CFPB Flags Student Loan Servicing Problems, Eyes Changes

By Jeff Bater

Sept. 29 — The Consumer Financial Protection Bureau (CFPB) signaled it might put together a rule to protect student loan borrowers as it released a report outlining loan servicing failures.

In compiling the report, the bureau used comments elicited from stakeholders who identified a range of student loan servicing practices that could pose risks for borrowers seeking to repay student debt.

More than 41 million Americans owe student loan debt, and the volume of outstanding federal and private student loan debt has more than doubled in less than a decade to a level exceeding $1.2 trillion. The CFPB says student loans make up the nation’s second-largest consumer debt market, behind mortgages.

In a news release announcing its report, the CFPB said it intends “to explore potential industry-wide rules to increase borrower protections.”

Signs of Distress 

The report pointed out that unlike other types of consumer debt, which have realized reduced levels of delinquency and default following the recession, the student loan market continues to show signs of distress.

“With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical,” CFPB Director Richard Cordray said in a news release. “Today’s report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.”

The CFPB has had its eye on student loan servicing this year. It ordered Discover Bank in July to refund $16 million to consumers and pay a $2.5 million penalty on allegations of illegal student loan servicing practices. Two months before that enforcement action, the agency had launched a public inquiry into servicing practices that may make paying back loans a stressful or harmful process for borrowers.

More Than 30,000 Comments 

The inquiry triggered more than 30,000 comments from the public. Consumers and other stakeholders reported problems such as servicers losing paperwork or misapplying payments. Borrowers said that when errors arise, they find it difficult to have them corrected. Many federal and private loan borrowers report experiencing serious problems accessing affordable repayment options or other repayment alternatives to avoid default.

In addition to the report, the CFPB joined with the Department of Education and the Treasury Department to issue a framework meant to improve servicing practices. The interagency statement of principles recommends consistent industrywide standards for the entire servicing market and suggests holding servicers accountable.

In December 2013, the CFPB finalized a rule allowing the agency to supervise the nation's largest nonbank servicers of student loans. The bureau was already overseeing student loan servicing at the largest banks, and the new rule expanded that supervision to any nonbank student loan servicer handling more than 1 million borrower accounts, regardless of whether they service federal or private loans. Under the rule, those nonbank servicers are considered “larger participants” in consumer financial markets and subject to the bureau's supervision.

Reaction to Report 

Jaret Seiberg, an analyst at Guggenheim Securities, predicts increased government focus on student loan servicers as the 2016 election approaches. In a market commentary, Seiberg wrote that the political risk to servicers is growing “as the administration looks for ways to blame student loan defaults on student loan servicers.”

Federal student lending accounts for the vast majority of student debt. The Consumer Bankers Association (CBA) said private student loan borrowers are protected by a robust underwriting process that includes an ability-to-repay test and that private loans made by CBA members have a delinquency rate of less than 3 percent.

“With nearly 98 percent of private student loans being successfully repaid — putting delinquency rates for private borrowers at their lowest level since before the 2008 crisis — and tuition prices having risen 1,120% since 1978, we encourage the CFPB, the Department of Education, Department of Treasury, and members of Congress to focus their attention on the root of the problem for students and borrowers, which is college affordability,” CBA’s president, Richard Hunt, said in a statement.

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Mike Ferullo in Washington at

The CFPB report and interagency framework are available at