The CFPB’s Winter 2019 Supervisory Highlights discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  We discussed the Bureau’s auto loan servicing findings in a separate blog post.  In this blog post, we focus on the Bureau’s additional findings.

Although issued under Director Kraninger’s leadership, the Winter 2019 Supervisory Highlights covers examinations generally completed between June and November 2018 when Mick Mulvaney was Acting Director.  It represents the CFPB’s second Supervisory Highlights covering supervisory activities conducted under Mr. Mulvaney’s leadership.  Like the Summer 2019 Supervisory Highlights, the Winter 2019 issue contains the following language in its introduction:

It is important to keep in mind that institutions are subject only to the requirements of relevant laws and regulations.  The information contained in Supervisory Highlights is disseminated to help institutions and better understand how the Bureau examines institutions for compliance with those requirements.  In addition, the legal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations.  A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different circumstances.

Also like the Summer 2019 Supervisory Highlights, the new issue’s introduction and the Bureau’s press release about the report does not include any statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of five consent orders entered into by the Bureau, including its settlements with Cash Tyme, a payday retail lender, and Cash Express, a small-dollar lender.)

Key findings include:

Deposits.  CFPB examiners found that one or more institutions engaged in deceptive acts or practices by representing that payments made through their online bill-pay service would be debited no sooner than the date selected by the consumer and failing to disclose (or disclose adequately) that the debit might occur earlier than that date when the payee only accepted a paper check.  Such paper checks were sent by the institution several days before the consumer’s designated payment date, at the institution’s discretion, and would be debited from the consumer’s account when presented and cashed by the payee.  As a result, the debit could have occurred earlier or later than the designated date.  In response to the Bureau’s findings, the institutions “undertook a revision” of their consumer-facing materials and “undertook a plan to remediate consumers” who were charged an overdraft fee due to a paper check being negotiated before the consumer’s designated payment date.

Mortgage Servicing.  CFPB examiners found:

  • Servicers engaged in unfair practices by charging late fees greater than those permitted by the mortgage notes.  In one example, the FHA mortgage note permitted late fees based on a percentage of the overdue principal and interest only.  However, the servicer charged late fees based on a percentage of the full periodic payment of principal, interest, taxes, and insurance.  The overcharges were the result of programming errors in the servicing platform and “lapses in service provider oversight.”  In response to the findings, servicers conducted a review to identify and remediate affected borrowers and changed their policies and procedures “to assist in charging the late fee authorized by the mortgage note.”
  • Servicers engaged in deceptive practices by misrepresenting the conditions for the cancellation of private mortgage insurance (PMI).  One or more servicers were found to have told borrowers requesting PMI cancellation that such requests were declined because the borrowers has not reached the 80% loan to value requirement for cancellation.  While the relevant amortization schedules did not yet reach 80% LTV, the borrowers had in fact reached 80% LTV by making additional principal curtailment payments.  Although the borrowers had not satisfied additional conditions necessary for PMI cancellation, the servicers did not identify those conditions as the reasons for denying the borrowers’ cancellation requests.  In response to the Bureau’s findings, the servicers “changed templates, as well as policies and procedures, to ensure that PMI cancellation notices state accurate denial reasons.”
  • One or more servicers were found not to have satisfied the Regulation X requirement for a servicer to exercise “reasonable diligence” in obtaining documents and information to complete a loss mitigation application.  The servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who had expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation.  However, the servicers had not notified the borrowers that their forbearance offers were based on an incomplete application evaluation and did not contact the borrowers, near the end of the forbearance period, to inquire whether they wanted to complete the applications to receive a full loss mitigation evaluation.  In response to the Bureau’s findings, the servicers “used enhanced processes, such as a centralized queue, to track borrowers receiving short-term forbearance programs and subsequently notify them that additional loss mitigation options may be available and that they could apply for such options over the phone or in writing.”
  • In examinations reviewing servicing of Home Equity Conversion Mortgage loans, examiners criticized the notices sent by servicers to successors of deceased borrowers informing them that they could qualify for an extension of time to delay or avoid foreclosure to enable them to purchase or market the property and directing them to return a form indicating their intentions for the property.  While the notices listed several documents that might be needed to evaluate whether the successor qualified for an extension, it did not direct them to submit such documents within a certain timeframe to be eligible for an extension. The Bureau found that the servicers had assessed foreclosure fees, and in some instances had foreclosed on properties, where successors had returned the form indicating that they intended to purchase or market the property but had not returned the documents necessary for an evaluation. While examiners did not find this to be a legal violation, they observed that it could pose a risk of a deceptive practice by creating an impression that the statement of intent was all that was needed to delay foreclosure.  In response to the Bureau’s findings, the servicers “planned to improve communications with successors, including specifying the documents successors needed for an extension and the relevant deadlines.”

