CFPB Finalizes “Larger Participant” Rule For Student Loan Servicing, Updates Exam Procedures

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On December 3, the CFPB issued a final rule that will allow the Bureau to supervise certain nonbank student loan servicers for the first time. The CFPB already oversees student loan servicing at the largest banks. The new rule will allow the Bureau to also oversee “larger participants” in federal and private loan servicing, defined as any nonbank student loan servicer that handles more than one million borrower accounts. The Bureau estimates that its final rule will allow supervision of the seven largest student loan servicers, responsible for servicing the loans of more than 49 million borrower accounts. The final rule takes effect on March 1, 2014.

Several commenters to the Bureau’s initial proposal requested further clarification of what constitutes an “account.” The final rule, like the proposed rule issued on March 28, 2013, considers each separate stream of fees to which a servicer is entitled for servicing post-secondary education loans with respect to a given student or prior student to be an account. Commenters also requested further clarification of the inclusions and exclusions implicit in this definition. The Bureau declined to make any substantive changes and instead adopted its proposed definitions with only technical changes.

The final rule does adopt several adjustments to the proposed definition of “student loan servicing.” The Bureau changed the proposed definition to address comments related to the use of a lockbox and similar services, agreeing that the function of merely receiving and remitting payments without handling borrowers’ accounts should not itself be considered “student loan servicing” for purposes of the final rule. The final rule also further clarifies that the purpose of an interaction with a borrower is important for determining whether it is “student loan servicing” and that activities to prevent default arising from post-secondary education loans are only included if conducted to facilitate the core servicing activities identified in the definition of “student loan servicing.” In addition, the Bureau adjusted the clause of the definition that addresses periods when payments are not required on the loan to make clear that it intends the clause to apply during all periods when no payment is required on a loan, including, for example, periods of forbearance.

The Bureau did not receive any objections to the proposed method of aggregating accounts of affiliated companies for the purpose of calculating volume and therefore adopts the aggregation method as proposed. The final rule also adopts the proposed threshold of one million accounts for the student loan servicing market, despite numerous comments requesting an alternate threshold for qualifying entities as “larger participants.”

On the same date, the CFPB released updated student loan examination procedures, which the Bureau revised to account for examination of nonbank servicers under the larger participant rule. In addition, the revised procedures prepare examiners to identify potential violations outside of consumer financial service laws applicable to servicers and administered by the CFPB, including potential violations of certain Servicemember Civil Relief Act (SCRA) requirements. The procedures also were revised to emphasize student loan servicing transfer and repayment issues, two issues the CFPB has highlighted as areas of concern over the past year.