The California Department of Business Oversight (DBO) has published a second round of modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published its first round of revised rules last month.

The latest revisions to the regulations clarify servicer responsibilities related to application of payments, borrower communications and handling of qualified written requests (QWRs), and recordkeeping requirements, among other miscellaneous changes.

Payments

The initial regulations provided that a servicer must credit any online payment the same day it is paid by the borrower, if paid before the daily cut off time for same day crediting posted on the servicer’s website, or the next day, if paid after the posted cut off time.  These requirements, which were unmodified by the first round of revisions, have now been changed to clarify that servicers must only apply payments the same or next business day, depending on whether received before or after the published cut off time.

Borrower Communications and Qualified Written Requests

The Act requires that a servicer respond to QWRs by acknowledging receipt of the request within five business days and, within 30 days, providing information relating to the request and an explanation of any account action, if applicable.  The first round of revised regulations added the limitation that a servicer is only required to send a borrower a total of three notices for duplicative requests.  The latest revisions add two additional provisions.  First, servicers are only required to send an acknowledgement of receipt within five days if the action requested by the borrower has not been taken within five days of receipt.  Second, servicers may designate a specific electronic or physical address to which QWRs must be sent.  If designated, however, this information must be posted on the servicer’s website.

The revised regulations also further specify what is required of customer service representatives.  Now, federal and private loan servicer representatives must inform callers about alternative repayment plans if the caller inquires about repayment options.  Federal loan servicers must now also inform callers about loan forgiveness benefits, if the caller inquires about repayment options.  These regulations have evolved significantly.  The initial regulations required that representatives “be capable of discussing” alternative repayment plan and loan forgiveness benefits with callers, and be trained in the difference between forbearance and alternative repayment plans.  The latest revisions have added specific triggers for discussing repayment options—and forgiveness benefits for federal loans.

Servicer Records

The first round of revisions eliminated the DBO’s specific record keeping formatting requirements.  In its place, the latest round of revisions has added the general requirement that the books and records required by the act must be maintained in accordance with generally accepted accounting principles.  The new revisions also change the information required as part of the aggregate student loan servicing report to require the number of monthly payments required to repay the loan.

The modifications are subject to comment until July 25, 2018.  As with the first round, the revisions will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.

The CFPB has issued a new report, “Data Point: Final Student Loan Payments and Broader Household Borrowing,” which looks at repayment patterns for student loans and how borrowers who have repaid their student loans subsequently use credit.  The CFPB’s analysis focuses on borrowers when they first pay off individual student loans.  The report uses data from the Bureau’s Consumer Credit Panel, a nationally-representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies.

Key findings include the following:

  • Most borrowers paying off a student loan do so before the scheduled due date of the final payment, often with a single large final payment.  The median final payment made on a student loan is 55 times larger than the scheduled payment (implying a payoff at least 55 months ahead of schedule), with 94 percent of final payments exceeding the scheduled payment and only 6 percent of loans paid off with the final few payments equal to the scheduled payments.
  • Most borrowers paying off a student loan early also simultaneously reduce their credit card balances and make large payments on their other student loans.  These borrowers are also 31 percent more likely to take out their first mortgage loan in the year following the payoff.  While this evidence shows that early student loan payoffs coincide with increased home purchases, the simultaneous reduction in credit card and other student loan balances suggests that increased wealth or income may influence when borrowers pay off student loans, reduce credit card balances, and purchase homes.
  • Most borrowers who pay off a student loan by making all of the scheduled payments pay down other debts in the months following payoff rather than take on new debt.  Those borrowers with additional student loans put 24 percent and 16 percent of their newly-available funds toward, respectively, paying down their other student loans faster and reducing credit card balances.  Unlike borrowers paying off a student loan early, borrowers paying off on schedule are not more likely to take out a mortgage for the first time.

The CFPB observes that because the results discussed in the report show that repayment of one type of debt directly affects payments and borrowing on other kinds of debt, “policies and products that change repayment terms or balances for one credit product are likely to have spillover effects on  others, either enhancing the intended effects (e.g. payment relief, increased credit access) or leading to compensating shifts (e.g. reallocated payments or borrowing).”  As a result, the CFPB believes that analyzing borrower behavior across all liabilities can improve its understanding of the underlying mechanisms that influence behavior and allow it to more accurately predict the impact of new policies or products on consumers and the overall marketplace.

