CFPB Cautions Student Loan Servicers, Contemplates Reforms

"One in four student loan borrowers are currently in default or struggling to stay current on their loans, despite the availability of income-driven repayment options for the vast majority of borrowers" - The Consumer Financial Protection Bureau (CFPB).

This does not capture the actual scenario of the student loan market. It is perhaps not only the borrowers who are actually responsible for the higher default rate, rather the shoddy and illegal practices resorted to by the loan servicing companies may have also been responsible for this crisis.

In a recent report released by the CFPB, the U.S. consumer watch dog raised concerns as student loan borrowers reported widespread servicing failures. The CFPB is determined to take action against companies that resort to unlawful servicing practices and plans to seek potential industry-wide rules in order to safeguard borrowers.

The rapid growth of the students loan in less than a decade has placed it as the nation's second largest consumer debt market after mortgages. According to the CFPB report, the volume of outstanding federal student loan debt has increased over two fold, rising from $516 billion in 2007 to more than $1.2 trillion currently.

However, the student loan market continues to signal distress with mounting level of default. Citing a recent release by the Department of Education, CFPB stated that over the past two years, the total volume of federal student loans in default, on a dollar basis, has increased by almost 25%.

In May 2015, CFPB initiated a public inquiry into student loan servicing practices "that may make paying back loans a stressful or harmful process for borrowers". In response to the inquiry, CFPB received more than 30,000 public comments.

The Issues

Acting as an important medium between borrowers and lenders, servicers are engaged in key functions of managing borrowers' accounts, processing monthly payments, and directly communicating with borrowers. According to the CFPB, very often, the servicer is different than the lender, and a borrower typically has no control over which company services a loan. Several consumers have claimed servicers' failure to provide the basic services required to meet the needs of borrowers.

Consumers reported a number of servicing problems they encounter such as servicers losing paperwork, committing errors, misapplying payments, failing to provide updated information about borrowers account and delaying payment process. Borrowers also reported that they face severe difficulty in accessing affordable repayment options or other repayment alternative plans in order to avoid default. Further, in the event of any error borrowers face difficulty in correcting the issue.

Several reported problems detailed how a number of servicing practices may lead to payment surprises, lost benefits, higher interest charges for borrowers, create hindrance in repayment and result in default as borrowers struggle to repay debt.


In coordination with the U.S. Department of Education and the U.S. Department of the Treasury, the CFPB has laid down the following four important recommendations for reforming the loan servicing market:

  • Student loan servicing should be consistent with industry-wide standards for the entire servicing market.
  • Student loan servicers to be held accountable if servicers break the law and servicers should ensure resolution of errors.
  • Student loan servicers should facilitate borrowers in accessing accurate and timely information on payment plans or repayment options.
  • Ensure greater transparency with improved public access to information on student loan performance.

CFPB Director Richard Cordray mentioned, "Today's report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers."

Bottom Line

The U.S. student loan industry is currently under heightened regulatory scrutiny over alleged anti-consumer practices. Notably, in July, the CFPB ordered Discover Financial Services DFS to pay $18.5 million, charging the bank for engaging in illegal practices pertaining to the repayment and collection of student loans.

Further, Navient Corporation NAVI , which services student loans for more than 12 million customers, is likely to face legal action by the CFPB over its practices in handling loans. Navient, which started operating independently following the separation of SLM Corporation SLM last year, has also drawn investigations from states including Illinois and Washington.

It is high time that student loan servicing companies should exercise more caution and adopt a borrower friendly approach in order to address and minimize borrowers' difficulties. Further, they should refrain from unethical practices or be prepared to face regulatory wrath.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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