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.
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For more information, please contact Venable's CFPB Task Force.