Remittances.  CFPB examiners found that one or more supervised entities violated the remittance rule’s error resolution requirements by failing to refund fees and, as allowed by law, taxes to consumers whose remitted funds were made available to designated recipients later than the date of availability stated in the entity’s remittance disclosures and the delay was not due to any of the rule’s excepted events. The CFPB cited the violations, even though the delays at issue were due to a mistake by a non-agent foreign payer institution.  The CFPB reminded companies that “neither the relationship between a remittance transfer provider and the institution disbursing the funds to the designated recipient, nor the particular entity that is at fault for the delayed receipt of funds, is relevant to whether the remittance transfer provider must refund fees and taxes to the consumer.”  In response to the Bureau’s findings, the entities are making the mandated refunds.

D.C. License Applications. The District of Columbia Department of Insurance, Securities and Banking recently started to accept applications and transition fillings for a Student Loan Servicer License on the National Mortgage Licensing System (NMLS).

The District of Columbia’s Student Loan Act, which became effective on February 18, 2017, provides that no person or entity, unless exempt, can service a “student education loan” of a “student loan borrower” in the District, directly or indirectly, without first obtaining a license.  The Act also created the position of a Student Loan Ombudsman within the Department whose duties include examining each servicer not less than once every three years, assisting the Commissioner with enforcing the Act’s licensing provisions, educating borrowers, reviewing borrower complaints, compiling and analyzing complaint data, and making recommendations to the Commissioner for resolving borrowers’ problems.

The Act directed the Commissioner to issue rules implementing the Act’s Ombudsman and licensing provisions within 180 days of the Act’s effective date.  Since the Department has not yet announced the appointment of an Ombudsman or the issuance of regulations implementing the Act, it is unclear whether the Department’s acceptance of applications on the NMLS indicates that the Department considers the Act’s licensing requirement to be currently effective.

CT Servicing Standards. Connecticut has adopted service standards for licensed student loan servicers.  The state’s licensing requirement for student loan servicers became effective on July 1, 2016.  The statute establishing the licensing requirement directed the state’s Banking Commissioner to set service standards for licensed servicers and post them on the Department’s website by July 1, 2017.

The Commissioner has indicated that the new standards are based on a review of various resources, including existing mortgage industry servicing standards, information provided by the CFPB concerning the student loan servicing industry, and the U.S. Department of Education’s Policy Direction on Federal Student Loan Servicing dated July 20, 2016.

The standards address the following ten areas:

  • Development and implementation of default aversion services
  • Notice of servicing transfer
  • Application of payments
  • Books and records
  • Providing periodic billing statements
  • Providing payoff statements upon request
  • Implementation of policies and procedures to respond to borrower inquiries
  • Maintenance of fee schedule and fee disclosure
  • Credit report information
  • Federal law compliance

The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016.  The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers.  The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:

  • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default.  According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
  • Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
  • Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
  • Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting.  The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
  • Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.

The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers.  The CFPB also urged policymakers and industry to consider various actions, including enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, 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 the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.”  It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.

Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards.  The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”

 

The Department of Education has released a memorandum to provide policy direction for the new federal student loan “state-of-the-art loan servicing ecosystem” that the ED is currently procuring.  According to the memorandum, ED expects the policy direction to guide the development of contract provisions in the new contracts that the ED will enter into with the “customer service providers” it selects to participate in servicing federal student loans on the new servicing ecosystem.  ED also states that it “will continue to work with federal and state law enforcement agencies and regulators to apply this policy direction expeditiously to the servicing of all student loans, to the maximum extent possible.”  However, not only has ED acknowledged that applicable law could currently prohibit some of the measures it contemplates (in a footnote, it states that “[t]o the extent aspects of this policy guidance are not currently allowable under Education’s regulations, they should be considered for future rulemakings”), ED’s focus on implementing the new requirements through contractual provisions strongly suggests that it does not consider these measures to be required under applicable law.   

The memorandum builds on the joint principles issued last fall by the ED, CFPB and Treasury Department and the borrower “rights and expectations” concerning student loan repayment rights that were part of a vision for student loan servicing outlined by the ED earlier this year.  In prepared remarks, Director Cordray called the memorandum’s release “an important milestone in our continued efforts to better protect consumers by addressing the many student loan servicing problems that we have highlighted in recent years.”  He noted that the CFPB “also remain[s] committed to taking immediate action to protect consumers in this market, and we will use our enforcement and supervisory tools to address illegal student loan servicing practices.”

The memorandum gives direction to the ED’s Financial Student Aid Division (FSA) in five specific areas:

  • Economic Incentives. The ED makes a series of “performance-based contracting recommendations” to FSA that “contemplate a servicing incentive structure designed to balance the need to keep borrowers current and the need to direct servicer resources to borrowers most in need of assistance.”  The recommendations suggest specific changes to the compensation structure and performance measurements included in the federal Direct Loan servicing contracts “with the goal of maximizing the financial incentives for servicers to provide borrowers with high-quality customer service.”
  • Accurate and Actionable Information. To improve oral and written communications with borrowers, the ED wants FSA to direct its contractors “to designate, train, and appropriately compensate a specialized unit of servicing personnel to assist at-risk borrowers and borrowers who have expressed interest in a more affordable monthly payment.”  The memorandum contains a set of standards to be followed by such specialized personnel (termed “high-touch servicing staff” by the ED) when interacting with borrowers, and details notices and procedures that should be used in connection with recertifying income and family size of borrowers in income-driven repayment plans, enrolling or re-enrolling borrowers in such repayment plans, and serving the needs of military borrowers.  It also includes steps to be taken by servicers to “strengthen the consumer experience” for all borrowers through “accurate servicing, actionable, personalized communications and state-of-the-art technology.”
  • Consistency. The memorandum contains a set of standards to provide consistency in the handling, processing, and application of payments by servicers.  It also contains standards to provide consistency in (1) how information about student loans is reported to credit bureaus, (2) borrower access to payment histories and billing statements, (3) the payoff process, and (4) the process for transferring servicing.
  • Accountability. On July 1, 2016, the ED launched a new online complaint system, the “FSA Feedback System,” which was required by a Presidential directive.  The memorandum describes how the complaint data should be analyzed  and used by FSA in monitoring servicers and deciding whether to take action.  It directs FSA to identify thresholds for servicers (such as a certain number of complaints identifying the same servicing error, certain types of “serious” errors, and/or unreasonable delays in responding to complaints) that would trigger “appropriate remediation plans or sanctions…requir[ing] the servicing servicers to pay for the costs resulting from the action.”  (In another footnote, the ED states that it is also “exploring additional ways to expand the role borrowers can play when policing servicers for compliance with servicer obligations under the law and under any contract servicers may hold with Education.”)  The memorandum also provides standards for servicers to follow in taking, tracking, and resolving  borrower requests for assistance and account disputes, such as policies and procedures that should apply if an account dispute cannot be fully resolved in the borrower’s favor within ten days.
  • Transparency. The memorandum describes servicer-level data that should be published by servicers or the ED on portfolio performance and composition, customer service performance, payment processing and borrower preferences relating to repayment, enrollment in income-driven repayment plans and other repayment plans, administration of borrower benefits and protections, and the performance of previously-defaulted borrowers.  The memorandum provides standards for internal tracking, monitoring of servicing personnel, automated processes, and requests for assistance and account disputes.

