Feds Near Creation of Student Loan Servicing Regime

WASHINGTON — The government appears to be speeding toward establishing uniform standards for student loan servicers in light of reports of pervasive problems in the administration of both private and federal loans.

Three federal agencies issued a joint framework Tuesday for developing servicing reforms as one of them — the Consumer Financial Protection Bureau — says it is considering industrywide rules. The joint statement of servicing "principles" came out the same day that the CFPB released results of a public inquiry that sought comments from consumers on their loan-servicing experiences.

"Student loan borrowers and servicers alike would benefit from a clear set of expectations for what constitutes minimum requirements for services provided by student loan servicers and servicer communications with borrowers, including adequate and timely customer service," the CFPB, Department of Education and Department of Treasury said in the joint statement. "Student loan borrowers should expect effective student loan servicing, including, but not limited to, conduct related to payment processing, servicing transfers, customer requests for information, error resolution, and disclosure of borrower repayment options and benefits."

The CFPB's 151-page report on feedback found that borrowers encounter poor customer service, may incur unexpected fees from servicing transfers and get penalized by payment processing practices, among other problems. Borrowers also report getting steered into repayment plans that are not always appropriate and facing roadblocks to refinancing. The bureau's report said the agency estimates one out of four borrowers is now delinquent or in default on a student loan. (The CFPB said it received more than 30,000 comments.)

"Although not necessarily representative of the experience of more than 41 million student loan borrowers, public comments help to illustrate where there may be a mismatch between borrower needs and actual service delivered," the CFPB's report said. In a press release, the bureau said that on top of enforcement actions for illegal servicing practices, the agency "also intends to explore potential industry-wide rules to increase borrower protections."

The joint statement on principles is in response to a March directive from the Obama administration, which as part of its "Student Aid Bill of Rights" called for recommendations on student loan servicing standards by Oct. 1.

The three agencies said a framework would make sure borrowers are treated fairly, have information they need to avoid default, can access ways to resolve errors "expeditiously" and be assured that student loan servicers "both in the marketplace and through federally-contracted companies, are held accountable for their conduct."

The joint principles include that policymakers would aim to make future standards consistent across the industry. The statement also called for information provided to borrowers that is "accurate and actionable."

"Information, including explanation and instructions regarding borrowers' loans and repayment options, should be presented in a manner that best informs borrowers, helps them achieve positive outcomes, and mitigates the risk and costs of default," the statement said.

Borrowers and regulators should also have "access to appropriate channels for recourse" as allowed under law to hold servicers for federal or state violations, they said. The statement also called for better transparency about the performance of private and federal student loans as well as industry practices.