03/14/2013 03:46 pm ET Updated Mar 14, 2013

CFPB Will Regulate Student Loan Debt Servicers

The Consumer Financial Protection Bureau on Thursday announced new rules aimed at cracking down on alleged abuses by companies that collect debts for student lenders, seeking to tame an area of finance accused of afflicting debt-saturated graduates with exorbitant fees.

Under the new rules, so-called loan servicers -- the companies that send out bills on behalf of lenders and process payments -- will be subject to audits by the CFPB, senior bureau officials told reporters in a conference call.

The bureau already claims the authority to fine servicers that violate federal statutes on governing lending. The bureau said it intends to monitor servicers, while specifically probing reports that they often mislead borrowers about their rights to modify terms of their loans, resulting in late fees and tarnished credit.

“Managing that debt can be complicated for borrower,” Richard Cordray, director of the CFPB, said during the call. “We’ve heard complaints from private loan borrowers that no one makes servicers accountable.”

Bureau officials told reporters they were taking action following investigations the agency conducted last year. Those probes found that student loan borrowers are often victimized by costly and frustrating errors in seeking to manage their accounts. Previous reporting by The Huffington Post has found some servicing companies do in fact engage in practices meant to defraud borrowers, especially when dealing with those at risk of defaulting on their debts.

Cordray added that given the size of the market, which the Federal Reserve recently estimated at over $966 billion, it was appropriate for his agency to intervene. The goal, Cordray said, was to make sure those dealing directly with borrowers “play by the rules and treat borrowers appropriately.”

The rules, which senior CFPB officials explained are subject to change, would only apply to loan servicers that deal with over a million clients, effectively extending CFPB oversight to only seven companies. However, the companies covered deal with 49 million borrowers, those officials said -- more than 80 percent of the student loan market.

The Student Loan Servicing Alliance, a trade group the represents the 25 largest American servicers, said it had yet to learn details of the new rules and declined to comment.

The CFPB’s proposed regulations would have the agency carry out regular audits of the largest loan servicers, private corporations hired by banks and other loan holders that deal with student loan borrowers. The purpose of the audits would be to make sure those firms are in compliance with federal consumer protection laws, such as those that prohibit deceptive marketing or unauthorized access to consumer accounts.

There are some potential blind spots in the regulations: banks with less than $10 billion in assets are exempt from direct supervision by the CFPB, for example. Smaller companies that loan servicers sometimes hire to work with delinquent borrowers would not necessarily be covered, and the specialty finance companies that sometimes package student loans into bonds could also be exempt.

But CFPB officials noted that the agency is not restricted from investigating complaints or calling out abuses through its Office of Enforcement.



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