The Illinois House of Representatives and Senate have voted to override the veto by the state’s Republican governor of Senate Bill 1351, known as the Illinois Student Loan Servicing Rights Act.  The override means that the new law will become effective on December 31, 2018.  The bill was drafted by the office of Lisa Madigan, the Democratic Illinois Attorney General, and had strong Democratic support in the state’s House and Senate.

The Act includes the following key provisions:

  • Licensing. The Act makes it unlawful “for any person to operate as a student loan servicer in Illinois except as authorized by this Act and without first having obtained a license in accordance with this Act.”   For purposes of the Act,  a “student loan” includes federal and private student loans, including loans to refinance a student loan.  The Act contains exclusions for various types of entities, such as federal- or state-chartered banks, and for open-end credit and loans secured by real property or a dwelling.  Credit extended by a postsecondary school is also excluded if the credit term is no longer than the borrower’s school program, the remaining principal balance at the time of the borrower’s graduation or completion of the program is less than $1,500 ,or the borrower failed to graduate or successfully complete the program and had a balance due at the time of disenrollment.  The Act authorizes the Secretary of Financial and Professional Regulation, or his or her designee, to license and supervise servicers and issue implementing regulations.
  • Servicing Practices. Article 5 of the Act, titled “Student Loan Bill of Rights,” prohibits certain servicing practices and imposes various requirements.  The Act authorizes the Attorney General to enforce a violation of Article 5 as an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act.  Article 5 prohibits a servicer from engaging in any unfair or deceptive practice toward any borrower or cosigner or misrepresenting or omitting any material information in connection with servicing a loan.   A servicer is also prohibited from misapplying payments to the loan balance and is required to oversee third parties to ensure their compliance with Article 5 when working on the servicer’s behalf.  In addition, Article 5 contains provisions addressing the following specific areas:
    • Payment processing. Provisions include a requirement for prompt and accurate crediting of payments, a prohibition on charging a penalty if within 90 days of a change in address, a payment is received at a previous address, and a requirement to allow borrowers or cosigners to provide instructions for applying payments.
    • Fees. Unless otherwise provided by federal law, a servicer can only charge late fees that are reasonable and proportional to the cost it incurred related to the late payment and cannot charge a borrower or cosigner for modifying, deferring, forbearing, renewing, extending, or amending a loan.
    • Billing statements. A servicer is prohibited from misrepresenting various items of information in billing statements or information “regarding the $0 bill and advancement of the due date on any billing statement that reflects $0 owed.”
    • Payment histories. A servicer must provide a written payment history to a borrower or cosigner at no cost within 21 days of receiving a request.
    • Specialized assistance. A servicer must “specially designate servicing and collections personnel deemed repayment specialists who have received enhanced training related to repayment options.”  The  Act contains a definition of “federal loan borrower eligible for referral to a repayment specialist” that covers a borrower who has certain specified characteristics such as a borrower who requests information about options to reduce or suspend payments, has missed 2 consecutive payments, or is at least 75 days delinquent.  Servicers must provide specified information to such borrowers and make certain assessments regarding available payment options and are prohibited from implementing any compensation plan that incentivizes a repayment specialist to violate the Act.
    • Disclosures related to discharge and  cancellation.  Servicers must make disclosures information related to the Department of Education’s procedures for asserting a defense to repayment or claiming a discharge to borrowers eligible to assert such a defense or claim a discharge.
    • Income-driven repayment plan certifications.  A servicer must disclose the date a borrower’s income-driven payment plan certification expires and the consequences, including the new repayment amount, of failing to recertify.
    • Information provided to private student loan borrowers. A servicer’s website must provide a description of any alternative repayment plan offered by the servicer for private student loans.  The servicer must establish policies and procedures for evaluating private student loan alternative repayment arrangement requests and such arrangements must consider certain specified information.
    • Cosigner release. A servicer’s website must provide information on the availability and criteria for the release of cosigners on private student loans.
    • Payoff statements.  A servicer’s website must indicate that a borrower can request a payoff statement.  The servicer must provide a statement within 10 days, including information needed for the requester to pay off the loan, and must send a paid-in-full notice within 30 days of a payoff.
    • Transfer of servicing. The Act requires specified information to be provided by a transferor and transferee servicer within a specified time period, prohibits the charging of late fees and interest and furnishing of negative credit information in connection with certain payments made after a transfer of servicing, requires prompt transfer of payments received by a transferor servicer, and requires a transferee servicer to establish a process for a borrower to authorize recurring electronic fund transfers (unless the borrower’s authorization was automatically transferred to the transferee servicer.)
    • Requests for assistance and account dispute resolution. A servicer must implement policies and procedures for dealing effectively and timely with requests for assistance that meet certain specified requirements, including providing information about submitting such requests on its website, responding to such requests within specified time frames, and implementing a process for a requester to escalate such a request.  When a request for assistance contains an account dispute, a servicer must comply with specified dispute resolution procedures that must include a process for a requester to appeal a servicer’s determination.  The Act contains requirements that the appeal process must satisfy.
  •  Ombudsman. The Act creates the position of Student Loan Ombudsman within the Attorney General’s office “to provide timely assistance to student loan borrowers.”  The Ombudsman’s responsibilities include attempting to resolve complaints from student loan borrowers and compiling and analyzing complaint data.

