On February 3, the CFPB’s student loan ombudsman, Rohit Chopra, released a summary of student loan servicers’ responses to questions the CFPB posed last November about the application of borrower payments.  In that November request, the CFPB asked a group of unidentified servicers to provide information about (i) the allocation of lump sum payments by the Department of Defense and other third parties on behalf of servicemembers or others seeking to direct lump-sum payments to specific loans; (ii) the percentage of borrower payments made through online bill pay systems and direct debit, and servicer practices related to borrower instructions provided with such payments; (iii) servicers’ ability to accommodate standing instructions for future excess payments; and (iv) the methods by which servicers communicate with borrowers about directing prepayments.

The CFPB’s summary of the responses explains that the request was sent to “a number of private student loan servicers” and that the respondents “represented many different forms” including “third-parties servicing notes held by banks or in a securitized pool, large depository institutions servicing loans in-house, and small depository institutions.” However, a chart included in the summary reports the results of only six respondents.

The report presents a short list of “key findings”:

  • Many servicers responded that they cannot honor specific payment allocation instructions communicated through online, third-party bill pay services.
  • Many servicer online payment platforms allow borrowers to direct payments to a specific loan, but others do not. Some that do not provide a workaround, requiring the borrower to contact their servicer following a payment and request a reallocation.
  • Many servicers indicated that they are making other changes to improve communications to borrowers about payment processing policies.
  • Many servicers have limited ability to accept payment instructions in advance of a payment made by a third party (e.g. payments made by the Department of the Defense on behalf of servicemembers receiving loan repayment assistance).
  • Some servicers have recently changed their payment allocation policies and now allocate payments from borrowers in excess of the scheduled payment amount or statement balance due to balances with the highest interest rate.

In addition, in response to servicer inquiries regarding an appropriate standard allocation policy when borrowers have both fixed and variable rate loans, the Ombudsman states, based on the CFPB’s preliminary analysis, that applying excess funds toward the loan with the highest current interest rate will save the borrower interest in the short run and over the life of the loan.