CFPB To Oversee Student Loan Servicers

As of 2013 this nation’s second largest consumer debt market is student loans.  It is predicted that student loan defaults will be the next financial tidal wave to hit the nation.  Earlier this year, the Consumer Financial Protection Bureau (CFPB) announced that outstanding student debt totals approximately $1.2 trillion. The Bureau also estimates that 7 million student loan borrowers are now in default on their debt.
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.
CFPB issued a rule December 5, 2013 that allows the Bureau to supervise certain nonbank student loan servicers for the first time. Under this new rule, which was proposed in March, the Bureau 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.
Borrowers submitted complaints to the Bureau highlighting:

• Prepayment Stumbling Blocks: Since options to refinance high-rate private student loans are limited, many consumers attempt to pay off their loans in order to reduce the amount of interest owed over the life of the loan. But many consumers express confusion about how to pay off their loans early. For example, borrowers complained that servicers applied their payments in excess of the amount due across all their loans, not to the highest-interest rate loan that they would prefer to pay off first.
• Partial Payment Snags: When borrowers have multiple loans with one servicer and are unable to pay their bill in full, many servicers instruct borrowers to make whatever payment they can afford. Many complaints described how servicers often divide up the partial payment and apply it evenly across all of the loans in their account. This maximizes the late fees charged to the consumer, and it can exacerbate the negative credit impact of a single late payment.
• Servicing Transfer Surprises: When borrowers’ loans are transferred between servicers, borrowers say they experience lost paperwork, processing errors that result in late fees, and interruptions of routine communication, such as billing statements. Consumers complained that payment-processing policies can vary depending on the servicer. And, consumers said when they make decisions on the previous servicer’s practices, they can get penalized.

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