Consumer-Protection Agency Seeks Oversight of Nonbank Student-Loan Servicers

March 14, 2013

The Consumer Financial Protection Bureau proposed a rule on Thursday that would allow the federal agency to supervise large nonbank student-loan servicers to ensure their compliance with federal consumer financial laws.

If the rule were to be adopted, the bureau would be able to monitor the activity of nonbank student-loan servicers that handle more than one million borrower accounts to make sure they are following the same rules as banks in the student-loan-servicing market. (The bureau currently oversees student loan servicing at banks.) The bureau estimates that the rule would affect the seven largest student-loan servicers, which handle 49 million borrower accounts.

The rule would cover the servicing of not only private student loans but also federal student loans, which are commonly serviced by private companies.

With the rising cost of higher education, many students and their families take out loans but have no choice when it comes to loan servicers, according to Richard Cordray, the bureau's director. Borrowers may have several different types of loans as well as several loan servicers, which makes the process of loan repayment complex.

Student-loan servicers are responsible for collecting payments from borrowers and providing statements and billing information, among other duties. But some borrowers have reported to the bureau that they often face confusion, inefficient communication, and "runarounds" when trying to pay back their loans.

According to a recent report from the bureau on complaints about private student loans, some borrowers said they had received conflicting instructions from servicers and had been unable to reach the appropriate staff members to answer their questions, a situation that can lead to additional charges and missed payments that can reflect poorly on their credit in the future.

"The decision to take out loans may be the first major financial decision for some students," Mr. Cordray said. "We don't want to see degrees become more of a burden than a blessing."

But it's not only the process of dealing with loan servicers that confuses borrowers. The rising number of businesses that service student loans, from one company in 2008 to 13 as of last September, and a lack of consistency in how they operate have exacerbated the confusion.

Further complicating the situation is concern over how borrowers report complaints about their loan servicers. Last May the National Consumer Law Center's Student Loan Borrower Assistance Project released a report outlining what it said were gaps in the system for loan-servicer complaints. The report said that some servicers ignore the U.S. Department of Education's minimum requirements for handling borrower grievances, for example.

A follow-up report, released on Thursday, says the department has improved the complaint process but more changes are still needed. The report suggests that the department publish information about the various stages of the complaint-resolution process, as well as track and publish complaint outcomes and average response times.

The bureau's proposed rule now faces a 60-day public-comment period.