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After Years of Troubles, Largest Student-Loan Servicers Get Stepped-up Oversight

The Consumer Financial Protection Bureau announced increased oversight of the companies that act as go-between for student borrowers and lenders. 

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Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in on Nov. 12, 2013. The CFPB announced increased oversight of the companies that act as go-between for student borrowers and lenders. (Jacquelyn Martin/AP Photo)

Sallie Mae and other large student-loan servicers -- the companies that act as a go-between for borrowers and lenders -- will soon be getting some regular oversight from the Consumer Financial Protection Bureau, the watchdog agency announced this week.

ProPublica and others have long documented student borrowers’ troubles with the companies that handle the day-to-day collection of student-loan payments and communicate with borrowers.

“Student loan servicers can have a profound impact on borrowers and their families,” CFPB Director Richard Cordray said Monday in a call with reporters. “Given how quickly this market has grown and the recent uptick in delinquency rates, it is important for us to ensure that borrowers receive appropriate attention from their servicers.”

The CFPB has been logging thousands of complaints about the companies that service both private and federal student loans. It has issued a number of reports detailing common complaints, including trouble accessing the loan-repayment options to which they are entitled, problems processing payments, difficulty getting accurate information from servicers, and servicers ignoring the protections due to active-duty service members. Such mistakes can leave already indebted borrowers further burdened with administrative hassles or penalized with additional fees.

Bank-based loan servicers -- such as Wells Fargo or Discover -- are already overseen by the CFPB. But student-loan companies such as Sallie Mae and Nelnet -- so-called “nonbank” servicers -- have long fallen into a regulatory grey area.

The Education Department had authority over their contracts to service federal student loans. And both the CFPB and the Federal Trade Commission had the authority to investigate specific violations of consumer protection laws. But no agency was consistently monitoring for violations.

That will change as of March, when the CFPB will begin providing regular supervision to student-loan servicers with more than one million customer accounts, regardless of whether the loans they service are federal or private.

According to the CFPB, that will likely cover the seven largest non-bank servicers – which together have more than 49 million borrower accounts.

The agency declined to name companies. But the list will likely include Sallie Mae, Nelnet, Great Lakes Educational Loan Services, and FedLoan Servicing/PHEAA -- all of which service large numbers of federal student loans.

Some servicers that work with federal student loans will likely still fall under the threshold for getting the stepped-up oversight. That’s because, as we’ve noted, the Education Department has in the last few years expanded its stable of loan servicers to roughly a dozen.  

Brandon Adams

Dec. 3, 2013, 6:46 p.m.

I still don’t understand the need for these loan servicers to exist.

My student loans were first being serviced directly by the Department of Education, where they originated.  Then after a couple of years they bounced to Nelnet, and less than a year later bounced to GSMR.

Who’s benefiting from that?  The servicers are ostensibly non-profits.

Mindy Machanic

Dec. 3, 2013, 11:57 p.m.

The undiscussed problem is what happens when they sell from one servicer to another. They capitalize the interest and make it part of the loan amount that they base new interest on. I had that happen with mine - within 5 years (in various deferment statuses) it went from about $48,000 to over $70,000. When I called to ask why, I was told they had bought the loan and that was what they had paid. I asked what they showed was owing when it was consolidated several years earlier, and they showed around $52,000. So why was it suddenly so high, just because they paid that much for it? Because that’s what they bought it for, so that’s what I owed, new interest accruing. How can that be legal? I had my loan “forgiven” with a disability discharge, but still, what about all those other people who find their loans suddenly much higher than they borrowed because some servicer paid that much for it?

Mindy Machanic

Dec. 4, 2013, 12:16 a.m.

The undiscussed problem is what happens when they sell from one servicer to another. They capitalize the interest and make it part of the loan amount that they base new interest on.

I had that happen with mine - within 5 years (in various deferment statuses) it went from about $48,000 to over $70,000. When I called to ask why, I was told they had bought the loan and that was what they had paid. I asked what they showed was owing when it was consolidated several years earlier, and they showed around $52,000. So why was it suddenly so high, just because they paid that much for it? Because that’s what they bought it for, so that’s what I owed, new interest accruing.

How can that be legal? I had my loan “forgiven” with a disability discharge, but still, what about all those other people who find their loans suddenly much higher than they borrowed because some servicer paid that much for it?

Brandon, I don’t know what the intent was, but at least a use for a servicer would be to bargain down rates.  “We’ll collect all the money from your customers and give it to you in clean, easy-to-process batches if you knock off a point of interest” can be a pretty good deal that benefits everybody.

As I said, I don’t know if that’s happening here, and I’d tend to doubt it, but there is at least a potential good role for such an organization.

And that said, the article makes it sound vaguely like the opposite is happening, that these organizations are helping the lenders maximize revenue (Given how quickly this market has grown and the recent uptick in delinquency rates, it is important for us to ensure that borrowers receive appropriate attention from their servicers—to my ear, that sounds like “servicers need to make sure banks get their money”), rather than making the loans more palatable to the people who need them.

Loan services exist so that the government can create an employment service for nothing and increase costs by over 23%.  They must pay for the outsourcing. And, that outsourcing creates and unnecessary cos tot he students. The loan services arose because of their lobbying efforts on primarily the Republicans.  Obama personally supports these bandits. Without the Servicers the corrupt government could reduce the cost to students by at least 23%, nearly a quarter to help the students out. This can occur by, putting the service in the Education Office of GAO or Treasury Dept. The reduction in cost would be applied to the principle each month to reduce the monthly payment and total payment due. The impact on the budgets of the respective gov’t agencies would be negligible So why farm the service out??? Because it lines the pockets of the crummy congress and creates huge salaries for the Execs at the Service cos. while putting the burden on the backs of students and their families. A democracy cannot be run in this fashion and the only answer is revolution.

This article is part of an ongoing investigation:
College Debt

College Debt

Total outstanding college debt is estimated at $1 trillion dollars – and with costs still soaring, the burden on students and their families shows no signs of abating. We're examining how the complicated system of college debt is putting the squeeze on families.

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