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A bill introduced last week in the California State Assembly could change the consumer lending landscape in California considerably. The bill, AB 539, would change several aspects of the California Financing Law (CFL), including setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties. Additionally, AB 539 would change the CFL to make clear that a loan’s rate cannot be used as the sole factor in determining whether a loan is unconscionable. According to the bill’s authors, these changes are necessary because of the “looming threat of a potential ballot initiative,” and due to the uncertainty caused by the California Supreme Court’s recent De La Torre decision which opened the door for borrowers to claim that high-rate consumer loans are unconscionable.

AB 539 would make these changes to the CFL:

  • At present, the CFL does not set a maximum interest rate on loans of $2,500 or more. AB 539 would cap the interest rate at 36% plus the federal funds rate (2.4% as of today) on loans of $2,500 or more but less than $10,000.
  • The CFL provides certain factors to determine whether a loan is of a “bona fide principal amount” or if there has been some artifice to evade regulation under the CFL. AB 539 would apply these factors to loans of $2,500 or more but less than $10,000.
  • At present, the CFL prohibits loans of at least $3,000 but less than $5,000 from having a term greater than 60 months and 15 days. AB 539 would increase this upper limit from $5,000 to $10,000.
  • At least for loans in excess of $2,500 up to $10,000, AB 539 would prohibit CFL licensees from issuing a loan with a term of less than 12 months.
  • AB 539 would add a section to the CFL providing that no licensee may impose a prepayment penalty for any loan not secured by real property.

California’s unconscionability doctrine is incorporated into the CFL. Although it was once widely thought that loans with no interest rate cap under the CFL could not be unconscionable, in De La Torre the California Supreme Court held that consumers could use California’s Unfair Competition Law to claim that high-rate loans were unconscionable and therefore violated the CFL. AB 539 expressly provides that a CFL-regulated loan cannot be found unconscionable based on the interest rate alone. In our view, this provision is theoretically unnecessary. In De La Torre, the California Supreme Court held that courts must consider all the circumstances of the loan before declaring that a loan’s rate is unconscionable. Specifically, courts must consider “the bargaining process and prevailing market conditions,” which is “highly dependent on context” and “flexible” according to the Court. In other words, courts properly following De La Torre could not solely consider a loan’s rate to determine unconscionability in any event. That said, the bill would be helpful in that it would foreclose unconscionability arguments based on the rate alone.

The Conference of State Bank Supervisors (CSBS) announced last week that it has agreed to implement 14 recommendations made by its Fintech Industry Advisory Panel (Advisory Panel).

The Advisory Panel was formed in 2017 to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.  It has 33 fintech company members that engage with the CSBS Emerging Payments and Innovation Task Force and other state regulators.  The Advisory Panel has a subgroup focused on lending and another focused on payments.  Both subgroups submitted reports that formed the basis of the recommendations CSBS has agreed to implement.

Those recommendations primarily address creating uniform definitions and practices, increasing transparency, and expanding the use of common technology among all state regulators.  Among the actions CSBS has agreed to take to implement the recommendations are:

  • Developing a 50-state model law to license money services businesses
  • Creating a standardized call report for consumer finance businesses
  • Building an online database of state licensing and fintech guidance, while encouraging a common standard
  • Developing a new technology offering, a State Examination System, to simplify examinations of nonbanks operating in more than one state
  • Expanding the use of the Nationwide Multistate Licensing System (NMLS) among all state regulators and to all nonbank industries supervised at the state level

At the annual NMLS conference in Orlando, CSBS and the Advisory Panel’s payments subgroup reported that in connection with efforts to harmonize state licensing regimes and ultimately to draft a model state law for licensing money services businesses, CSBS is conducting state surveys relating to existing state definitions and exemptions from licensure and will publish  such surveys when complete.

The CSBS initiative is undoubtedly in part a reaction to the OCC’s decision to grant special purpose national bank charters to fintech companies.  Such charters would eliminate the need for fintech companies to obtain multi-state licenses.  In October 2018, CSBS filed a second lawsuit in D.C. federal district court to stop the OCC from issuing such charters.

 

 

 

 

Earlier this week, Governor Andrew Cuomo again advanced controversial legislation that would establish a state licensing regime for student loan servicers.  The proposal, which is packaged as Part L of the governor’s proposed Transportation, Economic Development and Environmental Conservation Bill for fiscal year 2020, would require companies that service student loans held by New Yorkers to obtain a state license from the New York Department of Financial Services (NYDFS) and submit to onerous reporting and examination requirements.  The proposal also would authorize NYDFS to seek—in addition to remedies already available to other New York and federal regulators—substantial penalties for enumerated categories of loan servicing misconduct.

Similar legislation has repeatedly failed in the past.  Last year’s proposal, despite having support from the office of former New York Attorney General Eric Schneiderman, was “intentionally omitted” from the amended budget bill passed by the New York legislature; the same thing happened in 2017.  Efforts to codify a “student loan borrower bill of rights” died in the Higher Education committees of the New York Assembly and Senate during the 2017-18 legislative session.

This year’s proposed licensing scheme differs significantly from previous efforts in several respects.  First, it expressly includes a limited carve-out for entities that service federal student loans (i.e., those issued under the William D. Ford Federal Direct Loan Program, or issued under the Federal Family Education Loan Program and later purchased by the federal government).  That provision was most likely included in response to the recent federal court opinion holding that federal law partially preempted the District of Columbia’s like-minded attempt to license student loan servicers.  The New York proposal would still, however, leave servicers of federal student loans subject to penalty for failure to satisfy certain notice obligations or adhere to the aforementioned substantive standards of operation.  Those provisions are likely to continue to present preemption issues.

Also unlike previous efforts, the FY 2020 proposal provides for substantial penalties for violations of the proposed licensing scheme.  Proposed penalties are capped at the greater of (1) $10,000 per offense; (2) double the actual damages caused by the violation; or (3) double the “aggregate economic gain” attributable to the violation.  The new proposal drops calls for a student loan ombudsman within NYDFS.  It also abandons provisions from the prior year’s draft that would have imposed restrictions on student debt consultants and prevented certain state licensing boards from denying a professional license because of an applicant’s student debt.

Whether these changes will be enough to persuade the New York legislature to adopt a measure that it has repeatedly rejected, and that is all but certain to face additional challenges in federal court, remains to be seen.

 

 

 

 

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.