Last week, the CFPB announced that it had issued a Request for Information seeking comment on a set of prototype disclosures (the “Payback Playbook”) to assist federal student loan borrowers in selecting between alternative repayment plans.  The CFPB’s announcement was accompanied by an announcement by the Department of Education of two new student loan-related initiatives, one directed at credit reports and the other directed at servicing.  The ED’s initiatives were undertaken with the Treasury Department, in consultation with the CFPB.

Credit reporting.  The ED’s fact sheet indicates that the initiative’s goal is “to modernize the way student loans appear on borrowers’ credit reports.”  It states that the ED is “working collaboratively with the credit reporting industry to develop guidance for servicers, lenders, and others who furnish data to credit bureaus to determine how best to report student loan data to ensure that credit reporting for student loans fairly, consistently, and accurately reflects repayment activity.  In the coming months, the [ED] will implement this effort as part of its new vision for serving student loans.”

The fact sheet describes the elements of an updated credit reporting system.  Such elements include:

  • Credit reporting will reflect changes in the way federal loans are made, such as using common reporting standards for common features of Direct Loans and guaranteed loans and having servicers provide information that clearly indicates programmatic differences between such loans.
  • Credit histories will be reported in the same way for each borrower so similarly-situated individuals are treated similarly, such as by having servicers use the same basic reporting framework that standardizes reporting of loan details and establishing clear requirements for servicers to follow when providing additional information about a borrower’s credit history.
  • Credit histories will accurately reflect the unique characteristics and terms of federal loans, such as having the expected duration of a loan reflect the repayment terms for both fixed-amortization and income-driven repayment plans, ensuring the reporting of accurate information about servicing transfers, and distinguishing borrowers experiencing financial distress from borrowers who invoke their right under federal law to reduce or postpone monthly payments.

Servicing.  The ED’s fact sheet lists borrower “rights and expectations” concerning student loan repayment rights which include the following:

  • The borrower’s right to receive “personalized, actionable, and effective information about alternative repayment plans,” access to “knowledgeable, well-trained staff who can evaluate borrowers’ specific circumstances to help them stay on track,” access to staff trained to assist borrowers at risk for default and military borrowers, and appropriate information and assistance with income-driven repayment plans.
  • Consistency in common servicing functions such as in maintaining affordable payments under an income-driven repayment plan, honoring of directions  for processing payments, easy access to payment histories and basic loan information, instructions for requesting payoff statements and making payoffs, and consistent service when servicers change.
  • Accountability of servicers for errors, such as through the ED’s monitoring of complaints submitted to the online complaint system being developed by the ED, a servicer escalation process in which borrower disputes are reevaluated by senior personnel, and servicer monitoring of third-party contractors
  • Transparency in information about the performance of private and federal student loans and practices of individual student loan lenders and servicers through portfolio performance data, including data at the individual servicer level, such as information on aggregate student loan outcomes, and enhanced reporting and robust information about the Federal Student Loan Portfolio.

The CFPB released its fourth Annual Report of the Student Loan Ombudsman discussing complaints received by the CFPB about private and federal student loans and the lessons drawn by the Ombudsman from those complaints.  (The report was issued by Seth Frotman, who is currently serving as Acting Student Loan Ombudsman after the departure of Rohit Chopra this past June.)  The report is based on the CFPB Student Loan Ombudsman’s analysis of approximately 6,400 private student loan related complaints and 2,700 debt collection complaints related to private and federal student loans submitted to the CFPB from October 1, 2014 to September 30, 2015.  (This continues to represent an exceedingly low complaint rate given the millions of private student loans outstanding.)

