December 5, 2013

Student-Loan Servicers Face Scrutiny

WASHINGTON—Companies that collect payments on student loans will face stepped-up government scrutiny next year as a federal regulator examines whether they are breaking any laws or treating borrowers unfairly.

The Consumer Financial Protection Bureau in March will start overseeing the seven largest servicers of student loans, agency officials said Monday. They are expected to include Sallie Mae, SLM +0.68% also known as SLM Corp., and Nelnet Inc., NNI -1.47% as well as government agencies in Pennsylvania and Missouri that service loans for the federal government.
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Richard Cordray's CFPB will keep a close watch on student-loan servicers. Reuters

The federal government makes more than 85% of student loans but delegates collection of payments to outside servicers.

The exams come amid concerns from federal officials that servicers try to maximize late fees charged to consumers and don't properly credit students who try to pay off loans early.

Through its exams, the CFPB will be able to evaluate how borrowers are treated by their student-loan servicer regardless of whether the loan was originated by the federal government or a private lender. Previously, the CFPB examined large banks' student-loan-servicing operations but not those of nonbank firms like Sallie Mae.

Under rules being published Tuesday, the CFPB will outline plans to supervise nonbank student-loan servicers with more than one million accounts.

Sallie Mae, the largest student-loan servicer, has already been scrutinized by the CFPB because it services loans for banks the regulator has been examining. "We have been engaged with the CFPB in the review of our lending, servicing and collections operations," a spokeswoman said. A Nelnet spokesman said the company would "work with the CFPB to ensure borrowers receive the best possible service." A spokesman for the Pennsylvania Higher Education Assistance Agency, which handles payments on 12 million loans, said his agency is "pretty accustomed to being regulated" by federal authorities and doesn't anticipate problems. A representative of Great Lakes Educational Loan Services Inc., a nonprofit servicer, declined to comment.

The CFPB has focused on student loans over the past year, highlighting concerns with how borrowers are treated. The regulator has flagged problems, including processing errors and payment practices that result in higher-than-necessary late fees.

In an October analysis of more than 3,800 complaints filed with the regulator, the agency questioned practices such as servicers not applying larger-than-required payments by borrowers to loans with the highest interest rate.

Since students often have several loans at different rates, CFPB officials say servicers can effectively force borrowers to pay more in interest by spreading out payments over several loans. To prevent that from happening, the regulator has been encouraging borrowers to instruct their servicer to apply payments to the loan with the highest rate.

Last week, the regulator sent several student loan servicers a letter asking detailed questions about their loan-repayment practices, including how servicers communicate to borrowers who want to direct payments toward a specific loan.

CFPB officials also have said there is little opportunity for many student borrowers to refinance their loans."Student-loan servicers can have a profound impact on borrowers and their families," CFPB Director Richard Cordray said. "We need to make sure they are complying with federal consumer financial laws."

online.wsj.com

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