Student Loan Servicers Under Scrutiny

A rule released by the Consumer Financial Protection Bureau on December 3 will allow the CFPB to examine the top student loan servicers on March 1. This comes on the heels of an announcement made two days earlier that the CFPB was asking student loan servicers provide to the options they’d have for borrowers who want to accelerate the payoff of their student loans. Although providing this information would be voluntary, the CFPB wants it by December 17.

 Federal officials and servicer critics have said that servicers do not properly credit payments made above the minimum due.

“We have heard from borrowers that many of them want to pay off their high interest loans, but they also told us they had to run an obstacle course to get their payments processed properly,” said Rohit Chopra, the CFPB’s student loan ombudsman in American Banker on December 2. “We hope that by asking student loan servicers to voluntarily tell us about their payment processing policies, we can work together to ensure that borrowers understand their options in repaying their loans.”

Loan servicers essentially act as custodians for the loan originators—they collect payments and perform administrative tasks in maintaining a loan portfolio, including the processing of deferments and forbearances. Private lenders use loan servicers—so does the federal government. The Department of Education, which makes about 90% of all student loans, outsources the collection of payments to loan servicers. As the CFPB steps up its scrutiny of servicers, the two federal agencies could be on a collision course.

In a November 26 letter, Chopra’s request that servicers show the options available to borrowers who want to make extra payments on their loans follows an October study that said servicers were not applying extra payments to higher-value loans, even after a borrower’s specific request.

Chopra referred to a “sample text” it developed for borrowers who submit payments over the amount due that would reduce the amount of interest owed. The letter said “an industry trade association”—possibly the Student Loan Servicing Association—told them the sample text was “unhelpful.” Instead, the trade association suggested borrowers that make a specific request for every extra payment allocation—a demand that is likely to thwart a quicker payoff.

 But this may be a first shot across the bow, with the big bang arriving in March when the top seven student-loan servicers are subject to examinations. They include Sallie Mae (SLM Corp.), PHEAA—the Pennsylvania Higher Education Assistance Authority—NelNet, the National Educational Loan Network and Great Lakes Educational Loan Services. They are among the payment processors for about 70% of the market.

Chopra seems to hope that servicers will want to get with the program. “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,” he said in his 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.”

Keith New, a spokesperson for PHEAA said on Monday he was not aware of Chopra’s letter and would have to consult with PHEAA’s policy personnel before commenting on it. He stated that since they are a servicer and not a lender, the amount of relief they can provide is limited to the terms of the contract the borrower signed with the lender. Once the borrower has exhausted all contractually available options, he said, PHEAA’s hands are tied.

Ben Kiser, spokesperson for Lincoln, Nebraska-based NelNet—the National Educational Loan Network—did not return a phone call seeking comment. Nikki Lavoie, spokesperson for Newark, Delaware-based Sallie Mae did not respond to an email. A spokesperson for Great Lakes Loan Services could not be reached.

 John Sandman

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