Large nonbank student loan servicers need to take proactive approach to comply with CFPB regulations on a sustainable basis.

1. •
Cognizant 20-20 Insights
CFPB Impact on Nonbank Student
Loan Servicers
With CFPB all set to bring the large nonbank student loan servicers
under its regulatory umbrella, players who take a proactive and
comprehensive approach towards CFPB compliance will be more
successful in managing impact of CFPB changes on a sustainable basis.
Executive Summary
Student loan market debt in the US stands at
$1.2 trillion, second only to home loan debt. In
Q3 2012, the default rate for student loans crossed
the default rate for credit cards, raising concerns
about their wider economic impact. This spiraling
debt and rising defaults combined with customer
complaints about poor customer service, poor
loss mitigation efforts, unnecessary charges and
lack of transparency made Consumer Financial
Protection Bureau (CFPB) intervene and take proactive steps to improve loan performance rates,
prevent dubious practices, enhance customer
experience and ensure transparency.
To assess the situation and make informed decisions, CFPB started collecting information on
customer complaints from March 2012. Based on
the analysis of these complaints, CFPB noticed
that loan servicing dominated the list of complaints, which included poor customer service,
poor request resolution and lack of transparency and loss mitigation options. Subsequently,
CFPB issued a directive that allows it to monitor
cognizant 20-20 insights | february 2014
large nonbank servicers (with one-million-plus
borrower accounts) effective March 1, 2014. CFPB
has not proposed any new consumer financial
laws; but it will ensure that the nonbank servicers
comply with existing consumer financial laws.
Most bank servicers have already gone through
several cycles of regulatory changes such as
Making Home Affordable, Consent Order (top
five banks), CFPB rules, etc. and have already
managed the impact of regulations on their processes, workforce and systems. For most large
nonbank student loan servicers, who would be
facing such stringent regulations for the first
time, there are some big challenges ahead.
This white paper provides a brief background on
student loan industry and CFPB, lists the major
reasons for CFPB to step in, and touches upon
existing consumer financial laws that affect the
student loan industry. It presents a high-mid level
analysis of the current process deficiencies and
suggests solutions to overcome them by improving supporting processes, people, and systems.

2. Growing Numbers and Players in the Industry
Size and Scale
Key Players
• $ 1.2 trillion debt as of Q3 2013.
• 85% of $1.2 trillion is federal loans.
• Roughly 40 M borrowers with average
• Key
stakeholders are Department of Education,
Borrowers, Servicers, Educational Institutions and
Private Lenders.
• Non-bank servicers have 85% loans – Sallie Mae Great
debt of $ 25K.
Lakes etc.
Figure 1
Student Loan Industry Background
In its efforts to promote higher education in an
equitable fashion, the US government has been
helping students secure loans for post-secondary,
undergraduate and postgraduate courses. Bolstered by the government support, student loan
debt shot up to $1.2 trillion by Q3 2013, second
only to mortgage debt in the US. Of this, federal
loan balance takes lion’s share of $1.035 trillion
and private loan balance is around $165 billion.
Student loan servicing is handled by two types
of institutions – banks and nonbanks. Nonbank
servicers account for almost 85% of the debt
and dominate the student loan servicing market
(see Figure 1). Sallie Mae, American Education
Services, Great Lakes and Nelnet are some of the
largest student loan servicers in the U.S.
Student loan industry has been well regulated for
several years. Regulations such as the National
Defense Education Act of 1958 were formed to
provide dedicated higher education funding for
defense personnel, and Higher Education Act in
1965 that broadened the scope to strengthen educational resources of institutions and provided
financial assistance to all students have reformed
the way the industry functioned. The recent CFPB CFPB has not
act in 2013, which aims to proposed any new
monitor and improve servicing practices of large consumer financial
nonbank student loan laws; but it will
servicers, is an important ensure that the
addition (see Figure 2).
CFPB Expands to
Student Loans
nonbank servicers
comply with existing
consumer financial
laws.
In response to the financial and housing crisis of
2007, the government passed the Dodd-Frank
Wall Street Reform and Consumer Protection Act
of 2010. The Dodd-Frank Act comprised 16 titles,
in which Consumer Financial Protection Bureau
(CFPB) is part of Title X.
