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The new year heralds many new developments in the state regulation of student loan servicers.  California, Illinois, and Washington have each taken significant steps in implementing their existing laws while legislation has been introduced in Virginia and New Mexico to regulate student loan servicers for the first time.

California. California’s Department of Business Oversight has published its student loan servicing annual report cover letter and student loan servicing annual report form.  The cover letter provides instructions for how licensees are to file the required annual report with the Commissioner by March 15th.  The annual report form requires detailed portfolio and borrower information as of December 31st, as well as aggregate complaint information for the calendar year.  These developments come along with the DBO’s publication of the third revisions to its proposed rules under the Student Loan Servicing Act.  The revisions include publication of NMLS forms, require that licensees appoint the Commissioner of the DBO as an agent for service of process, clarify the formula for assessing the required annual fee, and make various clerical revisions.

Illinois. Illinois is now accepting student loan servicer applications through NMLS.  The Student Loan Servicing Rights Act became effective December 31, 2018, but the state’s proposed regulations, published November 16, 2018, have not been finalized.

Among other requirements, the Illinois regulations require that each licensee maintain a “secured-access website” to handle communications and questions regarding new loan applications or existing loans.  The regulations further require that licensees provide “detailed” account information to borrowers on its website through a secure login system.  The regulations include an independent requirement that servicers maintain certain documents or information concerning each loan serviced consisting of: (1) the application; (2) disclosure statements sent to the borrower; (3) the promissory note or loan agreement; (4) complete loan history; (5) qualified written requests; (6) borrower instructions on how to apply overpayments; (7) statements of account sent to the borrower; and (8) any additional records specified by the Director of the Division of Banking.  All records must be maintained for a minimum of three years after the loan has been paid in full, assigned to collections, or the servicing rights have been sold, assigned, or transferred.

The regulations also include other novel additions, including that licensees maintain a consolidated report of all loans serviced by the licensee, provide same-day crediting of physical payments, provide same-day crediting of electronic payments received before a posted cut-off time, and apply payments received from cosigners only to loans for which the payor has cosigned unless otherwise specifically directed by the cosigner.

Washington. The state of Washington has published revised student loan servicer regulations, which became effective January 1, 2019.  The rules implement the modifications to the Consumer Loan Act passed last year.  The regulations now define “student loan servicing” which, similar to other states, includes receiving scheduled periodic payments, applying payments, handling modification requests, and performing “other administrative services, including collection activities.”  The modifications clarify that the regulations do not apply to licensed collection agencies collecting loans in default, or licensed attorneys collecting loans as part of providing legal services.

Substantive changes to the Washington rules relate to servicers’ reporting duties in the event of business changes, the provision of payoff information to borrowers, and the provision of a toll-free number where the borrower may speak to a single point of contact about repayment and loan forgiveness options.  The regulations also clarify that if a servicer is acquiring, transferring, or selling servicing on federal student loans in compliance with federal Department of Education rules, the regulations’ loan transfer requirements do not apply.

Virginia. In Virginia, Democratic representative Marcus B. Simon introduced HB 1760, which would prohibit any person from acting as an education loan servicer without a license and mirrors legislation he introduced in 2017.  The bill exempts certain financial institutions and nonprofit institutions of higher education, but covers other entities that receive scheduled periodic payments, apply principal and interest payments, or perform other administrative services.  The bill makes a violation punishable by a civil penalty of up to $2,500.  Among other things, violations may result from activity related to borrower communication, payment application, and credit reporting.  The bill has a delayed effective date of October 1, 2020 with applications to be accepted March 1, 2020.

New Mexico. The New Mexico legislature may soon consider its own student loan servicing restrictions.  On December 27th, Democratic Senator Bill Tallman introduced the Student Loan Servicing Rights Act, which largely follows the form of other state bills, including Virginia.  Servicing—receiving scheduled periodic payment, applying principal and interest payments, or performing administrative services—would require a license.  Certain financial institutions are exempted.  A violation of the Act, which includes provision of false or deceptive information, misapplication of payments, and furnishing inaccurate credit information, can result in a civil penalty of up to $5,000.