The Student Loan Ombudsman’s report comes on the heels of the report on student loan servicing issued by the CFPB  at the end of last month which discussed comments submitted in response to a Request for Information Regarding Student Loan Servicing published by the CFPB in May 2015.  That report was accompanied by a Joint Statement of Principles on Student Loan Servicing issued by the CFPB, U.S. Department of the Treasury, and the U.S. Department of Education, which recommended that industrywide standards be created for the entire servicing market.  In the new report, the Student Loan Ombudsman cites the report’s findings as additional support for that recommendation.

Like last month’s report, the new report is heavily focused  on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment plans.  The CFPB discusses complaints from borrowers about various problems experienced in obtaining information about such plans, including information about how to recertify for income-driven plans and difficulties that result from untimely recertifications.  Despite the limited number of complaints received by the CFPB, the Student Loan Ombudsman contends in the report that data from the GAO “suggest[s] the servicing problems [cited in the complaints] may be experienced by a broad segment of student loan borrowers.”

The Ombudsman also contends in the report that economic incentives for student loan servicers may contribute to limited utilization of income-driven repayment plans.  The report states that “it is not clear whether third-party student loan servicers have adequate economic incentives to enroll borrowers” in such plans.  In particular, the report faults compensation models under which servicers are paid a flat monthly fee per account serviced regardless of the level of service a particular borrower requires in a given month.

A substantial portion of the report is devoted to the utilization of income-driven repayment plans by borrowers with privately-held, federally-guaranteed student loans made by private lenders (FFELP loans).  Although FFELP loans were discontinued in 2010, the report indicates that they comprise more than $370 billion of outstanding student loans.  The CFPB’s findings on such loans are based on its analysis of a sample that included portfolio-level summary information of more than $150 billion in such loans owed by more than 7.5 million borrowers as of December 30, 2014.  The CFPB notes that “[t]his is not a statistically-valid, random sample and these results should not be interpreted to suggest significance.” Nevertheless, it states that because the sample includes information about approximately 60 percent of all privately-held FFELP loans outstanding, it “may offer readers insight into common experiences for borrowers with privately-held FFELP loans serviced by large, nonbank specialty student loan servicers.”

The CFPB states that FFELP loan borrowers show “a higher level of distress than the [student loan] market as a whole.”  Based on its analysis, the CFPB found that at least 30 percent of FFELP borrowers are either in default or more than 30 days past due.  The CFPB contrasts this with market-wide levels indicating that 25 percent of student loan borrowers are either in default or more than 30 days past due.  The CFPB found that FFELP  borrowers use income-driven repayment plans at nearly one third of the rate of borrowers in the federal direct loan program.  (The CFPB acknowledges that certain characteristics of FFELP loans, such as the higher portion of FFELP loans that are consolidation loans and the unavailability of the most generous income-driven repayment plan for FFELP loans, may partially explain the lower utilization rate.)

In addition to citing the report as additional support for industry-wide servicing standards, the Student Loan Ombudsman recommends that policymakers “consider additional steps to expand public access to data on student loan performance and the utilization of alternative repayment plans, including income-driven repayment plans.”  He suggests that policymakers consider the establishment of  a uniform set of metrics on student loan servicing performance for all types of student loans and compile and publish data reflecting such metrics to “better position policymakers and market participants to target resources to assist at-risk borrowers” and “inform future initiatives to establish industrywide [servicing] standards.”  He also suggests that policymakers consider the establishment of a uniform set of industrywide metrics on alternative repayment plan utilization and performance and consider aggregating and publishing such data on a periodic basis “to facilitate comparison in performance among student loan servicers.”  According to the Ombudsman, the compilation of such metrics could “provide incentive for servicers to improve performance and proactively resolve servicing issues.”

Based on its past practice, we expect the CFPB to pursue the issues raised in the report through a combination of use of its bully pulpit, lobbying efforts, industry guidance, heightened scrutiny in examinations, and enforcement actions.

We previously covered the first, second and third Annual Reports.

