Pursuant to a March 2015 Presidential directive, an interagency task force consisting of the Department of the Treasury, Department of Education, Office of Management and Budget, and Domestic Policy Council has issued recommendations on best practices in performance-based contracting intended to ensure that federal student loan servicers “help borrowers responsibly make monthly payments on their student loans.”  In developing its recommendations, the task force consulted with the CFPB.

The task force recommended that Federal Student Aid (FSA) take the following actions:

  • Use a compensation structure that provides incentives to servicers to keep all borrowers current and also provides targeted incentives based on the performance of borrowers identified by FSA as being at a greater risk of default when they leave school.  FSA should evaluate the impact of the targeted incentives on borrower performance to determine whether they should continue through the duration of the servicing contract.
  • Use an allocation formula that is structured to award new loan volume based on a comprehensive set of metrics that measure servicer performance in (i) driving positive borrower performance, (ii) providing quality customer service, and (iii) adhering to contract requirements and maintaining strong business practices and internal controls.
  • Establish a minimum level of required services to be provided by servicers that includes
    (i) certain standardized communications (such as “a core set of clear, easy-to-read tables that contain consolidated loan information that is most valuable for the borrower to make informed decisions”), and (ii) technology-enabled communication methods, with enhanced, “higher-touch” servicing requirements for borrowers at risk of default, including those identified as being at greater risk of default at school separation and those who become delinquent.  (The task force also recommended that servicers be allowed to apply for waivers of certain requirements on a subset of borrowers “to test innovative strategies that improve borrower outcomes.”)
  • In conjunction with the development of a centralized complaint system, implement a standardized complaint process that provides for clear borrower rights, a specific process to address borrower complaints about servicer interactions, and an escalation process with an FSA resource to address escalated complaints.
  • Use oversight and auditing of servicers to monitor compliance with contractual requirements and incorporate compliance assessments into performance metrics.  Servicers should be subject to administrative and contractual sanctions, including withholding of payment and penalties for noncompliance or other contract violations.