CFPB Student Loan Report Recommends Servicing Policy Changes

CFPB Student Lending

On October 16, the CFPB Student Loan Ombudsman issued a second annual report on student loans. The report analyzes and discusses approximately 3,800 complaints submitted by consumers to the CFPB from October 1, 2012 through September 30, 2013. According to the report, the most common complaints related to borrowers attempting to adjust the repayment terms of their loans in times of hardship, problems with debt collection practices, problems covering a range of payment processing issues, and general customer service issues. The report did caution that given its reliance on complaints and other non-scientific collection of data, it is not based on a representative sample and should not be used to draw conclusions as to the prevalence of problems in the student loan marketplace.

The majority of the report seeks to again draw parallels between problems previously seen in the mortgage servicing marketplace to those the CFPB sees in the student loan market. The CFPB also adds that some perceived problems in student loan servicing mirror those previously observed with regard to credit card servicing. The CFPB cites consumer complaints that servicers (i) fail to explain their payment application policies and processes, (ii) do not apply payments to highest interest loans first, (iii) apply underpayments to maximize late fees, (iv) fail to timely apply on-time payments, (v) do not provide electronic access to payment histories for payments made by phone or mail, (vi) lose payments, and (vii) are unable to provide accurate payoff information. In addition, the CFPB reports that consumers complained about numerous problems that arose following a transfer of the loan from one servicer to another. The CFPB also highlights its concern about insufficient refinancing and modification activity, but notes a recent statement from prudential regulators that the CFPB expects may help address those issues. The CFPB further discusses concerns about the servicing of loans for military servicemembers, but notes that some servicers have moved to address these alleged problems.

Stressing the interests of investors in addition to policymakers, and drawing from requirements in the CFPB’s new mortgage servicing rules and the 2009 Credit CARD Act, the Ombudsman recommends that student loan servicers take certain steps to address these and other servicing concerns:

• Provide notices prior to and following a change in servicer and ensure timely transfer of all documents and information;

• Introduce greater consistency in the handling of payoff requests, providing borrowers with a timely payoff statement in writing, and honoring the estimate for sufficient time;

• Improve error resolution procedures;

• Designate a single point of contact or team for each borrower;

• Improve and expand record management and retention policies;

• Initiate follow up communications after a missed payment;

• Improve payment posting to ensure timely application of payments;

• Reconsider fee-based model for expedited payments; and

• Deliver statements 21 days prior to payment date.

Further, the Ombudsman recommends that congressional policymakers, in connection with reauthorization of the Higher Education Act next year, consider statutory amendments to implement these suggested student loan servicing practices.

The CFPB suggests these changes as it prepares its final student loan servicer larger participant rule, which is expected in the coming weeks. If finalized largely as proposed, the rule will allow the CFPB to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers.

On the same day, the CFPB also issued a consumer advisory to help borrowers instruct their servicers on how to process their payments. The CFPB advises borrowers to provide instructions to servicers with each payment and provides a sample instruction letter. For example, one such instruction letter would be used by borrowers to direct application of overpayments toward the highest-interest rate loans.