With the 2018 midterm elections shifting state legislatures and governorships to Democratic control, similar legislation is expected in more states this year.

 

Former CFPB Student Loan Ombudsman Seth Frotman, who abruptly resigned from the Bureau in August, has formed a nonprofit organization to advocate for additional oversight of the student loan industry. Called the Student Borrower Protection Center (SBPC), the group describes itself as “leading a nationwide effort to end the student debt crisis in America.”

The group’s website describes its projects as “supporting state and local officials” and “driving new actions in communities, in court, and in government.” These projects include: the Student Loan Law Initiative, a partnership with the University of California Irvine School of Law to generate additional research into student loan law and the economic impact of student loans; and the group’s partnerships with cities and states to advance borrower protections through legislations and policy proposals.

Among the legislative initiatives, the group describes as a discrete project the “California Borrower Bill of Rights.” The project solicits borrowers to join in lobbying the state of California to establish loan servicing standards, ban abusive practices, and create a state Student Loan Borrower Advocate to respond to consumer complaints, recommend legal reforms, and refer violators to law enforcement. The project acknowledges existing borrower protections established by the California’s Student Loan Servicing Act but does not describe what additional protections the group advocates.

The SBPC also has the explicit goal of assisting states and cities with “creative litigation strategy” in lawsuits against lenders and servicers. As part of its project on state partnerships, the group provides detailed resources on federal preemption of state regulations, borrower protections, and the nationwide impact of student debt on minorities, women, servicemembers, older Americans, and public servants.

As previously reported, Frotman’s departure from the Bureau included pointed criticism of Mulvaney’s leadership. The SBPC continues Frotman’s rehetoric with the accusations that when borrowers default, “it is often as a direct result of widespread illegal practices by student loan servicers” and that servicers “use the full weight of the government to wreak havoc on borrowers.”

In addition to Frotman, the organization includes several former CFPB employees. Bonnie Latreille, who was formerly part of the Office for Students and Young Consumers at the Bureau, serves as Director of Research and Advocacy. Mike Pierce, the SBPC’s Director and Managing Counsel, was formerly a deputy assistant director. The group’s advisory board includes Holly Petraeus and Nick Rathod, both former assistant directors at the Bureau.

In August 2018, we reported about significant changes to Connecticut’s licensing laws for consumer financial services providers that were to take effect on October 1, 2018.  In our blog post, we highlighted a new requirement (which appeared to be unprecedented), for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts.  A licensee is required to submit the demographic records collected between October 1, 2018 and June 30, 2019 to the Connecticut Banking Department by July 1, 2019.

We observed that the new requirement presented an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant.  See 12 C.F.R. § 1002.5(b) (“A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.])

On September 28, the Connecticut Department of Banking issued a memo stating that it has formally asked the CFPB for an official interpretation as to whether the state’s new requirement is consistent with Regulation B.  The Department also indicated that until it receives additional guidance from the CFPB, it “takes a no-action position as the enforcement of the new requirement.”  The Department also stated that it considers the no-action position necessary to provide it with “additional time to undertake a review of the appropriate manner and form for which [the records required to be kept by sales finance companies] shall be acquired, maintained and reported to this Department.”

We have been following closely efforts by state regulators, state legislatures and the courts to restrict, or in some cases prohibit, bank model lending programs, so the recent guidance from the Vermont Department of Financial Regulation (“Department”)  is welcome news.  On September 13, 2018, the Department issued an Order exempting loan solicitation companies from licensure when they partner with FDIC-insured banks to offer commercial loans.

The Order provides that a loan solicitation license is not required provided the following conditions are satisfied: 1) the loan solicitation company has partnered with an FDIC insured bank; 2) the loan solicitation company is soliciting commercial loans; 3) the commercial loan is made by the FDIC-insured bank and the bank is clearly identified as the lender in the loan documents; 4) the loan solicitation company is already subject to ongoing monitoring, training, and compliance programs by the FDIC-insured bank to manage the activities of the loan solicitation company; and 5) the loan solicitation company is subject to supervision, oversight, regulation and examination by the FDIC-insured bank’s state regulator (if any) and federal regulator.