 

 

 

 

The District of Columbia Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 (Servicing Act) became effective February 18, 2017.  The Servicing Act set an October 1 deadline for the Student Loan Ombudsman to prepare course materials to help borrowers understand their student loans and to draft a separate student loan Bill of Rights.  While the course materials apparently have not yet been released, the D.C. Department of Insurance, Securities, and Banking (DISB) did release its “Student Loan Borrower’s Bill of Rights” on October 11.

The list of specific rights set forth by the DISB is preceded by the following statement:

Student loan borrowers in the District of Columbia deserve a loan repayment process built on fairness, professionalism, and transparency. This bill of rights sets out the basic principles and protections that borrowers can rely on as they work to reduce their student debt. Beyond that, student loan servicers in the District are expected to uphold these key tenets with respect to all student loan borrowers and each student loan they service.

The Bill of Rights contains five articles as follows:

  • Article I: Transparent Pricing and Terms – Rates must be disclosed transparently pursuant to the Truth in  Lending Act requirements, there can be no hidden fees, plain-English terms should be used to describe key terms, and pricing and other key terms should be presented clearly and prominently.
  • Article 2: Receive Non-Abusive Products – There should be no debt traps, no “double-dipping” (i.e. no fees can be charged on the borrower’s outstanding principal when refinancing or modifying a loan with a fixed-fee as the primary financing charge unless there is tangible cost benefit to the borrower), and the design of loan products should be consistent with their use.
  • Article 3: Fair and Responsible Underwriting – Financing should be only offered only with high confidence in the borrower’s ability to repay, loans should be aligned with borrower interests and  be right-sized, and servicers and lenders should engage in responsible credit reporting.
  • Article 4: Fair Collection Practices – Servicers should abide by the spirit of the Fair Debt Collection Practices Act, must  vet and oversee the collection practices of third-party collectors and debt buyers, and must maintain and communicate accurate loan information.
  • Article 5: Quality Customer Service – Servicers should provide a confirmation of receipt of a complaint in writing (within five days when possible), research and resolve every complaint in a timely manner, and take proactive steps to inform borrowers of relevant organizational changes that could affect loan repayment, consumer interaction with the servicer, or the transfer of the borrower’s account.  Borrowers shall not be discriminated against based on race, color, religion, national origin, sex, marital status, age, sexual orientation or identity, or any other protected classification.

Oddly, the Bill of Rights does not appear to be based on student loan servicing principles articulated by other regulators.  Instead, it seems to borrow copiously from principles for the origination, servicing, and collection of small business loans adopted by the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates.  Accordingly, because it is not based on anything involving student loan servicing, the Bill of Rights may be on shaky legal ground.

