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[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Rules and Regulations]
[Pages 73383-73407]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29145]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1090

[Docket No. CFPB-2013-0005]
RIN 3170-AA35

Defining Larger Participants of the Student Loan Servicing Market

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB) 
amends the regulation defining larger participants of certain consumer 
financial product and service markets by adding a new section to define 
larger participants of a market for student loan servicing. The Bureau 
is issuing the final rule pursuant to its authority, under the Dodd-
Frank Wall Street Reform and Consumer Protection Act, to supervise 
certain nonbank covered persons for compliance with Federal consumer 
financial law and for other purposes. The Bureau has the authority to 
supervise nonbank covered persons of all sizes in the residential 
mortgage, private education lending, and payday lending markets. In 
addition, the Bureau has the authority to supervise nonbank ``larger 
participant[s]'' of markets for other consumer financial products or 
services, as the Bureau defines by rule. Rules defining larger 
participants of a market for consumer reporting and larger participants 
of a market for consumer debt collection were published in the Federal 
Register on July 20, 2012 (Consumer Reporting Rule) and October 31, 
2012 (Consumer Debt Collection Rule). This final rule identifies a 
market for student loan servicing and defines ``larger participants'' 
of this market that are subject to the Bureau's supervisory authority.

DATES: Effective March 1, 2014.

FOR FURTHER INFORMATION CONTACT: Allison Brown, Program Manager, (202) 
435-7107, Amanda Quester, Senior Counsel, (202) 365-0702, or Brian 
Shearer, Attorney, (202) 435-7794, Office of Supervision Policy, Bureau 
of Consumer Financial Protection, 1700 G Street NW., Washington, DC 
20552.

SUPPLEMENTARY INFORMATION: On March 28, 2013, the Bureau published a 
notice of proposed rulemaking proposing to define larger participants 
of a market for student loan servicing.\1\ The Bureau is issuing this 
final rule to define larger participants of the identified market 
(Final Rule).
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    \1\ 78 FR 18902 (Mar. 28, 2013).
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I. Overview

    Title X of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) \2\ established the Bureau on July 21, 
2010. Under 12 U.S.C. 5514, the Bureau has supervisory authority over 
all nonbank covered persons \3\ offering or providing three enumerated 
types of consumer financial products or services: (1) Origination, 
brokerage, or servicing of consumer loans secured by real estate, and 
related mortgage loan modification or foreclosure relief services; (2) 
private education loans; and (3) payday loans.\4\ The Bureau also has 
supervisory authority over ``larger participant[s] of a market for 
other consumer financial products or services,'' as the Bureau defines 
by rule.\5\
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010) (codified at 12 
U.S.C. 5301 et seq.).
    \3\ The provisions of 12 U.S.C. 5514 apply to certain categories 
of covered persons, described in subsection (a)(1), and expressly 
exclude from coverage persons described in 12 U.S.C. 5515(a) or 
5516(a). ``Covered persons'' include ``(A) any person that engages 
in offering or providing a consumer financial product or service; 
and (B) any affiliate of a person described [in (A)] if such 
affiliate acts as a service provider to such person.'' 12 U.S.C. 
5481(6).
    \4\ 12 U.S.C. 5514(a)(1)(A), (D), (E). The Bureau also has the 
authority to supervise any nonbank covered person that it ``has 
reasonable cause to determine, by order, after notice to the covered 
person and a reasonable opportunity . . . to respond . . . is 
engaging, or has engaged, in conduct that poses risks to consumers 
with regard to the offering or provision of consumer financial 
products or services.'' 12 U.S.C. 5514(a)(1)(C); see also 12 CFR 
part 1091 (prescribing procedures for making determinations under 12 
U.S.C. 5514(a)(1)(C)). In addition, the Bureau has supervisory 
authority over very large depository institutions and credit unions 
and their affiliates. 12 U.S.C. 5515(a). Furthermore, the Bureau has 
certain authorities relating to the supervision of other depository 
institutions and credit unions. 12 U.S.C. 5516(c)(1), (e).
    \5\ 12 U.S.C. 5514(a)(1)(B), (a)(2); see also 12 U.S.C. 5481(5) 
(defining ``consumer financial product or service'').
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    The Bureau is authorized to supervise nonbank covered persons 
subject to 12 U.S.C. 5514 of the Dodd-Frank Act for purposes of: (1) 
Assessing compliance with Federal consumer financial law; (2) obtaining 
information about such persons' activities and compliance systems or 
procedures; and (3) detecting and assessing risks to consumers and 
consumer financial markets.\6\ The Bureau conducts examinations, of 
various scopes, of supervised entities. In addition, the Bureau may, as 
appropriate, request information from supervised entities without 
conducting examinations.\7\
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    \6\ 12 U.S.C. 5514(b)(1).
    \7\ See 12 U.S.C. 5514(b) (authorizing the Bureau both to 
conduct examinations and to require reports from entities subject to 
supervision).
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    The Bureau prioritizes supervisory activity at nonbank covered 
persons on the basis of risk, taking into account, among other factors, 
the size of each entity, the volume of its transactions involving 
consumer financial products or services, the size and risk presented by 
the market in which it is a participant, the extent of relevant State 
oversight, and any field and market information that the Bureau has on 
the entity. Such field and market information might include, for 
example, information from complaints and any other information the 
Bureau has about risks to consumers.
    The specifics of how an examination takes place vary by market and 
entity. However, the examination process generally proceeds as follows. 
Bureau examiners initiate preparations for the on-site portion of an 
examination by contacting an entity for an initial conference with 
management, and often by also requesting records and other information. 
Bureau examiners will ordinarily also review the components of the 
supervised entity's compliance management system. Based on these 
discussions and a preliminary review of the information received, 
examiners determine the scope of an on-site examination and then 
coordinate with the entity to initiate the on-site portion of the 
examination. While on-site, examiners spend a period of time holding 
discussions with management about the entity's policies, processes, and 
procedures; reviewing documents and records; testing transactions and 
accounts for compliance; and evaluating the entity's compliance 
management system. As with any Bureau examination, examinations of 
nonbanks may involve issuing confidential examination reports, 
supervisory letters, and compliance ratings.
    The Bureau has published a general examination manual describing 
the Bureau's supervisory approach and

[[Page 73384]]

procedures. This manual is available on the Bureau's Web site.\8\ As 
explained in the manual, examinations will be structured to address 
various factors related to a supervised entity's compliance with 
Federal consumer financial law and other relevant considerations. The 
Bureau has released procedures specific to education lending and 
servicing for use in the Bureau's examinations.\9\ The Bureau also 
plans to use those examination procedures in supervising nonbank larger 
participants of the student loan servicing market.
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    \8\ CFPB Supervision and Examination Manual (Oct. 31, 2012), 
available at http://www.consumerfinance.gov/guidance/supervision/manual/.
    \9\ The CFPB Supervision and Examination Manual's Education Loan 
Examination Procedures can be accessed at http://www.consumerfinance.gov/guidance/supervision/manual/.
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    This Final Rule establishes a category of covered persons that are 
subject to the Bureau's supervisory authority \10\ under 12 U.S.C. 5514 
by defining ``larger participants'' of a market for student loan 
servicing.\11\ The Final Rule pertains only to that purpose and does 
not impose new substantive consumer protection requirements. Nonbank 
covered persons generally are subject to the Bureau's regulatory and 
enforcement authority, and any applicable Federal consumer financial 
law, regardless of whether they are subject to the Bureau's supervisory 
authority.
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    \10\ The Bureau's supervisory authority also extends to service 
providers of those covered persons that are subject to supervision 
under 12 U.S.C. 5514. 12 U.S.C. 5514(e); see also 12 U.S.C. 5481(26) 
(defining ``service provider'').
    \11\ The Final Rule describes a market for consumer financial 
products or services, which the Final Rule labels ``student loan 
servicing.'' The definition does not encompass all activities that 
could be considered student loan servicing. Any reference herein to 
the ``student loan servicing market'' means only the particular 
market for student loan servicing identified by the Final Rule.
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II. Background

    On March 28, 2013, the Bureau published a notice of proposed 
rulemaking proposing to define larger participants of a market for 
student loan servicing (Proposed Rule).\12\ The Bureau requested and 
received public comment on the Proposed Rule. The Bureau received 59 
comments on the Proposed Rule from, among others, consumer groups, 
industry trade associations, companies, State-affiliated agencies, and 
individuals. The comments are discussed in more detail below in the 
section-by-section analysis.
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    \12\ 78 FR 18902 (Mar. 28, 2013).
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    The Proposed Rule included a test to assess whether a nonbank 
covered person is a larger participant of the student loan servicing 
market. Under this test, a nonbank covered person with an account 
volume exceeding one million, as described in the Proposed Rule, would 
be a larger participant of the student loan servicing market.

III. Summary of the Final Rule

    The Bureau's existing larger-participant rule, 12 CFR part 1090, 
prescribes various procedures, definitions, standards, and protocols 
that apply with respect to all markets in which the Bureau has defined 
larger participants.\13\ Those generally applicable provisions, which 
are codified in subpart A, also are applicable for the student loan 
servicing market described by this Final Rule. The definitions in Sec.  
1090.101 should be used, unless otherwise specified, when interpreting 
terms in this Final Rule.
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    \13\ 12 CFR 1090.100-103.
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    As the Bureau has previously explained, it will include relevant 
market descriptions and larger-participant tests, as it develops them, 
in subpart B.\14\ Accordingly, the Final Rule defining larger 
participants of the student loan servicing market amends Part 1090 by 
adding Sec.  1090.106 in subpart B.
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    \14\ 77 FR 42874, 42875 (July 20, 2012) (Consumer Reporting 
Rule); 77 FR 65775, 65777 (Oct. 31, 2012), as corrected at 77 FR 
72913 (Dec. 7, 2012) (Consumer Debt Collection Rule).
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    The Final Rule is the latest in a series of rules to define 
``larger participants'' of specific markets for purposes of 
establishing, in part, the scope of coverage of the Bureau's nonbank 
supervision program. The Final Rule defines a student loan servicing 
market that would cover the servicing of both Federal and private 
student loans.\15\ Under the Final Rule, ``student loan servicing'' 
means (1) receiving loan payments (or receiving notification of 
payments) and applying payments to the borrower's account pursuant to 
the terms of the post-secondary education loan or of the contract 
governing the servicing; (2) during periods when no payments are 
required, maintaining account records and communicating with borrowers 
on behalf of loan holders; or (3) interactions with borrowers, 
including activities to help prevent default, conducted to facilitate 
the foregoing activities. The Final Rule also sets forth a test that 
determines whether a nonbank covered person is a larger participant of 
the student loan servicing market.
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    \15\ As discussed below, student loans include those under Title 
IV of the Higher Education Act of 1965, 20 U.S.C. 1070 et seq., and, 
with limited exceptions, those that are otherwise extended to a 
consumer in order to pay post-secondary education expenses.
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    To identify the larger participants of this market that are subject 
to the Bureau's supervision authority, the Bureau is adopting a test 
based on the number of accounts on which an entity performs student 
loan servicing. The Final Rule defines the criterion ``account 
volume,'' which reflects the number of accounts for which an entity and 
its affiliated companies were considered to perform student loan 
servicing as of December 31 of the prior calendar year.\16\ An entity 
is a larger participant if its account volume exceeds one million. As 
prescribed by existing Sec.  1090.102, any nonbank covered person that 
has qualified as a larger participant will remain a larger participant 
until two years after the first day of the tax year in which the person 
last met the applicable test.
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    \16\ Although the Bureau is adopting account volume as the 
criterion for identifying larger participants of the student loan 
servicing market, that criterion is not necessarily appropriate for 
any other market that may be the subject of a future rulemaking. As 
the Bureau explained in the Consumer Reporting Rule and the Consumer 
Debt Collection Rule, the Bureau expects to tailor each test to the 
market to which it will be applied. 77 FR 42874, 42876 (July 20, 
2012) (Consumer Reporting Rule); 77 FR 65775, 65778 (Oct. 31, 2012) 
(Debt Collection Rule).
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    Pursuant to existing Sec.  1090.103, a person can dispute whether 
it qualifies as a larger participant in the student loan servicing 
market. The Bureau will notify an entity when the Bureau intends to 
undertake supervisory activity; the entity will then have an 
opportunity to submit documentary evidence and written arguments that 
it is not a larger participant. Section 1090.103(d) provides that the 
Bureau may require submission of certain records, documents, and other 
information for purposes of assessing whether a person is a larger 
participant of a covered market; this authority will be available to 
the Bureau for facilitating its identification of larger participants 
of the student loan servicing market, just as in other markets.

IV. Legal Authority and Procedural Matters

A. Rulemaking Authority

    The Bureau is issuing this Final Rule pursuant to its authority 
under: (1) 12 U.S.C. 5514(a)(1)(B) and (a)(2), which authorize the 
Bureau to supervise larger participants of markets for consumer 
financial products or services, as defined by rule; (2) 12 U.S.C. 
5514(b)(7), which, among other things, authorizes the Bureau to 
prescribe rules to facilitate the supervision of covered persons under 
12 U.S.C. 5514; and (3) 12 U.S.C.

[[Page 73385]]

5512(b)(1), which grants the Bureau the authority to prescribe rules as 
may be necessary or appropriate to enable the Bureau to administer and 
carry out the purposes and objectives of Federal consumer financial 
law, and to prevent evasions of such law.

B. Effective Date of Final Rule

    The Administrative Procedure Act generally requires that rules be 
published not less than 30 days before their effective dates.\17\ The 
Bureau proposed that the Final Rule would be effective at least 60 days 
after publication and received no comments relating to the effective 
date. The Bureau adopts March 1, 2014, as the effective date for the 
Final Rule, which is more than 60 days after publication.
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    \17\ 5 U.S.C. 553(d).
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V. Section-By-Section Analysis

Section 1090.106--Student Loan Servicing Market

    Section 1090.106 relates to student loan servicing. The student 
loan servicing market is composed of entities that service Federal and 
private student loans that have been disbursed to pay for post-
secondary education expenses.\18\ Students may obtain Federal student 
loans to fund their own post-secondary education expenses; a parent or 
guardian of a student may also obtain certain Federal student loans to 
fund that student's post-secondary education expenses.\19\ A private 
student loan may be available to any individual willing to help secure 
funding for post-secondary education expenses.
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    \18\ Throughout this preamble, the terms ``student loan'' and 
``post-secondary education loan'' are used interchangeably.
    \19\ See 20 U.S.C. 1078-2 (describing the Federal PLUS loan 
program, which, among other things, permits parents to obtain loans 
to pay for the cost of their children's education). A borrower who 
has one or more outstanding student loans may sometimes take out a 
new loan to refinance and consolidate those existing student loans. 
For purposes of the Final Rule, such a refinancing would also be 
considered a student loan.
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    Student loans are essential for many students to obtain post-
secondary education and are a significant part of the nation's economy, 
as several industry and consumer group commenters recognized in their 
comments. In fact, during the last decade, a greater proportion of 
Americans than ever pursued post-secondary education; from fall 2000 to 
fall 2010, the number of undergraduate students increased by 45 
percent.\20\ At the same time, published tuition and fees at public 
four-year institutions have increased on average at an annual rate of 
5.2 percent per year above the general rate of inflation.\21\ In light 
of the rising cost of obtaining post-secondary education, American 
consumers have increasingly turned to student loans to bridge the gap 
between personal and family resources and the total cost of education. 
From the academic year 2001-2002 to 2011-2012, the average total 
borrowing per student increased by 55 percent.\22\ According to one 
recent estimate, two-thirds (66 percent) of college seniors who 
graduated in 2011 had student loan debt, with an average of $26,600 for 
those with loans.\23\ As of the end of 2012, the principal balance of 
outstanding student loan debt totaled approximately $1.1 trillion, and 
student loans were the largest category of non-mortgage debt in the 
United States.\24\
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    \20\ Coll. Bd. Advocacy & Policy Ctr., Trends in College Pricing 
2012, at 4 (Oct. 2012).
    \21\ Coll. Bd. Advocacy & Policy Ctr., Trends in College Pricing 
2012, at 7 (Oct. 2012).
    \22\ Coll. Bd. Advocacy & Policy Ctr., Trends in Student Aid 
2012, at 4 (Oct. 2012).
    \23\ These figures reflect one nonprofit organization's estimate 
of the percentage of 2010-2011 bachelor's degree recipients with 
student loan debt at public and private nonprofit four-year colleges 
and the average cumulative debt level for those with loans. See The 
Inst. for Coll. Access & Success, Student Debt and the Class of 
2011, at 2 (2012), available at http://projectonstudentdebt.org/files/pub/classof2011.pdf.
    \24\ As of September 30, 2012, the total Federal student aid 
loan portfolio amounted to $948 billion. U.S. Dep't of Educ., 
Federal Student Aid Annual Report 2 (2012), available at http://www2.ed.gov/about/reports/annual/2012report/fsa-report.pdf. The 
Department of Education and the Bureau have together estimated that 
American consumers owe more than $150 billion in outstanding private 
student loans. CFPB & Dep't of Educ., Private Student Loans 17 (Aug. 
29, 2012) (report to the Senate Committee on Banking, Housing, and 
Urban Affairs, the Senate Committee on Health, Education, Labor, and 
Pensions, the House Committee on Financial Services, and the House 
Committee on Education and the Workforce), available at http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf. Since the Proposed Rule was issued, the Board of 
Governors for the Federal Reserve has published data on total 
outstanding student loan debt that includes all holders of student 
loans, including the Federal government. Bd. of Governors of the 
Fed. Reserve Sys., Federal Reserve Statistical Release G.19 (Oct. 7, 
2013), available at http://www.federalreserve.gov/releases/g19/Current/g19.pdf. Consistent with the estimates from the Department 
of Education and CFPB noted above, the Federal Reserve estimates 
principal balance of outstanding student loan debt as of December 
31, 2012 to be approximately $1.1 trillion. Id.
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    Student loan servicers play a critical role in the student loan 
market. Servicing, in general, is the day-to-day management of a 
borrower's loan. Servicers' duties typically include maintaining 
account records regarding a borrower, sending periodic statements 
advising borrowers about amounts due and outstanding balances, 
receiving payments from borrowers and allocating them among various 
loans and loan holders, answering borrower questions, reporting to 
creditors or investors, and attempting default aversion activities for 
delinquent borrowers. Servicers receive scheduled periodic payments 
from borrowers pursuant to the terms of their loans (or notification of 
such payments if borrowers are instructed to send payments to a lockbox 
service or other third party), and apply the payments of principal and 
interest and other such payments as may be required pursuant to the 
terms of the loans or of the contracts governing the servicers' work.
    Student loan servicers also play a role while students are still in 
school. A borrower may receive multiple disbursements of a loan over 
the course of one or more academic years. Repayment of the loan may be 
deferred until some future point, such as when the student finishes 
post-secondary education. A student loan servicer will maintain records 
of the amount lent to the borrower and of any interest that accrues; 
the servicer also may send statements of such amounts to the borrower.
    In short, most borrowers, once they have obtained their loans, 
conduct almost all transactions relating to their loans through student 
loan servicers. The Final Rule will enable the Bureau to supervise 
larger participants of an industry that has a tremendous impact on the 
lives of post-secondary education students and former students, as well 
as their families.\25\
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    \25\ ``Servicing loans'' is a ``consumer financial product or 
service'' pursuant to the Dodd-Frank Act. See 12 U.S.C. 
5481(15)(A)(i) (defining ``financial product or service,'' including 
``extending credit and servicing loans''); see also 12 U.S.C. 
5481(5) (defining ``consumer financial product or service'').
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    Several commenters stated that it is essential to supervise this 
market due to the substantial impact that student loan servicers can 
have on a borrower's experience with student loans. One commenter also 
stated that greater oversight is needed due to the size of the market, 
uneven existing oversight, and the particular vulnerability of student 
loan borrowers. That commenter noted that education loan borrowers are 
not able to choose their loan servicers. It also observed that student 
borrowers, who are often young at the time of origination, may be 
signing loan agreements for the first time, and that disclosures to co-
signers may be limited.
    A number of consumer groups and individual commenters expressed 
concerns about this market. One commenter noted that according to the 
2012 Annual Report of the CFPB Student Loan Ombudsman, 65 percent of 
complaints received by the Bureau about student loans related to

[[Page 73386]]

repayment and servicing. Consumer groups also provided examples that 
they said show dysfunction in the servicing process for both Federal 
and private student loans. Among other things, these groups noted that 
many borrowers have reported difficulties with repayment plans and 
forbearances. The groups attribute many of these complaints to the 
transfer of servicing within the William D. Ford Federal Direct Loan 
Program (as discussed below), which they say has resulted in many 
borrowers being placed in the wrong repayment plan or inadvertently 
missing payments. These groups also noted that borrowers have reported 
problems with private student loan servicers that claim to lack 
authority to approve relief options for borrowers.
    One trade association took a different view, asserting that current 
laws, including the Higher Education Opportunity Act (HEOA) and the 
Truth in Lending Act (TILA) and their implementing regulations already 
protect student borrowers. This trade association asserted that the 
Bureau needs to explain the problem it is trying to address and the 
alternatives it considered before proceeding with this rulemaking.\26\
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    \26\ A commenter urged the Bureau to conclude that, as a 
consequence of 12 U.S.C. 5517(e), the Bureau cannot exercise 
supervisory authority over collection attorneys acting as service 
providers to student loan servicers. The purpose of the Final Rule 
is to define the scope of the student loan servicing market, not to 
define the scope of supervision of any particular service provider. 
The Bureau's authority to supervise service providers to supervised 
nonbanks is established and regulated by the Dodd-Frank Act.
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    In response to these comments, the Bureau notes that it has wide 
discretion in choosing markets in which to define larger participants. 
The Bureau need not conclude, before issuing a rule defining larger 
participants, that the market identified in the rule has a higher rate 
of noncompliance, poses a greater risk to consumers, or is in some 
other sense more important to supervise than other markets. Indeed, 12 
U.S.C. 5514(b)(1) recognizes that the purposes of supervision include 
assessing compliance and risks posed to consumers. Thus, the Bureau is 
not required to determine the level of compliance and risk in a market 
before issuing a larger-participant rule.\27\
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    \27\ A commenter argued that, because the student loan servicing 
industry is already subject to numerous Federal and State 
regulations, the Final Rule may ``create[ ] duplicative and 
potentially inconsistent compliance obligations.'' The commenter 
requested that the Bureau make clear that ``conduct that complies 
with applicable Federal regulations, including [Department of 
Education] regulations, also complies with the CFPB's requirements 
for enforcement or supervision purposes.'' But the Final Rule does 
not create any new ``compliance obligation'' of the type that 
concerns the commenter. Nothing in the Final Rule requires loan 
servicers to engage in, or refrain from, any particular conduct. 
Instead, the Final Rule identifies those persons that are subject to 
Bureau supervision as larger participants of the student loan 
servicing market. In addition, the requirements of Department of 
Education regulations are not coextensive with those imposed by the 
statutes and regulations enforced by the Bureau. Accordingly, 
compliance with the Department of Education's regulations does not 
necessarily satisfy a servicer's obligation to comply with Federal 
consumer financial laws.
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    The student loan servicing market is a reasonable choice for the 
Bureau. Because student loan servicing is an important activity that 
affects millions of consumers, supervision of larger participants of 
this market will be beneficial to both consumers and the market as a 
whole. Supervision of larger participants of the student loan servicing 
market will help the Bureau ensure that these market participants are 
complying with applicable Federal consumer financial law and will help 
the Bureau detect and assess risks to consumers and to the market. The 
supervision program thereby will further the Bureau's mission to ensure 
consumers' access to fair, transparent, and competitive markets for 
consumer financial products and services.
    The existence of substantive Federal consumer financial laws that 
govern student loan servicing, including TILA, does not undermine the 
need for this rulemaking. Indeed, one purpose of the supervision 
program established by the Final Rule will be to oversee nonbank 
compliance with existing Federal consumer financial laws and assess 
risks to consumers in the student loan servicing market.
    As one industry commenter recognized, establishment of supervision 
over larger nonbank participants in the student loan servicing market 
is also appropriate because banks that engage in student loan servicing 
already are subject to Federal supervision with respect to Federal 
consumer financial law.\28\ Extending supervisory coverage to larger 
nonbank participants will help ensure that nonbank student loan 
servicers are subject to comparable scrutiny.
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    \28\ See, e.g., 12 U.S.C. 5515(a) (establishing the Bureau's 
supervisory authority over very large depository institutions and 
credit unions and their affiliates). One of the Bureau's mandates 
under the Dodd-Frank Act is to ensure that ``Federal consumer 
financial law is enforced consistently without regard to the status 
of a person as a depository institution, in order to promote fair 
competition.'' 12 U.S.C. 5511(b)(4).
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    Student loan servicers handle three main types of post-secondary 
education loans on which borrowers still have outstanding balances; 
only two of these categories of loans are still available for new 
originations. First, some outstanding loans were made under the Federal 
Family Education Loan Program (FFELP).\29\ FFELP loans were funded by 
private lenders, guaranteed by entities that are generally State-
affiliated or not-for-profit entities, and reinsured by the Federal 
government. These loans are either serviced by the loan holders 
themselves or serviced pursuant to contracts with the loan holders. 
FFELP loans constituted the vast majority of Federal student loans 
before 2010. Second, pursuant to the 2010 SAFRA Act, new originations 
under FFELP were discontinued, and the U.S. Department of Education 
became the primary lender for Federal student loans, providing loans 
directly to borrowers under the William D. Ford Federal Direct Loan 
Program.\30\ Direct loans are serviced by entities that contract with 
the Department of Education pursuant to Title IV of the Higher 
Education Act of 1965.\31\ These entities are known as Title IV 
Additional Servicers (TIVAS).\32\ Third, the student loan market 
includes private student loans made without Federal involvement. 
Private student loans are usually serviced either by the originating 
institutions or by other, nonbank entities. The same nonbank entities 
awarded servicing rights under the TIVAS contracts may also service 
both legacy FFELP loans and private student loans.
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    \29\ 20 U.S.C. 1071 et seq.
    \30\ Public Law 111-152, Sec. Sec.  2101-2213, 124 Stat. 1029, 
1071-81 (2010). The Direct Loan Program actually began in 1992, see 
Public Law 102-325, Sec. Sec.  451-52, 106 Stat. 569-76 (1992), but 
Federal Direct loans constituted only a small portion of Federal 
student lending before the enactment of the SAFRA Act in 2010. Two 
additional Federal programs under Title IV also authorize student 
loans. One offers grants to those who pledge to become teachers. If 
the recipients do not become teachers, then the disbursed funds are 
converted from grants to loans. See 20 U.S.C. 1070g et seq. A second 
finances loans made directly by certain post-secondary education 
institutions through their financial aid offices. See 20 U.S.C. 
1087aa et seq.
    \31\ 20 U.S.C. 1087f(b).
    \32\ Most of the initial Direct Loan servicing business went to 
one entity: Affiliated Computer Services, Inc. (ACS). As the 
Department of Education began contracting with additional servicers, 
those additional servicers became Title IV Additional Servicers. In 
order to avoid confusion, when the Bureau uses the term TIVAS, the 
Bureau means to refer also to ACS, the original servicer of Federal 
Direct loans.
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    The student loan servicing market includes fewer than 50 nonbank 
servicers. As discussed below, approximately 33 guaranty agencies also 
engage in student loan servicing activities by providing default 
aversion services in connection with FFELP loans. The student loan 
servicing market

[[Page 73387]]

is heavily concentrated.\33\ As measured by unpaid principal balance 
and by number of borrowers with loans being serviced, five nonbanks, 
the TIVAS, account for between approximately 67 percent and 87 percent 
of activity in the market.\34\ There are only a few nonbanks in the 
middle tier of this market, each with a market share that is slightly 
greater than 1 percent. Many of the firms in this middle tier service 
loans placed with them by smaller nonbanks that are in the lowest tier 
of the market.\35\ Finally, the lowest tier of the market includes a 
few dozen smaller nonbank servicers, each of which has only a fraction 
of a percent in market share.\36\ Many of these smaller nonbanks are 
not-for-profit entities or closely associated with State or local 
governments, and at least half of them contract to other firms the 
servicing of the loans for which they have servicing rights.\37\ As 
noted, approximately 33 guaranty agencies also participate in the 
servicing market by providing default aversion services, but available 
data indicate that these entities' default aversion activities do not 
constitute a significant share of the student loan servicing 
market.\38\
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    \33\ The Bureau has estimated entity-level data for nonbank 
student loan servicers as of December 31, 2012, based mainly on the 
2012 Student Loan Servicing Alliance (SLSA) Servicing Volume Survey, 
to which most nonbank servicers reported data as of December 31, 
2011. Depository institutions also service student loans, but they 
do not report to SLSA and will not be larger participants under this 
Final Rule. To construct its estimates for nonbank servicers, the 
Bureau augmented the data from SLSA's Servicing Volume Survey in 
several ways. (1) For the servicers that elected not to report their 
servicing information to SLSA, the Bureau estimated their servicing 
volume using Department of Education reports, shareholder 
presentations, and other market information. (2) The Bureau 
forecasted the growth of the largest student loan servicers' 
portfolios of Federal Direct loans on the basis of the overall 
growth in Federal Direct loans of 11.8 percent in 2012. See Dep't of 
Educ., Federal Student Aid Annual Report 2 (2012), available at 
http://www2.ed.gov/about/reports/annual/2012report/fsa-report.pdf. 
(3) The Bureau accounted for publicly reported market changes, 
including the Department of Education's borrower volume 
reallocations. (4) The Bureau also included in its estimate of a 
servicer's volume the borrowers for whose loans the servicer 
performs subservicing under contract with other servicers. The 
results of these calculations are entity-level estimates of total 
unpaid principal balance, borrower volume, and loan volume. In 
response to a comment discussed below, the Bureau has updated these 
calculations to include guaranty agencies that provide default 
aversion services. The resulting Bureau estimates are cited 
hereinafter as ``2012 SLSA Servicing Volume Survey, augmented by 
CFPB estimates.''
    \34\ See 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates. Because the Bureau does not have data directly on 
servicers' ``account volume'' as defined in the Final Rule, the 
Bureau has used data on both unpaid principal balance and number of 
borrowers to estimate market share. The Bureau calculated the lower 
end of the market-share range using data regarding unpaid principal 
balance. In making this calculation, the Bureau used its estimate of 
$1.1 trillion in outstanding student loan debt as the denominator. 
Because the $1.1 trillion estimate includes unpaid principal balance 
serviced by both banks and nonbanks, and because the relevant market 
includes only servicing by nonbanks, the Bureau expects the TIVAS' 
actual share of the nonbank student loan servicing market to be 
somewhat larger than the lower end of the range. The Bureau 
calculated the upper end of the range using data reported to SLSA 
regarding the number of borrowers for whom loans are serviced. The 
calculation is slightly different from the Bureau's estimate when it 
issued the Proposed Rule because the Bureau has now factored in 
guaranty agencies that provide default aversion services. This 
likely overestimates market coverage because there may be nonbanks 
engaged in ``student loan servicing'' as defined in the Final Rule 
that do not report to SLSA and that are not included in the Bureau's 
augmented analysis due to insufficient data. Indeed, as one 
commenter noted, the 2012 SLSA Servicing Volume Survey is a 
voluntary survey of participating SLSA members' servicing volume and 
does not purport to be a definitive survey of the marketplace, 
though it does provide a snapshot of the participating servicers' 
volume as of December 31, 2011. However, the Bureau need not resolve 
these uncertainties regarding market share to issue the Final Rule. 
As discussed below, the approximately seven entities that will 
likely qualify as larger participants under the Bureau's Final Rule 
engage in substantially more market activity than the next largest 
participants, evaluated under any of the proposed criteria.
    \35\ See HCERA/SAFRA--Not-For-Profit (NFP) Servicer Program 
documentation, as of Sept. 25, 2013 (showing firms that contract 
servicing rights to other entities), available at https://www.fbo.gov/spg/ED/FSA/CA/NFP-RFP-2010/listing.html.
    \36\ See 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
    \37\ See HCERA/SAFRA--Not-For-Profit (NFP) Servicer Program 
documentation, as of Sept. 25, 2013 (showing firms that contract 
servicing rights to other entities), available at https://www.fbo.gov/spg/ED/FSA/CA/NFP-RFP-2010/listing.html.
    \38\ In 2011, these 33 guaranty agencies reported a total of 
approximately $111 million in net default aversion fee revenue to 
the Department of Education. Fed. Student Aid, FY 2011 Summary of 
Guaranty Agency Financial Reports, available at http://www.fp.ed.gov/attachments/publications/EDForms2000DataFY11AnnualReport.pdf (summation of row AR-30). The 
guaranty agencies' default aversion activities are discussed in more 
detail in the Threshold section below.
---------------------------------------------------------------------------

Section 1090.106(a)--Market-Related Definitions
    Unless otherwise specified, the definitions in Sec.  1090.101 
should be used when interpreting terms in the Final Rule. The Final 
Rule defines additional terms relevant to the student loan servicing 
market. These terms include ``student loan servicing,'' which 
delineates the scope of the identified market; ``post-secondary 
education expenses''; ``post-secondary education loan''; and ``account 
volume.''
    Account volume. The Bureau received a few comments related to the 
definition of ``account volume,'' which the Bureau proposed as the 
criterion that would determine whether an entity is a larger 
participant of the student loan servicing market.\39\ For the reasons 
explained below, the Bureau has adopted the definition of ``account 
volume'' as proposed.
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    \39\ Several commenters advocated using the number of borrowers 
or the number of loans that a servicer handles to assess whether an 
entity is a larger participant. Those comments are discussed below, 
in connection with Sec.  1090.106(b).
---------------------------------------------------------------------------

    Section 1090.106(a) defines the term ``account volume'' as the 
number of accounts with respect to which a nonbank covered person is 
considered to perform student loan servicing and contains instructions 
for calculating account volume.\40\ Account volume is based on the 
number of students or prior students with respect to whom a nonbank 
covered person performs student loan servicing. For example, a servicer 
might service a post-secondary education loan made to a student at the 
beginning of the student's time in college and paid back over a number 
of years after the student completed college. As another example, a 
servicer might service a post-secondary education loan made to a parent 
of a student to fund that student's education expenses.\41\ In each of 
these examples, the student whose post-secondary education expenses a 
loan funded represents at least one account, even if the student is not 
an obligor on the loan.
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    \40\ The number of accounts generally will be counted as of 
December 31 of the prior calendar year. In general, a loan 
originator may open an account for a borrower at the beginning of an 
academic year and then disburse funds for the student's expenses at 
various points throughout the year. An originator may allocate the 
borrower's account to a servicer at the beginning of the academic 
year, even though the originator will be making further 
disbursements. If a servicer is responsible for servicing loans with 
respect to a student as of December 31, the corresponding account 
will be included in the calculation of account volume.
    \41\ For example, under the Federal PLUS loan program, a 
student's parent or guardian may take out a loan to pay the 
student's expenses. See 20 U.S.C. 1078-2. In the private lending 
market, the Bureau understands that, subject to underwriting 
criteria, post-secondary education loans may be available to any 
person who wishes to support a student's education.
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    However, the Bureau is aware that in some situations, a student or 
prior student may correspond to more than one account at a given 
servicer. For example, if a nonbank covered person is servicing a loan 
to a student and also a loan to that student's parent, the servicer 
will typically maintain separate accounts for the two loans. The 
student and the parent will each receive separate statements regarding 
their loans, and the servicer will remit payments on the loans to their 
respective holders. As another example, a student may receive loans 
from two different originators, or a given originator may securitize 
loans to the

[[Page 73388]]

student through two different securitization vehicles. These different 
holders of the student's loans may all retain the same servicer, which 
may maintain separate accounts for the different loans.\42\ The 
servicer may send the student one consolidated statement or multiple 
statements, depending on the circumstances and its practices, and the 
servicer will remit payments on the loans to different loan holders. 
Under the Final Rule, the criterion for larger-participant status will 
recognize these separate accounts as additional servicing activity.
---------------------------------------------------------------------------

    \42\ In some instances, student loans that have been securitized 
in the secondary market may have a single loan originator but a 
separate legal holder for each loan. The Bureau understands that a 
securitization sponsor will typically use the same servicer for 
multiple securitizations.
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    To provide a straightforward understanding of what constitutes an 
``account,'' the Final Rule counts each separate stream of fees to 
which a servicer is entitled for servicing post-secondary education 
loans with respect to a given student or prior student.\43\ The Bureau 
believes that student loan servicers are generally compensated, on a 
monthly basis, at a fixed rate for each account. For Federal Direct 
loans and Federally-owned FFELP loans, this compensation structure is 
determined by contract with the Department of Education, and the 
average fee rate for 2013 was estimated to be $1.68 per month per 
account.\44\ In total, according to Bureau analysis of available 
Department of Education data and other sources, these loans make up 
greater than 50 percent of the total outstanding dollar volume of 
student loans and more than 90 percent of all new student loan 
originations.\45\ For loans held by private entities (both private 
loans and FFELP loans), the rate may vary depending on the contracts 
governing a given servicer's business. But the same basic compensation 
structure appears to be common throughout the student loan servicing 
market. The Bureau therefore expects that counting the number of 
streams of fees a servicer receives for servicing loans with respect to 
a given student will be an appropriate way to represent the scope of 
the servicer's business with respect to that student.
---------------------------------------------------------------------------

    \43\ Ancillary fees (such as a late payment fee or a 
disbursement fee) that a servicer may receive in particular 
circumstances would not constitute a distinct stream of fees for 
performing student loan servicing.
    \44\ See Title IV Redacted Contract Awards 12-13, available at 
https://www.fbo.gov/spg/ED/FSA/CA/FSA-TitleIV-09/listing.html. The 
contract fixes monthly compensation on a per-borrower basis, and the 
compensation depends on the repayment status of each borrower being 
serviced. See also Student Aid Administration Fiscal Year 2013 
Request, at AA-15, available at http://www2.ed.gov/about/overview/budget/budget13/justifications/aa-saadmin.pdf. The Student Aid 
Administration estimates the average cost per-borrower (which is 
equivalent to a servicer's per-account compensation for purposes of 
this Final Rule) to be $1.68 per month, based on the contractual 
prices and the proportion of borrowers with different repayment 
statuses. Id.
    \45\ Bd. of Governors of the Fed. Reserve Sys., Federal Reserve 
Statistical Release G.19 (Oct. 7, 2013), available at http://www.federalreserve.gov/releases/g19/Current/g19.pdf; CFPB & Dep't of 
Educ., Private Student Loans 17 (Aug. 29, 2012) (report to the 
Senate Committee on Banking, Housing, and Urban Affairs, the Senate 
Committee on Health, Education, Labor, and Pensions, the House 
Committee on Financial Services, and the House Committee on 
Education and the Workforce), available at http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf; Dep't of Educ., Federal Student Aid Annual Report 2 
(2012), available at http://www2.ed.gov/about/reports/annual/2012report/fsa-report.pdf.
---------------------------------------------------------------------------

    One trade association commented that, while uncommon, in some 
instances, servicer compensation is calculated as a percentage of the 
aggregate principal balance of all loans serviced. This commenter asked 
whether such servicers have just one income stream. The Bureau 
recognizes that some nonbank covered persons may not receive servicing 
fees on a per-account basis. This might occur, for example, in the 
unusual circumstance where a servicer is compensated based on aggregate 
principal balance for all loans in its portfolio, regardless of the 
student or prior student to whom the loans correspond. Similarly, a 
nonbank covered person might not be compensated on a per-account basis 
for servicing of loans it holds. For such a person, each student or 
prior student whose education is funded by a loan will still count as 
one account under the proposed definition of ``account volume'' that 
the Bureau is adopting in the Final Rule, regardless of whether the 
student or former student is an obligor on the loan.
    Another trade association stated that the Proposed Rule was not 
sufficiently clear to permit servicers to compute the number of 
accounts they service and posed two hypothetical questions that it said 
highlighted the rule's lack of clarity. First, the commenter asked 
whether there would be one or at least two income streams if a servicer 
is paid by a lender for servicing both FFELP loans and private 
education loans for a particular student or former student. Pursuant to 
the Final Rule, the answer would depend on whether the servicer 
receives separate fees for its services on the FFELP loans and private 
education loans, information that should be readily available to the 
servicer. If the servicer receives a fee for the FFELP loans and a 
separate fee for the private education loans of a particular borrower, 
there would be two accounts for this borrower. If the servicer receives 
one fee for all of the loans, there would only be one account for this 
borrower. Second, the commenter asked whether there would be one income 
stream or four income streams if a servicer is paid by a lender on a 
per-loan basis for servicing where a borrower has four outstanding 
private education loans. Because the Final Rule provides that a 
``nonbank covered person has one account for each stream of fees to 
which the person is entitled,'' the hypothetical servicer would have 
four accounts for this borrower. The Bureau regards these consequences 
as straightforward applications of the definition of ``account volume'' 
and does not believe they show the definition to be unclear.
    A commenter expressed concern about the Bureau's use of the term 
``student or prior student'' in the Proposed Rule's section-by-section 
analysis and asked that the Bureau instead use ``borrower'' in the 
section-by-section analysis of the Final Rule in order to clarify that 
a parent borrowing on behalf of a student is a separate consumer. Other 
commenters also suggested using ``borrower'' in the definition of 
``number of accounts'' and offered a possible definition of 
``borrower.'' Paragraph (i) of the account volume definition in the 
Proposed Rule said: ``A nonbank covered person has at least one account 
for each student or prior student with respect to whom the nonbank 
covered person performs student loan servicing.'' The Bureau's use of 
the term ``student or prior student'' was not meant to suggest that a 
student and a parent borrowing on behalf of that student are generally 
the same consumer. However, the Bureau believes that it is important 
for the definition of ``account volume'' to refer to a ``student'' 
rather than a ``borrower.'' The difference between the two terms, as 
used in the definition of ``account volume,'' would be most significant 
for a servicer that does not receive compensation on a per-account 
basis. As discussed above, such a servicer has at least one account for 
each student with respect to which the servicer is servicing loans. The 
Bureau prefers ``student or prior student'' for these purposes because 
``student or prior student'' provides a clear reference to a single 
individual and avoids the complexities, described in the Sec.  
1090.106(b) criterion discussion below, that may be associated with 
counting borrowers in situations

[[Page 73389]]

involving co-makers, co-signers, or endorsers.\46\
---------------------------------------------------------------------------

    \46\ As noted above, the term ``student or prior student'' 
includes any student or prior student whose post-secondary education 
expenses are or were funded by one or more post-secondary education 
loan(s) that the servicer is servicing, regardless of whether the 
student or prior student is an obligor on the loan(s). If a servicer 
is not compensated on a per-account basis and a student and the 
student's parent(s) borrow independently of each other for the 
student's higher education expenses, the Bureau recognizes that by 
using ``student or prior student'' in the definition of account 
volume the student and the student's parent(s) will be counted as 
just one account. The Bureau believes that this circumstance would 
only occur rarely.
---------------------------------------------------------------------------

    The definition attributes to a nonbank covered person the sum of 
the number of accounts of the person and its affiliated companies. 
Under 12 U.S.C. 5514(a)(3)(B), the activities of affiliated companies 
are to be aggregated for purposes of computing activity levels for 
rules--like the Final Rule--under 12 U.S.C. 5514(a)(1). In the consumer 
reporting and consumer debt collection markets, the Bureau implemented 
the aggregation called for by 12 U.S.C. 5514(a)(3)(B) by prescribing 
the addition of all the receipts of a person and its affiliated 
companies to produce the person's annual receipts. The Bureau proposed 
a similar calculation for the student loan servicing market. The 
account volume for each nonbank covered person would be the sum of the 
number of accounts serviced by that nonbank covered person and the 
numbers of accounts serviced by all affiliated companies.\47\ The 
calculation would add together each account on which any affiliated 
company was providing student loan servicing. For example, if two 
affiliated companies each serviced the loans of 10 students, each of 
the two companies' account volume would be 20.\48\ The calculation 
would be the same even if the companies service loans for some of the 
same students.
---------------------------------------------------------------------------

    \47\ Pursuant to the definition of account volume, each person's 
number of accounts as of the prior calendar year's December 31 will 
be aggregated together where two persons become affiliated companies 
in the middle of that prior year. As a further consequence of the 
definition, where two affiliated companies cease to be affiliated 
companies in the middle of a year, the account volume of each will 
continue to include the other's number of accounts until the 
succeeding December 31.
    \48\ This example assumes that each company is receiving only a 
single stream of fees for each of the 10 students.
---------------------------------------------------------------------------

    Several commenters expressed support for the Bureau's proposed 
method of aggregating accounts of affiliated companies for the purpose 
of calculating account volume, and the Bureau received no comments 
objecting to the proposed method.\49\ For the reasons described above 
and in the Proposed Rule, the Bureau adopts the aggregation method as 
proposed.
---------------------------------------------------------------------------

    \49\ One commenter suggested that the Bureau prevent evasion by 
aggregating accounts of firms that act as agents or are under 
contract to another firm in addition to affiliated companies. The 
Bureau will apply the definition in 12 CFR 1090.101 to determine 
whether an entity is an ``affiliated company.'' In developing that 
definition, the Bureau considered whether to expand aggregation to 
include contractors or agents. 77 FR 42874, 42877 (July 20, 2012). 
The reasons the Bureau gave at that time for aggregating only the 
activity of ``affiliated companies,'' as defined in the rule, are 
valid for this market as well.
---------------------------------------------------------------------------

    Post-secondary education expenses. The Bureau proposed to define 
the term ``post-secondary education expenses'' to mean any of the 
expenses that are included as part of the cost of attendance of a 
student as defined in 20 U.S.C. 1087ll. The Bureau received support and 
no comments raising concerns regarding this definition and adopts the 
definition as proposed.
    Post-secondary education loan. The Bureau proposed to define the 
term ``post-secondary education loan'' as an extension of credit that 
is made, insured, or guaranteed under Title IV of the Higher Education 
Act of 1965, 20 U.S.C. 1070 et seq., or that is extended to a consumer 
with the expectation that the funds extended will be used in whole or 
in part to pay post-secondary education expenses.\50\ The Bureau 
received a number of comments related to the definition of ``post-
secondary education loan,'' and the Bureau is adopting the proposed 
definition in the Final Rule, with only technical changes, for the 
reasons described below.
---------------------------------------------------------------------------

    \50\ Loans for refinancing or consolidating post-secondary 
education loans would also be considered post-secondary education 
loans. However, loans under an open-end credit plan or secured by 
real property are not post-secondary education loans.
---------------------------------------------------------------------------

    Loans made to parents or other third parties. A number of consumer 
groups requested that the Bureau clarify that the definition includes 
loans made to parents or other third-parties to pay for a student's 
educational expenses. Some of the groups suggested that the Bureau 
replace ``consumer'' with ``borrower'' in the definition of ``post-
secondary education loan'' and define ``borrower'' as ``a person who 
has obtained a post-secondary education loan for the borrower or a 
third-party.'' The Bureau recognizes that a loan may be made to a 
parent or guardian, or to another consumer, to fund the post-secondary 
education expenses of a student who is not a borrower of that loan. As 
the Bureau explained in the Proposed Rule, such a loan would be a 
``post-secondary education loan'' under the definition as originally 
proposed because the term ``post-secondary education loan'' includes a 
loan made to a parent, guardian, or other consumer to fund the post-
secondary education expenses of a student who is not a borrower. Thus, 
the Bureau concludes that it is not necessary to add a definition of 
``borrower'' or to change the definition of ``post-secondary education 
loan.''
    Open-end loans and loans secured by real property. Consumer groups 
also urged the Bureau to remove the definition's exclusions for open-
end loans, as defined by the Bureau's Regulation Z, 12 CFR 
1026.2(a)(20), and loans secured by real property (such as residential 
mortgages or reverse mortgages), if they are expressly marketed as 
student loans. These groups advocated for including such loans within 
the definition of ``post-secondary education loan,'' arguing that the 
goal should be to protect student loan borrowers as a whole, rather 
than creating technical distinctions. One trade association also urged 
that the Bureau, if it did not use the existing TILA definition as 
discussed below, include open-end credit plans in its definition of 
post-secondary education loan, noting that the needs of consumers who 
use open-end credit plans to pay for post-secondary expenses are 
essentially identical to those of users of traditional private student 
loans.
    The Bureau recognizes that students and their families may use 
credit cards or home equity lines of credit to finance post-secondary 
education. However, for the reasons set forth below, the Bureau 
concludes that it is appropriate to exclude these two categories of 
credit from the defined category of ``post-secondary education loan,'' 
as originally proposed.
    First, the Bureau believes that open-end loans and loans secured by 
real estate are sufficiently different from conventional student loans 
such that it would not be advisable to include them in the definition 
of ``post-secondary education loan.'' Such loans and post-secondary 
education loans as defined in this Final Rule are typically serviced 
separately due in part to the different features of these types of 
loans. The commenters suggested that the Bureau did not provide any 
evidence on this point, but they offered no reason to think the Bureau 
was mistaken.
    Indeed, as the Bureau indicated in proposing the rule, multiple 
differences between these forms of credit suggest that a given servicer 
is unlikely to handle servicing, in the same portfolio and using the 
same procedures, of both student loans and either credit cards or home 
equity loans. The platforms that

[[Page 73390]]

are used to service post-secondary education loans, including private 
student loans, have in many instances evolved out of program-specific 
requirements, such as those of the Title IV/FFELP guidelines. 
Similarly, the platforms used for credit cards or home equity loans 
have been developed to suit the structures of those loans, the 
applicable regulatory obligations, and the requirements of loan 
holders. For example, servicing of loans secured by real estate must 
account for escrow payments, if applicable, and must comply with 
mortgage-specific regulatory requirements. Credit card servicers 
typically do not aggregate credit card accounts for single billing in 
the manner that a student loan servicer might, and unlike student loan 
servicers, credit card servicers post purchase transactions on a daily 
basis. In addition, credit card servicers must manage balances that 
revolve on a monthly basis. Meanwhile, even if incurred for education 
purposes, credit card debt and loans secured by real estate also 
typically lack some of the standard features of student loans, such as 
the initial period in which no payments are required.
    Commenters stated that structural differences of this nature are an 
insufficient reason to exclude servicing of these other types of loans 
from the market and that the Bureau's rule should include in the market 
servicing of as many types of student loans as possible. The Bureau 
disagrees. The purpose of the Final Rule is to define the student loan 
servicing market for purposes of its nonbank supervision program. Even 
if some credit cards or home equity loans are marketed at origination 
for use in paying educational expenses, the servicing of such loans is 
nonetheless separate from the servicing of conventional student loans.
    Second, pursuant to 12 U.S.C. 5514, the Bureau has supervisory 
authority, independent of the Final Rule, over nonbank covered persons 
that offer or provide origination or servicing of loans secured by real 
estate, including home equity loans or lines of credit. The Bureau also 
has supervisory authority regarding large portions of the credit card 
market through its supervision of very large banks and credit unions 
and their affiliates and service providers pursuant to 12 U.S.C. 5515. 
Indeed, one of the three examples cited by the commenters is a credit 
card issued by a large bank that already is subject to the Bureau's 
supervisory authority.
    The commenters stated that even if such loans are serviced by 
entities already within the Bureau's authority those entities should be 
subject to supervision as student loan servicers under this larger 
participant rule. They asserted that the existence of supervisory 
authority over some of these entities under different auspices is 
irrelevant. The Bureau disagrees. If an entity is already subject to 
the Bureau's supervisory authority, the Bureau may examine the entire 
entity for compliance with all Federal consumer financial law and 
assess and detect risks to consumers or to markets for consumer 
financial products and services posed by any activity of the entity, 
not just the activities that initially rendered the entity subject to 
Bureau supervision.\51\ In light of this existing authority, it is not 
necessary to define as larger participants entities that are otherwise 
under the Bureau's supervision, because the Bureau already can 
supervise the servicing activities in which such entities may engage 
regarding student loans.
---------------------------------------------------------------------------

    \51\ See 12 U.S.C. 5514(b)(1); 77 FR 42874, 42880 (July 20, 
2012) (``[I]f an entity is subject to the Bureau's supervisory 
authority, the Bureau may examine the entire entity for compliance 
with all Federal consumer financial law, assess enterprise-wide 
compliance systems and procedures, and assess and detect risks to 
consumers or to markets for consumer financial products and services 
posed by any activity of the entity, not just the activities that 
initially rendered the entity subject to Bureau supervision.'').
---------------------------------------------------------------------------

    As the commenter points out, there may be entities that are not 
currently supervised by the Bureau that service open-end loans for the 
purpose of financing a consumer's higher education costs. Because open-
end loans are not widely offered for educational purposes, including 
the servicing of these loans in the market would not change the set of 
entities subject to Bureau supervision under any of the thresholds 
considered by the Bureau. But regardless, the Bureau believes that the 
considerations described above regarding how these loans differ from 
conventional student loans justify defining the market without 
including the servicing of these loans. For all of these reasons, the 
Bureau has decided not to include open-end and real-estate secured 
loans in the definition of ``post-secondary education loan.''
    Truth in Lending Act definition of ``private education loan.'' The 
definition of ``post-secondary education loan'' helps determine the 
scope of the student loan servicing market identified by the rule, 
because the market activities involve servicing of ``post-secondary 
education loans.'' Two trade associations commented that the Bureau 
should align the definition of ``post-secondary education loan'' with 
the definition of ``private education loan'' that appears in 15 U.S.C. 
1650(a)(7) and in Regulation Z, 12 CFR 226.46(b)(5). As in previous 
larger-participant rules, the Bureau does not intend its definitions to 
mirror the scope of definitions in TILA or other Federal consumer 
financial law. The Final Rule and TILA serve different purposes. TILA 
is a substantive consumer protection statute that regulates the 
origination and servicing of consumer credit. As amended by the Higher 
Education Opportunity Act,\52\ TILA prescribes certain disclosure and 
timing rules that apply specifically to a category of loans, ``private 
education loans,'' defined in the statute. The Final Rule, by contrast, 
defines larger participants of a market for student loan servicing for 
purposes of delineating, in part, the scope of the Bureau's supervisory 
authority. The Bureau emphasizes that the definitions in the Final Rule 
are relevant only to that purpose and have no applicability to the 
scope, coverage, definitions, or any other provisions of TILA or any 
other law or regulation.
---------------------------------------------------------------------------

    \52\ Public Law 110-315, 122 Stat. 3078 (2008).
---------------------------------------------------------------------------

    The definition of ``private education loan'' in Regulation Z that 
the commenters asked the Bureau to adopt differs in at least two ways 
from the definition of ``post-secondary education loan.'' First, 
Regulation Z, in accordance with the TILA definition, includes only 
loans that are ``not made, insured, or guaranteed under title IV of the 
Higher Education Act of 1965.'' \53\ Thus, Federal loans are not 
``private education loans'' under TILA and Regulation Z. Second, 
Regulation Z further excludes loans that have a term of 90 days or less 
or that have a term of one year or less and no interest rate.\54\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 1650(a)(7)(A)(i).
    \54\ 12 CFR 1026.46(b)(5).
---------------------------------------------------------------------------

    The Bureau believes that servicing of both Federal loans and short-
term loans should be included in the identified student loan servicing 
market. First, Federal loans are commonly serviced by private nonbank 
servicers, accounting for roughly 30 million borrowers at the seven 
largest nonbank servicers.\55\ These companies typically use similar 
platforms for servicing both Federal and private loans, and servicing 
for both kinds of loans affects consumers in similar ways. Indeed, one 
of the two commenters that urged the Bureau to model its definition of 
``post-secondary education loan'' on the TILA definition of ``private 
education loan'' simultaneously urged the Bureau to ensure that it 
supervises the servicing of Federal loans. This commenter argued

[[Page 73391]]

that borrowers of Federal student loans should receive the same 
benefits of Bureau oversight as borrowers of private student loans. The 
Bureau agrees.
---------------------------------------------------------------------------

    \55\ See 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
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    Second, servicing of short-term loans can give rise to many of the 
same concerns as longer-term loans.\56\ For example, servicers of 
short-term loans may have obligations under the Fair Credit Reporting 
Act, 15 U.S.C. 1681 et seq. And their work may pose risks to consumers, 
if, for example, they maintain account records inaccurately, fail to 
provide basic account information, or misinform consumers. The Bureau 
seeks in this Final Rule to address the impact that the servicing of 
student loans, including short-term loans, has on the lives of post-
secondary education students and former students and their families.
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    \56\ Contrary to the suggestion of a commenter, a decision to 
include servicing of short-term loans in the market identified by 
the Final Rule does not constitute a repudiation of the reasons the 
Federal Reserve Board gave for excluding such loans from the 
category of ``private education loans.'' The Board concluded that 
the particular disclosure and timing requirements applicable to that 
category of loans are not necessary for the excluded short-term 
loans. 74 FR 41194, 41204-05 (Aug. 14, 2009) (noting, inter alia, 
that the waiting period required by the HEOA could delay 
disbursement of a short-term emergency loan). The Board did not 
suggest that short-term student loans warrant no consumer 
protections or administrative oversight. As noted below, such loans 
remain subject to other requirements of TILA and Regulation Z, as 
well as other applicable Federal consumer financial law.
---------------------------------------------------------------------------

    The Bureau stresses that it need not identify specific risks 
associated with either type of loan before including servicing of such 
loans in the market. As the Bureau has observed before, it need not 
reach any conclusions about the extent of noncompliance in a market 
before defining larger participants of the market.\57\ The Bureau has 
identified the student loan servicing market not just to include risky 
behavior, but to encompass a set of activities that are related. 
Servicers handling Federal loans and servicers handling short-term 
loans are all participating in the process of managing student loans 
and interactions with borrowers. Aside from the specific requirements 
applicable solely to ``private education loans'' under TILA, many other 
legal requirements apply to both these servicing activities and 
servicing of ``private education loans.'' To the extent that the risks 
attendant on servicing differ between loans that are or are not 
``private education loans,'' the Bureau can adjust the scope and focus 
of its supervision activities accordingly.
---------------------------------------------------------------------------

    \57\ 77 FR 42874, 42883 (July 20, 2012) (Consumer Reporting 
Rule).
---------------------------------------------------------------------------

    One trade association also suggested that the Bureau's potential 
supervisory authority in this area is actually limited to ``private 
education loans.'' The association noted that 12 U.S.C. 5514(a)(1)(D) 
gives the Bureau supervisory authority over nonbank institutions that 
offer or provide loans that are ``private education loans'' as defined 
by TILA. Meanwhile, under 12 U.S.C. 5514(a)(1)(B), the Bureau defines 
larger participants of markets for ``other consumer financial products 
or services.'' The association argued that because paragraph (D) covers 
private education loans, student loans are not an ``other consumer 
financial product or service'' and cannot be the subject of a rule 
under 12 U.S.C. 5514(a)(1)(B).
    The commenter's argument is unclear, because the market defined by 
the Final Rule includes the servicing of many loans that are not 
``private education loans.'' This market activity is not ``offer[ing] 
or provid[ing] . . . private education loan[s],'' and it is therefore 
an ``other'' consumer financial product or service. The commenter 
suggested that the Bureau's authority under section 5514(a)(1)(B) is 
limited to entities that offer or provide loans that are not addressed 
elsewhere in section 5514(a)(1), as private education loans are. Thus, 
the commenter appears implicitly to have assumed that all activity 
relating to student loans is the same type of consumer financial 
product or service as the business of offering or providing a private 
education loan. In the commenter's view, as the Bureau understands it, 
section 5514(a)(1)(D) describes all the student loans that Congress 
wanted to be subject to the Bureau's supervisory authority. So 
``other'' consumer financial products or services should be wholly 
distinct from the category of student loans for which Congress already 
decided the scope of the Bureau's authority.
    The Bureau disagrees. The better reading, in light of the purposes 
of the provision, is that ``other'' simply means ``remaining'' consumer 
financial products or services, i.e. those with respect to which 
section 5514(a) does not expressly provide the Bureau supervisory 
authority.\58\ The Final Rule, which identifies a market for servicing 
post-secondary education loans as defined in the Final Rule, achieves 
the statutory purpose: It defines the larger participants of a market 
that includes products and services other than ``offer[ing] or 
provid[ing] . . . private education loan[s]'' as defined in TILA.
---------------------------------------------------------------------------

    \58\ See American Heritage Dictionary (5th ed. 2011) (listing, 
as the principal meaning of ``other,'' ``being the remaining ones of 
several'').
---------------------------------------------------------------------------

    Of course, the market defined by the Final Rule does include 
servicing activities related to private education loans as well. But 
the commenter offers no reason to think that a larger-participant rule 
must avoid any possible overlap with one of the categories expressly 
enumerated in section 5514(a)(1). The word ``other'' was not meant to 
limit the Bureau's rulemaking authority in this area. The purpose was 
simply to permit the Bureau to expand its supervisory authority beyond 
what section 5514(a)(1) explicitly prescribes. Consistent with that 
purpose, the Bureau can identify a market that both overlaps with the 
enumerated categories and includes other consumer financial products or 
services. Nonbank entities that offer or provide private education 
loans to consumers are already subject to the Bureau's supervisory 
authority. But the Bureau can reasonably take account of their activity 
in identifying a market for other products or services and deciding how 
to define larger participants of the market.
    Finally, the commenters suggested that the difference between the 
definition of ``post-secondary education loan'' and the Regulation Z 
definition of ``private education loan'' might complicate 
implementation of the new Rule and industry compliance. These 
commenters did not explain how such consequences might arise, and the 
Bureau does not believe the Final Rule's definition will complicate 
either implementation or industry compliance. The commenters may be 
assuming that servicers will need to calculate whether they are larger 
participants to determine whether they need to comply. However, the 
Final Rule does not impose any substantive compliance obligations and 
does not require such a calculation. Generally, an entity will need to 
calculate its account volume only if it decides to dispute that it is a 
larger participant when the Bureau initiates supervision activity, such 
as an examination or a requirement that the company provide reports to 
the Bureau.
    Student loan servicing. The Bureau proposed to define the term 
``student loan servicing'' to mean receiving any scheduled periodic 
payments from a borrower pursuant to the terms of any post-secondary 
education loan, and making the payments of principal and interest and 
other amounts with respect to the amounts received from the borrower as 
may be required pursuant to the terms of the post-secondary education 
loan or of the contract governing the servicing; or, during a period 
when payment on a post-secondary education loan is deferred, 
maintaining account records for the loan and communicating with the 
borrower regarding the loan, on behalf of the

[[Page 73392]]

loan's holder. The proposed definition would also have made clear that 
student loan servicing includes interactions with a borrower to 
facilitate such activities. The Bureau received a number of comments on 
the proposed definition. In response to these comments, the Bureau is 
adopting the proposed definition with several adjustments, as explained 
below.
    Activities required for ``student loan servicing.'' One commenter 
suggested that activity should not be included within the defined 
market unless the entity engages in all of the activities listed in the 
proposed definition of ``student loan servicing.'' The Bureau declines 
to adopt this suggestion because in some circumstances multiple 
entities may contribute in handling an account. For example, some 
companies may perform specialized servicing functions, such as the 
default aversion services discussed below, but may not perform other 
servicing operations. The Bureau believes the companies' activities 
should nonetheless be considered part of the identified market. 
Otherwise, servicers might divide their activities among different 
entities in an attempt to evade supervision. In addition, the 
activities of maintaining account records and communicating with a 
borrower take place during a period when no payments are due on the 
borrower's loan. Such a period may last for years, for example while 
the student is in school. The Bureau believes a servicer's activities 
during such a period regarding a borrower should be included in the 
market to the same extent as servicing activities performed when 
payments are due.
    Lockbox services. The Bureau is changing the first sentence of the 
proposed definition of ``student loan servicing'' to address comments 
received relating to the use of a lockbox and similar services. A 
servicer noted in its comment that the first sentence of the definition 
refers to ``receiving'' payments even though servicers of Federally-
owned loans have no direct role in the receipt of borrower payments. As 
the commenter explained, the collection of such payments is instead 
performed by the U.S. Treasury and its contractors, independent of the 
servicer. A trade association commenter raised a similar issue, 
expressing concern that organizations that provide some, but not all, 
of the activities listed in the proposed definition of ``student loan 
servicing'' would inappropriately be considered student loan servicers. 
The trade association stated that an organization should not be 
considered a servicer if it only accepts payments for a servicer (for 
example, by providing ``lockbox'' services).
    The Bureau does not believe servicing activity should be excluded 
from the market merely by virtue of the fact that the servicer uses a 
lockbox service to collect payments. But the Bureau agrees that the 
lockbox service, i.e. the function of merely receiving payments for a 
loan holder and providing notification to a servicer, should not itself 
be considered student loan servicing for purposes of the Final Rule. To 
make clear that servicing with the assistance of a lockbox service is 
nonetheless market activity, the Bureau has inserted the words ``or 
notification of such payments'' after ``receiving any scheduled 
periodic payments from a borrower'' in the first sentence of the Final 
Rule's definition of ``student loan servicing.'' To make clear that a 
lockbox service that simply receives and remits money without handling 
borrowers' accounts is not a market participant, the Bureau has further 
revised this sentence of the definition by substituting ``applying 
payments to the borrower's account'' for ``making the payments of 
principal and interest and other amounts with respect to the amounts 
received from the borrower.'' By ``applying payments,'' the Bureau 
means the activity of adjusting the amount of principal, interest, or 
other amounts due on an account when payments are received from the 
borrower. A lockbox that merely receives payments and passes them on 
would not engage in ``student loan servicing'' under the Final Rule's 
definition because it does not apply payments (part of the defined 
activity in paragraph (i)) or communicate or otherwise interact with 
the borrower (as in paragraphs (ii) or (iii)).\59\
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    \59\ One commenter stated that entities that provide a third-
party servicing system or communicate with borrowers but do not 
receive payments or maintain account records should not be 
considered to be engaged in ``student loan servicing.'' An entity 
that provides a software system but does not itself apply payments 
to specific borrower accounts or interact with borrowers would not 
be engaged in ``student loan servicing.'' By contrast, an entity 
that communicates with borrowers could be engaged in ``student loan 
servicing'' under the Final Rule, depending on the purpose of its 
borrower interactions. For example, the default aversion services 
that a guaranty agency provides pursuant to the Department of 
Education's regulations would be included in the market, as 
discussed in more detail below.
---------------------------------------------------------------------------

    Guaranty Agencies and Default Aversion Services. A guaranty agency 
submitted a comment expressing concern that guaranty agencies could be 
interpreted to be engaging in ``student loan servicing.'' The commenter 
stated that the Bureau should exclude guaranty agencies by adding a 
definition of ``student loan servicer'' that is limited to entities 
performing student loan servicing at the direction of and under 
contract with the loan holder and owner.
    As the commenter explained, guaranty agencies engage in a variety 
of activities, including assisting borrowers in applying for Federal 
student loans, completing program reviews, providing default aversion 
services, and administering and collecting payments on loans in 
default. The commenter asserted that guaranty agencies perform their 
functions on behalf of the Department of Education as fiduciaries and 
that those functions are unrelated to the Bureau's consumer protection 
mission. It also noted that guaranty agencies do not take payments for 
non-defaulted loans or grant deferments or forbearances, although they 
do conduct default aversion services prior to default and collect on 
defaulted loans.
    The Bureau believes that servicing another servicer's account 
should be considered an activity that is within the market and that 
limiting the market definition to activities performed at the direction 
of and under contract with the loan holder and owner could be read to 
exclude these activities. Under certain circumstances, a servicer 
performs much or all of the activity described by the proposed 
definition, but it does so under contract with another servicer, which 
in turn is under contract to the loan's holders. The focus of the 
Bureau's supervision program is on servicing as it is provided to 
consumers. Therefore, for purposes of this rule, the Bureau believes 
the activities described above should be considered part of the market 
to the same extent as though the subservicer were under contract 
directly with the loan holder. The Bureau therefore has decided not to 
adopt the definition of ``student loan servicer'' suggested by the 
commenter.
    The commenter also urged the Bureau not to include default aversion 
services in the student loan servicing market. The proposed definition 
of ``student loan servicing'' expressly mentioned such activity, and 
the commenter pointed to this aspect as another way the Bureau could 
refine the definition to exclude guaranty agencies. The Bureau believes 
it is appropriate to include default aversion services, even when 
conducted as a standalone servicing function, in the student loan 
servicing market. As the Proposed Rule explained, the Bureau regards 
default aversion activities as closely connected to the core aspects of 
student loan servicing--receiving and applying payments and maintaining 
account records and communicating with

[[Page 73393]]

borrowers.\60\ The Bureau recognizes that many student loan servicers 
perform or subcontract default aversion activities for loans that they 
are servicing. In addition, efforts to prevent default on post-
secondary education loans can help save borrowers from the serious 
consequences resulting from default, which can include the accrual of 
thousands of dollars in penalties and fees and a damaged credit 
profile.\61\ Default aversion can help protect consumers from certain 
risks; but, when not conducted in compliance with applicable law, 
default aversion can exacerbate those risks or create others. The 
Bureau expects to assess those risks in its supervision of larger 
participants of the student loan servicing market. These potential 
risks are not limited to entities that work for the owner of the note 
and instead result from the nature of the activity, regardless of any 
other functions the entities may perform.
---------------------------------------------------------------------------

    \60\ One commenter requested that the Bureau clarify its 
description of a servicer's role in modifying a borrower's payment 
plan. The Bureau understands that certain servicers may have limited 
or no discretion in the loan amounts or interest rates modified. But 
the Bureau believes that even where the servicers' role involves 
only communicating the borrower's extenuating circumstances to the 
loan holder, informing the borrower, and modifying the borrower's 
account in accordance with directions from the loan holder, these 
services are closely connected to the core of servicing.
    \61\ Default on a Federal student loan has an additional 
deleterious consequence: A loan in default may not qualify for 
income-based repayment, an alternative plan under which a low-income 
borrower may be able to reduce his or her monthly payments.
---------------------------------------------------------------------------

    The default aversion services provided by guaranty agencies in 
particular should be within the defined market because they are similar 
to those provided by traditional servicers. Under Department of 
Education regulations, a guaranty agency's default aversion services 
consist of ``activities . . . designed to prevent a default by a 
borrower who is at least 60 days delinquent and that are directly 
related to providing collection assistance to the lender.'' \62\ A 
guaranty agency may contact a borrower and urge the borrower to bring 
the loan current. As part of these efforts, the agency may suggest 
forbearance, deferment, or various repayment plans. The agency may 
provide the borrower information that will help the borrower assess his 
or her eligibility for various options. The Bureau believes borrowers 
perceive these communications no differently from communications that 
the borrower has received from the servicer of the borrower's loan. 
Thus, when a guaranty agency provides default aversion services, it 
plays a role that is, from the borrower's perspective, likely to be 
indistinguishable from the role of a servicer.\63\
---------------------------------------------------------------------------

    \62\ 34 CFR 682.404(a)(2)(ii).
    \63\ Further, if the default aversion services fail and the 
borrower defaults, the guaranty agency must return the fee it 
received for providing the services, 34 CFR 682.404(k)(2)(ii), and 
the guaranty agency shares a loss on the default because part of its 
function is to insure lenders against loss on student loans. Under 
Department of Education regulations, a guaranty agency guarantees no 
more than 97 percent of the unpaid balance of defaulted loans that 
were disbursed on or after July 1, 2006; a lender thus bears at 
least 3 percent of the loss. 34 CFR 682.401(b)(14). The guaranty 
agency's interests in the outcome of default aversion are comparable 
to those of the loan's primary servicer, which will lose from 
default because the loan servicer's functions (and compensation) 
with respect to the borrower will terminate.
---------------------------------------------------------------------------

    The Bureau believes the proposed definition of ``student loan 
servicing'' appropriately reflected these considerations. The proposed 
market definition included interactions with a borrower to facilitate 
the core servicing activities of receiving and remitting payments or 
maintaining records and communicating about them with a borrower.\64\ 
The word ``facilitate'' indicates that the interactions included within 
the market are only those that are related to the core servicing 
activities and are performed in order to make those activities, 
particularly receiving payments, more likely to succeed. To clarify 
further that the purpose of an interaction with a borrower is important 
for determining whether it is ``student loan servicing,'' the Bureau is 
using the phrase ``conducted to facilitate,'' rather than simply ``to 
facilitate.'' The Bureau has also consolidated the final two sentences 
of the definition to ensure that it is clear that activities to prevent 
default on obligations arising from post-secondary education loans only 
constitute servicing if they are conducted to facilitate the core 
servicing activities described in paragraphs (i) or (ii) of the 
definition. The Bureau is also making several structural changes to the 
definition, relative to the Proposed Rule, to simplify the 
definition.\65\
---------------------------------------------------------------------------

    \64\ As discussed above, the definition the Bureau is adopting 
also includes receiving notice of payments, and it replaces 
remitting payments with applying payments to borrowers' accounts.
    \65\ A commenter expressed concern that the proposed definition 
of ``student loan servicing'' might be read to include third-party 
service providers that assist schools by providing default 
prevention services. Such services are often provided in an effort 
to improve the schools' cohort default rates under the Higher 
Education Act of 1965, 20 U.S.C. 1070 et seq., and its implementing 
regulations, 34 CFR parts 600 et seq. Whether entities performing 
default aversion activities are engaged in ``student loan 
servicing'' under the Final Rule will depend on the purpose for 
which the services are performed. If they are done to facilitate the 
activities described in paragraphs (i) or (ii) of the Final Rule's 
definition, they will be ``student loan servicing.''
---------------------------------------------------------------------------

    Periods when no payment is required. The Bureau has adjusted the 
clause of the definition that addresses periods when payments are not 
required on the loan. As proposed, the definition would have included 
maintaining account records and communicating with a borrower ``during 
a period when payment on a post-secondary education loan is deferred.'' 
However, the Bureau intends this clause to apply during all periods 
when no payment is required on a loan, including, for example, periods 
of forbearance. To ensure this is clear, the definition as adopted 
refers to ``a period when no payment is required.''
Section 1090.106(b)--Test To Define Larger Participants
    Criterion. The Bureau has broad discretion in choosing a criterion 
for assessing whether a nonbank covered person is a larger participant 
of a market within which the Bureau will conduct supervision. The 
Bureau proposed to use account volume as the criterion that determines 
which entities are larger participants of a market for student loan 
servicing. The Bureau invited comment on this proposal, and also asked 
for comment regarding two other possible criteria: total amount of 
unpaid principal balance and number of student loans serviced. The 
Bureau also invited suggestions for other criteria that commenters 
believed might be superior.
    Comments from several consumer groups and one trade association 
supported using account volume as the measure of market participant 
size. On the other hand, a number of industry comments suggested that 
the Bureau instead use either number of borrowers or number of loans as 
the criterion. For the reasons set out below, the Bureau has adopted 
account volume as the criterion in Sec.  1090.106(b), as proposed.
    The Bureau believes that account volume is the appropriate 
criterion because, among other things, it is a meaningful measure of a 
student loan servicer's level of participation in the market and of the 
servicer's impact on consumers. First, the number of accounts on which 
a person performs servicing reflects the magnitude of the student loan 
servicer's interactions with consumers. Each account represents a 
regular series of interactions with at least one consumer. Account 
volume should therefore appropriately reflect the comparative amount of 
consumer impact of various servicers.\66\ Second,

[[Page 73394]]

because account volume is defined, in part, in terms of how many 
streams of fees a servicer receives with respect to a given student, 
the Bureau anticipates that the account volume criterion will correlate 
to the amount of compensation a person receives for its student loan 
servicing (and also to receipts and other comparable measures of market 
participation). Third, the degree of consumer impact increases directly 
when a servicer handles multiple accounts for a given consumer because 
the accounts are likely to represent loans held by different loan 
holders. In that situation, the servicer will be managing the 
consumer's dealings with multiple other companies. In addition, 
different loan holders may impose different standards and requirements 
for how the servicer performs its tasks, including the task of applying 
the consumer's payments to multiple accounts. The coordination needed 
can be complicated and represents an additional facet of servicing that 
account volume reflects.
---------------------------------------------------------------------------

    \66\ While account volume may not correlate perfectly with the 
amount of consumer interaction, the Bureau believes the two are 
reasonably related. For example, although account volume may not 
reflect the number of co-signers on borrowers' loans, the Bureau 
believes that servicers' interactions with co-signers are relatively 
infrequent compared to their interactions with borrowers. A servicer 
typically deals with a co-signer only when the borrower has failed 
to make payments.
---------------------------------------------------------------------------

    Some commenters asserted that servicers do not currently track 
account volume based on fee streams and expressed concern that it will 
be burdensome for companies to track this information. This concern is 
misplaced for at least two reasons. First, as noted above, the larger 
participant rule does not require entities to calculate whether they 
are larger participants. Second, student loan servicers should be able 
to determine relatively easily whether their account volume meets the 
threshold, if the occasion to do so arises. Most market participants 
already assemble data on the number of loans they service and the 
number of borrowers of those loans. Many student loan servicers are 
members of the Student Loan Servicing Alliance, a trade organization, 
and have reported the sizes of their servicing programs to SLSA 
annually on both those bases.\67\ A servicer's account volume would not 
necessarily be the same, for any particular servicer, as the number of 
its loans or the number of its borrowers. But because any student with 
respect to whom a nonbank covered person is performing student loan 
servicing corresponds to at least one account, a nonbank covered 
person's account volume will generally be at least as large as that 
person's number of borrowers.\68\ Thus, any student loan servicer whose 
number of borrowers is above the threshold can expect that its account 
volume will also exceed the threshold.
---------------------------------------------------------------------------

    \67\ See, e.g., 2012 SLSA Servicing Volume Survey.
    \68\ The number of students with respect to whom a servicer is 
servicing loans is not identical to the number of borrowers, but the 
Bureau expects the differences to be fairly small.
---------------------------------------------------------------------------

    Presently, few if any entities with less than one million borrowers 
are likely to have account volumes anywhere close to the threshold.\69\ 
As discussed above, the detailed calculation of account volume 
generally reflects the number of accounts for which the servicer is 
receiving fees. The Bureau expects that servicers will readily be able 
to ascertain this number if the occasion arises to do so because 
servicers are presumably invoicing and expecting receipts on that 
basis. One servicer noted in its comment that such information is not 
typically aggregated or tracked across clients but acknowledged that 
servicers may track billable accounts for purposes of contract 
management and client invoicing.
---------------------------------------------------------------------------

    \69\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates. Data from SLSA and other sources do not reveal any 
entities servicing between approximately 350,000 borrowers and 1.4 
million borrowers.
---------------------------------------------------------------------------

    Several industry commenters claimed that number of loans or number 
of borrowers would be a superior measure. These commenters did not 
agree on which of these measures would be preferable, but they 
generally suggested that account volume as a criterion would treat 
otherwise similar servicing portfolios differently.\70\ The commenters 
noted that servicers are compensated based on different variables 
(e.g., per-borrower, per-loan, or per-account) depending on the lender 
and stated that two organizations' servicing portfolios that include 
the same number of borrowers and/or loans could, under the proposed 
definition, have a significantly different number of income streams 
depending on the method of compensation. Another commenter noted that 
using the Bureau's definition of account volume could produce different 
results for servicers that are employed by multiple student loan 
holders or securitization trusts as opposed to those that service 
multiple loans held by the same holder. For example, while one servicer 
may be administering four loans for a single borrower and receiving one 
stream of fees because all those loans are owned by the same entity, 
another servicer may be receiving four streams of fees for the borrower 
because the loans are owned by four separate entities.
---------------------------------------------------------------------------

    \70\ One servicer also noted that data are reported to the 
National Student Loan Data System (NSLDS) at the loan level. 
However, the data reported to the NSLDS do not include private 
loans.
---------------------------------------------------------------------------

    The Bureau recognizes that two servicers whose portfolios contain 
the same number of borrowers or the same number of loans, according to 
their respective calculations, may have different numbers of accounts 
under the Bureau's definition. But because the Bureau does not regard 
number of borrowers or number of loans as the sole or proper measure of 
market participation, these apparent discrepancies do not mean that 
number of accounts is an improper measure. The Bureau has sought to 
develop a definition that appropriately represents a firm's 
participation in the market and overall impact on consumers and is 
sufficiently clear to apply when the Bureau assesses whether a firm is 
a larger participant in the market.
    While the number of loans and the number of borrowers for which an 
entity performs servicing are both relevant to the entity's consumer 
impact and market participation, neither measure is superior to number 
of accounts. Although one commenter suggested that a servicer servicing 
four loans for four different holders should be treated the same as a 
servicer handling four loans for the same holder, the former portfolio 
will probably be substantially more complex than the latter and involve 
more consumer impact, as discussed above. The account volume criterion 
captures this additional consumer impact. Meanwhile, the number of 
borrowers does not measure the extent of a particular borrower's 
interactions with the servicer because the extent of a servicer's 
contact with a borrower will depend on various factors including the 
number of accounts or loans the borrower has and whether the borrower 
is the principal obligor on the account.
    In addition, each of the alternative criteria would produce 
discrepancies between servicing portfolios. Different servicers may 
define and count ``loans'' in various ways, depending on the type of 
loans serviced and the details of the servicing contracts.\71\ Thus, 
two portfolios that are the same in many important respects might 
nonetheless have different numbers of loans. With

[[Page 73395]]

respect to number of borrowers, two trade associations proposed in 
their comments that loans that involve more than one borrower (co-
makers) or that are co-signed or endorsed should be counted for a 
single borrower so as not to ``artificially'' inflate the number of 
borrowers attributable to a servicer. These comments did not address 
how the number of borrowers should be counted when individuals are 
responsible for multiple loans that involve a co-maker, co-signer, or 
endorser.\72\ Whatever result the Bureau might specify for these 
various alternative criteria would produce different borrower counts 
for servicing portfolios that are arguably similar.\73\
---------------------------------------------------------------------------

    \71\ There is no industry-wide definition of a student loan 
because there is not a uniform system for reporting loans in the 
marketplace. Only Federal student loans are reported in the NSLDS. 
Although many servicers have reported their loan volume to SLSA, 
SLSA has not established standards for counting loans or borrowers. 
To establish a clear criterion for determining larger-participant 
status based on loan volume, the Bureau would need to choose a 
particular understanding of what constitutes a single ``loan'' and a 
single method of counting loans.
    \72\ For example, it is unclear how many unique borrowers a 
family would represent if the parents were co-makers on loans for 
education expenses for each of their two children, endorsed 
additional loans taken out by one of their two children for the 
child's education expenses, and also each had loans taken out on 
their own for their own education. One trade association also noted 
that with respect to Federal Parent PLUS loans and some private 
education loans, the student may not be considered the borrower but 
would instead be considered a loan beneficiary, and suggested that 
only the loan obligor be included in any accounting of the number of 
borrowers in that circumstance. Because the Final Rule does not use 
number of borrowers as the criterion, the Bureau need not address 
this suggestion.
    \73\ One commenter also asserted that the Proposed Rule appeared 
to mix two different concepts, as ``per-account'' is generally not 
the same as ``per-borrower.'' This commenter appears to have 
misunderstood the Bureau's proposal because the Proposed Rule, like 
the Final Rule the Bureau is now adopting, does not equate account 
with borrower.
---------------------------------------------------------------------------

    As commenters noted, number of accounts does not correlate 
perfectly with number of borrowers or number of loans. But, compared to 
these other two measures, number of accounts seems the most appropriate 
basis on which to measure overall market participation. Of the three 
measures, account volume better reflects consumer interactions, 
servicer compensation, and the number of holders for the loans a 
servicer is handling with respect to each borrower.
    The Bureau does not have data directly on servicers' account 
volumes, as defined in this Final Rule, but believes that the numbers 
of borrowers that servicers reported to SLSA in 2012 is an adequate 
proxy to enable the Bureau to analyze the market and select a threshold 
for larger-participant status. For purposes of its analysis, the Bureau 
noted in proposing the rule that, for most firms, the number of 
accounts may not differ substantially from the number of borrowers--the 
Bureau estimated that a firm's number of accounts generally is no more 
than about 50 percent greater than the number of borrowers it 
reports.\74\
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    \74\ The Bureau reached this estimate as follows: For Federally-
owned loans (including Federal Direct loans and Federally-owned 
FFELP loans), each borrower corresponds to exactly one account (that 
is one stream of fees), because the Department of Education 
compensates servicers based on their number of borrowers, rather 
than on the number of loans they service. See Title IV Redacted 
Contract Awards, Attachment A-6--Servicing Pricing Definitions, 
available at https://www.fbo.gov/spg/ED/FSA/CA/FSA-TitleIV-09/listing.html. According to SLSA's data, the seven largest firms have 
reported that they service 30 million borrowers of Federally-owned 
loans. Among outstanding student loans that are not Federally-owned 
(commercially-held FFELP loans and all private student loans), the 
Bureau believes that the number of accounts is unlikely to exceed 
the number of loans reported by the various servicers, as the Bureau 
is unaware of any fee stream that corresponds to a unit smaller than 
a single loan. The seven largest firms reported to SLSA that they 
service 45 million non-Federally-owned loans. (The Bureau recognizes 
that because SLSA has not established standards, servicers have 
adopted different methods for counting private loans and their 
borrowers, but the Bureau does not expect the variations to be 
substantial for purposes of this estimate.) Thus, the Bureau 
believes an upper-bound estimate of the number of accounts serviced 
by the seven largest market participants is 75 million--the sum of 
the number of accounts corresponding to 30 million borrowers of 
Federally-owned student loans (at one account per borrower) and the 
number of accounts corresponding to 45 million loans that are not 
Federally-owned (at one account per loan). The seven largest firms 
report that they are servicing the loans of a total of 49 million 
borrowers. Therefore, the Bureau's upper-bound estimate for the 
number of accounts serviced by these seven firms, 75 million, is 
roughly 50 percent greater than the aggregate number of borrowers 
reported by these seven firms, 49 million. Using a similar means of 
estimating, the Bureau has calculated that an upper-bound estimate 
of the number of accounts serviced market-wide is about 50 percent 
more than the estimated number of borrowers in the market.
---------------------------------------------------------------------------

    Two commenters expressed concern about this part of the Bureau's 
analysis. One servicer asserted that the ``CFPB assumes that the ratio 
between loans and borrowers will be approximately two loans per 
borrower.'' The servicer also noted that it had calculated its own 
overall average loan-to-borrower ratio as 3.54 as of December 2012. It 
reported that its loan-to-borrower ratio varies among its portfolios 
based on portfolio characteristics: It estimated that it services 2.35 
loans for each borrower of FFELP and private student loans, and 4.17 
loans for each borrower of loans that it services as a TIVAS on behalf 
of the Department of Education. This commenter appears to misunderstand 
the Bureau's analysis. The Bureau did not assume a 2-to-1 ratio or any 
other ratio for loans-to-borrowers, but has instead estimated that the 
typical account-to-borrower ratio is unlikely to exceed 1.5 based on 
market-wide information. The numbers provided by the commenter are not 
to the contrary because they do not reflect account-to-borrower ratios 
but instead are estimates of the servicer's loan-to-borrower ratios. 
The commenter's account-to-borrower ratio would be substantially lower 
than the ratio it provided because each borrower corresponds to only 
one account for Federal Direct loans and Federally-owned FFELP loans 
and a servicer generally would not have more accounts than loans for 
other types of loans.
    Another commenter noted that the ratio of number of accounts to 
number of borrowers could change in the future, depending on the state 
of the economy and changes to student loan policy at the Federal level. 
This commenter indicated that borrowers may go back to school or 
otherwise need to take out more loans in the coming years. The Bureau's 
analysis is not intended to estimate what the account-to-borrower ratio 
will be in the future. Instead, the ratio is merely to assist in 
translating the numbers of borrower that servicers reported in the 2012 
SLSA volume survey into information about servicers' current account 
volume. In light of this purpose, the Bureau concludes that the 2012 
SLSA volume survey is an adequate proxy to enable the Bureau to conduct 
a sufficient analysis of the market so that it can select a threshold 
for larger-participant status.
    Threshold. The Bureau has broad discretion in setting the threshold 
above which an entity would qualify as a larger participant of the 
market for student loan servicing. The Bureau proposed that a nonbank 
covered person would be a larger participant of the student loan 
servicing market if the person's account volume exceeded one million. 
The Bureau received a number of comments on the proposed threshold. In 
light of the comments, and for the reasons stated below, the Bureau 
adopts the proposed threshold in the Final Rule.
    As discussed above, the Bureau does not have precise data on market 
participants' account volumes calculated in accordance with the Final 
Rule's definition. However, the number of a servicer's accounts, under 
the Final Rule's definition of ``account volume,'' is generally no 
smaller than the number of borrowers whose loans it is servicing. In 
addition, the Bureau believes that in general the number of accounts 
should be no greater than the number of loans (if any) that a servicer 
has reported to SLSA. These two figures, therefore, provide estimated 
outer bounds for a given servicer's number of accounts with a 
sufficient degree of precision to enable the Bureau's threshold-setting 
analysis. According to the 2012 SLSA volume survey, seven nonbank 
entities each serviced the loans of more than

[[Page 73396]]

one million borrowers.\75\ Those seven nonbanks, which will presumably 
be larger participants under the Final Rule, are responsible for 
between approximately 71 and 93 percent of activity in the nonbank 
student loan servicing market.\76\ The next largest market participants 
report servicing the loans of approximately 300,000 borrowers each and 
are unlikely to reach the one million threshold on the basis of account 
volume.\77\
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    \75\ By contrast, the median number of borrowers with loans 
being serviced by a given entity is approximately 250,000. 2012 SLSA 
Servicing Volume Survey, augmented by CFPB estimates.
    \76\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates. This estimated range is slightly different from the 
Bureau's estimate when it issued the Proposed Rule because the 
Bureau has now factored in guaranty agencies that provide default 
aversion services, as noted above.
    \77\ As discussed above, the Bureau expects the number of 
accounts at a given servicer to be less than 50 percent larger than 
the number of borrowers. A firm with 300,000 borrowers is therefore 
unlikely to have more than 450,000 accounts. However, the Bureau's 
estimates do not take account of any servicers that do not report 
data to SLSA. These estimates also do not reflect any affiliations 
that may exist among market participants. If two student loan 
servicers that appear to be below the threshold given their reports 
to SLSA are actually affiliated companies, their aggregated account 
volume might render them both larger participants.
---------------------------------------------------------------------------

    Although guaranty agencies engage in student loan servicing when 
they provide default aversion services in the manner provided by 
regulation,\78\ the Bureau does not believe that the inclusion of this 
default aversion activity in the definition of ``student loan 
servicing'' changes the number of entities that currently meet the 
definition of larger participants under the Final Rule. A guaranty 
agency is compensated for performing default aversion by receiving a 
fee of one percent of the total unpaid principal and accrued interest 
owed by the borrower as of the date an institution asked the agency to 
engage in default aversion.\79\ In light of the net default aversion 
income reported by each guaranty agency to the Department of Education 
and available data about FFELP balances, the Bureau does not believe 
that any guaranty agency performs this function for more than one 
million accounts.\80\
---------------------------------------------------------------------------

    \78\ 34 CFR 682.404.
    \79\ 34 CFR 682.404(k). This fee cannot be paid more than once 
on any loan. Id.
    \80\ In 2011, 33 guaranty agencies reported a total of $111 
million in net default aversion fee revenue, which, given the one 
percent fee, corresponds to $11.1 billion in outstanding principal 
and interest of FFELP loans. Fed. Student Aid, FY 2011 Summary of 
Guaranty Agency Financial Reports, available at http://www.fp.ed.gov/attachments/publications/EDForms2000DataFY11AnnualReport.pdf (providing the total default 
aversion fees collected by guaranty agencies in FY 2011). The Bureau 
has estimated the average FFELP balance at $20,600 per borrower 
based on the total outstanding balance and number of borrowers 
reported by Federal Student Aid in the repayment, deferment, 
forbearance, and other categories as of September 30, 2012. Fed. 
Student Aid, Direct Loan Portfolio by Loan Status, available at 
http://studentaid.ed.gov/sites/default/files/fsawg/datacenter/library/PortfoliobyLoanStatus.xls. Using this data, the Bureau has 
estimated that the 33 guaranty agencies together provided default 
aversion services on the loans of less than one million borrowers. 
Because the highest net default aversion fee revenue reported by a 
single guaranty agency to the Department of Education was 
$33,725,085, the Bureau concludes based on the same analysis that no 
individual guaranty agency currently has even close to one million 
fee streams from default aversion services on its own.
---------------------------------------------------------------------------

    The Bureau believes that the account volume threshold of one 
million is consistent with the objective of supervising market 
participants that represent a substantial portion of the student loan 
servicing market and have a significant impact on consumers. The seven 
student loan servicers that the Bureau believes will likely be larger 
participants collectively service the loans of approximately 49 million 
borrowers.\81\ At the same time, this threshold will subject to the 
Bureau's supervisory authority only entities that can reasonably be 
considered larger participants of the market.
---------------------------------------------------------------------------

    \81\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
---------------------------------------------------------------------------

    One industry commenter urged the Bureau to increase the threshold 
to three million accounts. This would likely allow the Bureau to 
supervise only the five very largest participants in the market, which 
are the five Title IV Additional Servicers (TIVAS). The TIVAS represent 
between approximately 67 and 87 percent of activity in this market 
based on unpaid principal balance and number of borrowers.\82\ In 
support of this change, the commenter noted that the TIVAS have a much 
higher volume than the next largest entities in the market. Other 
commenters including consumer groups opposed this change, noting that 
it would fail to include in the Bureau's supervisory program two very 
large loan servicers responsible for billions of dollars in education 
loans and would leave only five student loan servicers subject to the 
Bureau's supervision under the larger participant rule.
---------------------------------------------------------------------------

    \82\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
---------------------------------------------------------------------------

    The Bureau agrees that even if these two entities are smaller than 
the TIVAS, they should nevertheless be considered ``larger 
participants'' of the market at present. Servicers with responsibility 
for over one million accounts have a substantial impact on consumers 
and the market. In fact, each of the two servicers that might be 
removed from the definition of ``larger participant'' if the threshold 
were increased from 1 million to 3 million accounts currently services 
approximately 1.5 million borrowers.\83\ Additionally, these two 
servicers are responsible for the direct servicing of a large number of 
loans assigned to various smaller State-affiliated agencies or not-for-
profits by the Health Care and Education Reconciliation Act of 
2010.\84\ In light of these relationships, the Bureau believes that 
supervising servicers that handle between one and three million 
accounts is an efficient way to monitor the servicing of loans assigned 
by statute to smaller servicers. The Bureau therefore declines to raise 
the threshold.\85\
---------------------------------------------------------------------------

    \83\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
    \84\ 20 U.S.C. 1087f(a)(4); HCERA/SAFRA--Not-For-Profit (NFP) 
Servicer Program documentation, as of Sept. 25, 2013 (showing firms 
that contract servicing rights to other entities), available at 
https://www.fbo.gov/spg/ED/FSA/CA/NFP-RFP-2010/listing.html.
    \85\ The trade association advocating a higher threshold also 
suggested that only the TIVAS should be treated as larger 
participants because the TIVAS are now receiving all new account 
allocations under the Federal Direct Loan Program. The Bureau 
recognizes that account allocations may implicate which entities 
have sufficient volume to meet the larger participant threshold of 
one million accounts in the future, but does not view this as a 
reason to adjust the threshold. In any event, entities that are not 
TIVAS may well obtain additional volume through other sources, such 
as subservicing contracts.
---------------------------------------------------------------------------

    Several consumer groups suggested lowering the threshold to 200,000 
accounts. One of these commenters stated that a lower threshold would 
give the Bureau more flexibility because it would allow the Bureau to 
supervise between 15 and 18 entities, representing between 
approximately 74 and 99 percent of activity in this market.\86\ Some 
asserted that a servicer with 200,000 accounts would need a similar 
large-scale investment in technology, internal controls, and human 
resources as a servicer with one million accounts; given that level of 
investment, the commenters said, supervision would not be burdensome. 
Consumer groups also stated that a lower threshold would increase the 
Bureau's ability to examine niche servicers that specialize in 
servicing important subsectors of borrowers.
---------------------------------------------------------------------------

    \86\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates. Three entities reported servicing the loans of between 
133,000 and 200,000 borrowers. Although these entities would be 
below a threshold of 200,000 borrowers, they might qualify as larger 
participants using a threshold of 200,000 accounts. As discussed 
above, the Bureau expects a firm's number of accounts generally to 
be no less than its number of borrowers and no more than about 50 
percent greater.
---------------------------------------------------------------------------

    The Bureau notes that the additional entities that would be 
included using

[[Page 73397]]

this lower threshold are only a fraction of the size of even the 
smallest entities that exceed the one million account threshold.\87\ 
Additionally, many of the entities that would be captured between 
200,000 and one million accounts are State-affiliated agencies or not-
for-profit entities that place their loans with two servicers that will 
likely be larger participants.\88\ Because these two servicers are 
above the one million account threshold, the Bureau should be able to 
evaluate these common servicing platforms and identify risks they pose 
to consumers. To the extent these smaller entities raise additional 
concerns, the Bureau has other tools that it could use to address them, 
including (1) establishing supervision authority over a particular 
company based on a reasonable-cause determination pursuant to the 
Bureau's risk determination rule, 12 CFR part 1091, pursuant to 12 
U.S.C. 5514(a)(1)(C); (2) enforcement investigations where warranted; 
(3) coordination with State regulators, State attorneys general, and 
the Federal Trade Commission; and (4) research and monitoring. In light 
of the availability of these alternative tools, the Bureau declines to 
lower the threshold for larger-participant status.\89\
---------------------------------------------------------------------------

    \87\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
    \88\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates; HCERA/SAFRA--Not-For-Profit (NFP) Servicer Program 
documentation, as of Sept. 25, 2013 (showing firms that contract 
servicing rights to other entities), available at https://www.fbo.gov/spg/ED/FSA/CA/NFP-RFP-2010/listing.html.
    \89\ Two consumer groups suggested that the Final Rule should 
automatically cover servicers that the Department of Education is 
required by statute to contract with for loan servicing. The Health 
Care and Education Reconciliation Act of 2010 directed the Secretary 
of Education to allocate up to 100,000 servicing accounts to each 
eligible not-for-profit student loan servicer in existence as of 
July 1, 2009, subject to certain limitations. 20 U.S.C. 1087f(a)(4). 
A consumer group commenter stated that when Congress mandates that a 
servicing contract be given to a student loan servicer, that 
servicer should be subject to Bureau oversight to manage taxpayer 
money. As noted above, the Bureau believes that many of these 
entities currently have total account volumes that fall between 
200,000 and 1 million. For the same reasons that the Bureau has 
chosen not to lower the threshold to 200,000 accounts, the Bureau 
has decided not to adjust the Proposed Rule's definitions in a way 
that would render these not-for-profit entities larger participants 
of the student loan servicing market.
---------------------------------------------------------------------------

    One commenter noted that the one million account threshold would 
not cover any servicers with annual receipts below $30 million and 
suggested the threshold should be lowered to align with the size 
standard for ``small businesses'' in this market established by the 
U.S. Small Business Administration (SBA). At the time the comment was 
filed, the threshold was $7 million in annual receipts for entities 
that fall in the NAICS code for ``other activities related to credit 
intermediation,'' the category that includes ``loan servicing.'' After 
the comment period closed, the SBA raised its size standard for this 
NAICS code to $19 million, effective July 22, 2013.\90\ The SBA also 
increased the size standard for a related category--``consumer 
lending'' (which includes ``student lending'')--to $35.5 million.\91\ 
In setting its size standards, the SBA considers a variety of factors--
such as eligibility for Federal small-business assistance and Federal 
contracting programs; startup costs, entry barriers, and industry 
competition; and technological change.\92\ These factors differ from 
the concerns articulated in this preamble that motivate the Bureau's 
definition of ``larger participants'' in a particular market such as 
student loan servicing. Because the SBA's measure and the Bureau's 
threshold are used for different purposes and targeted at different 
statutory objectives, the Bureau does not believe it is necessary as a 
general matter to adjust its threshold for a given market to conform to 
a particular SBA threshold.
---------------------------------------------------------------------------

    \90\ 78 FR 37409, 37412 (June 20, 2013); 13 CFR 121.201 (NAICS 
code 522390). For the purposes of its analysis under 12 U.S.C. 
5512(b)(2)(A), the Bureau assumes that participants in the student 
loan servicing market will be classified in NAICS code 522390, 
``other activities related to credit intermediation.'' NAICS lists 
``loan servicing'' as an index entry corresponding to this code. See 
Census Bureau, 2012 NAICS Definition, 522390 Other Activities 
Related to Credit Intermediation, available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=522390&search=2012 
NAICS Search. The Bureau solicited comment on whether this or any 
other NAICS code is most appropriate for this market and did not 
receive any comments. The Bureau is aware that a nonbank larger 
participant of the student loan servicing market might identify 
itself as falling within a NAICS code other than the one that 
includes loan servicing. For example, some entities may report under 
NAICS code 522291 for consumer lending, which is the index entry 
corresponding to student lending.
    \91\ See 78 FR 37409, 37412 (June 20, 2013); 13 CFR 121.201 
(NAICS code 522291).
    \92\ 13 CFR 121.102(a); Size Standards Div. Office of Gov't 
Contracting & Bus. Dev., ``SBA Size Standards Methodology'' (Apr. 
2009), available at http://www.sba.gov/sites/default/files/size_standards_methodology.pdf.
---------------------------------------------------------------------------

    The same commenter also suggested that a lower threshold than what 
the Bureau proposed is in order for this market because the threshold 
for larger participant status under the Consumer Reporting Rule is only 
$7 million in annual receipts. As stated in the Proposed Rule, the 
Bureau considers each market separately and may adopt different 
criteria and thresholds for each market. The Bureau selected annual 
receipts in the consumer reporting context for ease of application and 
made it clear that it had not determined that annual receipts, or a 
threshold of $7 million in annual receipts, would be appropriate for 
any other market that might be the subject of a future larger 
participant rulemaking.\93\ This tailored approach is necessary because 
the markets that the Bureau has considered to date (consumer reporting, 
consumer debt collection, and student loan servicing) differ in many 
ways: Firms in the three markets perform entirely different functions 
and interact with consumers in different ways, the market structures 
are different, the substantive Federal consumer financial laws 
principally relevant to the three markets differ substantially, and the 
manner in which annual receipts connect to consumer interactions is 
different in each of the markets. In light of these and other 
significant differences, the Bureau continues to believe that the 
criterion and threshold used in the Final Rule would fit the student 
loan servicing market better than would the criteria and threshold used 
in the Consumer Reporting Rule.
---------------------------------------------------------------------------

    \93\ 77 FR 42874, 42876, 42890 (July 20, 2012) (Consumer 
Reporting Rule). The ``annual receipts'' criteria used in the 
Consumer Reporting Rule and the Consumer Debt Collection Rule also 
differ in some respects from the SBA's definition of ``annual 
receipts.'' For example, the SBA counts all of a person's receipts 
in calculating annual receipts, while the Consumer Reporting and 
Consumer Debt Collection Rules count only receipts resulting from a 
market-related activity. Id.
---------------------------------------------------------------------------

    A number of individual commenters suggested that the Bureau 
supervise all student loan servicers or particular subcategories 
regardless of size, such as all Federal student loan servicers. Some of 
these commenters asserted that small servicers are as likely to engage 
in fraudulent practices as larger servicers are. The Bureau does not 
believe that including a category of servicers regardless of size would 
be consistent with 12 U.S.C. 5514(a)(1)(B), which authorizes the Bureau 
to define ``larger participants'' of other markets for consumer 
financial products or services.\94\ The Bureau therefore declines to 
make the changes suggested by these comments.\95\
---------------------------------------------------------------------------

    \94\ 12 U.S.C. 5514(a)(1)(B), (a)(2).
    \95\ As noted above, nonbank covered persons generally are 
subject to the Bureau's regulatory and enforcement authority, and 
any applicable Federal consumer financial law, regardless of whether 
they are subject to the Bureau's supervisory authority.
---------------------------------------------------------------------------

    Finally, one commenter urged the Bureau to read ``larger 
participant'' more broadly in light of the consumer protection purposes 
of the Dodd-Frank Act. In assessing whether an entity is a ``larger 
participant,'' this commenter suggested that the Bureau consider 
whether the entity mainly focuses on student loan servicing rather than 
assessing the volume of its accounts.

[[Page 73398]]

Under such an approach, a monoline company engaging in a certain volume 
of student loan servicing might be a larger participant even though a 
multiline company engaging in substantially more student loan servicing 
would not be a larger participant. The Bureau has decided not to adopt 
this approach because the Bureau does not believe that a company's 
status as a larger participant of the student loan servicing market 
should change based on the relative magnitude of other lines of 
business in which it may engage. For the reasons stated above, the 
Bureau adopts the proposed threshold of one million accounts for the 
student loan servicing market.

VI. Section 1022(b)(2)(A) of the Dodd-Frank Act \96\
---------------------------------------------------------------------------

    \96\ 12 U.S.C. 5512(b)(2)(A).
---------------------------------------------------------------------------

A. Overview

    The Bureau has considered potential benefits, costs, and impacts of 
the Final Rule.\97\ The Proposed Rule set forth a preliminary analysis 
of these effects, and the Bureau requested and received comments on the 
topic. In addition, the Bureau has consulted with or offered to consult 
with the Department of Education, the Federal Trade Commission, the 
Board of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, 
and the National Credit Union Administration, regarding, among other 
things, consistency with any prudential, market, or systemic objectives 
administered by such agencies.
---------------------------------------------------------------------------

    \97\ Specifically, 12 U.S.C. 5512(b)(2)(A) calls for the Bureau 
to consider the potential benefits and costs of a regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services, the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in 12 U.S.C. 5516, and the 
impact on consumers in rural areas. In addition, 12 U.S.C. 
5512(b)(2)(B) directs the Bureau to consult, before and during the 
rulemaking, with appropriate prudential regulators or other Federal 
agencies, regarding consistency with objectives those agencies 
administer. The manner and extent to which the provisions of 12 
U.S.C. 5512(b)(2) apply to a rulemaking of this kind that does not 
establish standards of conduct are unclear. Nevertheless, to inform 
this rulemaking more fully, the Bureau performed the analysis and 
consultations described in those provisions of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Final Rule defines a category of ``larger participant[s] of . . 
. market[s] for other consumer financial products or services'' that 
would be subject to the Bureau's nonbank supervision program pursuant 
to 12 U.S.C. 5514(a)(1)(B). The category includes ``larger 
participants'' of a market for ``student loan servicing'' that the 
Final Rule describes. Whether a firm is a larger participant in this 
market is measured on the basis of account volume. If a nonbank covered 
person's account volume (measured, per the definition, as of December 
31 in the preceding calendar year) exceeds one million, then it is a 
larger participant. If a firm is deemed to be a larger participant in a 
given year, then it will remain a larger participant for at least the 
subsequent year as well, regardless of its account volume in that year.

B. Potential Benefits and Costs to Consumers and Covered Persons

    This analysis considers the benefits, costs, and impacts of the key 
provisions of the Final Rule measured from a baseline that includes the 
Bureau's existing rules defining larger participants of certain 
markets.\98\ At present, there is no Federal program for supervision of 
nonbank student loan servicers of private student loans with respect to 
Federal consumer financial law. With respect to Federal student loans, 
there is no Federal program for supervision of nonbank student loan 
servicers with respect to Federal consumer financial law, but servicing 
of Federal student loans must be conducted in accordance with the 
Department of Education's performance standards.\99\ With the Final 
Rule in effect, the Bureau will be able to supervise larger 
participants of the defined student loan servicing market.
---------------------------------------------------------------------------

    \98\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline. The Bureau, as a matter of 
discretion, has chosen to describe a broader range of potential 
effects to more fully inform the rulemaking.
    \99\ Dep't of Educ., Federal Student Aid Annual Report 2 (2012), 
available at http://www2.ed.gov/about/reports/annual/2012report/fsa-report.pdf.
---------------------------------------------------------------------------

    The Bureau notes at the outset that limited data are available with 
which to quantify the potential benefits, costs, and impacts of the 
Final Rule. For example, although the Bureau has general quantitative 
information, as discussed above, on the number of market participants 
and their numbers of borrowers and loans and volumes of unpaid 
principal balances, the Bureau lacks detailed information about their 
rates of compliance or noncompliance with Federal consumer financial 
law and about the range of, and costs of, compliance mechanisms used by 
market participants.
    In light of these data limitations, this analysis generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the Final Rule. General economic principles, together with the 
limited data that are available, provide insight into these benefits, 
costs, and impacts. Where possible, the Bureau has made quantitative 
estimates based on these principles and data as well as on its 
experience of undertaking supervision.
    The discussion below describes three categories of potential 
benefits and costs. First, the Final Rule authorizes the Bureau's 
supervision in the student loan servicing market. Larger participants 
of the market may respond to the possibility of supervision by changing 
their systems and conduct, and those changes may result in costs, 
benefits, or other impacts. Second, when the Bureau undertakes 
supervisory activity at specific student loan servicers, those 
servicers will incur costs from responding to supervisory activity, and 
the results of these individual supervisory activities also may produce 
benefits and costs.\100\ Third, the Bureau analyzes the costs that may 
be associated with entities' efforts to assess whether they qualify as 
larger participants under the rule.
---------------------------------------------------------------------------

    \100\ Pursuant to 12 U.S.C. 5514(e), the Bureau also has 
supervisory authority over service providers to nonbank covered 
persons encompassed by 12 U.S.C. 5514(a)(1), which includes larger 
participants. The Bureau does not have data on the number or 
characteristics of service providers to the roughly seven larger 
participants of the student loan servicing market. The discussion 
herein of potential costs, benefits, and impacts that may result 
from the Final Rule generally applies to service providers to larger 
participants.
---------------------------------------------------------------------------

    In considering the costs and benefits of the Final Rule, it is 
important to note that Federal student loans and private student loans 
differ in various ways, including repayment options, terms, and 
conditions; the treatment of delinquent accounts; and servicing 
standards, which for Federal loans are imposed by the Department of 
Education. Federal student loans are also much more prevalent than 
private student loans: Of the 39 percent of undergraduates who obtained 
education loans in the 2007-2008 academic year, 90 percent obtained 
Federal loans and only 39 percent obtained private student loans.\101\
---------------------------------------------------------------------------

    \101\ National Postsecondary Student Aid Study 2008 (hereinafter 
NPSAS 2008).
---------------------------------------------------------------------------

1. Benefits and Costs of Responses to the Possibility of Supervision
    The Final Rule will subject larger participants of the student loan 
servicing market to the possibility of Bureau supervision. That the 
Bureau will be authorized to undertake supervisory activities with 
respect to a nonbank covered person that qualifies as a larger 
participant does not necessarily mean the Bureau will in fact undertake 
such activities regarding that

[[Page 73399]]

covered person in the near future. Rather, supervision of any 
particular larger participant as a result of this rulemaking is 
probabilistic in nature. For example, the Bureau will examine certain 
larger participants on a periodic or occasional basis. The Bureau's 
decisions about supervision will be informed, as applicable, by the 
factors set forth in 12 U.S.C. 5514(b)(2) relating to the size and 
transaction volume of individual participants, the risks their consumer 
financial products and services pose to consumers, the extent of State 
consumer protection oversight, and other factors the Bureau may 
determine are relevant. Each entity that believes it qualifies as a 
larger participant will know that it may be supervised and may gauge, 
given its circumstances, the likelihood that the Bureau will initiate 
an examination or other supervisory activity.
    The prospect of potential supervisory activity may create an 
incentive for larger participants to increase their compliance with 
Federal consumer financial law. They may anticipate that by doing so 
(and thereby decreasing risks to consumers), they can decrease the 
likelihood of their actually being subjected to supervision as the 
Bureau evaluates the factors outlined above. In addition, an actual 
examination will likely reveal any past or present noncompliance, which 
the Bureau can seek to correct through supervisory activity or, in some 
cases, enforcement action. Larger participants may therefore judge that 
the prospect of supervision increases the potential consequences of 
noncompliance with Federal consumer financial law, and they may seek to 
decrease that risk by curing or mitigating any noncompliance.
    The Bureau believes it is likely that market participants will 
increase compliance in response to the Bureau's supervisory activities 
authorized by the Final Rule. However, because the Final Rule itself 
does not require any student loan servicer to alter its performance of 
student loan servicing, any estimate of the amount of increased 
compliance would be both an estimate of current compliance levels and a 
prediction of market participants' behavior. The data the Bureau 
currently has do not support a specific quantitative estimate or 
prediction. But, to the extent that student loan servicers increase 
their compliance in response to the Final Rule, that response will 
result in both benefits and costs.\102\
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    \102\ Another approach to considering the benefits, costs, and 
impacts of the Final Rule would be to focus almost entirely on the 
supervision-related costs for larger participants and omit a broader 
consideration of the benefits and costs of increased compliance. As 
noted above, the Bureau has, as a matter of discretion, chosen to 
describe a broader range of potential effects to more fully inform 
the rulemaking.
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    The Bureau notes that the existing levels of compliance with 
Federal consumer financial law may be different for the servicing of 
Federal and private student loans. The Department of Education's Office 
of Federal Student Aid (FSA) sets performance standards and oversees 
the operations of Federal student loan servicers.\103\ FSA standards 
for systems, controls, and legal compliance may have the collateral 
consequence that entities comply more faithfully with some aspects of 
Federal consumer financial law with respect to their servicing of 
Federal student loans. To that extent, any increase in compliance that 
results from the Final Rule may be smaller for Federal than for private 
student loan servicing. Both the benefits and the costs of increased 
compliance might thus be smaller for Federal student loan servicing.
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    \103\ Dep't of Educ., Federal Student Aid Annual Report 2 
(2012), available at http://www2.ed.gov/about/reports/annual/2012report/fsa-report.pdf.
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a. Benefits From Increased Compliance
    Increased compliance will be beneficial to consumers that are 
affected by student loan servicing. As discussed above, the potential 
pool of consumers who are directly affected by student loan servicing 
is broad: In the 2007-2008 academic year, 39 percent of undergraduates 
and 43 percent of graduate students obtained new student loans.\104\ 
Increasing the rate of compliance with such laws will benefit consumers 
and the consumer financial market by providing more of the protections 
mandated by those laws. The roughly seven larger participants of the 
student loan servicing market that will likely, at the outset, qualify 
as larger participants under the Final Rule's threshold currently 
service the student loans of approximately 49 million borrowers.\105\ A 
number of Federal consumer financial laws, including the Electronic 
Fund Transfer Act (EFTA) and its implementing regulation, Regulation E; 
the Fair Credit Reporting Act (FCRA) and its implementing regulation, 
Regulation V; the Equal Credit Opportunity Act (ECOA) and its 
implementing regulation, Regulation B; and Title X of the Dodd-Frank 
Act offer substantive protections to consumers regarding student loan 
servicing.\106\ Increasing the rate of compliance with such laws will 
benefit consumers by providing more of the protections mandated by 
those laws.\107\
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    \104\ NPSAS 2008.
    \105\ See 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates. If a servicer were handling loans to an individual 
consumer for more than one holder, the servicer might count that 
consumer as more than one borrower. Nonetheless, 49 million 
borrowers corresponds to a comparably large number of consumers with 
whom the anticipated larger participants interact.
    \106\ 15 U.S.C. 1693 et seq. (EFTA); 12 CFR part 1005 
(Regulation E); 15 U.S.C. 1681 et seq. (FCRA); 12 CFR part 1022 
(Regulation V); 15 U.S.C. 1691 et seq. (ECOA); 12 CFR part 1002 
(Regulation B); 12 U.S.C. 5301 et seq. (Dodd-Frank Act).
    \107\ Among other things, EFTA is intended to establish basic 
consumer rights with regard to the use of electronic systems to 
transfer funds. 15 U.S.C. 1693. FCRA was enacted to improve credit 
report accuracy and protect consumer privacy. See Safeco Ins. Co. of 
Am. v. Burr, 551 U.S. 47, 52 (2007) (``Congress enacted the FCRA in 
1970 to ensure fair and accurate credit reporting, promote 
efficiency in the banking system, and protect consumer privacy.''). 
ECOA makes it unlawful for creditors to discriminate against 
applicants, with respect to any aspect of a credit transaction, on 
the basis of race, color, religion, national origin, sex or marital 
status, or age (provided the applicant has the capacity to 
contract), the receipt of public assistance income, or the 
applicants' exercise of certain rights under Federal consumer 
financial protection laws. 15 U.S.C. 1691(a).
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    For instance, many student loan servicers receive loan payments 
through preauthorized electronic fund transfers. Among other things, 
EFTA establishes certain guidelines for ensuring that fund transfers 
are not sent without consumers' consent.\108\ Increased compliance with 
EFTA might include a higher degree of fidelity to EFTA's consent 
process and could thereby decrease the risk that borrowers will suffer 
unauthorized transfers of their funds. Unauthorized transfers could 
adversely affect consumers by modifying the amount and timing of 
payments. Even if the amount of payments per period is anticipated, the 
timing of payments could constrain consumers in the very short run. For 
example, a consumer might plan to make a student loan payment in one 
pay period and a car payment in the next pay period, but may have 
insufficient funds both to make payments in the same pay period and to 
meet his other financial obligations without incurring additional 
charges such as overdraft fees. Furthermore, the timing of anticipated 
payments may affect overall consumption for certain groups of 
consumers.\109\
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    \108\ 15 U.S.C. 1693e.
    \109\ Recent work by Mastrobuoni and Weinberg and by Shapiro and 
Slemrod demonstrated that the timing of payments to consumers can 
affect their consumption. Mastrobuoni, Giovanni and Weinberg, 
Matthew, 2009. ``Heterogeneity in Intra-Monthly Consumption 
Payments, Self-Control, and Savings at Retirement,'' American 
Economic Journal: Economic Policy, American Economic Association, 
vol. 1(2), pp. 163-89; Shapiro, Matthew and Slemrod, Joel, 1995. 
``Consumer Response to the Timing of Income: Evidence from a Change 
in Tax Withholding,'' American Economic Review, American Economic 
Association, vol. 85(1), pp. 274-83. Consumers can also be expected 
to adjust their consumption in response to the timing of anticipated 
account debits such as automatic-debit student loan payments.

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[[Page 73400]]

    As another example, many student loan servicers furnish information 
to consumer reporting agencies about borrowers' payment histories. Such 
servicers therefore have certain obligations under FCRA and Regulation 
V. FCRA prohibits the furnishing of information to a consumer reporting 
agency that the furnisher knows or has reasonable cause to believe is 
inaccurate.\110\ A servicer that furnishes information to consumer 
reporting agencies must establish and implement reasonable written 
policies and procedures regarding the accuracy and integrity of the 
information furnished, considering applicable Federal guidelines, and 
must periodically review the policies and procedures and update them as 
necessary to ensure their continued effectiveness.\111\ FCRA and 
Regulation V also give consumers the ability to dispute information 
furnished to consumer reporting agencies by submitting disputes to the 
consumer reporting agencies or directly to furnishers.\112\ A student 
loan servicer receiving a dispute must generally conduct a reasonable 
investigation.\113\ Increased compliance with these FCRA requirements 
will increase the accuracy of information that is furnished to consumer 
reporting agencies and thus of the information that is included in 
consumer reports. Given that student debt is a substantial proportion 
of total consumer debt in the United States, increasing the accuracy of 
reporting in this segment of the debt market could have a substantial 
positive effect on consumer report accuracy.\114\ Because consumer 
reports are often critical in decisions regarding consumer financial 
products and services, more accurate information could lead to better 
economic decisions that would benefit both markets and consumers.\115\
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    \110\ 15 U.S.C. 1681s-2(a)(1)(A).
    \111\ 12 CFR 1022.42.
    \112\ 15 U.S.C. 1681i(a)(1), 1681s-2(a)(8); 12 CFR 1022.43.
    \113\ 15 U.S.C. 1681i (indirect); 12 CFR 1022.43 (direct). In 
2011 approximately eight million consumer contacts with the three 
largest consumer reporting agencies resulted in approximately 32 to 
38 million disputed items on consumers' credit files. CFPB, Key 
Dimensions and Processes in the U.S. Credit Reporting System 4 
(2012), available at http://www.consumerfinance.gov/reports/key-dimensions-and-processes-in-the-u-s-credit-reporting-system/.
    \114\ As discussed above, the Bureau estimates that outstanding 
student loan debt was approximately $1.1 trillion at the end of 
2012. This figure represents ten percent of total U.S. consumer debt 
at the end of the fourth quarter of 2012. See Fed. Reserve Bank of 
N.Y., Quarterly Report on Household Debt and Credit 3 (Feb. 2013), 
available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q42012.pdf (finding that total U.S. 
consumer debt was $11.31 trillion at the end of the fourth quarter 
of 2012).
    \115\ Inaccurate information, for example, could lead to a 
consumer's being denied a loan that the consumer could afford to and 
would be likely to repay. Several studies have identified the 
problems that inaccurate consumer reporting creates in credit 
markets. See, e.g., Avery, Robert B., et al., Credit Report Accuracy 
and Access to Credit, 2004 Fed. Res. Bull. 297, 314-15 (estimating 
fraction of individuals for whom inaccuracies in credit reports 
might affect credit terms); see also id. at 301-02 (citing prior 
research). Inaccurate information could also lead to a consumer's 
being offered credit at an interest rate higher than would be 
available if the creditor knew the consumer's true credit history. 
Conversely, some inaccuracies, by exaggerating some consumers' 
credit worthiness, may enable such consumers to receive lower 
interest rates than they otherwise would but understate their risk 
of default. In all these cases, increasing the accuracy of consumer 
report information should improve the pricing and allocation of 
credit.
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    More broadly, the Bureau will be examining whether larger 
participants of the student loan servicing market engage in unfair, 
deceptive, or abusive acts or practices (UDAAPs).\116\ Conduct that 
does not violate an express prohibition of another Federal consumer 
financial law may nonetheless constitute a UDAAP.\117\ Among the areas 
that the Bureau will examine with, in part, a view to preventing UDAAPs 
are repayment status processing, loan servicing transfers, general 
payment processing, application of prepayments and partial payments, 
and default aversion. To the degree that any servicer is currently 
engaged in any UDAAP in these areas, the cessation of the unlawful act 
or practice would benefit consumers.\118\ All of the previously listed 
areas could be reviewed during an examination and, therefore, student 
loan servicers might improve policies and procedures relating to these 
areas in order to avoid engaging in UDAAPs.
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    \116\ 12 U.S.C. 5531.
    \117\ The CFPB Supervision and Examination Manual provides 
further guidance on how the UDAAP prohibition applies to supervised 
entities. That examination manual is available at http://www.consumerfinance.gov/guidance/supervision/manual.
    \118\ See CFPB Supervision and Examination Manual (Oct. 31, 
2012), available at http://www.consumerfinance.gov/guidance/supervision/manual/, for a more extensive discussion on the areas in 
which the Bureau intends to examine. Examiners will be reviewing 
these business lines for UDAAPs and for any other noncompliance with 
Federal consumer financial law.
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b. Costs of Increased Compliance
    On the other hand, increasing compliance involves costs. In the 
first instance, those costs will be paid by the market participants 
that choose to increase compliance. Student loan servicers might need 
to hire or train additional personnel to effectuate any changes in 
their practices that would be necessary to produce the increased 
compliance. They might need to invest in systems changes to carry out 
their revised procedures. In addition, student loan servicers might 
need to develop or enhance compliance management systems, to ensure 
that they are aware of any gaps in their compliance. Such changes will 
also require investment and might entail increased operating costs.
    An entity that incurred costs in support of increasing compliance 
might try to recoup those costs by attempting to increase servicing 
revenues.\119\ Whether and to what extent such an increase occurred 
will depend on competitive conditions in the student loan servicing 
market. For example, larger participants of the student loan servicing 
market may be in competition with depository institutions or credit 
unions (or affiliates thereof) that are already subject to Federal 
supervision with respect to Federal consumer financial law. Assuming as 
a baseline Bureau supervision of depository institutions and credit 
unions with over $10 billion in assets (and their affiliates) and 
prudential regulator supervision with respect to these areas of other 
depository institutions and credit unions,\120\ to the extent the Final 
Rule results in an increase in the costs faced by the roughly seven 
larger participants, that increase will be a competitive benefit to 
those other covered persons. And competition from those other covered 
persons might reduce the ability of the roughly seven larger 
participants to pass an increase in their costs through as an increase 
in the price of servicing.
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    \119\ The Bureau uses the terms ``revenues'' and ``receipts'' 
interchangeably in the discussion that follows. The term ``annual 
receipts,'' however, is used with specific meaning in the context of 
the SBA's size standards. How a participant receives its revenue 
depends on the participant's business model. Compensation for 
servicing Federal student loans is based on contracts with the 
Department of Education and assignments are dependent on a 
Department of Education Performance Score Card. See Title IV 
Redacted Contract Awards, available at https://www.fbo.gov/spg/ED/FSA/CA/FSA-TitleIV-09/listing.html; see also Dep't of Educ., 2012 
FSA Conference Session 14, Federal Loan Servicer Panel Discussion 11 
(Nov. 2012). For private student loans, servicing contracts are 
negotiated between loan holders or guarantors and master servicers, 
and between master servicers and subservicers.
    \120\ See 12 U.S.C. 5515; 12 U.S.C. 5516.
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    Any increase that did occur could constitute a cost of the rule 
borne in part by originators and holders of student loans. Originators 
or holders might respond to such a cost by choosing to bear the higher 
servicing costs, by exiting the student loan market, or by

[[Page 73401]]

servicing their portfolios of student loans in-house.
    Whether and to what extent such an increase might occur will depend 
on market conditions. With respect to private student loans, 
origination and servicing are subject to the negotiation of terms, 
conditions, and prices; the Bureau lacks detailed information with 
which to predict what portion of any cost of increased compliance would 
be borne by loan originators or holders, and what portion would be 
borne by consumers. For Federally-owned loans, the price of servicing 
is determined by contracts between servicers and the FSA or in the case 
of guaranty agencies by regulation.\121\ Because the FSA, as a dominant 
purchaser of servicing, has great control over pricing, the Bureau 
expects that relatively little if any increase in the cost of servicing 
Federal student loans would be passed through as an increase in the 
price of servicing. With respect to consumers, Federal student loans 
``were authorized as entitlement programs in order to meet student loan 
demand.'' \122\ Eligibility criteria, interest rates, and loan limits 
for Federal student loans are determined by Federal law, including the 
periodic reauthorization of the Higher Education Act of 1965.\123\ 
Therefore, while the price of servicing Federal student loans might 
change, depending on market conditions, the pricing for and access to 
Federal student loans would likely not change substantially as a 
consequence of increases in servicers' compliance with Federal consumer 
financial law.
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    \121\ See 34 CFR 682.404(k) (setting the default aversion fee 
for guaranty agencies); Title IV Redacted Contract Awards, available 
at https://www.fbo.gov/spg/ED/FSA/CA/FSA-TitleIV-09/listing.html.
    \122\ Dep't of Educ., Student Loans Overview: Fiscal Year 2013 
Budget Request, at R-28, available at http://www2.ed.gov/about/overview/budget/budget13/justifications/r-loansoverview.pdf.
    \123\ 20 U.S.C. 1070 et seq.
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2. Benefits and Costs of Individual Supervisory Activities
    In addition to the responses of market participants anticipating 
supervision, the possible consequences of the Final Rule include the 
responses to and effects of individual examinations or other 
supervisory activity that the Bureau might conduct in the student loan 
servicing market.
a. Benefits of Supervisory Activities
    Supervisory activity could provide several types of benefits. For 
example, as a result of supervisory activity, the Bureau and the entity 
might uncover deficiencies in an entity's policies and procedures. The 
Bureau's examination manual calls for the Bureau generally to prepare a 
report of each examination, to assess the strength of the entity's 
compliance mechanisms, and to assess the risks the entity poses to 
consumers, among other topics. The Bureau will share examination 
findings with the entity because one purpose of supervision is to 
inform the entity of problems detected by examiners. Thus, for example, 
an examination might find evidence of widespread noncompliance with 
Federal consumer financial law, or it might identify specific areas 
where an entity has inadvertently failed to comply. These examples are 
only illustrative of what kinds of information an examination might 
uncover.
    Detecting and informing entities about such problems should be 
beneficial to consumers. When the Bureau notifies an entity about risks 
associated with an aspect of its activities, the entity is expected to 
adjust its practices to reduce those risks. That response may result in 
increased compliance with Federal consumer financial law, with benefits 
like those described above. Or it may avert a violation that would have 
occurred had Bureau supervision not detected the risk promptly. The 
Bureau also may inform entities about risks posed to consumers that 
fall short of violating the law. Action to reduce those risks would 
also be a benefit to consumers.
    Given the obligations student loan servicers have under Federal 
consumer financial law and the existence of efforts to enforce such 
law, the results of supervision also may benefit student loan servicers 
under supervision by detecting compliance problems early. When an 
entity's noncompliance has resulted in litigation or an enforcement 
action, the entity must face both the costs of defending its actions 
and the penalties for noncompliance, including potential liability for 
statutory damages to private plaintiffs. The entity must also adjust 
its systems to ensure future compliance. Changing practices that have 
been in place for long periods of time can be expected to be relatively 
difficult because they may be severe enough to represent a serious 
failing of an entity's systems. Supervision may detect flaws at a point 
when correcting them would be relatively inexpensive. Catching problems 
early can, in some situations, forestall costly litigation. To the 
extent early correction limits the amount of consumer harm caused by a 
violation, it can help limit the cost of redress. In short, supervision 
might benefit student loan servicers under supervision by, in the 
aggregate, reducing the need for other more expensive activities to 
achieve compliance.\124\
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    \124\ Further potential benefits to consumers, covered persons, 
or both might arise from the Bureau's gathering of information 
during supervisory activities. The goals of supervision include 
informing the Bureau about activities of market participants and 
assessing risks to consumers and to markets for consumer financial 
products and services. The Bureau may use this information to 
improve regulation of consumer financial products and services and 
to improve enforcement of Federal consumer financial law, in order 
to better serve its mission of ensuring consumers' access to fair, 
transparent, and competitive markets for such products and services. 
Benefits of this type would depend on what the Bureau learns during 
supervision and how it uses that knowledge. For example, because the 
Bureau would examine multiple covered persons in the student loan 
servicing market, the Bureau would build an understanding of how 
effective compliance systems and processes function.
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b. Costs of Supervisory Activities
    The potential costs of actual supervisory activities arise in two 
categories. The first involves the costs to individual student loan 
servicers of increasing compliance in response to the Bureau's findings 
during supervisory activity and to supervisory actions. These costs are 
similar in nature to the possible compliance costs, described above, 
that larger participants in general might incur in anticipation of 
possible supervisory activity. This analysis will not repeat that 
discussion. The second category is the cost of supporting supervisory 
activity.
    Supervisory activity may involve requests for information or 
records, on-site or off-site examinations, or some combination of these 
activities. For example, in an on-site examination, generally, Bureau 
examiners begin by contacting an entity for an initial conference with 
management. That initial contact is often accompanied by a request for 
information or records. Based on the discussion with management and an 
initial review of the information received, examiners determine the 
scope of the on-site exam. While on-site, examiners spend some time in 
further conversation with management about the entity's policies, 
processes, and procedures. The examiners also review documents, 
records, and accounts to assess the entity's compliance and evaluate 
the entity's compliance management systems. As with the Bureau's other 
examinations, examinations of nonbank participants in the student loan 
servicing market may involve issuing confidential examination reports 
and compliance ratings. The Bureau's examination manual describes the 
supervision process and indicates what materials and information an 
entity can expect examiners to request and review,

[[Page 73402]]

both before they arrive and during their time on-site.
    The primary cost an entity will face in connection with an 
examination would be the cost of employees' time to collect and provide 
the necessary information. At this stage in its nonbank supervision 
program, the Bureau does not have precise estimates of the expected 
duration and frequency of its examinations and the resources that 
entities may expend to cooperate with such examinations. The frequency 
and duration of examinations of any particular entity will depend on a 
number of factors, including the size of the entity, the compliance or 
other risks identified, whether the entity has been examined 
previously, and the demands on the Bureau's supervisory resources 
imposed by other entities and markets. Nevertheless, some rough 
estimates may be useful to provide a sense of the magnitude of 
potential staff costs that entities might incur.
    The Bureau has engaged in multiple mortgage servicing exams. 
Because both mortgage servicing and student loan servicing involve 
collecting and remitting payments on long-term loans, examinations of 
mortgage servicers should be a reasonable analogue for the examinations 
the Bureau will conduct under the Final Rule.\125\ Therefore, the 
Bureau can estimate duration and labor intensity of examinations using 
information from mortgage servicing examinations that have already been 
completed. The average duration of the on-site portion of a Bureau 
examination of a mortgage servicer is ten weeks.\126\ The Bureau 
estimates the cost of an examination to a student loan servicer by 
assuming that, similarly, Bureau examiners might review materials and 
interview employees for ten weeks.An entity could be expected to devote 
the equivalent of one full-time employee during that time and for two 
weeks beforehand to prepare materials for the examination. The typical 
cost of an employee involved in responding to supervision can be 
expected to be roughly $50 per hour.\127\ Twelve weeks of such an 
employee's time would cost approximately $24,000.\128\
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    \125\ Mortgage servicing examinations likely differ in detail 
from the supervisory activity the Bureau would undertake for student 
loan servicers. For example, mortgage servicers have certain 
obligations under the Real Estate Settlement Procedures Act, 12 
U.S.C. 2601 et seq., which does not apply to student loan servicing. 
As another example, mortgages are secured by real estate, and 
servicing activities can involve that security interest. The parts 
of the Bureau's examination manual that relate to mortgage servicing 
and education lending reflect the differences between these two 
markets. Nonetheless, for the majority of borrowers, the core 
activities of the two types of servicers are comparable. The Bureau 
therefore expects that its experience supervising mortgage servicers 
can provide a useful guide for estimating the costs of examinations 
of student loan servicers.
    \126\ This estimate was derived prior to issuance of the 
Proposed Rule using confidential supervisory Bureau data on the 
duration of on-site mortgage servicing examinations at both 
depository institutions and nonbanks. For purposes of this 
calculation, the Bureau counted its mortgage servicing examinations 
for which the on-site portion had been completed. Additionally, the 
Bureau counted only the on-site portion of an examination, which 
included time during the on-site period of the examination that 
examiners spent examining the entity while off-site for holiday or 
other travel considerations. However, the Bureau did not count time 
spent scoping an examination before the on-site portion of the 
examination or summarizing findings or preparing reports of 
examination afterwards.
    \127\ Bureau of Labor Statistics (BLS), Occupational Employment 
Statistics, available at ftp://ftp.bls.gov/pub/special.requests/oes/oesm11all.zip. BLS data for ``activities related to credit 
information'' (NAICS code 522300) indicate that the mean hourly wage 
of a compliance officer in that sector is $33.13. BLS data also 
indicate that salary and wages constitute 66.6 percent of the total 
cost of compensation. See BLS, Employer Costs for Employee 
Compensation Database, Series ID CMU2025220000000D, available at 
http://data.bls.gov/timeseries/CMU2025220000000D?data_tool=XGtable 
(providing wage and salary percent of total compensation in the 
credit intermediation and related activities private industry for Q4 
2011). Dividing the hourly wage by 66.6 percent yields a total mean 
hourly cost (including total costs, such as salary, benefits, and 
taxes) rounded to the nearest dollar of $50 per hour.
    \128\ All figures assume 40 hours of work per week.
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    Three commenters contended that the Bureau underestimated the costs 
of supervision and stated that the Bureau should have used a different 
basis for its estimate. In particular, two of the commenters stated 
that the Bureau should have based its estimate of costs on, among other 
things, audits of servicers required by the Department of Education. In 
the commenters' view, this would have resulted in a substantially 
higher estimate. The Bureau believes the analogue it uses is a better 
analogue than those proposed by the commenters because it more 
accurately reflects the sort of examination to which student loan 
servicers will be subject. Bureau examinations, as detailed in the 
``Overview'' section of the preamble to this rule, test for compliance 
with Federal consumer financial protection laws. Student loan servicing 
and mortgage loan servicing examinations will involve some of the same 
Federal consumer financial protection laws, and the general process and 
costs will be relatively similar.\129\ On the other hand, audits 
required by the Federal loan holder, the Department of Education, or 
FFELP loan holders, include preparing and filing detailed financial 
statements regarding matters other than Federal consumer financial 
protection law.\130\ The Bureau does not believe that the burden of 
accommodating an audit regarding matters other than compliance with 
Federal consumer financial protection law is more analogous to the 
costs imposed by this rule than examinations of similar entities for 
compliance with similar Federal consumer financial protection law. One 
commenter also urged the Bureau to recognize the cumulative burden of 
Federal reviews. However, the commenter did not identify any respect in 
which the existence of Department of Education audits would make Bureau 
supervision more burdensome.
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    \129\ See, e.g., 12 U.S.C. 5531 (prohibiting unfair, deceptive, 
or abusive acts or practices).
    \130\ See, e.g., Dep't of Educ., Office of Inspector Gen., 
Lender Servicer Financial Statement Audit and Compliance Attestation 
Guide, available at http://www2.ed.gov/about/offices/list/oig/nonfed/lenderservicerauditguidejanuary2011.pdf (establishing audit 
standards for certain servicers of FFELP loans).
---------------------------------------------------------------------------

    One commenter stated that the Bureau's cost estimate should be 
increased because additional employee time will be required. That more 
than one employee might be involved in an examination does not, in 
itself, suggest the Bureau's estimate was inaccurate. In estimating 
that an examination might require a full-time compliance officer for 12 
weeks and using the mean hourly wage for compliance officers, the 
Bureau did not mean to suggest that only one mid-level person would be 
involved in an examination. Instead, the Bureau recognizes that both 
junior and high-level staff may participate on a part-time basis and 
that these staff may be drawn from different offices within the entity. 
The Bureau intended its original estimate to represent the aggregate 
amount of labor resources a company might dedicate to responding to 
supervisory activity. The Bureau's estimate was based on the Bureau's 
experience in mortgage servicing examinations. As discussed above, the 
Bureau continues to believe these examinations are an appropriate 
analogue on which to base its estimate.
    The commenter specifically suggested that the Bureau's cost 
estimate was too low because it did not sufficiently account for the 
cost of attorneys, which the commenter asserted will likely be involved 
in examinations. The Bureau has not suggested that counsel is required 
during an examination. However, to provide further information about 
potential costs of the rule, the Bureau has additionally estimated the 
cost of an examination using the assumption that the equivalent of two 
full-time compliance officers participated for 12 weeks, and a lawyer 
participated in the examination for

[[Page 73403]]

approximately 10 percent of the firm's overall activity during the 
course of the examination, roughly 100 hours.\131\ Under these 
assumptions, the total labor costs would be approximately $59,000.
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    \131\ BLS, Occupational Employment Statistics, available at 
ftp://ftp.bls.gov/pub/special.requests/oes/oesm11all.zip. BLS data 
for ``activities related to credit information'' (NAICS code 522300) 
indicate that the mean hourly wage of a lawyer in that sector is 
$72.03. Because salary and wages constitute 66.6% of total 
compensation, the total mean hourly cost for a lawyer is $108 per 
hour.
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    By comparison, the Bureau estimates that a student loan servicer 
with responsibility for one million accounts would receive at least 
$20.2 million per year in revenue from that activity.\132\ Thus, the 
labor costs associated with an examination, as estimated above, would 
be no greater than 0.12 percent of the receipts of such a firm using 
the Bureau's original estimate or 0.29 percent using the alternative 
estimate that incorporates the equivalent of two full-time compliance 
officers and attorney involvement.\133\ Note that $20.2 million is an 
estimated lower bound on the receipts of a larger participant as 
defined by the Final Rule. The costs associated with an examination are 
therefore likely to be a much smaller percentage of receipts each year 
for a given larger participant.
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    \132\ The Bureau estimates this figure based on the 2013 average 
unit cost for loan servicing on Federal loans of $1.68 per month per 
borrower for for-profit servicers of Federal loans, as reported by 
the Department of Education. See Student Aid Administration Fiscal 
Year 2013 Request, at AA-15, available at http://www2.ed.gov/about/overview/budget/budget13/justifications/aa-saadmin.pdf. The same 
source reports that not-for-profit servicers' average unit cost is 
$1.76 per month per borrower. The Bureau assumes, for the estimate, 
that servicing private student loans generates at least as much 
revenue per month per borrower as servicing Federal loans, and that 
a loan is serviced for 12 months per year. Note that since the 
number of accounts is generally no less than the number of 
borrowers, this approach may underestimate revenues.
    \133\ The percentage would be even lower if an entity received 
revenue from other sources.
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    The overall costs of supervision in the student loan servicing 
market will depend on the frequency and extent of Bureau examinations. 
Neither the Dodd-Frank Act nor the Final Rule specifies a particular 
level or frequency of examinations.\134\ The frequency of examinations 
will depend on a number of factors, including the Bureau's 
understanding of the conduct of market participants and the specific 
risks they pose to consumers; the responses of larger participants to 
prior examinations; and the demands that other markets make on the 
Bureau's supervisory resources. These factors can be expected to change 
over time, and the Bureau's understanding of these factors may change 
as it gathers more information about the market through its supervision 
and by other means. The Bureau therefore declines to predict, at this 
point, precisely how many examinations in the student loan servicing 
market it would undertake in a given year.\135\
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    \134\ The Bureau declines to predict at this time precisely how 
many examinations it would undertake at each student loan servicer. 
But for purposes of the following analysis, the Bureau uses one 
examination every two years. If the Bureau examines each of the 
seven larger participants of the student loan servicing market once 
every two years, the expected annual labor cost of supervision per 
larger participant would be approximately $12,000 (the cost of one 
full-time compliance officer for twelve weeks, divided by two). This 
would account for at most 0.06 percent of the receipts of an entity 
responsible for one million accounts. To put this in perspective, 
the Bureau estimates that the seven larger participants handle at 
least 49 million accounts, resulting in at least $984 million in 
receipts. The expected annual labor cost of supervision, 
collectively, at these seven larger participants is estimated to be 
$82,000, which is 0.01 percent of their estimated total receipts. 
Even if the entity instead used the equivalent of two full-time 
compliance officers for twelve weeks and 100 hours of attorney time, 
the expected annual labor cost of supervision, collectively, at 
these seven larger participants would be an estimated $206,000, 
which is 0.02 percent of their estimated total receipts.
    \135\ One commenter recommended that the Bureau minimize the 
costs of supervision by coordinating with the Department of 
Education. In fact, in connection with its supervision of student 
loan servicers, pursuant to its statutory obligation, the Bureau 
will use, to the fullest extent possible, reports that have been 
provided to other Federal agencies and share information with the 
Department of Education regarding complaints. 12 U.S.C. 5514(b)(4); 
5535(c).
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3. Costs of Assessing Larger-Participant Status
    Finally, the Bureau acknowledges that in some cases student loan 
servicers may incur costs in assessing whether they qualify as larger 
participants and potentially disputing their status.
    Larger-participant status depends on the number of accounts for 
which a student loan servicer is performing servicing as of December 31 
of the prior calendar year. This number should be readily extractible 
from administrative records because account volume is, in general, 
derived from the compensation a servicer receives. In addition, all but 
one large nonbank student loan servicer reported to SLSA their number 
of borrowers and number of loans as of December 31, 2011.\136\ These 
two figures should be lower and upper bounds for a servicer's number of 
accounts. Student loan servicers that service Federal loans should at a 
minimum know their Federal loan volumes as of December 31 because the 
Department of Education keeps up-to-date records of Federal student 
loan servicers in the National Student Loan Data System.\137\
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    \136\ 2012 SLSA Servicing Volume Survey.
    \137\ Dep't of Educ., National Student Loan Data System (NSLDS) 
for Students (2013), available at https://www.nslds.ed.gov.
---------------------------------------------------------------------------

    To the extent that some student loan servicers do not already know 
their account volumes, such servicers might, in response to the Final 
Rule, develop new systems to count their accounts in accordance with 
the proposed definition of ``account volume.'' The data the Bureau 
currently has do not support a detailed estimate of how many student 
loan servicers would engage in such development or how much they might 
spend. Regardless, student loan servicers would be unlikely to spend 
significantly more on specialized systems to count accounts than it 
would cost them to be supervised by the Bureau as larger participants. 
It bears emphasizing that even if expenditures on an accounting system 
successfully proved that a student loan servicer was not a larger 
participant, it would not necessarily follow that the student loan 
servicer could not be supervised. The Bureau can supervise a student 
loan servicer whose conduct the Bureau determines, pursuant to 12 
U.S.C. 5514(a)(1)(C) and 12 CFR part 1091, poses risks to consumers. 
Thus, a student loan servicer choosing to spend significant amounts on 
an accounting system directed toward the larger-participant test could 
not be sure it would not be subject to Bureau supervision 
notwithstanding those expenses. The Bureau therefore believes it is 
unlikely that any but a very few student loan servicers would undertake 
such expenditures.
4. Consideration of Alternatives
    The Bureau considered different thresholds for larger-participant 
status in the student loan servicing market. Figure 1 presents 
projections of the number of borrowers with loans being serviced by 
each servicer as of December 31, 2012.\138\ Since the Bureau does not 
have specific data about the number of accounts, as defined in the 
Final Rule, in the discussion that follows the number of borrowers, as 
reported to SLSA, is treated as a proxy for the number of accounts at a 
given servicer.\139\ These projections may underestimate the actual 
number of accounts for loans being serviced because they do not account 
for the possibility of growth in the servicing of private student loans 
or the possibility

[[Page 73404]]

of multiple accounts for a given borrower at a servicer. Note that 
there is a relatively large decline in number of borrowers between the 
seventh largest servicer, which services the loans of approximately 1.5 
million borrowers, and the next largest servicers, each of which 
services the loans of approximately 300,000 borrowers. This drop is 
attributable in part to FSA's mechanism for allocating servicing 
contracts to the TIVAS and to the not-for-profit servicers (NFPs): Each 
NFP is limited to servicing at most 100,000 Federal accounts at a 
time.\140\
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    \138\ See 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
    \139\ For Federal Direct and Federally-owned FFELP loans, the 
concept of borrower and account are identical.
    \140\ HCERA/SAFRA--Not-For-Profit (NFP) Servicer Program 
documentation, as of Sept. 25, 2013, available at https://www.fbo.gov/spg/ED/FSA/CA/NFP-RFP-2010/listing.html.
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    One possible alternative the Bureau considered was a larger 
threshold of, for example, three million in account volume. Under such 
an alternative, the benefits of supervision to both consumers and 
covered persons would likely be substantially reduced because firms 
impacting a large number of consumers and/or consumers in important 
market segments would be omitted. On the other hand, the potential 
costs to nonbank covered persons would of course be reduced if fewer 
firms were defined as larger participants and thus fewer were subject 
to the Bureau's supervision authority on that basis.
[GRAPHIC] [TIFF OMITTED] TR06DE13.001

    The Bureau also considered various other criteria for assessing 
larger-participant status, including number of loans and total unpaid 
principal balances. Calculating either of these metrics might be more 
involved than calculating total account volume for a given servicer. If 
so, then a given entity might face greater costs for evaluating or 
disputing whether it qualified as a larger participant. However, among 
the participants in the student loan servicing market these metrics 
correlate strongly with account volume. For each criterion, the Bureau 
expects that it could choose a suitable threshold for which the set of 
larger participants, among those entities participating in the market 
today, would be the same as the seven entities expected to qualify 
under the Final Rule. Consequently, the costs, benefits, and impacts of 
supervisory activities should not depend on which criterion the Bureau 
uses.
---------------------------------------------------------------------------

    \141\ 2012 SLSA Servicing Volume Survey, augmented by CFPB 
estimates.
---------------------------------------------------------------------------

C. Potential Specific Impacts of the Final Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Dodd-Frank Act Section 1026
    The Final Rule does not apply to depository institutions or credit 
unions of any size. However, it might, as discussed above, have some 
impact on depository institutions that hold private student loans or 
that service private student loans or FFELP loans. The Final Rule might 
therefore alter market dynamics in a market in which some depository 
institutions and credit unions with less than $10 billion in assets may 
be active. To the extent such institutions may have less market power 
than larger institutions, the change in market dynamics could affect 
them differently. Although this affects all student loan holders that 
contract for servicing, loan holders that are depository institutions 
or credit unions with less than $10 billion in assets may have less 
negotiating power with respect to the price of servicing than larger 
institutions, so they may face larger price increases. However, the 
Bureau notes that asset size alone is not necessarily a good predictor 
of each institution's susceptibility to any changes in the student loan 
servicing market that might result from the Final Rule. An individual 
institution that focused on educational lending might, on its own or 
together with its affiliates, play a role in the market for originating 
student loans or for contracting for servicing that was 
disproportionate to its assets as a share of the overall banking 
market. And an individual

[[Page 73405]]

institution might have contractual or other relationships with 
particular servicers that could insulate it from some of the potential 
impacts of the Final Rule or could make it especially vulnerable to 
those impacts.
2. Impact of the Provisions on Consumer Access to Credit and on 
Consumers in Rural Areas
    If the costs of increased compliance increased the price of 
servicing, creditors might consider that increase in the underwriting 
and loan pricing process. Private student loan creditors might consider 
adjusting the terms and conditions of loans to pass some or all of the 
price increase through to consumers. In addition, creditors might be 
less willing to extend credit to marginal borrowers. Thus, it is 
possible that consumers' access to credit might decrease as a result of 
the Final Rule. As noted above, qualifying students are entitled to 
Federal Direct loans in amounts and on terms specified by statute.\142\ 
An increase in the price of servicing Federal loans is therefore 
unlikely to reduce consumers' access to such loans.
---------------------------------------------------------------------------

    \142\ See 20 U.S.C. 1087e.
---------------------------------------------------------------------------

    Since the rule applies uniformly to the loans of a particular type 
of both rural and non-rural consumers, the rule should not have a 
unique impact on rural consumers. The Bureau is not aware of any 
evidence suggesting that rural consumers have been disproportionately 
harmed by student loan servicers' failure to comply with Federal 
consumer financial law. The Bureau requested comments that provide 
information related to how student loan servicing affects rural 
consumers but did not receive any.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact of its regulations on small 
entities, including small businesses, small governmental units, and 
small not-for-profit organizations.\143\ The RFA defines a ``small 
business'' as a business that meets the size standard developed by the 
Small Business Administration pursuant to the Small Business Act.\144\
---------------------------------------------------------------------------

    \143\ 5 U.S.C. 601 et seq. The term ```small organization' means 
any not-for-profit enterprise which is independently owned and 
operated and is not dominant in its field, unless an agency 
establishes [an alternative definition after notice and comment].'' 
Id. at 601(4). The term ```small governmental jurisdiction' means 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts, with a population of less than 
fifty thousand, unless an agency establishes [an alternative 
definition after notice and comment].'' Id. at 601(5). The Bureau is 
not aware of any small governmental units or small not-for-profit 
organizations to which the Final Rule will apply.
    \144\ 5 U.S.C. 601(3). The Bureau may establish an alternative 
definition after consultation with the SBA and an opportunity for 
public comment.
---------------------------------------------------------------------------

    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) of any proposed rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the proposed rule would not have a significant economic impact on 
a substantial number of small entities. The Bureau also is subject to 
certain additional procedures under the RFA involving the convening of 
a panel to consult with small entity representatives prior to proposing 
a rule for which an IRFA is required.\145\
---------------------------------------------------------------------------

    \145\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The undersigned certified that the Proposed Rule, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities and that an initial regulatory flexibility analysis was 
therefore not required. The Final Student Loan Servicing Rule adopts 
the Proposed Rule, with some modifications that do not lead to a 
different conclusion. Therefore, a final regulatory flexibility 
analysis is not required.
    The Final Rule defines a class of student loan servicers as larger 
participants of the student loan servicing market and thereby 
authorizes the Bureau to undertake supervisory activities with respect 
to those servicers. The rule adopts a threshold for larger-participant 
status of one million in account volume. As estimated above, a student 
loan servicer with one million accounts receives about $20.2 million in 
servicing revenue per year. By contrast, under the SBA's criterion at 
the time of the Proposed Rule, a servicer was generally a small 
business only if its annual receipts were below $7 million. Thus, 
larger participants of the proposed student loan servicing market would 
generally not have been small businesses for purposes of the 
analysis.\146\ Using the SBA's updated criterion of $19 million would 
not have altered the conclusion because a servicer at the Bureau's 
threshold would have about $20.2 million in annual servicing 
revenue.\147\ Indeed, using the estimate above that a servicer earns 
$1.68 per month per account, the Bureau believes that at present none 
of the larger participants under the Final Rule have annual receipts 
below $30 million.\148\ Moreover, the rule does not itself impose any 
obligations or standards of conduct on businesses outside the category 
of larger participants.
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    \146\ A business might, hypothetically, be a larger participant 
of the student loan servicing market yet be a small business for RFA 
purposes, if the business lost a significant amount of account 
volume during the second year after qualifying as a larger 
participant. The Bureau expects such situations, if any, to be quite 
rare. In addition, if the Bureau aggregates the activities of 
affiliated companies in part by adding together numbers of accounts, 
two companies that are small businesses might, together, have an 
account volume over one million. The Bureau anticipates no more than 
a very few such cases, if any, in the student loan servicing market.
    \147\ 13 CFR 121.201 (NAICS code 522390), as amended at 78 FR 
37409 (June 20, 2013). Prior to this amendment (and at the time of 
the NPRM), the small business threshold was $7 million. For the 
purposes of this analysis, the Bureau assumes that participants in 
the student loan servicing market will be classified in NAICS code 
522390, ``other activities related to credit intermediation.'' NAICS 
lists ``loan servicing'' as an index entry corresponding to this 
code. See Census Bureau, 2012 NAICS Definition, 522390 Other 
Activities Related to Credit Intermediation, available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=522390&search=2012 
NAICS Search. The Bureau recognizes that there may be larger 
participants of the student loan servicing market that are primarily 
engaged in other market activities that fall under other NAICS 
codes. For example, an entity could have just over 1,000,000 student 
loan servicing accounts while also engaging in other market 
activities such as those falling under code 522291 (student loan 
origination), code 561440 (debt collection), or code 56149 (business 
support). The thresholds for these codes range from $14 million 
(NAICS code 56149) to $35.5 million (NAICS code 522291). A larger 
participant with $20.2 million in receipts from student loan 
servicing ($1.68 per month per account * 1,000,000 accounts) that 
also has enough receipts from another market activity to make that 
activity its ``primary industry'' is likely to have more than $35.5 
million in total receipts, which is the highest relevant threshold. 
See 13 CFR 121.107 (establishing that the SBA uses distribution of 
receipts, employees, and costs to determine an entity's ``primary 
industry'').
    \148\ If one or more larger participants services loans it 
holds, such a firm might not receive monthly servicing compensation 
for such accounts. However, the Bureau is not currently aware of any 
small businesses that service student loans they originate or hold 
and that would meet the larger-participant threshold.
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    For these reasons, the Final Rule will not have a significant 
impact on a substantial number of small entities.
    Additionally, and in any event, the Bureau believes that the Final 
Rule will not result in a ``significant impact'' on any small entities 
that could be affected. As previously noted, when and how often the 
Bureau will in fact engage in supervisory activity, such as an 
examination, with respect to a larger participant (and, if so, the 
frequency and extent of such activity) will depend on a number of 
considerations, including the Bureau's allocation of resources and the 
application of the statutory factors set forth in 12 U.S.C. 5514(b)(2). 
Given the Bureau's finite supervisory resources, and the range of

[[Page 73406]]

industries over which it has supervisory responsibility for consumer 
financial protection, when and how often a given student loan servicer 
will be supervised is uncertain. Moreover, when supervisory activity 
occurs, the costs that result from such activity are expected to be 
minimal in relation to the overall activities of a student loan 
servicer.\149\
---------------------------------------------------------------------------

    \149\ As discussed above, the Bureau has estimated that the cost 
of participating in an examination would be substantially below one 
percent of annual receipts for a firm near the threshold of one 
million in account volume.
---------------------------------------------------------------------------

    Finally, a commenter contended that ``it is unclear whether the 
CFPB intends to flow down the requirements of the Proposed Rule to 
service providers of larger participants.'' The same commenter also 
requested that, if the service providers are subject to supervision, 
the Bureau provide an RFA analysis of the impact of the Final Rule on 
service providers that are small businesses. Although the Final Rule 
does not address service providers, 12 U.S.C. 5514(e) authorizes the 
Bureau to supervise service providers to larger participants. The Final 
Rule identifies those student loan servicers who are larger 
participants and are, therefore subject to Bureau supervision. Thus, 
pursuant to the Bureau's statutory authority, in conjunction with the 
supervision of a larger participant encompassed by the Final Rule, the 
Bureau may also supervise any service providers to that larger 
participant.
    Nonetheless, the Final Rule does not address service providers, and 
effects on service providers therefore need not be discussed for 
purposes of this RFA analysis. Even if such effects were relevant, 
however, the Bureau concludes that, to the extent the Final Rule will 
result in the supervision of service provides to larger participants, 
this will not have a significant economic impact on a substantial 
number of small entities. First, the Bureau does not anticipate that 
the impact of supervisory activity on such service providers would have 
any greater economic impact than at the larger participants to which 
they were connected. Given the Bureau's finite supervisory resources, 
and its discretion in exercising supervisory authority, the impact at a 
given service provider would probably be much less than at its 
associated larger participant.
    Second, supervision of service providers to larger participants of 
the student loan servicing market will not have an impact on a 
substantial number of small entities. The Bureau reaches this 
conclusion based on the number of small firms in the relevant NAICS 
codes. Many of these service providers would be considered to be in the 
industries with NAICS code 552390, ``Other activities related to credit 
intermediation.'' According to the 2007 Economic Census, more than 
5,000 small firms are encompassed by that code,\150\ and the number of 
those firms that are service providers to the seven student loan 
servicers who are likely to be larger participants will be only a small 
fraction of that number.
---------------------------------------------------------------------------

    \150\ Census Bureau, 2007 Economic Census, American FactFinder, 
Finance and Insurance: Subject Series--Estab. and Firm Size: Summary 
Statistics by Revenue Size of Firms for the United States, available 
at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_52SSSZ4&prodType=table (NAICS 
code 522390).
---------------------------------------------------------------------------

    Accordingly, the Bureau adheres to the certification, in the 
Proposed Rule, that the Final Rule will not have a significant economic 
impact on a substantial number of small entities.

VIII. Paperwork Reduction Act

    The Bureau determined that the Proposed Rule would not impose any 
new recordkeeping, reporting, or disclosure requirements on covered 
entities or members of the public that would constitute collections of 
information requiring approval under the Paperwork Reduction Act, 44 
U.S.C. 3501 et seq. The Bureau did not receive any comments regarding 
this conclusion, to which the Bureau adheres. The Bureau concludes that 
the Final Student Loan Servicing Rule, which adopts the Proposed Rule 
in relevant respects, also imposes no new information collection 
requirements subject to the Paperwork Reduction Act.

List of Subjects in 12 CFR Part 1090

    Consumer protection, Credit.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 12 CFR 
part 1090, subpart B, as follows:

PART 1090--DEFINING LARGER PARTICIPANTS OF CERTAIN CONSUMER 
FINANCIAL PRODUCT AND SERVICE MARKETS

0
1. The authority citation for part 1090 continues to read as follows:

    Authority:  12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5514(a)(2); 12 
U.S.C. 5514(b)(7)(A); and 12 U.S.C. 5512(b)(1).

Subpart B--Markets

0
2. Add Sec.  1090.106 to subpart B to read as follows:

Sec.  1090.106  Student loan servicing market.

    (a) Market-related definitions. As used in this subpart:
    Account volume means the number of accounts with respect to which a 
nonbank covered person is considered to perform student loan servicing, 
calculated as follows:
    (i) Number of accounts. A nonbank covered person has at least one 
account for each student or prior student with respect to whom the 
nonbank covered person performs student loan servicing. If a nonbank 
covered person is receiving separate fees for performing student loan 
servicing with respect to a given student or prior student, the nonbank 
covered person has one account for each stream of fees to which the 
person is entitled.
    (ii) Time of measurement. The number of accounts is counted as of 
December 31 of the prior calendar year.
    (iii) Affiliated companies. (A) The account volume of a nonbank 
covered person is the sum of the number of accounts of that nonbank 
covered person and of any affiliated companies of that person.
    (B) If two persons become affiliated companies, each person's 
number of accounts as of the prior calendar year's December 31 is 
included in the total account volume.
    (C) If two affiliated companies cease to be affiliated companies, 
the number of accounts of each continues to be included in the other's 
account volume until the succeeding December 31.
    Post-secondary education expenses means any of the expenses that 
are included as part of the cost of attendance of a student as defined 
in 20 U.S.C. 1087ll.
    Post-secondary education loan means a loan that is made, insured or 
guaranteed under Title IV of the Higher Education Act of 1965 (20 
U.S.C. 1070 et seq.) or that is extended to a consumer with the 
expectation that the funds extended will be used in whole or in part to 
pay post-secondary education expenses. A loan that is extended in order 
to refinance or consolidate a consumer's existing post-secondary 
education loans is also a post-secondary education loan. However, no 
loan under an open-end credit plan (as defined in Regulation Z, 12 CFR 
1026.2(a)(20)) or loan that is secured by real property is a post-
secondary education loan, regardless of the purpose for the loan.
    Student loan servicing means:
    (i)(A) Receiving any scheduled periodic payments from a borrower or 
notification of such payments and
    (B) Applying payments to the borrower's account pursuant to the 
terms of the post-secondary education

[[Page 73407]]

loan or of the contract governing the servicing;
    (ii) During a period when no payment is required on a post-
secondary education loan,
    (A) Maintaining account records for the loan and
    (B) Communicating with the borrower regarding the loan, on behalf 
of the loan's holder; or
    (iii) Interactions with a borrower, including activities to help 
prevent default on obligations arising from post-secondary education 
loans, conducted to facilitate the activities described in paragraph 
(i) or (ii) of this definition.
    (b) Test to define larger participants. A nonbank covered person 
that offers or provides student loan servicing is a larger participant 
of the student loan servicing market if the nonbank covered person's 
account volume exceeds one million.

    Dated: December 3, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-29145 Filed 12-5-13; 8:45 am]
BILLING CODE 4810-AM-P
```