Treasury Dept. Urges Student Loan Servicers To Do A Better Job, Try Incentives

Hot of the heels of a report from the Consumer Financial Protection Bureau detailing how loan servicers trick consumers into paying more, top officials with the Department of Treasury implored the industry to fix their often nefarious ways.

The Wall Street Journal reports that Deputy Treasury secretary Sarah Bloom Raskin raised concerns that improper supervision and enforcement over the servicing industry can lead to devastating effects for consumers.

Troubling industry tactics included not providing student loan borrowers with enough flexibility if they get into financial trouble and charging late fees during periods were those fees were exempt.

While Raskin says the loan servicers provide borrowers with a valuable resource, they can also take advantage of those they are supposed to help.

“With more than 40 million federal student loan borrowers interacting with servicers and debt collectors, servicer and debt collector actions heavily influence the ability of students to complete their higher education, avoid the consequences of delinquency and default, and achieve their educational potential to the benefit of themselves and to the benefit of the country,” Raskin said during the Florida conference. “In short: a lot is riding on the content of servicer actions.”

Raskin implored that servicing cannot be one-size-fits-all. Incentives should be created so that servicers have motivation to take the time to place student loan borrowers in an appropriate and sustainable repayment plan.

“The servicer needs to invest in resources, including trained personnel who can deal with often complex one-off transactions,” she said. “The incentives created by the contract with the lender—be it a private lender or the federal government—will matter to the ultimate performance of the servicer in dealing with the borrower.”

Last week, the CFPB released a report examining the practices of the companies hired by financial institutions and put in charge of collecting and processing loan payments, modifications and keeping records of borrowers’ payment history.

Examiners for the CFPB found that from March to June 2014 some student loan servicers took part in several illegal and shady practices including inflating borrowers’ minimum payments, made illegal collection calls and charged unlawful late fees.

Raskin said during her speech that she was encouraged by the Department of Education’s efforts to revise its five-year contract with companies that collect student debt payments.

“Federal student loan debt collectors need to be encouraged to remove loan accounts from default when possible, as well as deal fairly with borrowers, and the incentive structures in debt collector contracts should convey these priorities,” Raskin said.

The revisions provide incentives for servicers to optimize their performance and helping borrowers avoid delinquency.

A Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit earlier this year found that outstanding student loan balances have increased to $1.08 trillion as of Dec. 31, representing an increase of $114 billion for 2013.

At the same time, a Credit.com report estimated that one-in-three student loans may currently be considered delinquent.

Raskin says government officials are currently working on identifying actions that could be taken to strengthen the outcomes for federal student loan borrowers.

“This work is focused on ensuring that all students have access to high-quality servicing and effective collections to prevent and remediate defaults,” she says.

Student-Loan Servicers Urged to Offer More Flexibility [The Wall Street Journal]