rule this week that will allow the Bureau to supervise certain nonbank student loan servicers for the first time. This important move should invigorate oversight of student loan servicing. The CFPB’s supervisory authority covers any nonbank student loan servicer that handles more than one million borrower accounts. This should include the seven largest student loan servicers of both federal and private student loans. These servicers are responsible for more than 70% of the activity in the nonbank student loan servicing market. (Note that regardless of size, nonbank student loan servicers are still subject to the CFPB’s enforcement jurisdiction).
The CFPB describes its supervisory focus as including these steps:
1. Gathering reports from and conducting examinations of supervised entities,
2. Making sure that all relevant federal consumer financial laws are being followed, and
3. Ensuring that banks and nonbanks are following the same rules.
The CFPB has previously released reports highlighting serious problems in the student loan servicing market, including issues with improper payment applications, account transfers, and failure to provide adequate relief options.
The CFPB can help fill the gaps caused by a long history of lax federal oversight. The Department of Education in particular has been mostly asleep at the wheel. For example, the Department apparently plans to renew its servicing contract with Sallie Mae despite outstanding government investigations of the company and high levels of borrower complaints. This move reinforces the need for government transparency on servicer performance and quality.
The hope is that the CFPB and Department of Education will work together to ensure that servicers are doing their jobs properly. The Department of Education will continue to have an important role in ensuring that the servicers comply with relevant laws and otherwise meet their contractual obligations. As SLBA Director Deanne Loonin discusses in this interview, the servicer role is particularly critical because if done properly, federal servicers can prevent many borrowers from going into default on their loans.
Unfortunately, our experience is that most servicers steer borrowers into the options that are easiest for the servicers such as deferments and forbearances. These options work in some cases, but there are better choices for many borrowers. In a July earnings call, Sallie Mae CEO John Remondi described servicing federal loans as very expensive work. He cited the example of enrolling a borrower into income-based repayment, noting that the company does not get paid for outperformance in “that side of the equation.” Mr. Remondi claims that his company still does this work properly, but his statement highlights the problems with the current commission system. The current system incentivizes servicers to push easy solutions rather than taking the time necessary to do what’s best for borrowers.
Given the high stakes for borrowers and the devastating consequences if they default, CFPB oversight of servicers is a welcome development for consumers. Borrowers having trouble with their servicers should submit complaints to the Bureau. The CFPB has also asked borrowers to share their experiences about the processing of student loans and has asked several servicers to voluntarily provide information about their policies.
