Federal Financial Regulator to Oversee Student Loan Servicers

The Consumer Financial Protection Bureau (CFPB) Tuesday announced that it will be expanding its regulatory reach to companies like Sallie Mae that collect and manage student loan payments.

In a rule issued today, the CFPB’s supervision authority will be expanded to include the largest nonbank student loan servicers. These companies manage the payment and borrower outreach services for lenders and are the primary points of contact for consumers.

The rule, which takes effect March 1, 2014, was written to target the seven largest servicers. Together, the companies manage about 49 million accounts and represent “most” of the student loan servicing market, according to the CFPB.

“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.”

Cordray said his agency has received complaints from consumers who have had trouble making prepayments or partial payments on their loans. Borrowers also have complained that when their loans were transferred between servicers, the paperwork was often lost or processed incorrectly, resulting in late fees.

The CFPB already oversees student loan lending at the largest banks. The group also has direct supervisory power over debt collection agencies tasked with recovering education loans after default. But the Bureau saw a need to supervise the copious activity that occurs in between, when borrowers are actively repaying their debts.

A servicer is often different than the lender itself, and a borrower typically has no control or choice over which company services a loan. The servicer is tasked with managing an account after the loan is funded, including communicating with the borrower and accepting and correctly applying payments. Lenders, including private banks and the federal government, nearly always outsource the tedious process to a select group of specialized companies.

The new rule expands supervision to any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans.

These criteria would apply to seven companies, in the CFPB’s estimation. The group includes Sallie Mae and Nelnet – both publicly traded private companies – and nonprofit and government agencies like Great Lakes, the Pennsylvania Higher Education Assistance Agency, American Education Services, and ACS Education Services, a division of Xerox.

The CFPB said it will ensure that bank and nonbank student loan servicers are playing by the same rules. The agency already has supervisory authority over other nonbanks such as mortgage originators and servicers, payday lenders, larger debt collectors, larger consumer reporting agencies, and private student loan originators. Nonbank student loan servicers, regardless of size, continue to be subject to the Bureau’s enforcement jurisdiction. Servicers who are not considered “larger participants” may still be subject to the Bureau’s supervisory authority if the Bureau has reasonable cause to determine the servicer poses risk to consumers.