Bureau Seeks Information On Industry Practices That Can Create Student Debt Stress
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is launching a public inquiry into student loan servicing practices that can make paying back loans a stressful or harmful process for borrowers. The issues that the Bureau is seeking information on include: industry practices that create repayment challenges, hurdles for distressed borrowers, and the economic incentives that may affect the quality of service. The CFPB is also re-launching an enhanced version of its Repay Student Debt online tool to help borrowers figure out their options for affordable repayment.
“Student debt stress can make borrowers feel like they are walking a tightrope where any false move in paying back a loan can cause them to fall,” said CFPB Director Richard Cordray. “Today’s inquiry seeks information on the pain points in student loan servicing that make repayment a more difficult and stressful process.”
Student loans make up the nation’s second largest consumer debt market. The market has grown rapidly in the last decade. Today there are more than 40 million federal and private student loan borrowers and collectively these consumers owe more than $1.2 trillion. The market is now facing an increasing number of borrowers who are struggling to stay current on their loans.
Servicers are a critical link between the borrowers and the lenders. They manage borrowers’ accounts, process monthly payments, and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. A servicer is often different than the lender, and a borrower typically has no control over which company services a loan.
The CFPB has heard from borrowers through its complaint handling, its Tell Your Story function, and from staff travelling across the country. The CFPB has observed that many borrowers are experiencing significant student debt stress. Consumers have complained about billing problems associated with payment posting, prepayments, and partial payments. For example, borrowers report that payments may be processed in ways that make repaying student loans even more expensive. Other consumers have complained about lost records, slow response times to fixing errors, and a general lack of customer service. Often, consumers who have their loan transferred from one servicer to another report experiencing interruptions when receiving notices, billing statements, or other routine communications.
The CFPB has also heard from distressed borrowers that student loan servicers may have difficulty helping them avoid defaults and delinquencies. Repayment roadblocks can exacerbate problems. Distressed borrowers complain that they are given the runaround when they ask for help, they have a hard time getting straight answers from servicing staff, and that the staff are untrained or unequipped to deal with their problems.
For many young consumers, repaying a student loan is their first experience in the financial services marketplace. Student loans play a pivotal role as they seek to establish their creditworthiness and, eventually, finance their first major purchases. This potential impact on millions of Americans lives only heightens the student debt stress borrowers face.
In light of these concerns, the CFPB is seeking input on ways to ensure borrowers receive quality student loan servicing. The public inquiry focuses on the following:
- Industry practices that create repayment challenges: The CFPB’s inquiry seeks information about specific practices that could potentially create problems as consumers repay their loans. The inquiry seeks information on whether consumers are harmed by billing error dispute processes, whether payments are applied in a way that maximizes fees or increases the amount of interest paid, and if the borrower receives enough information when a loan is transferred between servicers.
- Hurdles for distressed borrowers: The CFPB estimates that there are nearly 8 million borrowers in default, representing more than $110 billion in balances. Today’s public inquiry requests information on whether servicers’ policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment. It seeks information on whether these policies and procedures are driving borrowers to default on their loan.
- Economic incentives affecting the quality of service: The CFPB is seeking information on whether the typical ways that servicers are paid may indirectly lead to borrower harm. The model used in most third-party servicing contracts provides student loan servicers with a flat monthly fee per account serviced. This fee is generally fixed and does not rise or fall depending on the level of service a particular borrower requires in a given month. The CFPB’s inquiry seeks information on whether student loan servicers have adequate economic incentives to take the time to enroll borrowers in flexible repayment options or help them avoid default.
- Application of consumer protections in other markets: For student loan borrowers, there are no comprehensive federal regulations to ensure standards for the servicing of their loans. The CFPB is analyzing whether there are protections in other consumer credit markets – such as credit cards or mortgages – that could inform policymakers and market participants when considering options to improve the quality of student loan servicing. For example, servicers in some other markets are subject to more stringent rules that include early intervention for delinquent borrowers, protections when loans are sold, written acknowledgement of disputes, and limits on certain fees. A recent Presidential Memorandum requested that the Department of Education consider, in consultation with the CFPB and the Department of the Treasury, whether these other markets should inform potential student loan servicing standards.
- Availability of information about the student loan market: The CFPB is looking at whether a general lack of transparency in the market may be contributing to consumer harm. The Bureau is seeking information on whether there is adequate information available about how the market is functioning to determine whether servicers are providing help to those repaying their loans and those struggling to avoid default.
The CFPB oversees the student loan servicing industry for compliance with federal consumer financial protection laws. The Bureau currently supervises student loan servicing at the largest banks and nonbank student loan servicers that handle more than one million borrower accounts, regardless of whether they service federal or private loans. This represents most of the activity in the student loan servicing market.
The CFPB is working with the Department of Education and the Department of the Treasury to identify initiatives to strengthen student loan servicing. Members of the public are encouraged to submit comments. The submissions to this request for information may serve to assist federal and state regulatory and enforcement agencies in prioritizing resources. The public comments will also be used to inform a report required by the recent Presidential Memorandum. The deadline for submitting comments is July 13, 2015.
Repay Student Debt 2.0
Today, the CFPB has re-launched its Repay Student Debt web tool. This interactive resource offers a step-by-step guide to navigate borrowers through their repayment options, especially when facing default. The new version of this tool provides student loan borrowers with sample instructions to send to their student loan servicer to protect themselves against payment processing problems and auto-defaults. It also has information about how to request a lower monthly payment when experiencing financial distress. Student loan borrowers experiencing problems related to repaying student loans or debt collection can also submit a complaint to the CFPB.
More information is at: https://www.consumerfinance.gov/students
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.