The Department of Education has released a memorandum to provide policy direction for the new federal student loan “state-of-the-art loan servicing ecosystem” that the ED is currently procuring.  According to the memorandum, ED expects the policy direction to guide the development of contract provisions in the new contracts that the ED will enter into with the “customer service providers” it selects to participate in servicing federal student loans on the new servicing ecosystem.  ED also states that it “will continue to work with federal and state law enforcement agencies and regulators to apply this policy direction expeditiously to the servicing of all student loans, to the maximum extent possible.”  However, not only has ED acknowledged that applicable law could currently prohibit some of the measures it contemplates (in a footnote, it states that “[t]o the extent aspects of this policy guidance are not currently allowable under Education’s regulations, they should be considered for future rulemakings”), ED’s focus on implementing the new requirements through contractual provisions strongly suggests that it does not consider these measures to be required under applicable law.   

The memorandum builds on the joint principles issued last fall by the ED, CFPB and Treasury Department and the borrower “rights and expectations” concerning student loan repayment rights that were part of a vision for student loan servicing outlined by the ED earlier this year.  In prepared remarks, Director Cordray called the memorandum’s release “an important milestone in our continued efforts to better protect consumers by addressing the many student loan servicing problems that we have highlighted in recent years.”  He noted that the CFPB “also remain[s] committed to taking immediate action to protect consumers in this market, and we will use our enforcement and supervisory tools to address illegal student loan servicing practices.”

The memorandum gives direction to the ED’s Financial Student Aid Division (FSA) in five specific areas:

• Economic Incentives. The ED makes a series of “performance-based contracting recommendations” to FSA that “contemplate a servicing incentive structure designed to balance the need to keep borrowers current and the need to direct servicer resources to borrowers most in need of assistance.”  The recommendations suggest specific changes to the compensation structure and performance measurements included in the federal Direct Loan servicing contracts “with the goal of maximizing the financial incentives for servicers to provide borrowers with high-quality customer service.”
• Accurate and Actionable Information. To improve oral and written communications with borrowers, the ED wants FSA to direct its contractors “to designate, train, and appropriately compensate a specialized unit of servicing personnel to assist at-risk borrowers and borrowers who have expressed interest in a more affordable monthly payment.”  The memorandum contains a set of standards to be followed by such specialized personnel (termed “high-touch servicing staff” by the ED) when interacting with borrowers, and details notices and procedures that should be used in connection with recertifying income and family size of borrowers in income-driven repayment plans, enrolling or re-enrolling borrowers in such repayment plans, and serving the needs of military borrowers.  It also includes steps to be taken by servicers to “strengthen the consumer experience” for all borrowers through “accurate servicing, actionable, personalized communications and state-of-the-art technology.”
• Consistency. The memorandum contains a set of standards to provide consistency in the handling, processing, and application of payments by servicers.  It also contains standards to provide consistency in (1) how information about student loans is reported to credit bureaus, (2) borrower access to payment histories and billing statements, (3) the payoff process, and (4) the process for transferring servicing.
• Accountability. On July 1, 2016, the ED launched a new online complaint system, the “FSA Feedback System,” which was required by a Presidential directive.  The memorandum describes how the complaint data should be analyzed  and used by FSA in monitoring servicers and deciding whether to take action.  It directs FSA to identify thresholds for servicers (such as a certain number of complaints identifying the same servicing error, certain types of “serious” errors, and/or unreasonable delays in responding to complaints) that would trigger “appropriate remediation plans or sanctions…requir[ing] the servicing servicers to pay for the costs resulting from the action.”  (In another footnote, the ED states that it is also “exploring additional ways to expand the role borrowers can play when policing servicers for compliance with servicer obligations under the law and under any contract servicers may hold with Education.”)  The memorandum also provides standards for servicers to follow in taking, tracking, and resolving  borrower requests for assistance and account disputes, such as policies and procedures that should apply if an account dispute cannot be fully resolved in the borrower’s favor within ten days.
• Transparency. The memorandum describes servicer-level data that should be published by servicers or the ED on portfolio performance and composition, customer service performance, payment processing and borrower preferences relating to repayment, enrollment in income-driven repayment plans and other repayment plans, administration of borrower benefits and protections, and the performance of previously-defaulted borrowers.  The memorandum provides standards for internal tracking, monitoring of servicing personnel, automated processes, and requests for assistance and account disputes.