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.

Later this week, on March 1, the CFPB’s final rule defining larger participants of the student loan servicer market becomes effective.  

We expect the CFPB to immediately begin examining entities that qualify as larger participants.  Under the rule, the CFPB can supervise servicing of private and federal student loans by any nonbank entity that qualifies as a larger participant, regardless of whether it also offers or provides private student loans.  The rule defines as “larger participants” servicers with an “account volume” exceeding 1 million.  

We expect servicer exams to soon be followed by exams of service providers to student loan servicers.  Because Dodd-Frank allows the CFPB to supervise, regardless of size, service providers to nonbanks it supervises, effective March 1, the CFPB will also be able to supervise all service providers to larger participant nonbank student loan servicers.

 

In November 2013, the CFPB sent a letter to private student loan servicers asking them for information about their practices for handling extra payments from borrowers (i.e., payments in excess of the minimum amount due).  In a letter dated February 3, 2014, Rohit Chopra, the CFPB’s Student Loan Ombudsman, presented the CFPB’s findings based on the responses it received to that information request. 

It appears that the CFPB received responses from six servicers.  Mr. Chopra did not indicate how many servicers received the information request but his blog post about the responses indicated that “many of them responded.” 

To introduce the findings, Mr. Chopra provided “background” describing the “mismatched incentives” that borrowers, loan holders and servicers may have in the repayment process.  His discussion of these “incentives” appears to suggest that servicers have deliberately created obstacles for borrowers seeking to have extra payments allocated to their student loans with the highest interest rates.  

The CFPB found the following: 

  • Many respondents are acting to improve their communications with borrowers about payment processing.
  • Most respondents could not honor payment allocation instructions provided through third-party online bill pay systems because the instructions may not be transmitted to a servicer that receives electronic batch payments.
  • Most online servicing platforms allow borrowers to target excess payments to a specific loan.
  • None of the respondents indicated that they send targeted communications to borrowers who send excess payments without instructions.
  • Respondents were generally unable to accommodate borrower payment allocation instructions in advance of specific payments made by a third party, such as Department of Defense payments  made on behalf of servicemembers.
  • Respondents generally apply excess payments according to the standard methodology programmed into their servicing platforms.  The CFPB indicates that some servicers (presumably some of the respondents) have recently changed their standard methodology to apply excess payments toward the loan with the highest interest rate.  In what seems like a thinly veiled warning, Mr. Chopra states that “for servicers that do not accept standing instructions or transparently communicate a simple prepayment method, such [a methodology change] may help servicers ensure compliance with the Truth-in-Lending Act’s prohibition on private loan prepayment penalties.” 

In his letter, Mr. Chopra stated that in addition to providing the information the CFPB had requested, servicers asked “for a perspective on an appropriate standard allocation policy when borrowers have both fixed and variable rate loans.”  By way of “perspective,” Mr. Chopra indicated that the CFPB’s “preliminary analysis suggests that applying excess funds toward the loan with the highest current interest rate will save the borrower interest in the short run and also over the life of the loan.”  He further stated in his letter that early analysis by the CFPB and Department of Education in connection with their joint report on private student loans suggests that “index rates would have to increase suddenly and dramatically (in an historically aberrant fashion) for it to be economically worthwhile for a borrower to be better off directing excess payments to a variable rate loan with a comparatively-lower current interest rate, holding all else equal.” 

Interestingly, there is no discussion as to whether other features of a loan, such as the availability of alternative payment options in the event of default, should be considered in payment allocation.

In remarks to the National Council of Higher Education Loan Resource’s “2013 Knowledge Symposium” held this week in St. Pete Beach, Florida, Rohit Chopra, the CFPB’s Student Loan Ombudsman, indicated that the CFPB’s final “larger participant” student loan servicer rule will be issued at the end of 2013.  The proposal, issued by the CFPB in March 2013, would give the CFPB supervisory authority over nonbank servicers of private and federal student loans who qualify as “larger participants” in the student loan servicing market.