On May 14, 2015, the Consumer Financial Protection Bureau (CFPB)
issued a request for information (RFI)
regarding issues for and risks to consumers arising from student
loan servicing. The CFPB states that it is working with the U.S.
Department of Education and the U.S. Department of the Treasury to
identify initiatives to strengthen consumer protections in the
field of student loan servicing.
The CFPB estimates that over 40 million student loan borrowers
collectively owe more than $1.2 trillion. Of these borrowers, the
CFPB estimates that nearly 8 million student loan borrowers are in
default, representing over $110 billion in balances. Student loan
borrowers nearing default may qualify for deferments, forbearances,
modification requests, or other loss mitigation programs. One of
the CFPB's primary questions to be addressed in the RFI is
"whether third-party student loan servicers . . . have
adequate economic incentive to enroll borrowers in [programs] to
avoid default." The CFPB also notes that "[f]or student
loan borrowers, there is no existing, comprehensive federal
statutory or regulatory framework providing uniform standards for
the servicing of all student loans."
RFI Focus Areas
The CFPB's RFI asks a set of general questions related to
student loan repayment, focusing on specific areas:
- Common industry practices;
- Practices that may cause repayment challenges;
- Practices related to repayment for borrowers in distress, including communication with delinquent borrowers, procedures related to default and acceleration, and the availability of alternative payment options and loan modifications;
- Practices related to repayment for unique borrower demographic groups such as servicemembers and older Americans;
- Financial incentives that may affect the quality of service;
- Potential application of consumer protections from other consumer financial product markets; and
- The availability of information about the student loan market.
The RFI also asks specific questions regarding the potential
applicability of consumer protections from other consumer financial
product markets, including the Dodd-Frank Act mortgage servicing
rules and the Credit Card Accountability, Responsibility, and
Disclosure Act (CARD Act) credit card rules.
Framing these questions, the CFPB identifies what it has determined
to be key risk areas for consumers based on consumer complaints
submitted to the CFPB regarding servicing issues. These include,
among other things, issues related to prompt crediting of payments
and confusion regarding payoff of loans; errors, delays, and
miscommunications that may occur when borrowers attempt to apply
for forbearances or other alternative payment plans; and lack of
notice when servicing is transferred.
New Regulations Similar to Mortgage Servicing Rules May Follow
The eventual goal of the CFPB could be to issue regulations that
provide student loan servicer requirements similar to the mortgage
servicing protections promulgated by the CFPB under the Dodd-Frank
Act. These rules addressed CFPB-identified "critical servicer
practices," including error resolution, prompt crediting of
payments, and providing payoff statements, as well as specific
requirements relating to servicer policies and procedures, early
intervention for delinquent borrowers, continuity of contact, and
procedures for evaluating and responding to loss mitigation
applications. Specific mortgage loan servicer requirements that
could cross over to the student loan servicer industry
include:
- The requirement that servicers provide consumers with periodic statements reflecting the payment due, the application of past payments, late fees, and other information;
- The requirement that servicers provide a notice of transfer of loan servicing to the borrower and timely transfer documents to the new servicer;
- The requirement that servicers supply a borrower with a payoff statement upon request;
- Error resolution procedures requiring the timely correction or investigation of reported errors;
- Record retention requirements;
- Early intervention rules that require servicers to make efforts to contact delinquent borrowers and inform them about the availability of loss mitigation options; and
- Continuity of contact rules that require servicers to assign designated personnel to respond to a delinquent borrower's questions and to assist with available loss mitigation options.
Student loan servicers may also see requirements transferred
from the CARD Act, such as the timely posting of payments, periodic
billing statements, and rules regarding the application of excess
payments.
In addition to directing the CFPB's focus on the issue of
student loan servicing, the RFI could assist federal and state
agencies in prioritizing resources and in helping financial
services providers develop best practices. Public comments in
response to the RFI may also inform a report required by the March
10, 2015 Presidential Memorandum
regarding a Student Aid Bill of Rights. The deadline for submitting
comments is July 13, 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.