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has raised questions with the DISB regarding the application of some of the requirements of the Bill of Rights to student loan lenders, as opposed to servicers, which arguably goes far beyond the activities authorized by Congress in approving the Servicing Act given that D.C. laws must be approved by Congress, and has likewise raised questions regarding the conflicts between the requirements of the Bill of Rights and the provisions of the Higher Education Act of 1965 (HEA), which arguably preempt those requirements.  In July 2017, NCHER wrote to the Department of Education to express concern about the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the HEA.  In its letter, NCHER urged the ED to issue preemption guidance that would clearly state that “federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”

Meanwhile, the DISB continues to accept Student Loan Servicer License applications.  As we have previously reported, the Servicing Act directed the DISB to issue rules implementing its licensing provisions within 180 days of the Act’s effective date.  Although it did not meet that deadline, the DISB started to accept applications and transition filings for the Student Loan Servicer License on the National Mortgage Licensing System on August 10, 2017.  After nearly a month of accepting Student Loan Servicer License applications, the DISB released a Notice of Emergency and Proposed Rulemaking to implement the Act.  The Student Loan Servicer emergency rules were adopted and made effective September 8, 2017.  The emergency rules still have not been published in the D.C. Register, however, meaning that the deadline for comments has yet to be established.  In its notice setting forth the Student Loan Borrower’s Bill of Rights, the DISB did indicate that it began licensing student loan servicers effective September 8, 2017.

 

 

Earlier this month, the Pennsylvania Department of Banking and Securities issued a letter to “all persons engaged in activity regulated or licensed by the [Department] regardless of the means of delivery of such regulated financial service” which it described as intended to “reiterate[] and remind[]” such persons of its existing licensing guidance.  A number of states, including California, have previously undertaken initiatives to enforce licensing requirements applicable to fintech and other companies.  The Pennsylvania letter is a reminder of the need for such companies to make sure that they have all required licenses for the states in which they operate.

In the letter, the Department comments that “recent public and industry discourse regarding the delivery of financial services via ‘Fintech’ companies has clouded the regulatory environment concerning the regulation and oversight of the financial services and companies via existing consumer protection and licensing statutes.  The notion that a company labels itself as ‘Fintech’ because of the means by which it offers or delivers a financial service does not alter the underlying nature of the transaction or service it is offering.”

The Department states that it is “reiterating its previous guidance that a regulated financial service activity offered to consumers of the Commonwealth will be regulated in accordance with the statute governing the offering of that service regardless of the person offering such service or the means by which such service is offered.”  The Department states further that “a person that offers a financial service to the residents of Pennsylvania…regardless of whether they designate themselves as a ‘Fintech’ company or any other type of nomenclature, must be licensed in accordance with the appropriate statute and comply with all the provisions of the law under which they are regulated.  Compliance is required based upon the activity conducted and not the means in which that activity is conducted.”

In the letter, the Department cites to its previous guidance supporting this position.  Such guidance includes a 2008 notice regarding the need for nondepository entities charging more than 6% simple interest per annum on nonmortgage loans made to Pennsylvania residents to be licensed under the Pennsylvania Consumer Discount Company Act regardless of the method used to make the loans.  The Department’s position was upheld by the Pennsylvania Supreme Court.

Senate Bill 1351, known as the Illinois Student Loan Bill of Rights, was vetoed at the end of last week by the state’s Republican Governor.  The bill would have created a student loan ombudsman and implemented new requirements for student loan servicers, including a licensing requirement.

The bill was drafted by the office of Lisa Madigan, the Democratic Illinois Attorney General, and had Democratic support in the state’s House and Senate.  Ms. Madigan denounced the veto in a press release, which included statements from two Democratic state legislators who sponsored the bill that they intended to seek an override of the veto.  An override would require a three-fifths majority in the Illinois House and Senate.

While Governor Bruce Rauner is reported to have called the bill’s intent “laudable,” he is also reported to have concluded that the bill encroached on federal government responsibilities and would have added confusion to the student loan process.

D.C. License Applications. The District of Columbia Department of Insurance, Securities and Banking recently started to accept applications and transition fillings for a Student Loan Servicer License on the National Mortgage Licensing System (NMLS).

The District of Columbia’s Student Loan Act, which became effective on February 18, 2017, provides that no person or entity, unless exempt, can service a “student education loan” of a “student loan borrower” in the District, directly or indirectly, without first obtaining a license.  The Act also created the position of a Student Loan Ombudsman within the Department whose duties include examining each servicer not less than once every three years, assisting the Commissioner with enforcing the Act’s licensing provisions, educating borrowers, reviewing borrower complaints, compiling and analyzing complaint data, and making recommendations to the Commissioner for resolving borrowers’ problems.

