The Four Cornerstones: Regulatory Focus Sharpens on Student Loan Servicing Industry
We have previously written about recent regulatory focus on the student loan servicing industry. In particular, we discussed the issuance of a 151-page report issued by the Consumer Financial Protection Bureau (CFPB) titled “Student Loan Servicing: Analysis of Public Input and Recommendations for Reform,” as well as the “Joint Statement of Principles on Student Loan Servicing” (the “Joint Statement”) by the CFPB along with two other federal institutions, the Department of Education, and the Department of the Treasury (collectively, “Agencies”).
On this blog post, we would like to focus more closely on the framework established by the Agencies to standardize the practices relating to the servicing of student loans across both federal and private borrowing programs. Understanding the four cornerstones of the Joint Statement is critical to understanding and preparing for the regulations, guidance, enforcement, and other regulatory actions the Agencies will undertake as they work towards implementation of the Joint Statement.
The three basic, stated goals of the Agencies articulated in the Joint Statement are to: (1) improve student loan servicing practices; (2) promote borrower success; and (3) minimize defaults. In addition, the Joint Statement seeks to provide student loan borrowers with access to: (a) the information they need to repay their loans responsibly and avoid default; (b) enhanced protections to ensure fair treatment, even for those who cannot repay their loans; and (c) mechanisms that will ensure that errors are timely resolved and some framework so that companies will be held accountable for their conduct. While these aspirational goals are important, the future regulatory and enforcement mechanics likely will grow out of the over-arching collaborative agenda sketched in broad terms in the Joint Statement.
In the Joint Statement, the Agencies commit to cooperate and to work to ensure that student loan servicing satisfies four basic criteria: (1) Consistency; (2) Accuracy and Actionability; (3) Accountability and (4) Transparency. These four themes—or cornerstones as we refer to them—are summarized as follows:
- Consistency across the Industry: The Agencies suggest that student loan borrowers and servicers will benefit from a clear and consistent set of expectations regarding the minimum requirements for servicing actions, such as correspondence. In short, the Agencies would prefer to see that a consumer will receive equal treatment regardless of which entity will service their respective loan.
- Accurate and Actionable Information: The Agencies demand that information provided to borrowers be accurate and provided so that the borrowers can act on such information. The goal, in part, of providing such information is to mitigate the risk and cost of default relating to these loans.
- Accountability: The Agencies state that student loan servicers should be accountable for serving borrowers fairly, efficiently, and effectively. The Agencies further note that if failures occur, appropriate regulators, including law enforcement, should have access to appropriate channels for recourse.
- Transparency: The Agencies suggest that the public, including student loan borrowers, will benefit from additional information regarding the performance of federal and private student loans and the practices of the student loan servicing industry. The Agencies encourage private-sector student lenders to increase the availability of information and date to the public concerning the performance of their respective portfolios.
Although separate and apart from the Joint Statement, we also note that Director Cordray’s remarks at the recent Mortgage Bankers Association annual convention relating to third party vendors must be taken under advisement by the student loan industry. Specifically, in discussing the recent implementation in that industry of the TILA-RESPA Integrated Disclosure rule and forms, Director Cordray stated that he was “disturbed by reports I have been hearing about the vendors on whom so many of you rely. Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date. It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.” Rest assured, an evaluation of the performance of and reliance upon third party vendors will not be limited to the mortgage industry. Particularly when student loan companies rely so heavily on vendors, expect that the performance and use of vendors will be closely evaluated, particularly in the context of meeting the four themes identified in the Joint Statement.
It is clear that the CFPB’s intense scrutiny upon the mortgage servicing industry now extends beyond that industry to student loan servicers and other industries. In the coming months, the servicing industry will need to watch the Agencies closely as they begin to build a new regulatory structure on the foundations laid out in the Joint Statement.