California Governor Gavin Newsom has signed into law the Student Borrower Bill of Rights, AB 376, as part of a package of consumer protection legislation. He simultaneously signed AB 1864, which creates the Department of Financial Protection and Innovation (DFPI) and the California Consumer Financial Protection Law, and SB 908, which requires licensure of certain persons who are engaged in the business of collecting, on behalf of themselves or others, debts arising from consumer credit transactions with consumers who reside in California. (Ballard Spahr recently held a webinar on the three new laws with special guests Richard Cordray and Bret Ladine. The materials and recording are available by request.)
Effective January 1, 2021, the Student Borrower Bill of Rights (the Act) gives the DFPI (formerly the Department of Business Oversight) authority to regulate student loan servicers who are presently exempt from California’s student loan servicer licensing law, including depository institutions (other than federally chartered credit unions), private postsecondary educational institutions and, to a certain extent, FFELP guaranty agencies. Like the licensing law, the Act applies to servicers located in California or whose activities are “directed to” persons inside California.
The Act contains special protections for military borrowers, borrowers working in public service, older borrowers, and borrowers with disabilities. It contains a number of servicing standards related to late fee caps, income-driven repayment applications, and inbound borrower telephone calls that concern an account error or information request that cannot be resolved in a single call (“qualified requests”). The DFPI’s attempt to apply some of these requirements to banks and servicers of federal student loans is likely to raise preemption questions under federal banking law and the Higher Education Act (HEA), respectively.
Perhaps most importantly, the Act creates a private right of action allowing punitive damages and fees for a servicer’s failure to comply with the Act’s substantive standards or failure to comply with any aspect of applicable federal law, and for treble damages in certain circumstances. Borrowers are required to give servicers notice and an opportunity to cure before bringing an action on an individual or class basis.
Below is a section-by-section summary of the new law. Section references are to the California Civil Code unless otherwise specified.
- New Section 1788.101(a) prohibits abusive acts or practices in connection with servicing a student loan.
- New Section 1788.101(b)(1)-(6) transfers current Cal. Fin. Code 28136 (repealed by Section 7 of the Act) and makes it applicable to all student loan servicers (not just licensees, as in current Section 28136). Among other things, Section 28136 prohibits unfair or deceptive acts or practices, inaccurate credit reporting, refusing to communicate with a borrower’s authorized representative, and making false reports to the DBO or other governmental agency.
- New Section 1788.101(b)(7)-(10) prohibits unfair or deceptive practices toward military borrowers, borrowers working in public service, older borrowers, and borrowers with disabilities. It prohibits the misrepresentation or omission of material information in connection with the servicing of a student loan owed by these borrowers.
- New Section 1788.102:
- Specifies payment processing requirements, including timely crediting of on-time conforming payments, procedures for crediting checks lacking identifying information, and a three-day timeframe for updating the borrower’s payment history in their online account. [See Section 1788.102(a)]
- Prohibits servicers from imposing negative consequences on borrowers when there is a material delay in crediting payments within 60 days of the servicer’s material change in mailing address, office, or procedures for handling borrower payments. [See Section 1788.102(b)]
- Expands the requirements for applying overpayments and allocating partial payments (this provision is similar to Section 409.8(b) of New York’s student loan servicer regulations). [See Section 1788.102(c)-(d)]
- Caps late fees at six percent of the amount past due (which is currently the maximum fee set forth in the federal Direct Loan Master Promissory Notes), requires the late fee to be “reasonable and proportional to the total costs incurred as a result of the late payment,” and prohibits minimum late fees (i.e., any fee that is not assessed as a percentage of any amount past due). [See Section 1788.102(e)] This provision raises potential preemption arguments with respect to student loans made by depository institutions with federal interest authority as well as with respect to federal student loans, should the Act’s late fee limit conflict with the amount of late fees permissible under the HEA.