Entities that wish to rely upon this exemption must, upon request, provide the Commissioner of the Department with evidence demonstrating that the company is subject to regulatory supervision, including examinations, by the bank’s regulators in a manner that is at least equivalent to the supervision and examination of a loan solicitation company licensed by the Department.  The Order does not provide details on what level of supervision would be deemed “equivalent” to that imposed upon a licensee.

While the Order is limited to commercial loans, it does represent an acknowledgment by one state regulatory agency that programs involving banks are subject to significant supervision and oversight, and do not necessarily require additional oversight and regulation.

 

 

California Governor Jerry Brown has signed into law Assembly Bill 38, which significantly modifies the scope, administration, and servicing requirements of the state’s Student Loan Servicing Act.  The bill was approved by the California Assembly 55-23-2 and the California Senate 28-11-1 with the intent to “build upon existing law to ensure that the Student Loan Servicing Act’s goals are met as the federal government enacts new regulations.”  The bill contains no provisions delaying its immediate effectiveness.

In its most dramatic change, the bill narrows the scope of the Act by adding an exemption and redefining several terms.  The bill carves out from coverage guaranty agencies engaged in default aversion through an agreement with the Secretary of Education and redefines “student loan servicer” to exclude a debt collector who exclusively services defaulted student loans—federal loans where no payment has been received for 270 days or more and private student loans in default according to the terms of the borrower’s agreement.  The Act also adds a section to clarify that any person claiming an exemption or an exception from a definition has the burden of proving that exemption or exception.

Reflecting these changes, the licensing trigger has been restricted to those who “engage in the business of servicing a student loan in this state.”  The previous definition included any person “directly or indirectly” engaged in servicing.  However, an out-of-state entity is still deemed to be servicing “in this state” if it services loans to California residents.  In further modifying the Act’s scope, the term “student loan” has also been changed from a loan made “primarily” to finance a postsecondary education to a loan made “solely” to finance a postsecondary education.

The bill also provides significant licensing changes. Now, the commissioner may require that applications, filings, and assessments be completed through the Nationwide Multistate Licensing System & Registry (NMLS).  The commissioner is further empowered  to waive or modify NMLS requirements, use NMLS “as a channeling agent for requesting information from and distributing information to” the Department of Justice and other governmental agencies, and to create a process by which licensees may challenge information entered into the NMLS by the commissioner.

The criteria for denying a license application have been clarified, and now include: failure to meet a material requirement for issuance of a license; violations of a similar regulatory scheme of California or a foreign jurisdiction; liability in any civil action by final judgment or an administrative judgment by any public agency within the past seven years; and failure to establish that the business will be operated honestly, fairly, efficiently, and in accordance with the requirements of the Act.  Additionally, applicants must now appoint the commissioner as an agent for service of process.

With respect to servicing requirements, the bill extends the timeframe within which a servicer must acknowledge a borrower’s Qualified Written Request (QWR) to ten business days.  Previously, the Act and the most recent round of regulations required that servicers acknowledge a QWR within five business days, except when the servicer fulfilled the borrower’s request within that period.

The District of Columbia Department of Insurance, Securities, and Banking (DISB) published its final rules under the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.  The final rules became effective when published in the D.C. Register on August 10, 2018.

The rules are unchanged from the latest revisions.  In its notice of publication, the DISB explained that it rejected proposals to create a multi-year licensing period and to allow additional time for servicers to provide requested records to the Commissioner because the Department had disposed of the same issues in prior rounds of rulemaking.

Significant changes to Connecticut’s licensing laws for consumer financial services providers will take effect on October 1, 2018.  In addition to changes impacting mortgage-related licensees (e.g. mortgage lenders, originators and brokers), Public Act 18-173 revises or creates new licensing requirements for many providers including small loan lenders, sales finance companies, money transmitters, check cashers, debt adjustors, debt negotiators, collection agencies, student loan servicers, and mortgage servicers.

