Consumer bureau eyes student loan servicers

The Consumer Financial Protection Bureau is taking a closer look at companies that handle student loan payments.

The government watchdog announced Thursday it was seeking public input on any problems borrowers face when dealing with the “critical link” of servicers that manage their accounts.

{mosads}The agency noted in its request for public input that there are no comprehensive federal rules for student loan servicers, and is looking to see if rules applied to other financial products, like credit cards or mortgages, could be applied to student loans as well.

As student loan debt has now climbed over $1 trillion and now represents the most common form of consumer debt other than mortgages, the CFPB says it has heard a raft of complaints from borrowers who have faced problems paying back that debt.

In October, the watchdog charged that a host of mortgage and student loan servicers relied on unfair or even illegal practices. And in prepared remarks, CFPB Director Richard Cordray said industry practices now were uncomfortably similar to those often seen in the subprime mortgage space during the financial crisis.

“Having seen the improper and unnecessary foreclosures experienced by many homeowners, the Consumer Bureau is concerned that inadequate servicing is also contributing to America’s growing student loan default problem,” he said. “At this point, about 8 million Americans are in default on more than $100 billion in outstanding student loan balances.”

The agency said some borrowers have complained that servicers adopt practices that make loans ultimately more expensive, or suffer disruptions in service if a company hands off their loan business to another.

Distressed borrowers reportedly face their own struggles, as the CFPB heard complaints of “untrained or unequipped” staff struggling to come up with workable alternative repayment plans, or borrowers simply “given the runaround” when seeking assistance.

Through July 13, the CFPB is seeking public input on a host of factors tied to student loan servicing, ranging from what sort of information is available about the student loan market, to what sort of industry practices could pose problems for borrowers seeking to pay down their debt.

The bureau did not say exactly what it planned to do in terms of student loan servicing in its announcement, but said it was working with the Treasury and Education Departments to find ways to improve servicing.

But some of the specific questions posed by the bureau indicate the CFPB could be concerned that some industry practices could be used to drive up borrower costs. For example, the CFPB is seeking information about whether student loan payments are prioritized by servicers in a way to maximize fees or interest, or whether consumers are disadvantage when it comes to disputing billing errors.

When borrowers fall behind on their loans, the CFPB also wondered whether industry practices lead to higher fees for distressed borrowers, which can prolong repayment and even push borrowers to default on their loans.

The CFPB also noted that most servicers are paid are flat fee per account they service. The regulator wondered if that arrangement provides little incentive to provide quality service, since the fee does not change dependent on the level of service.