In 2014, $12 billion new loans were done with nonbank online ‘marketplace lending’. This industry is growing dramatically. With concern for consumers and fair industry practices, the Treasury Department launched an inquiry into the sector. What does this mean for those facing student debt stress? One of the primary concerns is how student loan servicing is done, and what pain points exist which is making repayment a stressful process. This is just one area of inquiry, but the whole picture is to marketplace lenders stay subject to regulation. Here are 10 things to understand about the treasury’s inquiry into marketplace lenders, primarily around student loan issues.

  • Student loans: the nation’s second largest consumer debt market. With all said, there are over 40 million federal and private college loan borrowers. Together, all these consumers owe total of more than $1.2 trillion. The problem lies in repayment of these loans, with more borrowers defaulting. The complaints from distressed borrowers have been rolling in to the Consumer Finance Protection Bureau (CFPB). The Request for Information is available at: http://files.consumerfinance.gov/f/201505_cfpb-rfi-student-loan-servicing.pdf.
  • Industry practices could create repayment challenges: The CFPB wants to know about specific practices which are potentially creating mass problems as consumers try to repay their student loans. The primary focus is on how consumers are being financially harmed by how payments are applied in a way that increases interest paid or maximizes fees. The borrower is not receiving enough information when their student loans are transferring between servicers. Most do not even know what ‘servicers’ are and assume the loan is within the office of the originating lender.
  • Reported hurdles for distressed borrowers: The CFPB requests information on policies and procedures of marketplace lenders to see if they are driving borrowers to default on loans. The fees and long repayment plans are two of the strongest hurdles revealed in consumers complaints.
  • The quality of service affected by economic incentives: Inquiries are seeking to know if student loan lenders have established good economic incentives to help borrowers avoid default. They also want to know if lenders are implementing a reasonable and flexible repayment option. The model used in most third-party lender contracts provides student loan servicers a flat monthly fee for every account serviced. This fee is usually fixed and does not fluctuate depending on the level of service a borrower receives in any given month.
  • Ensuring standards of consumer protections in other markets: As of this time, there are no understandable federal regulations to protect student loan borrowers. The CFPB is critically analyzing this to see if this extends to protections in other consumer markets. For instance, credit card or mortgages, this should be considered in improving the quality of student loan servicing. Some servicers in marketplace lending adhere to more stringent rules that include early intervention for borrowers having repayment issues, fee limits, and protections when loans are sold. Should other markets be informed of the potential servicing standards for student loans?
  • Availability of information about the student loan marketplace: Consumer harm could be a direct result from lack of transparency with marketplace lenders. CFPB is trying to determine if there is adequate information available about market lenders, their standards and how they are functioning. Are they providing enough help to those struggling to avoid default? A factsheet about student debt stress is available at: http://files.consumerfinance.gov/f/201505_cfpb-factsheet-student-debt-stress.pdf
  • Servicers are the critical link between borrowers and lenders: They communicate directly with borrowers. If a borrower faces unemployment or financial hardship, it is the student loan servicers they contact. A borrower typically has little control over which company services their loan. The CFPB has heard from distressed borrowers that student loan servicers are true to giving the runaround when borrowers ask for help. They also are aware of complaints about lost records, slow response time to fixing errors and lack of communication. The CFPB notes that borrowers may not be able to avoid defaults and delinquencies when servicers are unequipped or untrained to deal with borrower’s loan problems.
  • A student loan can be a consumer’s first experience in financial services marketplace: The impact on millions of American lives with student loans can be a make or break experience. Student loans play a major and pivotal role for many young consumers as they try to establish creditworthiness. If a servicer isn’t adhering to a flexible set of standards, this can heighten the student loan stress and ultimately set the borrower up for failure, even outside the loan into other areas of life.
  • The CFPB welcomes consumers input: A complaint can be submitted regarding unfair business practices in regards to student loans. Any borrowers experiencing problems are encouraged to follow through with a complaint. This is the one of the reasons the inquiry exists, because of borrower’s “telling their story”.
  • New to consumers: The CFPB has re-launched a Repay Student Debt web tool. It is an interactive resource to navigate borrowers facing default. It is devised as a protection tool to help borrowers keep poor servicers in check. The new version also teaches how to get a lower monthly payment when in financial hardship.