We previously blogged about Virginia’s enactment last month of a law requiring student loan servicers to be licensed by the Virginia State Corporation Commission (“Commission”). As promised, we are providing a more detailed summary of HB 10/SB 77, which is undoubtedly one of the most sweeping laws we’ve seem to date targeted at regulating student loan servicer conduct.
Activity Triggering Licensure
The law’s central feature is a licensing requirement applicable to “qualified education loan servicers.” That term is broadly defined, and covers (subject to exemptions) any person that:
- Receives any scheduled periodic payments from a borrower (or notification of such payments) or applies payments to the borrower’s account pursuant to the terms of a qualified education loan (“loan”) or the contract governing the servicing;
- Maintains account records for a student loan and communicates with the borrower regarding the loan, on behalf of the loan’s holder, during a period when no payment is required;
- Interacts with a borrower, which includes conducting activities to help prevent default on obligations arising from loans or to facilitate the receipt and/or application of payments to a borrower’s account.
The Commission can begin accepting license applications on or before March 1, 2021, and licensing will be via the NMLS.
Exemptions and Automatic Licensing Process
Certain financial institutions, as well as public or nonprofit institutions of higher education, are not only exempt from licensure, but fully-excluded from the law’s coverage. Specifically, the statute does not apply to any “bank, savings institution, credit union, or financial institution subject to regulation under 12 U.S.C. § 2002 [Farm Credit System].” A wholly-owned subsidiary of one of these institutions is also exempt, provided the subsidiary is subject to regulation, audit, or examination by a state or federal regulatory agency.
Servicers of federal loans and guarantors are not exempt, but the law calls for the creation of an automatic licensing process under which such servicers could obtain a license from the Commission after verifying eligibility. Notably, entities licensed under this process are subject to the law’s recordkeeping requirements, “except to the extent that the requirements are inconsistent with federal law,” and the law provides that nothing in the section addressing the automatic licensing process “prevents the Commission from issuing an order to temporarily or permanently prohibit or bar any person from acting as a qualified education loan servicer or violating applicable law.” So, the legislation gives a nod to the preemption concerns regarding federal student loan servicing, but still asserts sweeping authority to regulate servicer conduct.
Prohibited Activities and Required Affirmative Acts
The statute sets forth extensive lists of prohibited activities and affirmative requirements applicable to loan servicers.
Among the prohibitions set forth in the law, a covered servicer may not do any of the following:
- Directly or indirectly employ any scheme, device, or artifice to defraud or mislead borrowers;
- Engage in any unfair or deceptive act or practice toward any person or misrepresent or omit any material information in connection with the servicing of a loan, including misrepresenting (i) the amount, nature, or terms of any fee or payment due or claimed to be due on a loan; (ii) the terms and conditions of the loan agreement; or (iii) the borrower’s obligations under the loan;
- Obtain property by fraud or misrepresentation;
- Misapply loan payments to the outstanding balance of a loan;
- Provide inaccurate information to a nationally recognized consumer credit bureau;
- Fail to report both the favorable and unfavorable payment history of the borrower to a nationally recognized consumer credit bureau at least annually if the loan servicer regularly reports information to such a credit bureau;
- Fail to communicate with an authorized representative of the borrower who provides a written authorization signed by the borrower, provided that the loan servicer may adopt procedures reasonably related to verifying that the representative is in fact authorized to act on behalf of the borrower;
- Make any false statement of a material fact or omit any material fact in connection with any information provided to the Commission or another governmental authority; or
- Engage in abusive acts or practices when servicing a loan as defined under the statute.
The law also requires that a qualified education loan servicer “comply with all federal laws and regulations applicable to the conduct of its licensed business,” and makes any failure to do so a violation of the statute. Additionally, the Commissioner may also promulgate regulations prohibiting activities not expressly set forth in the statute.
In terms of affirmative requirements, servicers are required to do each of the following except to the extent Virginia’s requirements are “inconsistent with any provision of federal law or regulation, and then only to the extent of the inconsistency”:
- Evaluate a borrower for eligibility, if applicable, for an income-driven repayment program prior to placing the borrower in forbearance or default;
- Respond to a written inquiry from a borrower or the representative of a borrower within specified timeframes;
- Not furnish to a consumer reporting agency, during 60 days following receipt of a written request related to a dispute on a borrower’s payment, information regarding a payment that is the subject of the written request;
- Inquire of a borrower how to apply an overpayment to a loan (except as provided in federal law or required by a loan agreement);
- Apply partial payments in a manner that minimizes late fees and negative credit reporting;
- Require, as a condition of a sale, an assignment, or any other transfer of servicing, that the new loan servicer honor all benefits originally represented as available to a borrower during the repayment of the loan and preserve the availability of the benefits, including any benefits for which the borrower has not yet qualified; and
- In the event of a sale, assignment, or other transfer of servicing that results in a change in the identity of the person to whom a borrower is required to send payments or direct any communication concerning the loan, transfer all records, notify affected borrowers, and adopt policies and procedures to verify that the new servicer has received all records regarding the borrower’s account.
The Commission has a number of remedies available to it to address violations of the statute, including suspending or revoking a license, issuing cease and desist orders, and imposing civil penalties (in the amount of $2,500 per violation).
One of the most salient and concerning aspects of this law is the creation of a private right of action available to “[a]ny person who suffers damage as a result of the failure of a qualified education loan servicer to comply” with this law or with applicable federal student loan servicing laws and regulations. Relief may include actual damages, injunctive relief, restitution, punitive damages, attorney’s fees, or any “other relief the court deems proper.” However, as an additional remedy, treble damages are available if “a qualified education loan servicer has engaged in conduct that substantially interferes with a borrower’s right to (i) an alternative payment arrangement; (ii) loan forgiveness, cancellation, or discharge; or (iii) any other financial benefit as established under the terms of a borrower’s promissory note or under the Higher Education Act” subject to a “preponderance of the evidence” standard.