Student Loan Industry Regulations Snapshot
1958: National Defense
Education Act
• Provide assistance to
defense personnel.
• Funding Increased from
$183 million in 1959
to $222 million in 1960.
1965: Higher Education Act
• Strengthen educational
resources of institutions
and provide financial
assistance for students.
1979: Department of
Education Organization Act
• Policy formulation,
administration for federal
assistance to education.
• Collect data on U.S. Schools
and enforce regulations.
• 2012 budget - $19.4 billion
2008: Higher Education
Opportunity Act
• Changes in student loan
discharges for disabled.
• Higher Education Act
amended, effective July 2010.
Figure 2
cognizant 20-20 insights
2
2010: Health Care and
Education Reconciliation Act
• Ends the practice of federally
subsidized private loans –
cutting federal deficit by
$87 billion over 10 years
• Includes Student Aid and
Fiscal Responsibility Act.
2010: Dodd Frank Act
• CFPB brings nonbank student
loan servicers under its
supervision effective Mar 2014.
• Aims to rectify servicing
practices based on concerns
raised by student borrowers.

3. CFPB is a consumer protection organization and
its main responsibility is to monitor, supervise
and regulate institutions dealing with consumer
financial products. This includes mortgages,
student loans, personal loans, and payday loans.
The main reasons for CFPB’s intervention in
student loan servicing industry are:
• Rising
student loan
$ 1.2 trillion in 2013.
debt
that
against unfair practices of student loan servicers grew, CFPB began accepting complaints
from student and parent
borrowers from March As the complaints
2012. Based on its findagainst unfair
ings, CFPB came up
with proposed rules on practices of student
March 28, 2013, which loan servicers
were available for public
grew, CFPB
comments until May
28, 2013. Based on the began accepting
comments
received, complaints from
CFPB finalized the rules
student and parent
between September and
December 2013. These borrowers from
rules for largest nonbank March 2012.
student loan servicers
would become effective from March 1, 2014 (see
Figure 5 for timeline summary, next page).
touched
• In
Q3 2012, default rate of student loans
crossed the default rate of credit cards
and could further affect the US economy
(see Figure 3).
• Customer complaints about poor customer service, unnecessary fees and lack of transparency.
To address the aforementioned issues, the CFPB
brought the industry under its purview and
started analyzing the consumer complaints. Data
collected by CFPB suggested that majority of the
borrower issues were about servicing, and 96%
of complaints about loan repayment and default
management. CFPB’s deeper analysis clubbed
all complaints into eight major pain areas (Refer
Figure 4, next page).
Rule for Coverage of Players
CFPB already oversees the largest banks and
their servicing operations. In its proposed rule
for nonbank servicers, CFPB states that it would
monitor nonbank servicers with more than
1 million accounts as of December 31 2013
(see Figure 6, page 5). It would supervise the
banks. For the next two years irrespective of
the number of borrower accounts. There is also
provision for a nonbank servicer to dispute the
number of borrower accounts. The current rule
would affect the top seven nonbank servicers
who have about 49 million borrower accounts collectively, and account for 71-94% activity in the
nonbank servicer market.
Key Timelines
Dodd-Frank Act (and hence CFPB) came into
effect from July 21, 2010. After a year, the Bureau
obtained enforcement authority and began most
activities on July 21, 2011. As the complaints
Delinquencies by Loan Type
16
14
12
Percent
10
8
6
4
2
Credit Cards
Student Loans
Auto Loans
Mortgages
Source: Federal Reserve Bank of New York Consumer Credit Panel and Equifax
Figure 3
cognizant 20-20 insights
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12:Q3
12:Q1
11:Q3
11:Q1
10:Q3
10:Q1
09:Q3
09:Q1
08:Q3
08:Q1
07:Q3
07:Q1
06:Q3
06:Q1
05:Q3
05:Q1
04:Q3
04:Q1
03:Q3
03:Q1
0
Home Equity Loans

4. Customer Complaints to CFPB on Student Loans
Loan
Restructuring
• Limited loss mitigation options provided to borrower by the servicers.
• Borrowers not informed about deferment and forbearance options, which can help
reduce defaults.
Loan
Prepayment
• Borrowers face excessive prepayment charge.
