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California Association of Private Postsecondary Schools

Scrutiny for Loan Servicers

12/04/2013

Inside Higher Ed.  December 3, 2013.  Federal regulators next year will begin closer monitoring of companies that process student loan payments for the vast majority of borrowers to make sure they are following the law and not misleading consumers. 

Under a rule proposed earlier this year and set to be finalized Tuesday by the U.S. Consumer Financial Protection Bureau, federal regulators will have the authority to oversee a much larger swath of student loan servicers.

The bureau is extending its oversight to all student loan servicers that operate independently from banks and have at least one million accounts. Officials estimated that seven of the nation’s largest non-bank student loan servicers -- representing 70 percent of the market -- would fall within that threshold.

CFPB employees will be checking whether the student loan servicing companies are complying with a range of existing consumer protection laws. Under the new rule, which takes effect next March, the bureau will have the power to gather information and subject the servicers to formal “examinations” -- the term the CFPB uses to describe what are effectively compliance audits.

Regulators will also have the power to step in and stop servicers from engaging in conduct that the bureau deems “unfair, deceptive, or abusive” -- even if it isn’t expressly forbidden by the letter of the consumer protection statutes.

For example, the CFPB could go after loan servicers that misrepresent or make false statements about a borrower’s repayment options, officials said Monday. Regulators could also intervene if a servicer were to renege on a promise to discount a borrower’s interest rate after he or she makes a certain number of on-time payments, they said.

The CFPB has previously raised concerns about student loan servicing problems, especially with regard to private loans and military service members. For instance, the bureau has said that some servicers inappropriately apply advanced payments in a way that maximizes profits for the lender but leads to the borrower paying more interest.

The bureau’s new authority is expected to extend to all four of the Education Department’s main servicers for federal loans. That includes Sallie Mae, the nation’s largest student loan servicer, which is under fire from several lawmakers and already facing an investigation from the bureau and two other federal agencies over the company’s servicing activities.