CFPB Plans Major Expansion of Student Loan Oversight

WASHINGTON — The Consumer Financial Protection Bureau announced a huge expansion Thursday of its supervision of the student lending market, proposing that nonbank student loan servicers become subject to regular examinations by the bureau.

To date, the CFPB's oversight of student loan servicers has been limited to bank servicers, which account for a relatively small portion of the market. (Under the Dodd-Frank Act, the bureau supervises banks with over $10 billion in assets.)

But tapping Dodd-Frank powers to identify "larger participants" in certain nonbank sectors for additional supervision, the CFPB said in its proposal that it would begin overseeing the seven largest nonbank student loan servicers in the country. That would capture over 70% of the nonbank student loan market, senior CFPB officials said.

"In many ways student loans can make or break people's financial lives," CFPB Director Richard Cordray said in a conference call with reporters. "We need to make sure they're complying with federal consumer financial laws."

Like with the large banks and other nonbank entities already under the CFPB's purview, the bureau plans to gather reports from and conduct on-site examinations at student loan servicers that handle over one million borrower accounts each. In all, the proposal would cover firms handling a total of 49 million accounts, and examiners would be able to share information with the CFPB's enforcement team where necessary. Companies would be evaluated for compliance with laws dealing with fair lending, fair marketing and equal credit opportunity practices.

"This will bring new oversight to this market and give further visibility to the complete cycle of student loan debt," Cordray said.

The proposal would also deal with a key issue, cited by some observers, that nonbank servicers responsible for handling federal student loans — which account for the vast majority of credit for students — need better supervision.

The proposal "is recognition that the private student loan market is such a small fraction of the overall student market," said Rob Lavet, general counsel for Social Finance Inc., a nonbank student refinance lender. He added that delinquency rates for federal loans are also rising in comparison with private loans. "This is a way to more holistically look at the student loan market," he said.

The proposal marks yet another step by the CFPB to broaden its oversight generally of nonbank financial players. Under its "larger participant" powers, the agency had already announced plans to start examining major consumer credit reporting agencies as well as debt collectors.

In the press release announcing the proposal, Cordray said scrutiny of the companies that process student loan payments and are responsible for loan workouts is increasingly vital as more student loans are added to the list of nonperformers.

"The student loan market has grown rapidly in the last decade, and servicers are now facing the stress of an increasing number of delinquent borrowers," he said. (The public will have 60 days to comment on the proposal after it is published in the Federal Register.)

The CFPB said it received complaints from borrowers about confusing terms and conditions of the loan; whom to pay when the loan is sold; dead-end communication with servicers; and "runarounds" in processing payments on time.

"Some borrowers report paperwork getting lost and errors not always getting fixed. And, according to some borrowers, payments are not always processed on time," the bureau said in its announcement. "They say some servicers take several days to process payments and borrowers end up paying interest on the outstanding principal during that processing time."

Cordray said borrowers have "no control or choice" over their servicers and often "students find themselves at a dead end."

"We do not want to see college degrees become more of a burden than blessing," he said.