A new Joint Statement issued by the Consumer Financial Protection Bureau, Department of Education, and Department of the Treasury presents a framework to standardize student loan servicing practices across the various federal and private borrowing programs. The agencies expect the new principles will guide rulemaking for better servicing practices and, ultimately, reduce student loan defaults.
The Joint Statement was released in conjunction with a new Student Loan Servicing Report. The Joint Statement and Report are the result of a March 2015 Presidential directive and highlight the CFPB’s recent efforts to establish industry-wide rules to increase minimum standards for servicing practices and borrower protections. The directive, included in the Presidential Memorandum on a Student Aid Bill of Rights to Help Ensure Affordable Loan Repayment, charged the CFPB to issue a report by October 1, 2015 with recommendations for student loan servicing standards. The CFPB launched a public inquiry in May 2015 to identify areas of concern.
The Joint Statement identifies four broad target areas for reform to ensure that student loan servicing is:
- Consistent
The Joint Statement identifies a lack of clear expectations and minimum requirements for student loan servicers. The agencies view current industry practices as lacking effective customer service—including timely responses to consumer requests, error resolution, transfers, and payment processing. Particularly, the Joint Statement aims for improvements in practices to account for variations across loan products.
- Accurate and Actionable
The agencies identified shortcomings in the accuracy of information provided to student loan borrowers by servicers. The Joint Statement aims to mitigate the risk of default by ensuring that basic information about account features, borrower protections, and loan terms are relayed in a more reliable fashion.
- Accountable
The Joint Statement alerts all student loan servicers—government, for-profit, and not-for-profit—that they will be held accountable for violations of federal or state consumer financial laws, the HEA, contractual requirements, and federal regulations by ensuring that officials have continuing access to appropriate channels for recourse.
- Transparent
The agencies also indicated that borrowers may benefit from increased information regarding the performance of individual loans, lenders, and servicers. Forthcoming initiatives will establish uniformity by raising private-sector lenders and servicers to current standards applicable to federal student loans. Those standards include information related to loan origination, terms and conditions, borrower characteristics, portfolio composition, delinquencies, defaults, use of forbearance and deferment, and complaints.
The CFPB’s 151-page report incorporated over 30,000 public comments. Richard Cordray, CFPB director, stated in a press release announcing the report that the findings underscore the need for “market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.” The press release attributed “a wide range of sloppy, patchwork practices” as creating obstacles to repayment that drive struggling borrowers to default.
The report indicates that with one in four of the nation’s 41 million student borrowers delinquent or in default, new rules are justified to standardize practices among servicers—the “critical link between borrowers and lenders.” The CFPB expressed particular concern with servicer practices causing lost records, slow payment processing, incomplete and outdated account information, surprise bills demanding extra payments, auto-defaults, and accounting procedures that maximize costs and fees.
The CFPB also noted the need for servicers to provide “additional support” so that borrowers can understand and access repayment options to avoid default. This support includes information about alternative repayment plans, deferments, forbearances, refinancing, and modification of loan terms. Specifically, the report identified special populations—service members, veterans, borrowers with disabilities, and older consumers—as underserved.