• Lenders make it difficult for borrowers to close high-interest loans bydistributing
the payment across loans.
Repayment
Processing
• Issues related to partial payments causing maximum late charge to the borrower.
Denial of active-duty
service member
protection
• Servicers have not implemented SCRA rules ,so protection/benefits for
service members are not provided.
Inaccurate,
inconsistent and
incomplete information
• Borrowers provided inaccurate/inconsistent information on service requests and
loss mitigation processing.
• Has led to late charges.
Missed
Communication
Loan transfer
between servicers
• Missed communication (oral, written and electronic) due to lack of centralized
correspondence management solution.
• Inefficient processing of servicing transfers leads to missing documents/data,lack of
information and hence poor customer service and payments being sent incorrectly.
• Co-signors not given loan information access.
• Parents/ student borrowers have issues in accessing basic account information.
Issues faced
by Co-Signor
Figure 4
As per the final rule, effective March 1, 2014,
student loan servicers,— banks or nonbanks,
must comply with federal consumer financial laws
and the broader consumer protection laws given
below (see Figure 7, next page).
CFPB Impact on Student Loans
Recent rules imposed by CFPB indicate a paradigm
shift for the student loan servicing industry. The
rules would bring greater accountability, improve
customer service, reduce defaults and eliminate
unfair practices. It is important to note that CFPB
has not proposed any amendments to existing
consumer financial laws or introduced new laws,
but only extends coverage
to largest nonbank student
loan servicers. Most of the
monitoring and compliance requirements will be
similar to, and an extension of those applicable to,
Mortgage Servicing and
Credit Card lines of business. Nonetheless, having
been cushioned by the lack
of regulation in student
loan sector so far, nonbank servicers face a new
Most of the
monitoring and
compliance
requirements will
be similar to, and
an extension of
those applicable to,
Mortgage Servicing
and Credit Card
lines of business.
CFPB Rules for Student Loan Industry Timeline
July 2010
DFA and CFPB formed
Mar 2012
CFPB starts receiving
complaints from borrowers
July 2011
CFPB obtains
enforcement authority
Mar to May 2013
Proposes rules
and seeks comments
Figure 5
cognizant 20-20 insights
4
Sep to Dec 2013
Finalizes rules
Mar 2014
Rules become
effective

5. CFPB Proposed and Final Rule for Student Loan Servicer Coverage
>= 3 Million borrower accounts
(Top 5)
>= 1 Million borrower
accounts
(Top 7)
>= 200 K
Borrower
accounts
(Top 15-18)
> 0 Borrower
accounts
(All)
>= 3 Million borrower accounts
(Top 5)
Proposed rule
considered various
options to determine
who would be
supervised by CFPB
Final Rule
considers only
Servicers with more
than 1 Million borrower
accounts would
be supervised
>= 1 Million borrower
accounts
(Top 7)
Not under
CFPB
Final Rule
Proposed Rule
Figure 6
challenge. They need to make significant changes
to their processes and systems and train their
associates to set up a sustainable compliance
modules.
Based on our analysis, we believe servicers should
focus on four key are to analyze their processes
and prepare for the impending CFPB monitoring: Customer Service, Payment Processing, Loss
Mitigation and Correspondence Manager.
Student Loan Industry Regulations
Equal Credit
Opportunity Act
(ECOA)
Makes it unlawful
to discriminate on
the basis of race,
color religion,
national origin,
sex ,marital status
or age.
Gramm –
Leach-Bliley Act
(GLBA)
Requires financial institutions
to provide each consumer
with a privacy notice at
the time of establishing a
relationship and
annually thereafter.
Fair Debt Collection
Practices Act (FDCPA)
Governs the activities of
debt collectors. Intends to
eliminate abusive practices
and provide avenues for
disputing and obtaining
validation of debt
information.
Fair Credit Reporting
Act (FCRA)
Part of Regulation V – Require
entities to have reasonable
policies and procedures to ensure
the accuracy and integrity of
information they furnish to consumer
Truth In Lending
Electronics Fund
reporting agencies. Institutions
Act (TILA )
Transfer Act (EFTA)
have to investigate/reinvestigate
Part of Regulation
Part of Regulation
disputes reported directly
Z – Imposes requirements
E – Imposes requirements
or by consumer
for private education
on loan servicers if recurring
reporting agencies.
loan providers to provide
electronic payments are
disclosure of terms and
received from borrowers.
interest rate. Imposes
Financial institution are
advertisement of terms,
required to promptly
crediting of payment &
investigate the errors
treatment of balances
and resolve within
requirements.
stipulated time.
