The CFPB Gives Student Loan Servicers Bad Grades in New Report (Card)

By: Steve Kaplan, Elyse Schoenfeld*, and Tori Shinohara
*Ms. Schoenfeld is not admitted in D.C. She is supervised by Melanie Brody, a member of the D.C. Bar.

On September 29, 2015, the CFPB issued a 151-page report that details perceived problems with student loan servicing practices and provides insight into the CFPB’s agenda for changes to the student loan industry. The report signifies increased efforts by the CFPB to address issues in student loan servicing and suggests that servicers will be subject to increased scrutiny in the future.

The report details comments the CFPB received in response to its May 2015 public inquiry seeking input on and recommendations for improving student loan servicing practices. The CFPB received more than 30,000 public comments from individual consumers, state attorneys general and banking regulators, trade associations, and other organizations. The report highlights comments on a host of problems borrowers are facing, including lost paperwork and payment processing errors, difficulties in correcting servicing errors, and issues accessing affordable repayment options or alternatives to avoid default. Commenters also responded to queries regarding the similarity of the problems facing the student loan servicing industry to issues in the mortgage market after the financial crisis, and suggested that the reforms made to mortgage practices could inform future changes to student loan servicing.

The CFPB also provides recommendations for improving servicing practices. The recommendations were informed by the public comments and the Joint Statement of Principles on Student Loan Servicing, a “roadmap” for ameliorating student loan servicing practices jointly issued by the CFPB, the Department of the Treasury, and the Department of Education. In the Joint Statement, the CFPB and the Departments provide a framework for improving student loan servicing practices, promoting borrower success, and minimizing defaults that encompasses the following four principles:

• Consistent: There should be consistent, industry-wide standards for student loan servicers, including minimum requirements related to customer service and servicer communications with borrowers.
• Accurate and Actionable: Information provided by servicers to borrowers should be clear regarding account features, borrower protections, and loan terms to help borrowers avoid default.
• Accountable: Servicers should be accountable for providing fair and effective service to borrowers and for any servicing deficiencies or violations of laws.
• Transparent: The public should have increased access to performance data on both federal and private-sector student loans and the practices of student loan lenders and servicers, including loan terms and conditions, the performance of student loans, the utilization of repayment options, payment plan enrollment, and borrower characteristics. The CFPB and the Departments also suggest that servicer-level data on portfolio performance on all types of loans should be publicly available.

Interestingly, the report identifies several classes of vulnerable borrowers, including veterans, servicemembers, and older consumers, who are particularly impacted by certain servicing practices.

This discussion indicates that we may see more enforcement actions related to treatment of these populations.

We are analyzing the report in greater detail. Stay tuned for a forthcoming client alert.