The Act directed the Commissioner to issue rules implementing the Act’s Ombudsman and licensing provisions within 180 days of the Act’s effective date.  Since the Department has not yet announced the appointment of an Ombudsman or the issuance of regulations implementing the Act, it is unclear whether the Department’s acceptance of applications on the NMLS indicates that the Department considers the Act’s licensing requirement to be currently effective.

CT Servicing Standards. Connecticut has adopted service standards for licensed student loan servicers.  The state’s licensing requirement for student loan servicers became effective on July 1, 2016.  The statute establishing the licensing requirement directed the state’s Banking Commissioner to set service standards for licensed servicers and post them on the Department’s website by July 1, 2017.

The Commissioner has indicated that the new standards are based on a review of various resources, including existing mortgage industry servicing standards, information provided by the CFPB concerning the student loan servicing industry, and the U.S. Department of Education’s Policy Direction on Federal Student Loan Servicing dated July 20, 2016.

The standards address the following ten areas:

  • Development and implementation of default aversion services
  • Notice of servicing transfer
  • Application of payments
  • Books and records
  • Providing periodic billing statements
  • Providing payoff statements upon request
  • Implementation of policies and procedures to respond to borrower inquiries
  • Maintenance of fee schedule and fee disclosure
  • Credit report information
  • Federal law compliance

The Minnesota Attorney General announced that she has filed a lawsuit in state court against two pension advance companies.

According to the AG’s press release, the companies often solicited borrowers through their own websites or websites of “lead generators” who marketed “pension loans” or “loans that can fit your needs.”  The press release states that the transactions required military veterans and senior citizens to assign portions of their monthly pension payments for up to ten years in exchange for much smaller cash amounts (usually less than $5,000) on which the AG claimed the companies typically charged annual percentage rates of 200 percent.

The lawsuit is reported to allege that the companies violated Minnesota lending laws by making loans to Minnesota borrowers without being licensed as a lender and sought to evade Minnesota law by falsely characterizing the transactions as pension “purchase agreements” rather than loans.

In February 2017, the CFPB and the New York Attorney General filed a lawsuit in which they alleged that a litigation settlement advance product offered by the defendant was a usurious loan that was deceptively marketed as an assignment.  In August 2015, the CFPB and the New York Department of Financial Services filed a lawsuit against two pension advance companies in which the CFPB and NYDFS made similar allegations regarding the advances made by the companies.

The Minnesota AG’s lawsuit and the CFPB/NY lawsuits not only indicate that pension advance companies and litigation funding companies have become targets of regulatory enforcement actions, but also suggest that merchant cash advance providers and other finance companies whose products are structured as purchases rather than loans could face heightened scrutiny from state and federal regulators.

 

On July 28, 2017, California Governor Jerry Brown’s Office of Business and Economic Development recognized the California Department of Business Oversight for a successful Lean Six Sigma project that dramatically reduced the processing time for applications to amend financial services licenses.  Through the project, the Department cut the processing time from an average of 100 days to only 1.9 days!

We have previously commented that the time it takes state authorities to process license applications can be a significant factor for FinTech and other financial services companies to consider when determining how to structure their business.  State regulators who want to improve the business climate in their states would be well-advised to follow California’s lead in tackling this important issue.

The New York Department of Financial Services (DFS) announced last week that it is migrating the administration of its non-mortgage related licenses to the Nationwide Multistate Licensing System (NMLS), joining more than 60 other state financial services regulatory agencies that already administer their non-mortgage licenses via the NMLS.  Effective July 1, new applicants for a money transmitter license will be able to apply via the NMLS, and existing licensees will be able to transition their licenses to the NMLS.  DFS has indicated that ultimately it will manage all non-depository licenses via the NMLS.

The announcement also expressed support for Vision 2020, the Conference of State Bank Supervisors’ recently launched initiative to modernize state regulation for non-banks.

