Private companies that manage and collect student loans will have to prepare for new oversight from the federal government.
The Consumer Financial Protection Bureau (CFPB) is issuing a new regulation allowing it to supervise those loan servicers, including, for the first time, companies that operate independently from banks.
The effort should bring new transparency to the $1.2 trillion student loan market, the consumer bureau said, and prevent some of the abuses that it said are similar to those seen in the mortgage market during the height on the financial crisis.
“We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers,” CFPB Director Richard Cordray told reporters. “Today’s rule affects one out of every five households in this country and will help address our broader concerns that unmanageable student loan debt may be dragging down people’s lives.”
Loan servicers process monthly payments, communicate with borrowers about the money they owe and work out payment arrangements if they need to be modified. They are typically different from lenders that hand out money to students.
Servicers can sometimes make it confusing for borrowers to pay off their loans, though, or divide up partial payments to maximize the number of late fees.
Now, the CFPB will be able to crack down on those instances of abuse.
“We know that student loan servicers can have a profound impact on borrowers and their families,” Cordray said. “So we need to make sure they are complying with federal consumer financial laws.”
The CFPB has already had the authority to oversee student loan servicing at large banks. Tuesday’s rule expands its powers to regulate any servicer with more than a million accounts.
“Most of the market is actually in the nonbank sector,” an official said. “The bureau today is plugging a major gap in oversight where the market really needs attention.”
Seven new servicers will receive the CFPB’s oversight, adding up to 49 million borrower accounts. The agency is not providing details about those seven companies.
According to the consumer bureau, student loan debt can drag down the rest of the economy by dissuading people from buying homes, striking it out on their own or taking other financial risks.