Loan servicing fees are charges imposed by loan servicers to manage and administer a borrower’s loan. These fees cover a range of services, including processing payments, maintaining records, providing customer support, and handling escrow accounts for property taxes and insurance. While these services are essential for the smooth operation of the lending process and recovering costs associated with servicing loans, the way these fees are structured and applied can pose potential borrower harm.

Loan servicing fees have long been a regulatory concern for several years. Since the beginning of 2020, all but one of the Consumer Financial Protection Bureau (“CFPB”) Supervisory Highlights[1] have discussed examination findings related to servicing fees. In addition, the CFPB has created an initiative to reduce what they call “exploitative junk fees charged by banks and financial companies.”[2] 

The CFPB has expressed several concerns about servicing fees. First, the ”back-end” nature of servicing fees means that consumers may not factor such fees into their evaluations of the cost of credit even when the fees are accurately and appropriately disclosed in loan agreements. When announcing the junk fee initiative, CFPB Director Chopra said, “Many financial institutions obscure the true price of their services by luring customers with enticing offers and then charging excessive junk fees. By promoting competition and ridding the market of illegal practices, we hope to save Americans billions.”

Director Chopra’s remarks also highlighted a second CFPB concern with servicing fees. Regulators and consumers sometimes think the amount of the fee is substantially greater than the cost of providing the service for which the fee is charged. This stance is reflected in the CFPB’s Notice of Proposed Rulemaking (“NPRM”) on credit card late fees.[3]

Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”), Congress established limits on penalties, such as late fees, and the Federal Reserve (“FRB”) promulgated rules prohibiting generation of more revenue from late fees than was necessary to cover the costs associated with delinquent payment. This rule established an inflation-adjusted safe harbor for late fees. The safe harbor for an initial late fee is currently $30 for the first past due payment and $41 for an additional late payment within six billing cycles. The CFPB NPRM would reduce the safe harbor to $8, cap late fees at 25 percent of required payments, and eliminate the automatic inflation adjustment.

A third concern is the assessment of servicing fees that were not accurately disclosed to borrowers or permitted by the loan agreement. As part of its efforts to eliminate improper fees, the CFPB issued an advisory opinion on “pay-to-pay fees.”[4] Pay-to-pay fees are convenience fees charged for online or telephone payments. The CFPB advisory opinion affirms that such fees are a violation of the Fair Debt Collection Practices Act[5] and Regulation F[6] unless the convenience fees are expressly authorized by the agreement creating the debt or expressly authorized by law.

How can loan servicers manage their risks associated with servicing fees? First, review your loan agreements and ensure all servicing fees are accurately disclosed to borrowers.

Second, examine policies, procedures, and practices related to fees. Servicers should ensure that any late fees assessed to consumers are consistent with loan agreements or consumer contracts. Charging fees in excess of contractual limits could be an unfair act or practice. The CFPB used similar practices as an example of unfair acts or practices in its Supervisory Highlights Junk Fees Special Edition (“Junk Fee Supervisory Highlights”),[7]

Third, ensure that late fees and other servicing fees are reasonable and proportionate to the costs of providing the service with which the fee is associated. In the CFPB’s Junk Fee Supervisory Highlights, charging a repossession fee that was substantially greater than the amount paid to a repossession vendor was described as an unfair act or practice.[8] The same publication described charging payment processing fees that exceeded the servicers’ costs for processing payments as both unfair and abusive.[9] Disproportionate fees are more likely to receive adverse regulatory attention.

Fourth, compare your fees to relevant federal, state, and local laws and regulations. Some state laws addressing unfair, deceptive, or abusive acts and practices include enumerations of specific acts or practices that are prohibited. If your institution is subject to a law that includes any loan servicing fees in its scope, make sure your contracts and practices are compliant.

Finally, evaluate your policies, monitoring, and testing related to fees and fee waivers. Since servicing fees are part of credit terms and conditions, loan servicing fees and fee waivers should be included in fair lending monitoring and testing. Policies related to fee waivers should be designed to ensure consistent treatment of borrowers. Differences in assessing or waiving fees on a prohibited basis should be investigated to determine whether there is a legitimate, nondiscriminatory rationale for the differences.

Loan servicing fees may seem like a minor detail in the grand scheme of lending costs, but their impact on borrowers and regulatory compliance can be significant. Prudent lenders will take note of the regulatory interest and evaluate their servicing fee practices along with related monitoring and testing. This is especially true with respect to fees associated with delinquency and default, which may increase financial burdens on consumers already experiencing distress.

Lynn Woosley is a Managing Director with Asurity Advisory. She has more than 30 years’ risk management experience in both financial services and regulatory environments. She is an expert in consumer protection, including fair lending, community reinvestment, and UDAAP.

Before joining RiskExec, Lynn led the fair banking practice for an advisory firm. She has also held multiple leadership positions, including Senior Vice President and Fair and Responsible Banking Officer, within the Enterprise Risk Management division of a top 10 bank.

Prior to joining the private sector, Lynn served as Senior Examiner and Fair Lending Advisory Economist at the Federal Reserve Bank of Atlanta.

[1] Available at https://www.consumerfinance.gov/compliance/supervisory-highlights/

[2] https://www.consumerfinance.gov/rules-policy/junk-fees/

[3] https://www.federalregister.gov/documents/2023/03/29/2023-02393/credit-card-penalty-fees-regulation-z

[4] https://files.consumerfinance.gov/f/documents/cfpb_convenience-fees_advisory-opinion_2022-06.pdf

[5] Pub. L. No. 95-109, sec. 802(e), 91 Stat. 874, 874 (codified at 15 U.S.C. 1692(e))

[6] 12 CFR §1006.22(b)

[7] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-junk-fees-special-edition_2023-03.pdf, p. 6 and 9.

[8] Ibid, p. 7.

[9] Ibid, p. 8.