Saturday, May 16, 2015

Student Loan Servicing May Soon Resemble Mortgage Servicing

The CFPB has issued a Request for Information (the “RFI”) seeking comments concerning student loan servicing issues and potential solutions.  Based upon the content of the RFI and the prepared remarks of Cordray, it is likely that student loan servicers can soon expect rules and regulations to be implemented which will largely resemble those adopted for mortgage servicers and the credit card industry.  

The Rationale:
In March, President Obama issued his “Student Aid Bill of Rights” in which he directed the Secretary of Education, in cooperation with the CFPB, to issue a report assessing the potential applicability of consumer protections in the mortgage and credit card markets to student loans and recommendations as to statutory and regulatory changes. According to the CFPB, student loans are now the second largest consumer debt product.  The theme from the CFPB is a common one- consumers do not pick their student loan servicers and therefore there is no market control over the service industry. Currently, there is no comprehensive regulatory scheme in place governing the servicing of student loans and the CFPB believes that many of the issues it has identified with the servicing of student loans are similar to those that the Bureau has seen in the mortgage servicing and credit card markets.  The RFI “is meant to find ways to put the “service” back into the student loan servicing market and help people avoid unnecessary defaults.” Prepared Remarks of CFPB Director Richard Cordray at the Field Hearing on Student Loans (May 14, 2015).

The RFI:

The RFI focuses on the following key areas:
  1. Specific practices that create repayment problems – for instance, billing error dispute procedures and timely processing of payments;
  2. The compensation practices between lenders and servicers – specifically, whether student loan servicers are compensated in such a way as to encourage good service; 
  3. Transitions between servicers- particularly, whether adequate notice is provided to the consumer and whether adequate information is transferred between the prior and successor servicers;
  4.  Whether there are protections in other markets, specifically mortgage servicing and credit cards, that should be adopted in the student loan servicing market; and
  5.  Whether there is adequate information available in the market to determine whether servicers are being effective.

The Future Regulations:

The CFPB appears to be focusing in on the mortgage servicing and credit card market reforms that have been implemented since the inception of the CFPB.  “Loan servicing generally includes many common functions, irrespective of the underlying consumer financial product, including account maintenance, billing and payment processing, customer service, and managing accounts for customers experiencing financial distress.”  Request for Information Regarding Student Loan Servicing, Docket No. CFPB-2015-0021, p. 20.  It is therefore likely that student loan servicing reform will bear some similarities to reform in the mortgage servicing and credit card markets.

Some of the provisions being considered for implementation in the student loan servicing sector are:

  • Notice of transfer of loan servicing- expect to see some sort of notice provisions implemented and potentially, a provision that will require where there is a transfer, some sort of grace period in which the successor servicer cannot treat a consumer’s payment as late if the consumer made the payment in a timely manner to prior servicer;

  • Transfer of Information Between Servicers - some requirement that student loan servicers implement policies and procedures to facilitate a transfer of information during servicing transfers;

  • Payoff Statements – a requirement that servicers provide payoff statements within some set period of receiving a request for payoff from a consumer;

  • Error Resolution Procedures – the CFPB appears to be contemplating a provision similar to the Qualified Written Response requirement imposed on mortgage servicers;

  •  Early Intervention with Delinquent Borrowers – there is likely to be some provisions put in place for early rehabilitation of delinquent account and potentially modification rules to prevent defaults;

  •  Timely Posting of Payments – a requirement that payments be credited within a certain time of receipt;

  • Periodic Billing Statements – a requirement that monthly billing statements be provided; and

  •  Application of Payments – some provision as to how payments in excess of the minimum payment will be applied where there are multiple accounts.

Time Frame:
The deadline for comments is July 13, 2015.  It is therefore unlikely that any proposed rule will be published before 2016.

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