Magazine article American Banker

Student Loan Servicers Sue to Halt Rules That Could Raise Costs

Magazine article American Banker

Student Loan Servicers Sue to Halt Rules That Could Raise Costs

Article excerpt

WASHINGTON -- A group of student loan servicers filed suit this week to block a set of government regulations that, if implemented, could raise costs for banks and other educational lenders.

Affiliates of USA Group Inc., Indianapolis, argued in their lawsuit that the new regulations would permit the Department of Education to hold third-party servicers responsible for repayment of loans on which small errors were made.

"Today, servicers don't have any liability," said Edard R. Schmidt, general counsel for USA Group. The regulations, however, "impose more liability on third party servicers than on the actual lender."

Lenders Fear Higher Prices

If the regulations are put into effect as scheduled on July 1, lenders fear that servicers will raise their prices to offset the increased risk, said John Dean, special counsel to the Consumer Bankers Association.

"Some of the servicers are saying that if these regs take effect on July 1, thatit will mean fundamental change in the contractual relationship between banks and their servicers," Mr. Dean added.

At present, the liability of third-party servicers is a matter of contractual negotiation. It is the lenders who are responsible to the Department of Education for repayment of the loan.

The liability rules proposed by the Department of Education would hold the servicer jointly responsible with lenders for repayment of loans.

USA Groug argued in a statement released Tuesdasy that servicers could be liable for repayment of an entire loan if it violates a Department of Education regulation -- even if the mistake was small and inadevertent. …

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