The CFPB also notes that while its analysis focuses on student loan borrowers who successfully pay off their loans, similar approaches could be applied to struggling student borrowers and might shed light on how borrowers use other credit products to cope with their student debt, how their access to other credit may be inhibited, and how available repayment plans and other programs change these outcomes.

The California Department of Business Oversight (DBO) has published modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published notice of its initial proposed rules on September 8, 2017.  A blackline of the changes is available here.

The initial regulations mandated extensive customer service obligations.  Among other things, the regulations required that a servicer post a plain language description of the repayment and loan forgiveness options available for federal student loans on its website, with links to specified Department of Education resources.  The initial regulations also required this same repayment and loan forgiveness information be sent to each borrower, with the servicer’s toll-free customer service telephone number, at least once per calendar year (i.e., an “annual notice”).  The initial regulations provided similar requirements for a servicer of private student loans, with the added requirement that a private student loan servicer establish policies and procedures to ensure the provision of accurate private student loan repayment arrangement information and consistent presentation of those arrangements to similarly situated borrowers.  The initial regulations also provided requirements for handling borrower inquiries (“Qualified Written Requests”).  All communications were required to be sent according to the borrower’s preferred method of communication.

The proposed modifications:

  • clarify that only a servicer of federal student loans must post information about federal repayment and forgiveness options on its website or in its annual notices
  • permit a servicer of private student loans to provide information about repayment options customized to the borrower by eliminating the requirement that servicers must prominently post information about “any alternative repayment plan” for the student loans it services on its website homepage (though private loan servicers must still provide an annual notice);
  • allow a servicer to provide information about repayment and loan forgiveness options through links on its homepage, instead of aggregating the information on the homepage.
  • create a new rule that private student loan servicer representatives available at the servicer’s toll-free number must be “fully trained about, inform and discuss with callers, any alternative repayment plan offered by the servicer or promissory note holder” for the private student loan(s);
  • provide that annual notices may be sent with any other annual communications;
  • require that borrowers who do not consent to electronic communications receive communications through the U.S. Postal Service and, only if undeliverable, through email; and
  • create a new rule (that is somewhat ambiguous) that a servicer is only required to send a borrower a total of three notices stating that there will be no response to a Qualified Written Request because the borrower has previously submitted the same request, received a response, and provided no new information in its subsequent, duplicative Qualified Written Request.

The initial regulations also established payment requirements, including that a servicer credit any electronic payment on the day “electronically paid by the borrower” if received before a posted cut-off time and that a servicer credit physical payments on the day received.  The initial regulations also mandated that account information reflect payments within three days and be available to the borrower via a secure log-in system with a consolidated report of the borrower’s transaction history.

The proposed modifications:

  • clarify that, for payments (primarily, if not exclusively, paper checks) received without payment instructions, a servicer has a reasonable period of time (not to exceed ten business days) to research and apply the payment and update a borrower’s account; and
  • revise the rule regarding co-signers to require that a servicer provide a process for co-signers to follow to check to be sure that co-signer payments are credited only to the loan(s) the co-signer has co-signed.

The initial regulations provided that a servicer must maintain a current student loan servicing report (a record of all loans being serviced) including, with respect to each student loan serviced: the borrower’s name; the number of student loans serviced for each borrower; the loan number for each loan; the loan type; the origination amount; the interest rate(s) and maturity date for each loan; the loan balance and status for each loan; the cumulative balance owing for each borrower; whether a borrower has an application pending for, or is repaying under, an alternative repayment plan, listing the plan chosen; and whether the borrower has an application pending for any loan forgiveness benefit.  For each individual loan, the servicer must also maintain borrower records, including the borrower’s application, agreement, qualified written requests, and other disclosures and statements provided to the borrower.  The initial regulations also provided specific technical requirements for electronic document storage.

The proposed modifications:

  • clarify that servicers may provide the required aggregated servicing information through reports segregated by loan type;
  • revise the recordkeeping rule to require that a servicer maintain records for three years after pay off, assignment, or transfer unless a contract requires a shorter period; and
  • eliminate the specific optical image reproduction and electronic record storage requirements of Section 2056(b).

