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CFPB Supervisory Highlights Dive into Federal Student Loan Servicing

student loan servicingThe special report includes supervisory findings on university-owned lenders and an update on oversight of federal student loan transfers and the impact on consumers.

09/30/2022 1:30 P.M.

3 minute read

The student loan servicing market has shifted significantly over the past two and a half years, prompting the Consumer Financial Protection Bureau to develop a new Supervisory Highlights report on student loan servicing examining industry trends, institutional lending practices and compliance with the Consumer Financial Protection Act (CFPA).

The bureau also started the supervision report after it announced earlier this year that it would review the in-house lending practices at colleges.

The CFPB has supervised student loan servicers, including servicers responsible for handling direct and other U.S. Department of Education (DOE)-owned loans, since it finalized the student loan servicing larger participant rule in 2014, according to the report.

Under the CFPA, Congress gave the CFPB supervisory authority over entities that originate private education loans, including institutional loans. The CFPB examines private student lenders of all sizes, including entities that operate school-based lenders that extend loans directly to students.

At the backdrop of examining student loan servicers for the report, the bureau considered the impact of the COVID-19 pandemic on financial and operational processes at servicers and the federal loan payment suspension on borrowers.

There is also the fact that federal student loan servicers contracting with the DOE have left the market, and millions of federal student loan accounts were transferred to new servicers.

Additionally, the DOE introduced specific programs to broaden access to public service loan forgiveness and forgiveness through income-driven repayment, according to the bureau’s report.

Considering these developments, the bureau’s Supervisory Highlights Special Edition focuses on three sets of significant supervisory findings:

  • First, the bureau’s supervision team initiated work at certain institutional lenders and found that blanket policies to withhold transcripts in connection with an extension of credit are violations under the CFPA.
  • Second, the bureau engaged in oversight of major federal loan transfers and identified certain consumer risks related to those transfers.
  • Third, the bureau identified a considerable number of violations of federal consumer financial law by student loan servicers in administering Public Service Loan Forgiveness (PSLF), Income-Driven Repayment (IDR) and Teacher Loan Forgiveness (TLF). Supervision found that servicers regularly provide inaccurate information and deny payment relief to which borrowers are entitled. The DOE is addressing some of these risks through program changes like the PSLF and IDR program waivers, as well as improved vendor oversight.

The extensions to the COVID-19 payment pause for federally owned loans also has given the DOE some time to implement these changes, according to the bureau.

However, the findings documented in the report impact servicers’ entire portfolios, including commercially-owned Federal Family Education Loan Program loans, and the CFPB encourages servicers to address the issues across their portfolios.

What’s Next in Supervision?

The bureau says it will continue to supervise student loan servicers and lenders within its jurisdiction—regardless of the institution type.

The supervisory highlights report can help regulated entities comply with federal consumer financial law and manage compliance risks.

The bureau recommends that market participants—student loan servicers, originators and loan holders—review the findings in the report and implement changes within their own operations to ensure that these risks are thoroughly addressed.

Read the complete Supervisory Highlights report here.

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