A game changing announcement was made today that should prove a huge boon to many student loan borrowers. Consumer Finance Protection Bureau (CFPB) announced they will begin overseeing the largest of the nonbank student loan servicers. Although the list of those that will be monitored wasn’t announced, the largest include Sallie Mae, Great Lakes, Nelnet and Pennsylvania Higher Education Assistance Agency that should be subject to CFPB scrutiny.
Complaints have mounted that loan servicers aren’t complying with federal regulations on collections and that their profit-seeking activities have caused higher fees, higher interest and more borrowers to end up in delinquency. A report issued by CFPB in October revealed that not only are those struggling with loan payments having difficulty with their loan servicer, but so too are those trying to fast-track their loans for payment (which is a strategy we encourage).
But when borrowers send in extra money over and above their standard monthly payment, they are seeing it applied to future payments or spread across all loans rather than being applied to principal, which is the best use of additional funds. Instead, the money is being spread such that it generates the most profit for the loan servicer and essentially offers the least benefit to the borrower. This is just one of the many issues CFPB will address with their new powers.
For decades, the Department of Education had not offered anything more than lackluster oversight of lender activities despite them having literally hundreds of billions of dollars of government money under their perview. Three months ago, when a report on Sallie Mae revealed issues, Senator Elizabeth Warren wrote that the servicer exhibited a “pattern of breaking the rules and ignoring its contractual obligations” and that despite this, the DOE and Treasury Department “appear to have given [Sallie Mae] little more than a slap on the wrist.”
Those servicers with more than one million borrowers will fall under CFPB oversight, which will account for more than 70% of all student loans. And even smaller servicers will have to answer to the CFPB “if the Bureau has reasonable cause to determine the servicer poses risk to consumers.”
Here’s a rundown of some of the oversight activities CFPB will conduct:
• Reporting gathering, on-site examinations, communication and monitoring
• Ensure federal consumer financial laws are followed
• Ensure that both bank and nonbank loan servicers are held accountable for fair treatment of borrowers
• Oversight will include both federal and private loans managed by the lender
Some of the problems CFPB’s Student Loan Ombudsman have reported and that they will watch closely include:
• Prepayment (additional payment) issues of misapplied funds
• Partial payment issues where less than full payments are spread to maximize late fees and interest
• Servicer transfer problems including hiccups that cause undeserved late fees
This is great news for borrowers. Hopefully this additional student loan oversight will offer better results for debtors and eliminate many of the processing problems we’ve heard about. To also help you get the best results from your student loans, sign up here for Tuition.io’s free student loan management tool. And be sure to read our blog for repayment tips and to stay current on important news like this.