The initial rules also provided a variety of miscellaneous rules regarding licensing (including provisions requiring a servicer to submit policies and procedures related to borrower protection requirements) and account management.

The proposed modifications:

  • remove the requirement that a servicer appoint the Commissioner as their agent for service of process;
  • provide that, between regulatory examinations, a servicer need not submit changes to their policies and procedures related to borrower protection requirements; and
  • delete the rule requiring monthly reconciliations of trust accounts.

The modifications are subject to comment until June 18, 2018 and will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.  The short comment period suggests that the DBO intends to have the rules finalized by the effective date of the Student Loan Servicing Act, July 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.

 

 

The New Jersey Attorney General, Gurbir Grewal, has sent a letter to Department of Education Secretary Betsy Devos in which the NJ AG invites the ED to work with his office “to ensure that any investigations of fraudulent activities by educational institutions are completed properly, rather than ended prematurely or allowed to grow dormant.”

The NJ AG indicates that his invitation is intended to put to rest recent reports that the ED has discontinued investigations into potentially fraudulent activity at several large for-profit colleges and restricted communications between the ED’s staff and state AGs about such investigations.  He asserts that “[a]bandoning the Department’s cooperative relationships with State Attorneys General could only harm the public interest we should be working together to serve.”

The NJ AG asks the ED to let his office partner with the ED if it continues to pursue the investigations it “reportedly has (or had) in progress” or, if the ED will not pursue such investigations, to let his office “pick up where you leave off” and give it access to the ED’s files (claiming that his office can arrange to protect the confidentiality of any shared investigative files.)

 

On May 15, Maryland Governor Larry Hogan signed into law a bill that, among other things, establishes the role of Student Loan Ombudsman within the Office of the Commissioner of Financial Regulation and sets forth various duties related to that position.

Maryland SB 1068, titled the Financial Consumer Protection Act of 2018, represents a scaled down version of an attempt by state lawmakers to regulate student loan servicers. An earlier version of the bill contained language that would have created a licensing regime for servicers, similar to what the District of Columbia, California, Connecticut, Illinois, and Washington have enacted over the past couple of years. Instead, SB 1068 enacts the other key prong of such recent legislation: the creation of an ombudsman role to monitor student lending and servicing activity within the state.

Under the new law, the Student Loan Ombudsman is required to:

  • Receive and review complaints from student loan borrowers;
  • Attempt to resolve complaints by collaborating with higher education institutions, student loan servicers, and others, as specified;
  • Compile and analyze complaint data (and, as specified, disclose that data);
  • Help student loan borrowers understand their rights and responsibilities;
  • Provide information to the public and others;
  • Disseminate information about the availability of the ombudsman to address student loan concerns;
  • Analyze and monitor the development and implementation of federal, State, and local laws, regulations, and policies on student loan borrowers;
  • By October 1, 2019, establish a student loan borrower education course that includes educational presentations and material about student education loans;
  • Make recommendations regarding statutory and regulatory methods to resolve borrower problems and concerns; and
  • Make recommendations on necessary changes to Maryland law to ensure the student loan servicing industry is fair, transparent, and equitable, including whether licensing or registration of student loan servicers should be required in Maryland.

The last item on this list suggests that a licensing or registration requirement could be forthcoming. However, under the law as enacted, new obligations for student loan servicers are presently limited to requiring each student loan servicer operating in Maryland to (1) designate an individual to represent the servicer in communications with the ombudsman and (2) provide appropriate contact information for that designee to the ombudsman.

In addition to establishing the Student Loan Ombudsman role, SB 1068 contains a number of noteworthy changes to Maryland’s consumer finance statutes, including (1) expanding the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MCPA) to include “abusive” practices; (2) providing that unfair, abusive, or deceptive trade practices include violations of the federal Military Lending Act or the federal Servicemembers Civil Relief Act; (3) adding various provisions related to consumer lending, including raising the Maryland Consumer Loan Law’s licensing trigger from $6,000 to $25,000 (thus expanding the scope of the statute’s licensing requirement); (4) increasing the maximum civil penalties for violations of MCPA and several other financial licensing and regulatory laws; (5) allocating additional resources for enforcement of Maryland’s consumer protection laws; and (6) prohibiting consumer reporting agencies from charging for a placement, temporary lift, or removal of a security freeze.

