Your Money Adviser: Consumer Watchdog to Monitor Student Loan Servicers

If you’re a borrower having trouble with the company that handles your student loans, you may be interested to learn that the federal Consumer Financial Protection Bureau will soon begin scrutinizing practices of the largest loan servicers, the companies that manage loans on behalf of lenders.

The bureau announced on Tuesday that it issued a new rule giving it supervisory authority over big “nonbank” companies that service student loans.

The bureau already had oversight over student loan servicing by big banks, but most student debt is serviced by companies that aren’t banks. Officials with the bureau say the rule plugs a major gap in the oversight of student loan servicing. Student debt now totals about $1.2 trillion, and the bureau estimates that seven million borrowers are in default on their loans.

Servicers are companies that send out statements, collect and track payments, process requests for loan deferments, report borrower activity to credit reporting agencies and answer questions from borrowers. The servicer of a loan is often different from the original lender, but serves as the borrower’s main point of contact for the debt.

The new rule, which takes effect March 1, lets the bureau ensure that servicers are complying with all federal consumer protection laws, like the Fair Credit Reporting Act, and aren’t subjecting borrowers to abusive practices. The bureau’s oversight will include analysis of data from servicers as well as on-site examinations.

“We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers,” said Richard Cordray, the bureau’s director, in a phone call with reporters.

The rule applies to nonbank servicers that manage at least one million accounts. The bureau said it estimated that the rule gave it authority over the seven largest loan servicers, whether they handle loans made by the federal government or those made by private lenders. The bureau said it would “continue to coordinate closely” with the federal Education Department, which originates most student loans.

The seven combined manage more than 49 million borrower accounts and represent most of the activity in the student loan servicing market, the bureau said.

The bureau’s policy is not to identify the biggest nonbank servicers by name. But according to 2012 data from the Student Loan Servicing Alliance, a trade group, Sallie Mae is by far the largest.

“As the largest servicer of student loans, we have been engaged with the C.F.P.B. in the review of our lending, servicing and collections operations,” said a Sallie Mae spokeswoman, Patricia Christel.

The bureau has been collecting complaints about loan servicing from borrowers, who cited problems like having difficulty getting payments properly applied to their balance when they tried to prepay loans. Because options to refinance student loans at lower rates are limited, some borrowers choose to reduce their debt by paying down the loan early. Some borrowers complained that servicers don’t always apply the payment to their highest-interest loan first, which would save them the most money. Borrowers also complained that when loans were transferred between different servicers, they often encountered delays in having payments processed, resulting in late fees and possible damage to credit scores.

As a result of the findings, the bureau’s student loan ombudsman, Rohit Chopra, last week asked some servicers of private loans to voluntarily disclose details of their payment processing policies.

Mr. Cordray said, “Student loan borrowers should be able to rest assured that when they make a payment toward their loans, the company that takes their money is playing by the rules.”

Here are some questions to consider:

■ How can I make a complaint about my loan servicer?

You can go to the bureau’s website at www.consumerfinance.gov/students/

■ Does it matter if my loans were made by the federal government, or by a private lender?

A bureau spokeswoman said borrowers could lodge complaints with the consumer bureau, which will share the information with the Education Department “as appropriate.”

■ Where can I get more information about the new rule?

A fact sheet is available on the consumer bureau’s website.

Email: yourmoneyadviser@nytimes.com

Article source: http://www.nytimes.com/2013/12/03/your-money/student-loans/consumer-watchdog-to-monitor-student-loan-servicers.html?partner=rss&emc=rss