It is no secret that the DFS is not reluctant to launch its own initiatives if it believes that there is a gap in regulation, examination or oversight – their cybersecurity regulations – so the DFS embracing the NMLS is a positive for the industry as it relates to uniformity of the licensing application process.

 

 

On May 10, the Conference of State Bank Supervisors (CSBS) announced a series of initiatives (branded as Vision 2020) designed to modernize state regulation of non-banks.  The announcement specifically calls out financial technology firms and appears to be an attempt by state regulators to provide an alternative to the special purpose national bank charter the OCC has proposed to make available to financial technology companies (“fintech charter”).

The CSBS claims that by 2020 state regulators will have adopted “an integrated, 50-state licensing and supervisory system, leveraging technology and smart regulatory policy to transform the interaction between industry, regulators and consumers.”  The CSBS further claims that the Vision 2020 initiatives “will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties.”  Lofty goals to say the least, and ones that the financial services industry most certainly will support.  It remains to be seen, however, whether Vision 2020, which actually includes initiatives that are already in use or have been underway for some time, will move us further towards these goals by 2020, or even later.

Among others, Vision 2020 purports to include the following: 1) a redesign of the Nationwide Multistate Licensing System (NMLS); 2) harmonization of multi-state supervision; 3) formation of a fintech industry advisory panel focused on lending and money transmission, with the goal of identifying challenges related to licensing and multi-state regulation and providing feedback on state efforts to modernize the regulatory structure; 4) enhancing the CSBS regulatory agency accreditation program; 5) facilitate banks providing services to non-banks; 6) increasing efforts to address de-risking; and 7) supporting federal legislation facilitating coordinated supervision of bank third party service providers by state and federal regulators.

It bears noting that the redesign of the NMLS (called NMLS 2.0) has been underway (even if not formally) for some time, and long before the OCC first proposed offering a fintech charter.  Moreover, 62 (and counting) state agencies over more than 40 states and territories already use the NMLS for the administration of non-mortgage licenses. While migration by states to the NMLS for administration of its non-mortgage licenses will no doubt continue, the driver for that was not the need to find a way to regulate fintech companies, but rather the need for significant improvements to NMLS’s functionality and utility.

The CSBS has also been focusing on the harmonization of multi-state supervision for many years.  In the mortgage industry, for example, these efforts have included formation of the Multi-State Mortgage Committee, publication of a model mortgage exam manual, publication of model examinations guidelines, and promotion of model state laws.  Despite these efforts, those in the mortgage industry can attest to the fact that harmonization and uniformity is still more aspirational than a reality.

Some have suggested that Vision 2020 is intended to entice fintech companies to elect state regulation over seeking a fintech charter.  Whether or not that is the case, Vision 2020 certainly is an attempt by the CSBS to make the case that state regulators are in the best position to regulate fintech companies and that they are prepared to modernize and harmonize their laws and regulations.  Given the significant harmonization and modernization work that still remains to be done in the mortgage industry after many years of effort, I have significant reservations about the likelihood of “an integrated, 50-state licensing and supervisory system” by 2020.

 

 

The Conference of State Bank Supervisors issued a press release this week in which it announced the April 1 release of a new tool within the Nationwide Multistate Licensing System (NMLS) to streamline reporting by money services businesses.  The new tool is called the “Money Services Businesses (MSB) Call Report.”

The press release quotes a Vermont regulator who stated that the call report information “will provide complete and meaningful information on MSBs, including fintech companies licensed to do business as money transmitters, and assist state regulators to better analyze risk, monitor compliance, and make more informed and timely decisions when it comes to MSB supervision.”  The press release also indicated that the new reports “will also provide a unique, detailed snapshot of fintech companies as they mature and evolve.”

Licensees are required to file the new report within 45 days of the end of the first quarter (May 15).   According to the press release, 18 states (covering 25 money transmitter, money service, check casher/seller and currency exchange licenses) have adopted the report for the first quarter of 2017 and seven more states are expected to adopt it in the near future.

The reports include national and state specific MSB activity that is submitted on a quarterly and annual basis.  The MSB Call Report is the first comprehensive report to consolidate state MSB reporting requirements and provide a database of nationwide MSB transaction activity.  More detailed information regarding the MSB Call Report is available on the MSBCR webpage.