Regulatory Practice Letter April 2013 RPL 13-09

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1 Regulatory Practice Letter April 2013 RPL CFPB Nonbank Supervision Larger Participants for Student Loan Servicing Proposed Rule Executive Summary The Bureau of Consumer Financial Protection (CFPB or Bureau) released a proposed rule on March 14, 2013 that would amend its regulations defining larger participants of certain consumer financial products and services markets to add a new section defining larger participants of a market for student loan servicing. Under the rule, any nonbank student loan servicer that handles more than 1 million borrower accounts, including both Federal and private student loans, would be subject to CFPB supervisory authority. The Bureau estimates there are fewer than 50 nonbank student loan servicers and that the one million account threshold would provide the CFPB with authority to supervise the seven largest nonbank student loan servicers, which collectively service an estimated 49 million borrower accounts. The CFPB states these accounts represent most of the activity ( between approximately 71 and 94 percent ) in the nonbank student loan servicing market. Comments will be accepted through May 28, The CFPB is considering a final rule within the coming year. Background Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) establishes the CFPB and gives it rule-writing and enforcement authority for the provision of consumer financial products and services under the Federal consumer financial laws. Pursuant to Section 1024 of the Dodd-Frank Act, the CFPB has the authority to supervise certain nonbank providers of consumer financial products and services regardless of size, including mortgage companies (originators, brokers, and servicers as well as loan modification or foreclosure relief services); payday lenders; and private education lenders. Section 1024 also gives the CFPB authority to supervise larger participants of other markets for consumer financial products and services that the CFPB identifies and defines by rule. Since beginning operations, the CFPB has defined two markets under its Section 1024 larger participants nonbank authority (refer to RPL 12-24) including the: Consumer debt collection market (debt collectors with more than $10 million in annual receipts from debt collecting activities). The Bureau commenced supervision authority over this market on January 2, 2013; and Consumer reporting market (companies that receive more than $7 million in annual receipts from consumer reporting activities). Supervision of these companies began on September 30,

2 In a February 2013 release, the CFPB estimates there are more than 38 million student loan borrowers (note that a single borrower may have multiple loan accounts) with over $1.1 trillion in outstanding debt. The majority of the market consists of Federal loans originated under Title IV of the Higher Education Act, while the remainder of the market (approximately 15 percent) consists of private student loans. Federal student loans frequently provide for income-based repayment options for borrowers with partial financial hardship, as well as rehabilitation options for borrowers in default. In general, private student loans currently do not offer similar modified repayment options. In July 2012, the CFPB and the Department of Education (DOE) reported that, as of the end of 2011, there were more than $8 billion in defaulted private student loan balances alone, representing 850,000 loans. Description Student Loan Servicers The CFPB has proposed to identify nonbank student loan servicing as a market for consumer financial products and services that would fall under the Bureau s authority to supervise nonbanks, and to define that market to include servicers of both Federal and private student loans. Definitions The CFPB has proposed to use the following definitions, among others, to define the larger participants of the nonbank student loan servicing market: Student loan servicing would mean: Receiving any scheduled periodic payments from a borrower pursuant to the terms of any post-secondary education loan, and making the payments of principal and interest and other amounts with respect to the amounts received from the borrower as may be required pursuant to the terms of the post-secondary education loan or of the contract governing the servicing; or, During a period when payment on a post-secondary education loan is deferred, maintaining account records for the loan and communicating with the borrower regarding the loan, on behalf of the loan s holder; and Interacting with borrowers to facilitate the receiving or making of payments or the maintaining of accounts, as well as efforts to assist delinquent borrowers. Account volume would mean the number of accounts for which an entity and its affiliated companies were responsible as of December 31 of the prior calendar year, measured by individual streams of fees to which a servicer is entitled for servicing a post secondary education loan. Using this measure, it is possible for one student to have multiple accounts that are each treated as a stream of fees and each stream of fees would be counted as one account. An entity would be a larger participant if its account volume exceeded one million accounts. The Bureau is seeking comment on alternate methods of counting the number of accounts, one of which would be to count as one all accounts

