The CFPB issued a new report on September 29, 2015, making clear that it is targeting student loan servicing for a set of industry-wide reforms. Servicers should be on notice that the CFPB is reviewing new standards for them to follow. The CFPB report is the result of a public inquiry made in connection with the Department of Education and the Department of the Treasury that resulted in over 30,000 public comments on student loan servicing practices, as well as other findings that are the result of the CFPB’s examinations and investigations of student loan servicers. After identifying issues with the student loan servicing industry, and comparing the industry to other servicing industries, the CFPB report outlines recommendations for reform.
According to the report, the comments received discuss widespread issues for individual borrowers, including servicing practices that allegedly discourage income-based repayment plans, servicing errors, servicing transfer and payment processing issues that allegedly lead to higher interest rates or late fees, among other complaint. Student loan servicers, who also submitted various comments, discussed how “the complexity of the student loan programs may contribute to these problems,” and also provided concrete suggestions to improve borrower outcomes, including “consistent approaches to common servicing functions, while taking into account important variations in product terms and features.” Other comments also included many analogies from student borrowers and market participants in other servicing industries, linking the student loan servicing industry to the mortgage servicing industry and suggesting reforms based on those made in the mortgage industry. Notably, the student loan servicer commenters rejected those analogies as improper and not applicable for multiple reasons.
The CFPB took all 30,000 comments into account, and issued a framework to improve student loan servicing practices in its report. It recommended that student loan servicing be, at a minimum, (i) consistent; (ii) accurate and actionable; (iii) accountable; and (iv) transparent.
- One of the issues identified by borrowers was that different servicers had different approaches to basic servicing functions that are common to the entire market, as a result the CFPB recommends implementing baseline standards for processing payments, responding to customer inquiries, resolving errors, and providing basic information about benefits and alternative payment options.
- The report notes that baseline standards such as uniform alternative repayment plan disclosures, would have to “consider variations in product features, terms, borrower protections, and borrower preferences, but, to the extent practicable, be consistent across all loan types.”
Accurate and Actionable
- Many comments discussed how complex student loan repayment was when compared to other consumer financial products. In particular, borrower protections, benefits, and other features have evolved over time, but borrowers are often not informed of what these protections, benefits and other features are, or are not given accurate information.
- The report recommends that borrowers be given accurate information regarding the benefits or protections of certain loan repayment plans over others so that borrowers can make more informed decisions. When borrowers are not given accurate information, the report notes that they are more likely to make uninformed choices that “increase costs or otherwise inhibit borrower success.”
- The CFPB recommends that student loan servicers take a disclosure approach that not only provides borrowers with options, but informs them of the best option to “obtain an affordable monthly payment and a path to long-term financial success.” The report recommends that these accurate and actionable disclosures are “critical to facilitate borrower understanding and empower effective decision-making.”
- Perhaps the most critical recommendation as pertains to student loan servicers, the report recommends that the student loan servicing market be subject to “rigorous federal and state oversight.”
- The report emphasizes that servicer failures to correct errors and provide adequate customer service can have extremely damaging effects on borrowers’ credit profiles.
- Thus, the report recommends that state and federal regulators be able to help consumers when servicing practices “violate consumer financial laws” as opposed to the fragmented approach that currently exists.
- Finally, the report explains that there is not enough information on the performance of student loans in the market for anyone to know how successful these programs are.
- The report recommends requiring periodic public reporting of servicer-level data on student loan performance as well as public access to data on student loan performance. It hypothesizes that providing information to the public on what is and is not working will help both regulators and servicers identify the current issues more concretely and provide a clearer way to solve them.
- The report analogizes the current transparency of mortgage data as what policymakers should aim to create for the student loan servicing market. It states that the current student loan reports are simply not specific enough for anyone to use to address problems, encourage borrower success or mitigate defaults, which should be the purpose.
The CFPB’s report outlines a number of areas it will likely focus in the future, and student loan servicers should take this report seriously.