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CFPB to Oversee Nonbank Student Loan Servicers
Wednesday, December 4, 2013 7:00 AM

The Consumer Financial Protection Bureau (CFPB) issued a rule yesterday that allows the agency to supervise certain nonbank student loan servicers for the first time. The rule brings new oversight to the nation’s second largest consumer debt market – student loans – which have seen a rise in borrower delinquency in recent years.

“Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules,” said CFPB Director Richard Cordray. “This rule brings new oversight to those large student loan servicers that touch tens of millions of borrowers.”

More than 40 million Americans with student debt depend on student loan servicers to serve as their primary point of contact about their loans. Student loan servicers’ duties typically include managing borrowers’ accounts, processing monthly payments, and communicating directly with borrowers. When facing unemployment or other financial hardship, borrowers contact student loan servicers in order to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms.

A servicer is often different than the lender itself, and a borrower typically has no control or choice over which company services a loan. When problems arise because of servicing concerns, student loan borrowers may end up in trouble. They may miss a payment, owe more money because of additional interest on principal, or face future difficulties with credit because of a poor payment history.

The CFPB currently oversees student loan servicing at the largest banks. Yesterday’s rule expands that supervision to any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans. Under the rule, those servicers will be considered “larger participants,” and the CFPB may oversee their activity to ensure they are complying with federal consumer financial laws. To coincide with this new authority, the Bureau has also updated its Supervisory and Examination Manual to provide guidance on how the Bureau will monitor bank and nonbank servicers of private and federal student loans.

Under yesterday’s final rule, which was proposed in March, the CFPB estimates that it will have authority to supervise the seven largest student loan servicers. Combined, those seven service the loans of more than 49 million borrower accounts, representing most of the activity in the student loan servicing market.

Many student loan servicers perform their functions well. But the recent annual report by the CFPB’s Student Loan Ombudsman identified a broad range of concerns voiced by student loan borrowers in complaints to the CFPB.

Click here to view the rule. A factsheet on the student loan servicing rule is also available online.