3 attributable to the same student whether they are serviced by the servicer or an affiliate. CFPB is seeking input on alternatives to the number of accounts serviced to determine larger participants, including total amount of unpaid principal balance handled by the servicer and the number of student loans serviced. Post secondary education loan would mean an extension of credit that is made, insured or guaranteed under Title IV of the Higher Education Act, or extended to a consumer with the expectation that the proceeds will be used in whole or in part for post-secondary education expenses (i.e., Federal and private student loans). Student loans would not include loans secured by real property or cover open-end credit plans. Consistent with the provisions applicable to other entities meeting the larger participants criteria in markets defined by the CFPB, any nonbank student loan servicer that qualifies as a larger participant would remain a larger participant until two years after the first day of the tax year in which that person last met the applicable test. Supervisory Examinations On December 17, 2012, the Bureau released examination procedures specific to education lending and servicing for use in the CFPB s examinations. The CFPB indicates that if the proposed rule is adopted, the Bureau plans to use those examination procedures when supervising nonbank larger participants of the student loan servicing market. The Examination Procedures identify and outline those Federal consumer financial laws applicable to education lenders, which include, among others, the: Truth in Lending Act and its implementing Regulation Z, Fair Debt Collection Practices Act; Fair Credit Reporting Act and its implementing Regulation V; Gramm-Leach-Bliley Act and its implementing Regulation P; Electronic Funds Transfer Act and its implementing Regulation E; and Equal Credit Opportunity Act and its implementing Regulation B. In addition to evaluating compliance with the Federal consumer financial laws, examiners will assess other risks to consumers, including unfair, deceptive, or abusive acts or practices ( UDAAP ), especially with regard to repayment status processing, loan servicing transfers, general payment processing, application of prepayments and partial payments, and default prevention and avoidance. As applicable, examiners will review: Organization charges and process flowcharts, Board minutes, annual reports, Relevant management reporting, Policies and procedures, Rate sheets, Fee sheets, Loan applications, account documentation, notes, disclosures, underwriting and servicing files, Operating checklists, worksheets and review documents, Relevant computer program and system details, Service provider due diligence and monitoring procedures,

4 Underwriting guidelines, Compensation policies, Historical examination information, Audit and compliance reports, Management response to findings, Training programs and materials, Service provider contracts, Advertisements, and Complaints. Other Actions Related to Student-Directed Products and Services The CFPB has taken multiple actions over the past year related to student lending. These actions include: Accepting consumer complaints associated with student loans. Developing tools to help students evaluate financial aid offers, as well as to manage their loan repayments, including an income-based repayment tool. Preparing multiple reports, such as the: Annual Report of the CFPB Student Loan Ombudsman, which considers consumer complaints received by the CFPB regarding private student loans; The Next Front? Student Loan Servicing and the Cost to Our Men and Women in Uniform, which considers servicing issues associated with Federal and private student loans held by active duty military servicemembers; and Joint Report prepared with the DOE for submission to Congress, which summarizes their review of the private student loan market and related consumer protection issues. (Please refer to Regulatory Practice Letter for a discussion of these reports.) Soliciting public input and information on ways to encourage the development of more flexible repayment options for private student loan borrowers. Separately, the CFPB has solicited input on other consumer financial products and services marketed to students, such as credit cards and checking accounts, including products and services offered through agreements with secondary schools. In addition, the Bureau has: Released a guide for students on how to choose a credit card or checking account; Maintained a database of student credit card agreements; Released a consumer advisory for students about accessing financial aid funds; and Solicited input, generally, on student experiences with financial aid, loans, credit and debit cards and checking accounts through the Tell Your Story tab on the CFPB Web site. Commentary The CFPB s 2012 student loan reports distinguish nonmortgage servicing, and specifically student loan servicing, as no less important than mortgage servicing. And, interestingly, student loan servicing was found to be affected by issues similar to those identified in the mortgage market, such as consumer concerns over difficulties

