The Consumer Financial Protection Bureau has issued a proposal to supervise nonbank servicers of private and federal student loans who qualify as “larger participants” in the student loan servicing market. Comments on the proposal will be due 60 days after its publication in the Federal Register.
The proposal represents an attempt by the CFPB to expand significantly its supervisory authority over student loan servicers. Because it already has supervisory authority over larger banks and nonbank private student lenders, the CFPB can oversee student loan servicing by those entities.
The CFPB’s current authority to supervise nonbank private student lenders, however, does not allow it to supervise nonbank student loan servicers that do not offer or provide private student loans. The proposal would allow the CFPB to supervise servicing of private and federal student loans by such nonbank servicers.
The proposal defines as “larger participants” servicers with an “account volume” that exceeds 1 million. In general, the number of accounts attributed to a servicer would correspond to the number of students or prior students with loans that it is servicing. If a servicer maintains separate accounts for different loans made to the same student or prior student and receives separate fees for each such account, however, the servicer would be deemed to have “one account for each stream of fees to which the [servicer] is entitled.”
Nonbank student loan servicers that qualify as larger participants would be subject to examination for federal law compliance by the CFPB. In addition to examining their compliance with federal laws such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Electronic Fund Transfer Act, such companies should expect the CFPB to scrutinize their practices under “unfair, deceptive or abusive” standards.
Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, all nonbank providers of residential mortgage loans and certain related services, payday loans, and private education loans. The Dodd-Frank Act also gave the CFPB supervisory authority over nonbank providers considered to be “a larger participant of a market for other consumer financial products or services.”
The CFPB has already issued final rules defining who is considered a larger participant in the debt collection and consumer reporting markets. Dodd-Frank also allows the CFPB to supervise, regardless of size, all service providers to larger banks or nonbanks supervised by the CFPB. Once the CFPB establishes its supervisory authority over nonbank student loan servicers, it will similarly be able to supervise all service providers to such nonbank servicers.
Highlights of the proposal include these provisions:
The proposal would broadly define “student loan servicing” to include not only receiving payments from borrowers and making payments to loan holders, but also “interactions with a borrower to facilitate such receiving or making of payments or maintaining of account records and communicating with borrowers.” This would include “activities to help delinquent borrowers avoid or prevent default on obligations” arising from student loans.
In determining a servicer’s account volume, the proposal would attribute to a servicer the number of accounts it services, plus the number of accounts serviced by all affiliated companies. Each account on which an affiliate was providing servicing would count as one account even if two affiliated companies were servicing loans with respect to the same student.
The CFPB is considering a lower or higher threshold for “larger participant” status. It estimates that the proposed threshold of more than 1 million accounts would allow the CFPB to supervise about seven servicers. It notes that a lower account threshold of 200,000 might allow the CFPB to supervise 15 to 18 entities.
On April 1, 2013, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB's Proposed Rule Defining Larger Participants in the Student Loan Servicing Market.” More information on the webinar and a link to register can be found here.
Ballard Spahr’s Consumer Financial Services Group has created a team of lawyers who are already helping nonbanks subject to CFPB supervision to prepare for their first CFPB examinations. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
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