Alert December 10, 2013

CFPB Finalizes Rule Defining “Larger Participants” of the Student Loan Servicing Market

Noting that “student loan servicing is an important activity that affects millions of consumers,” the CFPB issuedfinal rule allowing it to supervise certain nonbank student loan servicers for the first time. The rule subjects any nonbank student loan servicer that handles more than one million post-secondary education loan accounts, as defined in the rule, to CFPB supervisory authority. The CFPB estimates that it will now have the authority to supervise the seven largest student loan servicers who, combined, are responsible for more than 70% of the activity in the nonbank student loan servicing market.

The rule follows publication of the CFPB Student Loan Ombudsman’s annual report (see October 29, 2013 Alert) and a proposed rule to define “larger participants” of the student loan servicing market (see March 19, 2013 Alert). The CFPB’s authority to issue the rule derives from the Dodd-Frank Act, which grants the CFPB the authority to supervise nonbank “larger participant[s] in markets for other consumer financial products or services.” The CFPB finalized rules defining “larger participants” of the consumer reporting and debt collection markets in July 2012 and October 2012 (see July 24, 2012 Alert and November 13, 2012 Alert, respectively). 

The rule, effective March 1, 2014, identifies a market for student loan servicing and defines the “larger participants” of the market that are subject to the CFPB’s supervisory authority. The rule defines the student loan servicing market to cover the servicing of both federal and private student loans. “Student loan servicing” is broadly defined to mean (1) receiving loan payments (or receiving notification of payments) and applying payments to the borrower’s account pursuant to the terms of the post-secondary education loan or of the contract governing the servicing; (2) during periods when no payments are required, maintaining account records and communicating with borrowers on behalf of loan holders; or (3) interactions with borrowers, including activities to help prevent default, conducted to facilitate the foregoing activities. While defined broadly in the proposed rule as well, the final definition of “student loan servicing” differs from the proposed definition in several ways including, for instance, by clarifying that clause (2) of the definition of “student loan servicing” is meant to apply during all periods when no payment is required on a loan, and not just during a deferment period.

As in the March proposal, whether a firm is a larger participant in the student loan servicing market is measured on the basis of “account volume,” which is measured as of December 31 in the preceding calendar year. If a servicer’s account volume exceeds one million, then the servicer will be considered a “larger participant” of the student loan servicing market. Of note, “account volume” reflects the number of accounts for which an entity and its affiliated companies perform student loan servicing. Further, the number of accounts used to calculate “account volume” includes every account for which the nonbank servicer receives separate fees for performing student loan servicing even if the servicer receives separate fees for one borrower. This means if a student has, for example, five loans with a servicer and the servicer receives five separate fees for servicing the loans, each of the five loans would count towards the account volume test. Notably, nonbank student loan servicers not considered “larger participants” may still be subject to the CFPB’s supervisory authority if the CFPB has reasonable cause to determine that the servicer poses risk to consumers.

In conjunction with the release of the final rule, the CFPB also issued updates to its examination procedures to provide guidance on how it will monitor bank and nonbank services for private and federal student loans.