New requirements include requirements (1) for licensees to clearly display their unique identifier, including on internet websites and in all audio solicitations, and (2) for licensees to conduct activities subject to licensure from a U.S. office.

Of particular note is a new requirement (which appears to be unprecedented), for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts.  A licensee will be required to submit the demographic records collected between October 1, 2018 and June 30, 2019 to the Connecticut Banking Department by July 1, 2019.

We understand that representatives of the Banking Department will be meeting with an industry group this week to discuss the Equal Credit Opportunity Act issues presented by this requirement and that the Department hopes to provide guidance soon.  (The new requirement presents an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant.   See 12 C.F.R. § 1002.5(b) (“A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.])

For more information on the provisions of Public Act 18-173, click here.

 

 

A group of 21 state attorneys general have sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and H.R. 4439 (“Modernizing Credit Opportunities Act”).

H.R. 3299, known as the “Madden fix” bill, was passed by the House in February 2018.  It attempts to address the uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding.  In that decision, the Second Circuit held that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act (NBA) allows the national bank to charge.  The bill would amend Section 85, as well as the provisions in the Home Owners’ Loan Act (HOLA), the Federal Credit Union Act, and the Federal Deposit Insurance Act (FDIA) that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks, to provide that a loan that is made at a valid interest rate remains valid with respect to such rate when the loan is subsequently transferred to a third party and can be enforced by such third party even if the rate would not be permitted under state law.

H.R. 4439 was referred to the House Financial Services Committee in November 2017.  It is intended to address a second source of uncertainty for some loans that are made by banks with substantial origination, marketing and/or servicing assistance from nonbank third parties and then sold shortly after origination.  These loans have been challenged by regulators and others on the theory that the nonbank agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.

The bill would amend the Bank Service Company Act to add language providing that the geographic location of a service provider for an insured depository institution “or the existence of an economic relationship between an insured depository institution and another person shall not affect the determination of the location of such institution under other applicable law.”  The bill would amend the HOLA to add similar language regarding service providers to and persons having economic relationships with federal savings associations.

It would also amend Section 85 of the NBA to add language providing that a loan or other debt is made by a national bank and subject to the bank’s rate exportation authority where the national bank “is the party to which the debt is owed according to the terms of the [loan or other debt], regardless of any later assignment.  The existence of a service or economic relationship between a [national bank] and another person shall not affect the application of [the national bank’s rate exportation authority] to the rate of interest rate upon the [loan, note or other evidence of debt] or the identity of the [national bank] as the lender under the agreement.”  The bill would add similar language to the provisions in the HOLA and FDIA that provide rate exportation authority to, respectively, federal savings associations and state-chartered banks.

The state AGs assert in their letter that the bills “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and “would constitute a substantial expansion of the existing preemption of state usury laws.”  As support for their argument that Congress did not intend to allow nonbank entities to use NBA preemption, they cite to the OCC’s recent bulletin on small dollar lending in which the OCC stated that it “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).”

While the context for the OCC’s statement was “specific to short-term, small-dollar installment lending,” we have expressed concern as to its implications for all banks that partner with third parties to make loans under Section 85.  As we noted, the statement also seems at odd with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision.

While the enactment of legislation reaffirming the valid-when-made doctrine and addressing the “true lender” issue would be helpful, we have advocated for the OCC’s adoption of a rule providing that (1) loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the NBA for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  In other words, it is the origination of the loan by a national bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

In two enforcement actions pending in Colorado state court, the Administrator of the Uniform Consumer Credit Code for the State of Colorado is employing the “true lender” theory and the Second Circuit’s Madden decision to challenge two bank-model lending programs.

 

The New York Department of Financial Services (“NYDFS”) has adopted a regulation that requires “consumer credit reporting agencies” (“CCRAs”) to register with the NYDFS, prohibits CCRAs from engaging in certain practices, and requires CCRAs to comply with certain provisions of the NYDFS cybersecurity regulation.

