CFPB Likely to Issue Student Loan Servicing Rules: What Will They Look Like?

The CFPB has set its target on student loan servicing.  Last week, the CFPB issued a Report on Student Loan Servicing and, in conjunction with the Department of Education and Department of the Treasury, issued a Joint Statement of Principles on StudentLoan Servicing.  The Report is a likely foreshadowing of impending rules governing how student loans are serviced.  According to the Joint Statement, rulemaking is likely to focus on four guiding principles:

• Consistency
• Accuracy
• Accountability
• Transparency

The CFPB Report makes the case for regulation of the student loan servicing industry by observing that there are no consistent market-wide standards for student loan servicing.  According to the CFPB, industry wide regulation is needed because student loan debt is the second largest class of consumer debt and while other sectors of consumer debt are showing improvement, the student loan market continues to show elevated levels of distress.  Moreover, the CFPB notes (as it has in other sectors it exercises dominion over) that “a borrower typically has little or no control over which company services their loan.”  The CFPB Report goes on to summarize the comments the CFPB has received in response to the Request for Information that issued in May of this year.  The Report makes it likely that the CFPB will issue a proposed Rule concerning Student Loan Servicing despite the fact that the sector was not earmarked for regulation in the Agency’s Spring 2015 Rulemaking Agenda.

So what would rulemaking look like?  Based upon the CFPB’s Report, it is likely that any rulemaking for student loan servicing is likely to bear similarity to the mortgage servicing rules issued in 2013.  Specifically, rule making is likely:

• To provide uniform standards as to loan servicing across the industry;
  • To address servicers’ obligations to correct errors asserted by borrowers;
  • To require servicers to notify borrower prior to transfer to a new servicer;
  • To establish standards for payment processing
    • Establish time frame for processing payments;
    • Establish some standards as to how payments are applied, particularly where loans are prepaid and groups of loans have been packaged;
       
• To create standardized protocols or programs for alternative repayment programs (a variation on the mortgage loss mitigation rules);
  • To potentially decrease and simplify the number of repayment options available to borrowers;
  • To potentially mandate as loss mitigation Pay as You Earn and/or Income Based Repayment programs;
  • To require standardized notifications of repayment options;
     
• To require servicers to provide certain information regarding student loans to borrowers on a periodic basis and/or upon the borrower’s request;
   
• Impose additional vendor management obligations on lenders (both private and federal) and on servicers.