The Consumer Financial Protection Bureau has issued a final rule allowing it to supervise nonbank servicers of private and federal student loans who qualify as “larger participants” in the student loan servicing market. The rule is effective March 1, 2014.
The rule defines as “larger participants” servicers with an “account volume” exceeding 1 million. In general, the number of accounts attributed to a servicer corresponds to the number of students or prior students with loans that it is servicing. If a servicer receives separate fees for performing servicing regarding a given student or prior student, the servicer is deemed to have “one account for each stream of fees to which the [servicer] is entitled.”
Because the Dodd-Frank Act gave the CFPB supervisory authority over larger banks and nonbank private student lenders regardless of size, the CFPB has already been overseeing certain aspects of student loan servicing. That authority is relatively limited, however.
The final rule, which is based on the CFPB’s Dodd-Frank authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services,” significantly expands the Bureau’s supervisory authority over student loan servicers. It will allow the CFPB to supervise servicing of private and federal student loans by any nonbank entity that qualifies as a larger participant, regardless of whether it also offers or provides private student loans. In addition, because Dodd-Frank allows the CFPB to supervise, regardless of size, all service providers to larger banks or nonbanks it supervises, the CFPB will be able to supervise all service providers to “larger participant” nonbank student loan servicers.
Nonbank student loan servicers that qualify as larger participants will be subject to examination by the CFPB for federal law compliance. In addition to examining servicers’ compliance with federal laws such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Electronic Fund Transfer Act, the CFPB should be expected to scrutinize their practices under “unfair, deceptive or abusive” standards.
The Dodd-Frank Act also authorizes the CFPB to supervise any nonbank—regardless of its size—that the CFPB has reasonable cause to determine "is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services." In the supplementary information accompanying the final rule, the CFPB noted its ability to use such authority to supervise nonbank student loan servicers that do not qualify as larger participants. (See our legal alert for a discussion of the CFPB’s recently adopted final rule that sets forth the procedures the Bureau will use to exercise such authority.)
Highlights of the final rule include:
- “Student loan servicing” is broadly defined to include not only receiving payments from borrowers and applying them to the borrower’s account, but also includes:
- - During a period when no payment is required (which includes periods of forbearance), maintaining account records and communicating with the borrower on behalf of the loan holder
- - Engaging in interactions with a borrower, including activities to help prevent default, to facilitate other activities included within “student loan servicing”
- In determining a servicer’s account volume, the rule attributes to a servicer the number of accounts it services, plus the number of accounts serviced by all affiliated companies. Each account being serviced by an affiliate counts as one account even if two affiliated companies are servicing loans regarding the same student or former student.
- In the supplementary information, the CFPB discusses how “account volume” is calculated where a servicer is not compensated on a per-account basis, such as where compensation is based on the aggregate principal balance of all loans in the servicer’s portfolio regardless of the student or prior student to whom the loans correspond. The CFPB states that for such a servicer, “each student or prior student whose education is funded by a loan will still count as one account” under the definition of “account volume” regardless of whether the student or former student is an obligor on the loan.
Ballard Spahr’s Consumer Financial Services Group has created a team of lawyers who are helping nonbanks prepare for CFPB examinations and respond to CFPB civil investigative demands. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com.
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