Figure 7
cognizant 20-20 insights
5

6. Impact Analysis
Figure 8, illustrates typical process challenges, corresponding process improvements and technology
changes for each of four focus areas to help set the stage for sustainable compliance.
Process Challenges
Customer Service
• Inadequate tracking of bor-
rower communications and
regular service requests leading to poor customer service
and request processing delays.
• Inadequate tracking and lack
of well-defined processes and
Service-level Agreement (SLA)
for borrower complaints and
other critical requests such
as Mods.
• Lack of transparency due to
inaccessibility to loan data
and associated documents for
various stakeholders.
Payments Processing
• Applying the payments to
minimize borrower charges
and expenses.
• Lack of transparency in
prepayment terms and
processing.
Vendors process payments
•
inaccurately.
Proposed Process Improvements
• Establish process for unified
•
•
•
•
Loss Mitigation
•
•
•
•
Correspondence Management
• Borrowers not sent regular
statements/receipts.
• Borrowers not provided with
critical notices such as rate
changes, statements, fees
notices, servicing norm disclosures, etc.
Borrowers not informed
•
adequately about servicing
transfers.
• Customer Service not able to
resolve issues and communicate effectively as customer
correspondence is distributed.
management and tracking.
Process controls and SLAs
built into systems with workflow and alerts.
Centralized borrower
correspondence and imaging.
System decision based
escalations and tracking to
legal & compliance.
Customer-facing portal for
various stakeholders with
role-based access.
Metrics and reports around
•
complaints management and
issue resolution.
• System-based controls for
•
• System-based statements/
•
•
•
adequate information on
loss mitigation options.
Lack of well-defined loss
mitigation processing and
fulfillment.
Borrower approved for loss
mitigation but still charged
late fees.
Service Members Civil
Relief Act (SCRA) benefits
not provided to borrowers.
Lack of income-driven repayment options causing further
distress to borrowers with low
income and high loan balance.
• Centralized service request
tracking of borrower communications,
service requests and complaints.
•
Establish sound processes and SLAs
for critical requests such as Mods.
Build escalation matrix and processes •
to provide oversight on issues that
involve legal and compliance issues. •
Employee training and change
management.
Providing access to information
•
to various stakeholders.
• Well-defined policies for applying
•
• Servicers do not provide
Proposed Technology Changes
payments.
Clear and consistent prepayment
terms and processing.
Immediate payment credit to
borrower.
Employee training and change
management.
Statements to reflect payment
processing.
Better controls on processes
executed by vendors.
payment application.
communications for payments
application and processing.
• System to track and manage
prepayment and partial
payment scenarios.
• System-based controls for
vendor process management.
• Automation/ insourcing of processes outsourced to vendors
• Define processes and policies for
• Build policy driven loss
•
• Capture borrower commu-
•
•
•
•
•
various loss mitigation options.
Train employees to offer and
process loss mitigation options.
Explore Single Point of Contact
(SPOC) concept for loss mitigation.
Define communication processes
and templates for loss mitigation.
Provide incentives for loss mitigation.
Define escalation matrix.
Train staff to check eligibility of
borrowers for Federal debt-relief
programs such as Public Service
Loan Forgiveness Program and
Pay as You Earn Program and
determine repayment terms
• Define processes and SLAs for all
borrower correspondence –interest
rate changes, billing statements,
account statements, etc.
• Define loan transfer processes
and correspondence for the same.
Ensure transfer of all documents
and correspondence.
Figure 8
cognizant 20-20 insights
6
mitigation hierarchy in system.
•
•
•
•
nication and conversation in
system.
Build reminders and escalations
based on policy in the system.
Proactively communicate with
borrowers to educate them
about loss mitigation options.
Implement SCRA rules in
system.
Enhance system to automate
income-driven loan repayment
options.
• System-based unified
management of inbound and
outbound communications.
Manage and control
•
correspondence templates.
