Burr Alert: Federal Regulators Shine a Spotlight on Private Student Loan Servicers

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Uptick in Private Student Loan Litigation
The private student lending market is experiencing a surge in consumer litigation and enforcement actions. This is largely due to the Consumer Financial Protection Bureau's elevated interest in enforcing consumer protection statutes against private student loan servicers. Loan servicers - rather than loan originators - remain the target of the bulk of student loan litigation. Once originators provide the funds, they commonly fade into the background in terms of consumer interactions. As such, this article will primarily focus on litigation and enforcement actions surrounding private student loan servicing.

After the mortgage loan-servicing crisis, federal regulators, such as the Consumer Financial Protection Bureau ("CFPB" or "Bureau"), began cracking down on private student loan originators and servicers, hoping to avoid similar industry-wide devastation. In a 2016 study, the CFPB found that more than 8 million borrowers were in default on more than $130 billion in student loans. In an effort to stifle this trend, federal regulators are responding by closely examining student-lending practices in the federal and private student loan markets.

The Basics: Private Student Loan Lending
The private student loan market is a $108 billion dollar industry. Private education loans are primarily offered by banks, non-profits, and higher education institutions (including for-profit schools). The originating institution often bundles multiple private educational loans and sells them to a depositor. The depositor, in turn, sells the loans to various trusts, which employ student loan servicers. Private student loan lenders do not have the enforcement mechanisms that federal lenders have (i.e. wage garnishment) and are left with filing suit against the borrower as their only recourse for a defaulted student loan.

Private loan servicers are the bridge between originators and borrowers. Servicers communicate with borrowers, manage their accounts, process their monthly payments, and are generally responsible for loan collections. Correspondingly, servicers are the ripest targets for litigation when borrowers have grievances regarding student loan accounts.

Download the full article, "Federal Regulators Shine a Spotlight on Private Student Loan Servicers" written by David Elliott and Parris Bell.

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