The Consumer Financial Protection Bureau and Private Student Loans

By Timothy K. Spencer, Attorney

Recently, the Consumer Financial Protection Bureau (CFPB) indicated an interest to delve further into overseeing and making recommendations concerning the private student loan market.  Chiefly, the Bureau may seek to regulate student loan servicers and mandate (or at least highly suggest) the implementation in the private student loan market many of the borrower options available in the federal student loan market.

Under the Consumer Financial Protection Act (Section 1035 of the Dodd-Frank Act)[1] , the CFPB has supervisory authority over all nonbank covered persons offering or providing private education loans.[2]   The Dodd-Frank Act authorizes the CFPB to supervise nonbank covered persons for the purposes of: (1) assessing compliance with Federal consumer financial law; (2) obtaining information about such persons’ activities and compliance systems or procedures; and (3) detecting and assessing risks to consumers and consumer financial markets.[3]   Acting in this capacity, the CFPB may, amongst other things, conduct examinations on and request information from supervised entities; the CFPB is empowered to then use this information for the purpose of making policy recommendations to the Secretary of the Treasury, the Secretary of Education, and Congress.

The CFPB recently proposed a new rule that will permit the CFPB to supervise some nonbank student loan servicers and place new restrictions on the quickly expanding market.  The new rule would give the CFPB access to servicers’ information relating to the whole process of student lending, from issuing loans to debt collection and credit reporting for both federal and private student loans.  CFPB Director Richard Cordray stated that the purpose of the new rule “help[s] ensure that tens of millions of borrowers are not treated unfairly by their servicers” as “servicers are now facing the stress of an increasing number of delinquent borrowers” brought on by “[t]he student loan market…grow[ing] rapidly in the last decade… .”  The CFPB currently oversees student loan servicing at larger banks; this rule would expand that oversight to nonbank servicers.

The CFPB has also issued an initiative to address the growing concern over defaults and delinquencies in the private student loan market.  This initiative is in the form of a request for information to determine options that would increase the availability of affordable payment plans for borrowers with existing private student loans.  The CFPB hopes to use this information in forming its “student loan affordability plan,” an effort aimed at easing the burden on private student loan borrowers and decreasing the amount of defaulted and delinquent private student loans.  Options include imposing on the private student loan market various repayment features such as income-based repayment, long-term forbearance, rehabilitation options if a borrower defaults and refinance options.  While these features are available with federal student loans, no requirement exists that private student loans have these features as well.

Timothy Spencer is an attorney of Compliance located in the Cleveland office of Weltman, Weinberg & Reis Co., LPA (WWR) who can be reached at 216.685.1092 and tspencer@weltman.com.

[1] 12 U.S.C. 5301 et seq.
[2] 12 U.S.C. 5514(a)(1)(D).
[3] 12 U.S.C. 5514(b)(1).

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