Regulatory Practice Letter January 2014 RPL 14-03

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1 Regulatory Practice Letter January 2014 RPL CFPB Nonbank Supervision of Student Loan Servicers Final Rule CFPB Student Loan Ombudsman - Annual Report Executive Summary Effective March 1, 2014, the Bureau of Consumer Financial Protection (CFPB or Bureau) will begin supervision of larger participants in the nonbank student loan servicing market. The CFPB released a final rule on December 3, 2013 that amends its regulations defining larger participants of certain consumer financial products and services markets by adding a new section defining larger participants of a market for student loan servicing. The rule, which is substantially similar to the proposal released in March 2013 (please refer to Regulatory Practice Letter 13-09), subjects any nonbank student loan servicer that handles more than 1 million borrower accounts, including both Federal and private student loans, to CFPB supervisory authority. The Bureau estimates there are fewer than 50 nonbank student loan servicers and that the one million account threshold will 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 more than 70 percent of the activity in the nonbank student loan servicing market. Director Cordray separately noted it also levels the playing field by covering the larger nonbank servicers, since our examiners are already supervising the largest student loan servicers that are banks. The CFPB notes that nonbank student loan servicers who do not meet the borrower account threshold may still be subject to the Bureau s supervisory authority if the Bureau has reasonable cause to determine the servicer poses risk to consumers. Earlier in the year (October 2013), the CFPB released the second Annual Report of the CFPB Student Loan Ombudsman, which analyzed approximately 3,800 private student loan consumer complaints received by the CFPB through September The CFPB summarizes that the majority of the complaints were related to requests for loan modifications, payment reductions, or opaque or inaccurate payment processing. Concurrently, the CFPB released a Consumer Advisory intended to assist borrowers in directing servicers on how to apply excess payments when the consumer has multiple student loans.

2 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. The student loan servicing market is the third larger participants market to be defined by the CFPB, following the consumer debt collection market (debt collectors with more than $10 million in annual receipts from debt collecting activities) and the consumer reporting market (companies that receive more than $7 million in annual receipts from consumer reporting activities). (Please refer to Regulatory Practice Letter ) In a December 2013 release, the CFPB estimates there are more than 40 million student loan borrowers (note that a single borrower may have multiple loan accounts) with outstanding debt approaching $1.2 trillion. 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. Description Student Loan Servicers The final rule identifies nonbank student loan servicing as a market for consumer financial products and services that falls under the Bureau s authority to supervise nonbanks, and defines that market to include servicers of both Federal and private student loans. Definitions Under the rule, the CFPB establishes the following definitions, among others, to define the larger participants of the nonbank student loan servicing market: Student loan servicing means any of the following: Receiving any scheduled periodic payments from a borrower or notification of such payments and applying payments to the borrower s account pursuant to the terms of the post-secondary education loan or of the contract governing the servicing During a period when no payment is required on a post-secondary education loan,, maintaining account records for the loan and communicating with the borrower regarding the loan, on behalf of the loan s holder Interacting with borrowers, including activities to help prevent default on obligations arising from post-secondary education loans, in order to facilitate the above mentioned activities. Account volume means the number of accounts for which an entity and its affiliated companies were considered to perform student loan servicing as of 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

3 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. An entity is a larger participant if its account volume exceeds 1 million accounts. 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. The Bureau expects that this measure will appropriately represent the scope of a servicer s business with respect to that student. Post-secondary education loan means a loan 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 postsecondary education expenses (i.e., Federal and private student loans). Loans that refinance or consolidate existing student loans are also considered post-secondary education loans. Student loans do not include loans secured by real property or cover openend credit plans, regardless of the purpose of the loan. A nonbank student loan servicer that qualifies as a larger participant will 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. On December 3, 2013, the Bureau released additional guidance on education loan examination procedures that will be incorporated into its examination manual at a later date. With the release of the final rule, the Bureau plans to use these examination procedures when supervising nonbank larger participants of the student loan servicing market. The Examination Procedures identify and outline the Federal consumer financial laws applicable to education lenders, in addition to other provisions that address risk to consumers, such as unfair, deceptive, or abusive acts or practices ( UDAAP ). CFPB Student Loan Ombudsman Annual Report Findings On October 16, 2013, the CFPB released its second Annual Report of the CFPB Student Loan Ombudsman, which included a discussion and analysis of approximately 3,800 private student consumer complaints received by the CFPB from October 1, 2012 through September The CFPB noted that, given the highly concentrated market for private student lending and servicing, 87 percent of the complaints they received were directed at eight companies. Just under half of the consumer complaints received by the CFPB involved borrowers who were unable to modify the repayment terms of their loans during periods of financial hardship. Dissatisfaction involving payment processing issues, such as poor communication and confusion about policies when borrowers attempt to either pay loans off early or make good faith underpayments, were also cited by the Bureau. Additional consumer complaints included:

4 Confusion over the application of additional payments to the principal balance Lost payments Payment processing timings that result in late fees Difficulty obtaining pay-off information Problems arising when the company servicing a borrower s loan changes. The Bureau noted that it will also continue to monitor the treatment of military borrowers, some of whom complained that market participants were making improper payment demands of them that they claimed may violate the protection afforded active-duty personnel under the Servicemembers Civil Relief Act. Recommendations The Ombudsman noted that recent changes to mortgage and credit card servicing might provide a possible framework that could also be applied to student loan servicers. Some of the identified provisions include: Mortgage servicing rules: Requiring a notice to the borrower when a mortgage lender transfers a loan s servicing rights to a new servicer under the Real Estate Settlement Procedures Act ( RESPA ), as implemented by Regulation X Requiring the timely transfer of documents and information, such as previous billing statements and account histories, when there is a change in servicer Providing written payoff statements within seven business days after receiving a consumer request under the Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z) Establishing error resolution, dispute review, and continuity of contact procedures to ensure accurate information is provided to consumers and to help them manage their mortgages under RESPA Requiring the retention of mortgage loan records until at least one year after a loan is discharged or servicing is transferred under RESPA Intervening at specific time intervals before a borrower enters default, including providing written notice of delinquency following the 45 th day of a missed payment under RESPA. Credit card servicing rules:: Establishing servicing standards to ensure the timely posting of payments Implementing procedures that ensure billing statements are delivered at least 21 days before a payment due date Disclosing the length of time and costs to the consumer to pay the full credit card balance under different scenarios on billing statements. Consumer Advisory On October 16, 2013, the CFPB released a Consumer Advisory intended to assist borrowers with instructing their servicers on how to process any additional loan payments when several loans are held by the same servicer. Entitled Stop Getting Sidetracked by Your Student Loan Servicer, the advisory includes both instructions and a sample letter that consumers with multiple accounts can use to direct servicers to allocate payments in excess of the minimum amount due.

5 Regulatory Practice Commentary The CFPB has taken multiple actions with regard to student lending, including accepting consumer complaints, developing tools to help students evaluate financial aid offers as well as to manage their loan repayments, and soliciting public input on the development of flexible repayment options for private student loan credits. It has partnered with the Department of Education to review the private student loan market and related consumer protection issues, and it is currently working with a variety of state attorneys general to investigate consumer protection issues (in particular, unfair, deceptive, or abusive acts or practices - UDAAP) in the student lending practices of for-profit colleges. The issues identified by the CFPB Student Loan Ombudsman report as well as by the CFPB in earlier reports (see Regulatory Practice Letter 13-09) highlight student loan servicing issues similar to those identified in the mortgage and consumer credit markets, such as consumer concerns over difficulties in negotiating a repayment plan, issues with payments processing, complaint and error intake and resolution, and points of contact and financial counseling. It is reasonably likely that the CFPB will expect student loan servicers to meet standards similar to those that apply to mortgage and other consumer credit servicing (recognizing that the Department of Education has set performance standards for the servicing of Federal student loans) and, at a minimum, those standards will likely be reflected in the expectations of the CFPB examiners. Nonbank student loan servicers that qualify as a larger participant will need to immediately consider, among other things: The requirements of the relevant Federal consumer financial laws, and related consumer protection laws such as UDAAP Staffing and training requirements related to compliance with those laws Development of or enhancement to their compliance management systems Gap analyses between current practices and compliance requirements Business strategies, including the mix of Federal and private student loan servicing portfolios CFPB examination procedures and information requirements and related systems and staffing needs to meet those requirements 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). Contact us: This is a publication of KPMG s Financial Services Regulatory Practice Contributing authors: Stacy Guardino, Partner: sguardino@kpmg.com Amy Matsuo, Principal: amatsuo@kpmg.com 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