The Consumer Financial Protection Bureau finalized a rule Tuesday that allows it to supervise the largest nonbank student loan servicers in the country.
The rule permits the CFPB to begin examining any nonbank servicer that handles more than one million student loan borrower accounts - a category that currently includes seven firms and accounts for 70% of the market - beginning March 1.
The regulation also gives the CFPB the ability to look at all student loans handled by supervised servicers, including federal student loans, which many studies say cover at least 85% of the $1.2 trillion market.
"By making sure these companies comply with federal consumer law, we can ensure that the marketplace for student loans is operating more effectively," said CFPB Director Richard Cordray during a conference call with reporters on Monday. "Today's rule affects one out of every five households in this country and will help address our broader concerns that unmanageable student loan debt may be dragging down people's lives."
The CFPB already supervises large banks that perform student loan servicing, but many outstanding loans, including those backed by the Department of Education, are currently being handled by nonbanks.
Critics have said the CFPB was too focused on the small, private student loan market, rather than federal loans.
"What remains a continued disappointment is the CFPB has ignored that over 86 percent of student loan borrowers have federal student loans," said Richard Hunt, president and chief executive of the Consumer Bankers Association, in an emailed statement Oct. 16 following a CFPB annual study on the private student loan market. "CBA believes the bureau should help all consumers especially when federal loan portfolios carry a 14.7% three-year default rate ... A fair, transparent and accurate analysis of the market is what all borrowers deserve."
During the call Monday, Cordray said the finalized rule "applies to servicers regardless of whether they handle federal or private student loans" and "levels the playing field" between bank and nonbank servicers.
The CFPB has consistently urged student loan servicers to modify loans, fearing that the high levels of debt could provoke harm the economy.
But since the CFPB first issued a proposal in March to cover the largest student loan servicers, many have said they are limited in modifying a federal loan because it must meet specified programs set by the Education Department. On the private loan side, many servicers have argued that they are initiating their own refinance or modification programs as borrowers struggled to find jobs coming out of college after the financial crisis and could not make loan payments.
"For our customers who demonstrate a reduced ability to pay, we offer customized assistance - modified loan terms, lower interest rates, and good-faith catch-up payment programs that amortize the loan principal, as well as the ability to temporarily suspend payments - that we believe is consistent with the CFPB's vision," said Patricia Nash Christel, a spokesperson for Sallie Mae, in an emailed statement earlier this year.
But with an estimated 7 million student loan borrowers currently in default based on CFPB research, agency officials have argued more can be done.
"While comprehensive data is not available, several major market participants in the [federal loan] program do not appear to be succeeding in enrolling struggling student loan borrowers in income-contingent plans," said Rohit Chopra during a speech before the Federal Bank of St. Louis Nov. 18. "In the servicing of government-guaranteed mortgages and student loans, incentive misalignment may be acute."
Both Chopra and Cordray have recently said that the inability for borrowers to reduce their student debt impairs their ability to buy a house in the near term and can ultimately slow down economic growth.
"In recent months, a growing chorus of analysts has joined the bureau in documenting how this rising debt burden may be holding back the economic recovery - slowing household formation, discouraging business start-ups, inhibiting first-time homeownership, and limiting the mobility and options of young graduates who would otherwise consider, say, working in rural communities or as teachers," Cordray said during the call Monday.
In October, the agency released a study showing many borrowers struggled to get payments processed correctly, particularly when trying to apply an extra amount to the loan with the highest interest rate. Based on concerns raised in the report, the CFPB is likely to examine how servicers charge late fees and the process of transferring the loan.
"Many of these borrowers did everything right; they worked hard and made years of monthly payments, but still cannot find any help to get out of those high-rate loans," Cordray said. "We know that student loan servicers can have a profound impact on borrowers and their families. So we need to make sure they are complying with federal consumer financial laws."
The CFPB also cautioned in its materials released with the final rule that servicers that fall outside of the larger participant rule could still be subject to enforcement actions. The CFPB has authority to cite any servicer for a myriad of violations, including mishandling credit reporting or electronic fund transfers or engaging in any practice the agency deems as unfair, deceptive or abusive.
For now, however, it appears the agency is still in data-gathering mode. Last week, Chopra sent a letter to an undisclosed number of student loan servicers asking them to "voluntarily" show their payment processes, particularly with electronic and debit payments. Chopra said the request was to support their "ongoing consumer education and market analysis functions" but he noted the importance of complying with federal laws.
"We understand that many servicers welcome the opportunity to electronically respond to borrowers acknowledging the borrower's request - even when a servicer will not honor standing instructions - and responding with the various ways that borrowers can direct a prepayment to a specific loan," Chopra said in the letter. "This not only helps servicers reduce operating costs by reducing call center volume and costly processing of paperwork, but it also supports their efforts to ensure compliance with the Truth-in-Lending Act's ban on prepayment penalties for private student loans."