CFPB Targets NonBank Student Loan Servicers

NEW YORK ( TheStreet) - As banks have exited the student loan business, a variety of non-traditional entities have entered the market, prompting the Consumer Financial Protection Bureau on Thursday to propose rules to tighten supervision.

The effort comes in the wake of calls to better respond the growing student-debt problem. The rules aim at expanding the Bureau's supervision of student loan servicing to include non-banks.

The Washington-based bureau is proposing that any student-loan provider handling more than 1 million borrower accounts would be subject to CFPB regulation. With that threshold, the Bureau estimates it would be able to supervise the seven largest student loan providers in the U.S., a group that accounts for 49 million borrowers.

The proposed rule would cover both federal and private student loans.

"The student loan market has grown rapidly in the last decade, and servicers are now facing the stress of an increasing number of delinquent borrowers," said CFPB Director Richard Cordray in a statement. "Our rule would bring new oversight to the student loan market and help ensure that tens of millions of borrowers are not treated unfairly by their servicers."

Student debt at nearly $1 trillion is now the second largest form of household debt after mortgages.

The pursuit of higher education has the obvious promise of better job prospects and incomes even as a rising percentage of students fall deeply into debt.

According to a recent study by the Federal Reserve Bank of New York, as many as 6.7 million borrowers, or 17%, are more than 90 days behind on their payments - a threshold which is considered seriously delinquent. That's up from 10% in 2004.

Yet the 17% delinquency rate may understate the problem as it includes borrowers who have been given a grace period. Excluding those borrowers, the delinquency rate shoots up to 30% with students 30 years of age or younger most affected.

For more on the student debt problem read what skyrocketing student debt means for the economy.

-- Written by Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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