The government's consumer finance watchdog wants stricter oversight of companies that collect and log student loan payments.
The Consumer Financial Protection Bureau proposed Thursday that it supervise the activities of nonbank student loan companies — a more stringent form of regulation than these companies have faced in the past. The bureau says the scrutiny is needed to ensure borrowers aren't mistreated as the industry grows and more people fall behind on their payments.
"Our rule would bring new oversight to the student loan market and help ensure that tens of millions of borrowers are not treated unfairly," CFPB Director Richard Cordray said in a statement.
Nonbank loan servicers like Sallie Mae collect payments for both private and government-backed student loans. Borrowers have complained that the companies lose paperwork, fail to apply payments and provide poor customer service.
The bureau wants to oversee the seven biggest nonbank student loan collection companies. Together, they handle the accounts of 49 million people with student loans. The CFPB says that accounts for "most of the activity" in the market.
The bureau already supervises student loan collections by big banks. By adding nonbanks to the supervision program, the CFPB would help even the playing field for banks and nonbanks. Banks say scrutiny of their student loan activities adds costs unfairly, while nonbank companies perform the same services without the added compliance costs.
Supervision by the CFPB amounts to having a government overseer peering over companies' shoulders as they conduct regular business. The bureau will monitor the companies and examine their internal procedures, data and any other information they seek in an effort to enforce consumer protections. Supervisors can demand vast amounts of information from companies to determine if they are following consumer protection laws, even if there is no indication that the company did anything wrong.
The CFPB is the first federal supervisor for a range of industries, including payday loan companies, private student lenders, mortgage companies, credit bureaus and debt collectors. Created as part of the 2010 overhaul of financial rules known as the Dodd-Frank Act, it aims to protect consumers from unfair fees, predatory loans and other threats. Under the law, the bureau can identify categories of consumer finance firms whose biggest players would face ongoing supervision.
Before the CFPB was created, bank regulators focused mainly on companies' financial strength. In granting the consumer bureau the authority to supervise nonbank financial companies, Congress vastly increased the federal government's tools for identifying and preventing financial practices deemed harmful to consumers.
Separate from its supervision program, the CFPB can file civil charges or take enforcement action against any company that violates consumer laws.
The proposal is open for public comment for the next 60 days.