- Imposes joint and several liability on student loan servicers for any violation of the law by their service providers. [See Section 1788.102(f)]
- Requires servicers to take measures to ensure they timely and correctly process income-driven repayment applications and other paperwork for federal student loan benefits. [See Section 1788.102(g)]
- Requires retention of borrower account records for a minimum of three years after the loan has been paid in full, assigned to collection, or the servicing rights have been transferred (except as otherwise required by a student loan agreement). [See Section 1788.102(h)]
- Expands the procedures for handling “qualified written requests” (i.e., a written allegation about an account error or a request for information) to likewise apply to “qualified requests” (i.e., an inbound telephone call about an account error or request for information, which cannot be resolved in a single call). Imposes a 60-day freeze on furnishing any information (not just adverse information) regarding a payment that is the subject of a qualified request or qualified written request. [See Section 1788.102(i) and (k)]
- Requires policies and procedures permitting a borrower who is dissatisfied with the outcome of an initial qualified request to escalate the borrower’s concern to a supervisor. [See Section 1788.102(j)]
- Requires servicers to protect borrowers from negative consequences (e.g., negative credit reporting, late fees not set forth in promissory note, loss or denial of borrower benefit) stemming from a sale, assignment, transfer, system conversion, or payment made by the borrower to the original student loan servicer consistent with the original servicer’s policy. [See Section 1788.102(l)]
- Transfers current Cal. Fin. Code Section 28134(a), requiring notice of servicing transfers, to the Borrower Bill of Rights. [See Section 1788.102(m)]
- Specifies the account information that must be transferred to a new servicer within 45 days of a sale, assignment, or transfer. [See Section 1788.102(n) (this is similar to old Cal. Fin. Code Section 28134(b), with the addition of the specific information that must be transferred)]
- Requires specialized training for customer service personnel that advise military borrowers, borrowers working in public service, older borrowers, and borrowers with disabilities about student loan repayment benefits and protections. [See Section 1788.102(o)-(r)]
- Requires servicers to respond to communications from the Ombudsman within 10 business days or the period specified by the Ombudsman. [See Section 1788.102(s)]
- Transfers current Cal. Fin. Code Section 28130(g)(1)-(2), which sets forth timeframes for responding to qualified written requests, to the Borrower Bill of Rights. [See Section 1788.102(t)]
- New Section 1788.103 creates a private right of action on an individual and class basis for violations of the Act and federal student loan servicing laws. Subject to procedural requirements for bringing and maintaining suit, consumers may recover or obtain actual damages of at least $500 per plaintiff, per violation; injunction, restitution, punitive damages, attorney’s fees, and any other relief that the court deems proper. Treble damages of at least $1,500 per plaintiff, per violation are available if it is proven by a preponderance of the evidence that a servicer has engaged in conduct that substantially interferes with a borrower’s right to an alternative payment arrangement; loan forgiveness, cancellation, or discharge; or any other financial benefit provided by the borrower’s promissory note or HEA.
- New 1788.104 creates a Student Loan Ombudsman position, contingent upon appropriations. The Ombudsman will be another point of contact for student loan servicing complaints. Complaints it receives about student loan servicer licensees will be referred to the DBO, those about non-licensees to the Department of Justice, and those about private postsecondary educational institutions to the Bureau for Private Postsecondary Education’s Office of Student Assistance and Relief. The Ombudsman has authority to request and compile information provided by a student loan servicer to effect its duties (including national banks, to the extent not preempted). FFELP guaranty agencies engaged in default aversion activities are “student loan servicers” for purposes of the Ombudsman provisions. The Ombudsman is required to issue a report by January 21, 2023 (and annually thereafter) on student loan complaints and student loan issues faced by borrowers.
- New Section 1788.105 authorizes the Commissioner, contingent upon appropriations, to engage in data collection and assessments to monitor for risks to consumers in the student loan servicing market. National banks that are student loan servicers are subject to the Commissioner’s monitoring and assessment authority to the extent not preempted, as well as FFELP guaranty agencies engaged in default aversion activities.
- The Act also amends the licensing provisions of the student loan servicing law to permit, subject to the Commissioner’s discretion, an applicant or licensee to submit annual consolidated financial statements if they are a wholly owned subsidiary of a public holding company that is required to comply with Securities and Exchange Commission reporting requirements. [See amended Cal. Fin. Code 28112(d) and 28140(b)]