In order to help resolve issues borrowers face when paying back student loans, the Consumer Financial Protection Bureau, or CFPB, announced this morning that it will begin supervising the largest non-bank student loan servicing entities which, together, hold tens of millions of federal and private student loan accounts. The new regulation will apply only to non-bank loan-servicing companies, which hold more than 1 million borrower accounts. Combined, these companies account for about 70 percent of all loan-servicing activity outside of the banking sector. The CFPB already oversees banks that offer student loan servicing.
"Borrowers have complained that they had trouble making prepayments or partial payments on their loans. They have also complained that when their loans were transferred between servicers, their paperwork was often lost and processing errors were made that resulted in late fees," director Richard Cordray said in a statement issued by the CFPB. "We know that student loan servicers can have a profound impact on borrowers and their families. So we need to make sure they are complying with federal consumer financial laws."
Going into effect March 1, 2014, the new regulation will impact the seven largest non-bank loan-servicing companies, including Sallie Mae, and comes on the heels of the organization's annual student loan ombudsman report issued this past October which analyzes student loan complaints filed by borrowers. The 2013 analysis of approximately 3,800 complaints found that payment processing problems, difficulty obtaining accurate payoff information on their loans, lost payments and "inappropriate -- and potentially unlawful -- practices directed at military families seeking to repay private student loans" plagued borrowers. A separate report published in October 2012 documented issues servicemen and women faced in understanding the impact of loan payment postponement, taking advantage of military borrower protections and working through processing errors with their loan servicers.
The new regulation seeks to place non-bank servicers under greater scrutiny and more carefully monitor how these entities are complying with federal laws, including the Fair Credit Reporting Act, the Electronic Fund Transfer Act and the Equal Credit Opportunity Act.
For some entities, increased monitoring had already begun. Earlier this year, the FDIC alerted Sallie Mae that it would be issuing an enforcement action against the lending giant for violations of the Servicemembers Civil Relief Act and the Equal Credit Opportunity Act. The CFPB launched its own investigation on a separate matter on Sallie Mae servicing procedures.
The goals of the new oversight are not only to help borrowers eliminate their loans faster, but also to reduce how student loan debt is inhibiting national economic growth, according to CFPB analysts who assert that the $1.2 trillion in outstanding student loan debt is inhibiting borrowers' ability to purchase homes.