Reading Between the Lines: Administration Task Force Makes Recommendations for Performance-Based Contracting for Student Loan Servicing

A recent report issued by an intra-agency task force (Task Force) consisting of the Department of the Treasury, Department of Education (DOE), Office of Management and Budget, and the Domestic Policy Council made five (5) recommendations to serve as best practices for performance-based contracting in the student loan servicing arena. The Task Force also consulted with the Consumer Financial Protection Bureau (CFPB), as well as numerous other experts, including: (i) federal agencies responsible for contracting, loan-program servicing, and oversight of federal loan programs; (ii) mortgage lenders, servicers, and mortgage industry experts; and (iii) student loan stakeholders such as consumer advocates, student groups, and think tanks. It is interesting to note that input from current student loan servicers was not included. Nevertheless, the report is significant not only for its substance as it directly relates to the servicing of student loans, but for its clear applicability to other areas of servicing of consumer debt.

The best practices as recommended by the Task Force are as follows:

• Compensation structure: Compensation structure should continue to incentivize contractors to keep all borrowers current and also provide targeted incentives based on the performance of those borrowers as being at a greater risk of default when they separate from school.
• Performance measurement and new loan allocation: Structure an allocation formula to award new loan volume to contractors based upon a set of metrics which measures their performance in (i) driving positive borrower performance, (ii) providing quality customer service, and (iii) adhering to contract requirements and maintaining strong business practices and internal controls.
• Standardized minimum service-level and borrower communication requirements: Establish a base-line of required services for those borrowers at risk of default, including those identified as being at greater risk of default at school separation and those who become delinquent. Those services should include certain standardized communications, technology-enabled communication, and enhanced "higher-touch" or "escalation" servicing requirements.
• Robust borrower protections and complaint resolution processes: Implement, in conjunction with the development of a centralized complaint system, a standardized complaint process that provides for clear borrower rights, a specific process to address borrower complaints about interactions with a contractor, and a Federal Student Aid (FSA) resource to address escalated complaints.
• Strong oversight processes and enforcement mechanisms: Mandated 3rd party vendor oversight including penalties and withheld compensation for noncompliance or other violations of the service contract. 

The recommendations suggested by the Task Force are also meant to complement existing changes currently implemented by the DOE which  include (i) a simplified complaint process and (ii) the establishment of a centralized and branded DOE point of access for all federal loan borrowers to enable them to make payments, and gain critical information about their loans as well as learn of repayment options. The report also made a conspicuous statement that there was no intention of increasing the amount of student loan contractors in the near future, rather the report  insinuated that those contractors who do remain must comply with these best practices or they will be replaced.    

For those stakeholders in the accounts receivable management (ARM) industry, many of the recommendations are nothing new and it is clear the CFPB was an integral  part of this report.  For example, the Task Force recommendation for strong oversight over outside vendors mirrors that of the CFPB's Service Provider Bulletin 2012-03. Furthermore, many of the recommendations contain the basic components of any compliance management system (CMS) which the CFPB mandates for all covered persons and service providers alike.

A bright spot in the report, although somewhat ironic, was a conclusion by the Task Force that, "successful repayment and overall borrower performance, also depend[s], in part, on the quality and availability of modern, easy-to-use methods of interacting with contractors." The Task Force has even suggested such tools as online chat or direct email as possible options for borrower contact. However, the Task Force was reluctant to endorse text messaging due to the recent Declaratory Order by the FCC regarding the Telephone Consumer Protection Act (TCPA).  The ARM industry has been saying for years that successful recovery requires the enhancement of communication and not increased barriers which stifle communication. That the Task Force saw the tremendous benefit of technology is a positive sign for all in the ARM and servicing industry. Any provider of a consumer financial service product or service should review this report carefully as it clearly is a roadmap for industry standards, as well as a peek into the expectations of the collection of any consumer debt, be it a student loan, a mortgage or an auto loan.

Clark Hill's Consumer Financial Services Regulatory & Compliance Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional  team of lawyers and government and regulatory advisors has extensive experience in – and an in-depth understanding of – the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.