U.S. seeks to increase oversight of student loan servicers

The Consumer Financial Protection Bureau wants to institute rules for certain non-bank loan servicers. What’s the likely result of the rules for borrowers and the industry?

The vast majority of the $1.1 trillion American student loan market isn’t serviced by banks. Lenders contract with third parties, which send bills and collect payments for them. But since these companies aren’t technically banks, they haven’t been subject to the same governmental oversight.

The Consumer Finance Protection Bureau wants to remedy that. It announced Thursday a proposal for a new rule allowing them to supervise some of the largest student loan service providers -- roughly seven companies which together represent 70 percent of the non-bank service market.

The CFPB says it’s received complaints from some borrowers about the quality of the servicers they’re forced to work with – consumers have no say in which company services their loan.

In some cases, their payments are not being applied properly, says Alice Hrdy, deputy in the office of supervision policy at the CFPB.

“So they’re getting charged a late fee when really they shouldn’t be charged a late fee and then they have a problem actually getting those problems resolved,” says Hrdy.

Attention from CFPB could be enough to get bad actors to shape up, says Mark Kantrowitz, the publisher of FinAid.org and FastWeb.com.

Additionally, lenders might want to peer over the regulator’s shoulder.

“When a servicer has problems, that’s hitting a lender in the pocketbook,” says Kantrowitz, “they will make changes if they see that certain servicers are much better quality than other servicers.”

If servicers don't shape up, the CFPB does have the authority levy financial penalties and return money to borrowers.

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