The new regulation became effective upon the publication of a Notice of Adoption by the NYDFS in the State Register on July 3, 2018.  Its definitions of “consumer credit report”  and “consumer credit reporting agency” closely track the definitions of, respectively, the terms “consumer report” and “consumer reporting agency” in the FCRA.  However, the term “consumer credit report” is limited to “a consumer report…bearing on a consumer’s credit worthiness, credit standing, or credit capacity.”  Similarly, the term “consumer credit reporting agency” is limited to “a consumer reporting agency that regularly engages in the practice of assembling or evaluating and maintaining [information from furnishers] for the purpose of furnishing consumer credit reports to third parties.”  The term “New York consumer” is defined as “an individual who is a resident of New York State as reflected in the most recent information in the possession of a [CCRA].”

Registration.  A CCRA must register with the NYDFS if “within the previous 12-month period, [it] has assembled, evaluated, or maintained a consumer credit report on one thousand or more New York consumers.”  Every CCRA “that is required to register…at any time between June 1, 2018 and September 1, 2018” must register by September 15, 2018.  Registration must be renewed by February 1, 2019 for the 2019 calendar year and by February 1 of each year thereafter.

The regulation prohibits a CCRA that is required to be registered and has not done so from engaging in the business of a CCRA in New York by furnishing a consumer credit report on a New York consumer to any individual or entity.  It also prohibits any “regulated person” from paying “any fee or other compensation” or transmitting any information about a New York resident to a CCRA that is required to be registered and has not done so.  A “regulated person” is defined as “any person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.”

Prohibited Practices.  A CCRA that is required to be registered is prohibited from engaging in various practices including engaging in any “unfair, deceptive, or predatory act or practice toward any consumer that is prohibited by any federal law, or by any New York State law that is not preempted by federal law,” or engaging in “any unfair, deceptive, or abusive act or practice in violation of section 1036 of the [Dodd-Frank Act].”

Cybersecurity.  A CCRA that is required to be registered must comply with specified provisions of the NYDFS cybersecurity regulation.  Except for the provisions that have a February 28, 2019 compliance date, a CCRA must comply with the specified provisions of the cybersecurity regulation by November 1, 2018.

The District of Columbia Department of Insurance, Securities, and Banking (DISB) has issued a second round of revised emergency and proposed rules under the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.  The latest revision, backdated to April 20 from its May release, provides “numerous substantive changes” in response to public comments.  A blackline of the revised emergency rules showing changes from the rules adopted in December 2017 can be found here.  The Student Loan Servicing Alliance filed a lawsuit in March 2018 challenging the rules as preempted by federal law.

The first revision made one substantive change from the initial rules by reducing the annual assessment fee from $6.60 per loan to $.50 per borrower.  The second revision further modifies the annual assessment fee by eliminating the additional “fixed” component.  Now, licensees are subject only to the volume-based assessment.  Application fees (initial and renewal) and reinstatement fees have also been reduced by $100.

For the first time, the proposed rules explicitly acknowledge and yield to federal law.  The DISB recordkeeping rules now apply “[e]xcept to the extent prohibited by federal law” and allow the Commissioner to “waive or reduce” the requirements if compliance “would require the licensee to violate federal law.”  The revisions also add protections by prohibiting public disclosure of the records under the Freedom of Information Act.

Unlike the recordkeeping provisions, the examination authority contains no deference to federal law.  The examination authority has also been expanded to allow the Commissioner to consider reports prepared by other federal or state agencies in conducting an examination and to conduct joint examinations with federal or state agencies.  The rules now also explicitly allow the Commissioner to request “policies and procedures, consumer complaints, financial statements, and any other reasonable information.”

Most significantly, the revisions have eliminated the initial penalty provisions, which allowed the Commissioner to impose a penalty of up to $5,000 “for each occurrence of each violation of the act” by a licensee and up to $25,000 “for each occurrence of each violation of the act” by an unlicensed person.  The revisions have also reduced the penalty for failure to timely file an annual report from up to $1,000 per business day to up to $50 per day.

The revised rules also expand the oversight of the DISB.  The rules now require updating of any information on file with the commissioner within ten business days of it become inaccurate.  Additionally, licensees must now notify the Commissioner in writing of “any material fact or condition” which may preclude the licensee from fulfilling its contractual obligations.