Student Loan Servicer Regulation to Start, Says CFPB
NEW YORK (MainStreet) The Consumer Financial Protection Bureau (CFPB) is preparing for its role as regulator of the largest non-bank student loan servicers. Supervision officially begins in March.
Bank-based loan servicers such as Wells Fargo or Discover are already overseen by the CFPB. But student-loan companies that service loans such as Sallie Mae and Nelnet so-called "nonbank" servicers have lived in a regulatory grey area.
Many observers say that greater supervision of these entities is long overdue. Watchdog organizations have criticized Uncle Sam for its ineffective monitoring of these businesses. The National Consumer Law Center's January report, "The Sallie Mae Saga: A Government Created, Debt Fueled Profit Machine" concludes the that largest private lender which doubles as a loan servicer is putting profits ahead of borrowers a trait NCLC says it shares with other student loan servicers.
"We consistently see examples of Sallie Mae and other servicers pushing borrowers into the quickest options, such as forbearance, rather than explaining and assisting borrowers to obtain more favorable long-term solutions, such as income-based repayment," writes Deanne Loonin, the report's author and Director of NCLC's Student Loan Borrower Assistance Project, referring to the federal loans it services. "Forbearances can be costly for borrowers because interest accrues during forbearance periods and because they must be renewed more frequently than most other options."
In a February 3 letter, the CFPB's student loan ombudsman Rohit Chopra disclosed the voluntary responses from servicers to questions that went out in a November request for information letter. Among the highlights: third-party payments servicers could not honor specific payment instructions and that many servicers are "not well-equipped to accept payment instructions in advance of payments made by a third party." Chopra cited problems experienced by the Department of Defense which seems to have difficulty intervening on behalf service members getting loan repayment assistance. Attempts to improve communication between borrowers and lenders was also found to be a work in progress.
In his letter, Chopra said that borrowers and lenders may have "mismatched incentives." The essential conflict is that borrowers are trying to pay off their loans while lenders are trying to make as much money from them as they can. The CFPB says it thinks that some loan services apply the payments in a way that maximized their ROI at the expense of borrowers who end up pay more for their loans. A key complaint, in the case of borrowers with multiple loans, was that servicers often fail to apply excess payments to the loan with the highest interest rate.
The bureau did not release the names of which entities responded to its request for information.
--Written by John Sandman for MainStreet