Last week, the CFPB released a report summarizing the results of a two-month public inquiry into student loan servicing practices. At the same time, the CFPB, in conjunction with the U.S. Department of Education and the U.S. Department of the Treasury, issued a Joint Statement of Principles on Student Loan Servicing, which “offer[s] a roadmap for student loan servicing reform, including a call to establish clear and consistent industry-wide standards.” The release of this report is yet another indication that the CFPB intends to regulate the student loan servicing market and should signal to market participants that the CFPB is not satisfied with the status quo. Student loan servicers should not wait for the CFPB to implement new regulations before making changes to their existing practices. Rather, using the existing mortgage servicing and credit card regulatory frameworks as a guide, servicers of student loans should take note of the areas identified by the CFPB as problematic. They can then determine whether there are common-sense enhancements that can be made in the short term.

As we wrote about in a previous post, on May 14, the CFPB formally commenced an inquiry into student loan servicing practices and released a 36-page Request for Information (RFI) seeking input from the public on the student loan servicing market. The RFI specifically sought information regarding the following three categories:

  • Common practices, policies and procedures in the student loan servicing market;
  • Applicability of consumer protections from other consumer financial product markets; and
  • Impact of limits on availability of data about student loan servicing and student loan repayment on borrowers.

Comments on these subjects could be submitted by anyone, though the CFPB specifically encouraged participation from a variety of interested parties, including student loan borrowers, lenders, servicers and debt collectors.

The 151-page report released last week summarizes more than 30,000 comments received through the RFI process. The first part of the CFPB’s report highlights five specific areas where borrowers report that they are encountering issues.

  • When borrowers are entitled to, or attempt to obtain, certain benefits and/or protections afforded by law or the underlying contract, they often are unable to do so or are provided inaccurate information;
  • Borrower information for student loans is often not timely transferred, information that is transferred may be inaccurate and borrowers may not be notified of the transfer at all;
  • Borrowers call to obtain or dispute information and frequently receive inadequate service and/or do not have their concerns adequately resolved in a timely manner;
  • Servicers lack consistent methods of processing and applying payments, so borrowers with multiple loans with different interest rates often do not have payments applied to the loans with the highest rates first; and
  • Inadequate service practices make it more likely that service members, older consumers and economically-vulnerable consumers will be harmed.

Many of these issues reappear in the second part of the report when the CFPB discusses comments submitted regarding the applicability of other regulatory regimes to the student loan market. For example, the report discusses regulations that mortgage servicers must comply with related to error resolution, servicing transfers and protections for struggling borrowers. It also analyzes regulations applicable to credit card markets related to payment processing. If nothing else, this portion of the report demonstrates that there likely are some areas where regulations from one market could easily apply to student loans (e.g. error resolution). However, the unique nature of the student loan market will pose difficulties if the CFPB applies a one-size-fits-all set of minimum standards across the industry or mimics existing mortgage and credit card regulations.

Relying upon the information described above, the CFPB closes out the report with recommendations for future reform. Their conclusion, also reflected in the joint policy statement released in conjunction with the U.S. Departments of Education and Treasury, is that policymakers and market participants should aim to make student loan servicing consistent, accurate and actionable, accountable and transparent. The CFPB argues that these four principles should guide any future efforts at establishing “baseline standards of conduct to strengthen student loan servicing.”

Last week’s report confirms that the CFPB 1) believes there are certain areas where borrowers are not receiving adequate service; 2) believes regulations governing other markets can, and should, be leveraged to establish minimum standards applicable to student loan servicers; and 3) intends to enact new regulations and/or amend existing regulations in the near future that will be applicable to the student loan market. Student loan servicers that are willing and able to analyze their current practices, compare them to existing industry standards in other relevant markets, and make reasonable enhancements in anticipation of future rulemakings will find it easier to implement and comply with the inevitable regulatory framework.