Certain nonbank student loan servicers that handle millions of accounts will now be regulated by the Consumer Financial Protection Bureau, according to a rule issued Tuesday that allows the federal agency to supervise the companies' actions.
While the bureau is already able to supervise banks that service student loans, such as Wells Fargo, it has been unable to ensure that large private companies such as Sallie Mae and others (Great Lakes, Inc. and American Education Services), which together manage millions of borrower accounts, are held to the same consumer protection standards.
"We know that student loan servicers can have a profound impact on borrowers and their families," said CFPB Director Richard Cordray, in a call with reporters. "So we need to make sure they are complying with federal consumer financial laws."
Under the new rule, which was first proposed in March, the CFPB will be able to supervise the activity of nonbank student loan servicers that manage more than one million borrower accounts, regardless of whether those accounts are for federal or private loans. That rule will cover the seven largest student loan servicers, which together service the loans of more than 49 million borrower accounts – representing most of the activity in the student loan market.
Sallie Mae is the nation's largest servicer of federal student loans, and often receives the largest number of complaints sent to the CFPB for its customer service practices. Despite those complaints, the Department of Education confirmed that it plans to renew its contract with the servicing company, which is set to expire in June, according to The Huffington Post.
"We design our payment programs to follow applicable rules and best practices, and are continuously looking for ways to improve and enhance them," Patricia Christel, a Sallie Mae spokeswoman, told Inside Higher Ed when the rule was first proposed.
Although borrowers may choose where they go to take out a student loan, whether through the federal government or a private lender, they have no say in who services their loans.
Once borrowers enter repayment on their student loans, the loan servicer is the primary contact for any issues that arise. Primarily, loan servicers are responsible for sending monthly statements, collecting payments, and maintaining records of payments and balances.
Loan servicers are also able to work with borrowers to devise alternative repayment plans, or to enroll borrowers in states of deferment or forbearance if they are suffering from financial hardship.
And with more college graduates struggling to find work, more have turned to their loan servicers for help, but with disappointing results, according to Cordray.
Borrowers have complained to the bureau that they face runarounds and inefficient communication with their servicers. Often times, paperwork gets lost when their loans are transferred between servicers, which results in processing errors and late fees, the CFPB said.
The bureau has also received complaints that borrowers face payment snags, when attempting to make prepayments or overpayments on private loans. Many borrowers claim, for example, that loan servicers distribute their payments equally across all loans, not to the loan with the highest interest rate, which borrowers would prefer to pay off first.
"Given how quickly this market has grown and the recent uptick in delinquency rates, it is important for us to ensure that borrowers receive appropriate attention from their servicers," Cordray said. "We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers."