In a memorandum issued last week, U.S. Department of Education Secretary Betsy DeVos withdrew various memoranda issued by the Obama Administration ED Secretary and the ED’s Financial Student Aid Division (FSA) that provided policy direction for a new federal student loan “state-of-the-art loan servicing ecosystem” to be procured by the ED. The memoranda were intended to guide the development of provisions in new contracts to be entered into by the ED with “customer service providers” it selected to participate in servicing federal student loans on the new servicing ecosystem. ED had also planned to work with federal and state law enforcement agencies and regulators to apply the policy direction to the servicing of all student loans, to the maximum extent possible.
The memoranda had included: recommendations for changes to the compensation structure and performance measurements included in the federal Direct Loan servicing contracts; directions to contractors to designate, train, and appropriately compensate specialized servicing personnel to assist at-risk and certain other borrowers; and standards to provide consistency in the handling, processing, and application of payments by servicers and other servicing practices, such as how information about student loans is reported to credit bureaus and the process for servicing transfers.
In the fifth annual report of the CFPB Student Loan Ombudsman released in October 2016, the CFPB focused on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment (IDR) plans. To address problems discussed in the report, the Ombudsman urged policymakers and industry to consider various actions, including requiring collectors to initiate and assist borrowers seeking to complete applications for IDR plans and to hand-off these documents to servicers for processing, enhancing servicer communications to borrowers transitioning out of default, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment. In light of Secretary DeVos’s action, the CFPB could intensify its efforts to address servicing issues through heightened supervisory and enforcement activity, and potentially rulemaking.
It is unclear what the ED’s next steps will be. In her memo, Secretary DeVos indicated the memoranda were withdrawn because ED “must promptly address not only [moving deadlines, changing requirements and a lack of consistent objectives in the student loan servicing procurement process] but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service.” She stated that she looked forward to working with FSA staff “as well as others, in order to acquire new federal student loan capabilities that will provide borrowers with the tools necessary to efficiently repay their debt.”