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March 15, 2013 2:23 PM Regulating the Repo Man

By Daniel Luzer

StudentLoanRepoMan

The Consumer Financial Protection Bureau, the institution created by President Barack Obama in 2011 to protect and inform Americans with regards to financial products and services in the United States, announced yesterday that it plans to regulate student loan debt servicers, AKA the repo men of college debt. As the bureau explained:

CFPB proposed a rule today that would allow it to federally supervise certain nonbank student loan servicers for the first time. The rule would bring new oversight to a rapidly growing market that has seen a rise in borrower delinquency in recent years.
”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. “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 loan debt servicers are basically debt collectors for federal student loans. In an (understandable) effort to try to save money, the federal government contracts the collection of its delinquent student loans out to private companies.

You can see where this is going. When you contract government functions to private companies, there’s less oversight and the companies often don’t perform as intended. The student loan servicers often appear to function with the all the charm, competence, and sympathy one might expect from private, unregulated debt collection businesses. In many cases they’re pretty awful.

As Stephen Burd explained in the magazine last year,

The debt-collecting companies can be downright scary. The federal government contracts with twenty-three such firms to collect on loans in default, paying the industry hundreds of millions of dollars annually in fees and commissions. Well-documented horror stories abound about how these collection agencies routinely fail to inform borrowers about repayment options to which they are entitled, demand excessive payments, refuse to provide documentation to back up their claims, call at all hours, harass borrowers’ friends, family members, and neighbors, and generally lash out in abusive and threatening ways.

The bureau currently oversees student loan servicing performed by large banks. Under the proposed rules it will also regulate these “nonbank student loan servicers.” These private companies perform the majority of loan servicing. The oversight authority would extend only to those companies with 1 million borrower accounts or more.

A copy of the new rules is here. [Image via]

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer