Department of ED to CFPB: Thanks, We’ll Handle Oversight of Student Loan Servicers by Ourselves

The Department of Education (ED) made two major announcements last week concerning oversight and supervision of private companies involved in Federal aid programs. 

First, in a letter dated August 31, 2017, ED provided the Consumer Financial Protection Bureau (CFPB) notice of their intent to terminate the Memoranda of Understanding (MOUs) between ED and the CFPB regarding the sharing of information in connection with oversight of federal student loans. The notice of termination applies to a MOU entered into on October 19, 2011 concerning “Sharing of Information” (Sharing MOU) and a MOU entered into on January 9, 2015 concerning “Supervisory and Oversight Cooperation” (Supervisory MOU). 

Per the terms of the MOUs, they will terminate thirty days from the date of the notice. 

The letter was authored by Kathleen Smith, acting assistant secretary for postsecondary education and Dr. A. Wayne Johnson, Chief Operating Officer, Federal Student Aid. In the termination letter ED chastises the CFPB.

“Our goals are to ease the burden for borrowers and to enhance the efficiencies of our servicers -- not to complicate the federal student loan process with potentially inaccurate and inconsistent directives. The department entered into the [memorandums of understanding] in reliance on the CFPB's commitment to helping each agency fulfill its respective duties. Instead, the CFPB is using the department's data to expand its jurisdiction into areas that Congress never envisioned. This latest expansion is characteristic of an overreaching and unaccountable agency, and it has led the Department to terminate the MOUs in order to ensure a fair and consistent enforcement of Title IV requirements and the efficient resolution of borrower complaints. The Department takes exception to the CFPB unilaterally expanding its oversight role to include the contracted federal loan servicers.” 

Second, on the same day ED also announced a “stronger approach to how Federal Student Aid (FSA) enforces compliance by institutions participating in the Federal student aid programs by creating stronger protections for students and borrowers against bad actors.” 

Per the announcement: 

"Protecting students has always been my top priority," said Secretary Betsy DeVos. "This new approach will enhance our efforts on our oversight responsibilities, including enforcement against bad actors, such as illegitimate debt relief organizations, schools defrauding students and institutions willfully ignoring their Clery Act responsibilities."

Dr. A. Wayne Johnson, the new chief operating officer at FSA, recently began transforming the oversight function—broadening its scope, increasing its capacity and adopting a more sophisticated strategy—while adding several key senior executives to help lead and implement a more comprehensive, broader approach to the oversight of the federal student aid programs.

"FSA recognizes that there are many quality institutions that participate in the Federal student aid programs, along with many third-party service providers that are committed to effectively administering and operating the programs," said Dr. Johnson. "But FSA has an obligation to ensure that any organization affiliated with these programs understands its responsibilities and complies with Federal student aid statutes, regulations and other related consumer protection laws."

"We will not allow bad actors to harm students, parents, borrowers and taxpayers," Dr. Johnson continued. "We will enforce what is right for students at every turn of their student aid life cycle, regardless of whether they are applying for, receiving or repaying aid."

The announcement also noted that FSA had added several new leaders across the organization in the areas of enforcement, outreach, communications and risk management.

insideARM Perspective

While the termination of the MOUs may have the greatest impact on student loan servicers, the announcement of increased staffing and emphasis on compliance by all companies that participate in the Federal student loan process may have broader implications in the future for the private collection agencies (PCAs) employed by ED to collect on defaulted student loans.

If and when ED finalizes selection of new PCAs, compliance with all ED policies and all debt collection rules and regulations must be an integral portion of any scorecard used to determine placement volumes or ongoing relationships. insideARM suspects that Dr. Johnson will be looking to identify and hire individuals from the private sector who have developed programs to manage outside collection vendors and have built scorecards that effectively measure compliance and performance indicators.

Finally, the timing of the announcement is interesting. Just two short weeks ago, the CFPB sided with ED in the litigation surrounding the RFP litigation. The CFPB filed an Amicus Curiae Brief in that litigation agreeing with ED on the issue of the preliminary injunction issued by the court that prevents ED from placing any new accounts with the PCAs. insideARM wrote about the filing on August 24, 2017.