• System triggered reminders,
notices and statements.

7. Looking Ahead
CFPB’s decision to supervise large nonbank
student loan servicers aims to reduce defaults,
improve customer service, and curtail unfair
practices. Under new guidelines, CFPB would constantly monitor the participants, review their data,
process and procedures. CFPB has not proposed
any new consumer financial laws or amendments
to existing laws but will ensure compliance and
penalize entities for non-compliance.
Changes in CFPB regulations are always a
possibility. Servicers need to gear up for several
changes on people, process and technology fronts
to be able to cope with the CFPB monitoring.
Process-related changes would impact customer service, collections, loan restructuring,
complaints management and proactive communication/solicitation for compliance management. Servicers need to redesign processes in
these areas to capture deeper data and automate
decisions. They need to build new processes
to support unified customer communication,
requests and complaints management. Servicers
should also install compliance-related escalation/authorization/approval matrix along with
SLAs for all processes, with special emphasis on
customer complaints and loan restructuring.
Training associates across business processes
on new policy and procedures and automated
systems can help them follow new processes and
capture critical data points to handle compliance
through automated decisioning, audit trail and
data depth.
Typically, the student loan systems are a mix of
off-the-shelf products and custom-build systems.
Most of these are inflexible and disparate legacy systems. Given the inflection point and risk
of non-compliance, now
would be a good time for Servicers need
servicers to decide if new to gear up for
systems will be a better
several changes
fit for future flexibility
on people, process
and compliance.
and technology
CFPB’s decision to monifronts to be able
tor large student loans
servicers will have sub- to cope with the
stantial impact on the CFPB monitoring.
nonbank servicers and
will test their resilience. The upgrade process,
which could take several months, will strengthen
the servicers with supportable systems to
meet future compliance needs. Based on the
research on CFPB compliance for various players,
we believe that players who take a proactive
and comprehensive approach towards CFPB
compliance by leveraging their internal resources
will be more successful in managing impact of
CFPB changes on a sustainable basis.
References
• “Supervision and Examination Manual - Version 2.0” CFPB
http://www.consumerfinance.gov/guidance/supervision/manual/.
• “Student Servicing Rule” CFPB
http://files.consumerfinance.gov/f/201312_cfpb_student-servicing-rule.pdf.
• “Quarterly Report, Nov 2013” Federal Reserve Bank of New York
http://www.newyorkfed.org/householdcredit/2013-Q3/HHDC_2013Q3.pdf.
• “Type of Student Loans” American Student Association
http://asa.org/basics/loans/types/.
• Rachel Witkowski “Student Loan Market Headed for Crisis” Nov. 18, American Banker
http://www.americanbanker.com/issues/178_222/student-loan-market-headed-for-crisiscfpb-warns-1063745-1.html.
• “Mid-Year Snapshot of Private Student Loan Complaints” July 2013 CFPB
http://files.consumerfinance.gov/f/201308_cfpb_complaint-snapshot.pdf.
cognizant 20-20 insights
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8. About the Authors
Sivaraj Lakshmanan is a Senior. Consultant with Cognizant Business Consulting. He has over 10 years
of experience working with leading banks in project management, product management, and business
process optimization. He can be reached at Sivaraj.Lakshmanan@cognizant.com.
Saurabh Parakh is a Consultant with Cognizant Business Consulting. He has over seven years of
experience working with leading banks in product management and business process optimization
across geographies. He can be reached at Saurabh.Parakh@cognizant.com.
Ashish Shreni is a Principal Consultant with Cognizant Business Consulting and has worked for over
14 years in the banking and insurance space on projects spanning business and IT strategy, business
process optimization and complex project execution. His core focus area is consumer finance. He can be
reached at Ashish.Shreni@cognizant.com.
About Cognizant’s Consumer Finance Practice
Cognizant’s Consumer Finance Practice employs over 70 subject matter experts and analysts and
5000-plus associates, and has successfully delivered over 500 large and complex engagements across
originations, secondary markets, servicing, and loss mitigation in the U.S. and UK, and Europe which
include several CFPB related projects. We offer Consulting, IT, BPO and IT infrastructure services across
all functional areas.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process
outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered
in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep
industry and business process expertise, and a global, collaborative workforce that embodies the future of work.
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