5 in negotiating a repayment plan, issues with payments processing, complaint and error intake and resolution, points of contact and financial counseling. As they relate to mortgage loan servicing, provisions associated with many of these concerns were included in the CFPB s recent final rule (see Regulatory Practice Letter 13-04). With the proposed expansion of the CFPB s nonbank authority to larger student loan servicers, and the similarity of consumer concerns, it is reasonably likely that standards similar to those that will be applied to mortgage servicing would be applied, in some form and to the extent practicable, to the servicing of private student loans (recognizing that the Department of Education has set performance standards for the servicing of Federal student loans). In any case, such standards will likely be reflected in the expectations of CFPB s examiners. Nonbank student loan servicers that anticipate qualifying as a larger participant should take steps to consider, among other things: The requirements of the relevant Federal consumer financial laws; Development of or enhancement to the compliance management systems; Analyses to evaluate gaps between current practices and compliance requirements; Business strategies, including the mix of Federal and private student loan servicing portfolios; Possible staffing and training needs associated with Federal consumer financial law compliance; and CFPB examination procedures and information requirements and related systems and staffing needs to meet those requirements. In addition, nonbank student loan servicers that anticipate qualifying as a larger participant should also become familiar with the CFPB s fair lending supervisory program and the features identified by the CFPB as contributing to a well-developed fair lending compliance program (refer to RPL 13-01). In addition to fair lending deficiencies that directly relate to lending and violate the Equal Credit Opportunity Act (ECOA), the CFPB will investigate servicing practices that can affect an individual s access to financial products and services, such as accurate data reporting to credit bureaus pursuant to the Fair Credit Reporting Act, dispute resolution, and error correction, as appropriate. The CFPB notes that increased compliance with the Federal consumer financial laws should have multiple benefits, including increased reporting accuracy to consumer reporting agencies and debt collectors, both of which fall under CFPB s large participant nonbank supervision authority and giving the CFPB oversight of student lending throughout the entire product cycle. Finally, the breadth of the Bureau s interest in consumer financial products and services directed toward students, and its partnership with the DOE, ensure that this will be an area of intense and broad focus throughout 2013 as the CFPB seeks to protect student consumers and increase the accessibility of student-directed consumer financial products and services. Such focus may generate new rules and requirements affecting a range of products and services from education loans to credit cards, checking accounts and other banking services and the marketing and promotional materials related to each. In anticipation, some industry participants have already begun to reassess their own business strategies and to take action

6 Regulatory Practice independently regarding student-directed products, such as reducing or eliminating late fees on student loans. Contact us: This is a publication of KPMG s Financial Services Regulatory Practice Contributing authors: Amy Matsuo, Principal: Greg Matthews, Managing Director Earlier editions are available at: ublications/regulatory-practice-letters/pages/default.aspx ALL INFORMATION PROVIDED HERE IS OF A GENERAL NATURE AND IS NOT INTENDED TO ADDRESS THE CIRCUMSTANCES OF ANY PARTICULAR INDIVIDUAL OR ENTITY. ALTHOUGH WE ENDEAVOR TO PROVIDE ACCURATE AND TIMELY INFORMATION, THERE CAN BE NO GUARANTEE THAT SUCH INFORMATION IS ACCURATE AS OF THE DATE IT IS RECEIVED OR THAT IT WILL CONTINUE TO BE ACCURATE IN THE FUTURE. NO ONE SHOULD ACT UPON SUCH INFORMATION WITHOUT APPROPRIATE PROFESSIONAL ADVICE AFTER A THOROUGH EXAMINATION OF THE FACTS OF THE PARTICULAR SITUATION KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International WDC

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