According to media reports, CFPB Acting Director Mick Mulvaney has sent an email to Bureau staff indicating that he plans to fold the Office of Students and Young Consumers into the Office of Financial Education.  Both Offices are part of the Bureau’s Consumer Education and Engagement Division.  The Student Loan Ombudsman, a position created by the Dodd-Frank Act, will also be part of the Office of Financial Education.  The current staff of the Office of Students and Young Consumers is expected to be reassigned to other Offices.

While the reorganization means that the Office of Students and Young Consumers will no longer be involved in investigations that could result either in supervisory actions or in enforcement actions, it does not mean that the CFPB will no longer bring such actions against student loan lenders and servicers.

As might be expected, the reorganization has quickly attracted criticism from consumer advocates and others. New York State Department of Financial Services Superintendent Maria Vullo released a statement expressing her Department’s concern “with the CFPB’s troubling decision to minimize the role of the Office of Students and Young Consumers.” She indicated that “DFS’s Student Protection Unit will continue its nation leading efforts in safeguarding students from fraud and misrepresentation in the market, monitoring student-related financial practices in New York and educating student consumers and their families regarding available financial products and services to empower them to make informed choices.  And violators of the law will be met with swift DFS response.”

In February 2018, Mr. Mulvaney announced that he planned to transfer the CFPB’s Office of Fair Lending from the Supervision, Enforcement, and Fair Lending Division to the Director’s Office, where it will become part of the Office of Equal Opportunity and Fairness.

Mr. Mulvaney is also reported to have indicated in his email to Bureau staff that he plans to hire more political appointees and create an office of cost-benefit analysis staffed by economists that report directly to him.  Another reported change is Mr. Mulvaney’s creation of an Office of Innovation, known previously as Project Catalyst, an initiative launched by the CFPB in 2012 for facilitating innovation in consumer financial products and services.

Following a remand from the D.C. federal district court, Department of Education (ED) Secretary Betsy DeVos has issued an order restoring the Accrediting Council for Independent Colleges and Schools’ (ACICS) status as a federally recognized accrediting agency.

ACICS accredits for-profit colleges, whose access to federal student loan funds is contingent on becoming, and remaining, accredited by a “nationally recognized accrediting agency,” as determined by ED. Although not the sole basis for his decision, Secretary DeVos’ predecessor, John B. King, had revoked ACICS’ recognition in 2016 after concluding, with reference to schools such as Corinthian and ITT Educational Services, that ACICS lacked sufficient mechanisms to monitor the results of state and federal agency enforcement actions brought against schools and to deny accreditation to those schools found to have been engaged in fraudulent conduct or to have otherwise violated applicable law.

Secretary DeVos’ recent order means that ACICS’ status as a federally recognized accrediting agency is restored effective December 12, 2016 (the date Secretary King terminated ACICS’ recognition) and that ED will conduct a further review of ACICS’ petition for recognition. ACICS-accredited institutions now may have to decide whether to wait for the outcome of ED’s review or continue pursuing their in-process applications with other accreditors.

The review of ACICS’s 2016 petition will include consideration of material that the D.C. federal district court concluded had been improperly omitted during the 2016 proceeding as well as additional, related material ACICS wishes to submit. According to U.S. District Judge Reggie B. Walton’s March 23 opinion, ED had violated the Administrative Procedure Act in 2016 by failing to consider during ACICS’ recognition proceeding: (1) supplemental information, submitted by ACICS at ED’s request, largely concerning ACICS’ standards for “problem schools,” and (2) evidence of ACICS’ placement verification and data integrity programs and procedures.

After ED had terminated ACICS’ recognition in 2016, it directed ACICS-accredited institutions to find a new accrediting agency by June 12, 2018. Under the terms of Provisional Program Participation Agreements they signed with ED, ACICS-accredited institutions were required to submit an application to a new accrediting agency by June 12, 2017 and host a site visit by the new agency by February 28, 2018. ED was authorized to: (1) terminate federal student aid funding for new students if an institution failed to meet either deadline and (2) require a letter of credit or other financial guarantee (equal to at least 10% of the institution’s Title IV volume from the prior completed award year) if an institution failed to meet the second deadline or obtain an extension.

Judge Walton’s March 23rd ruling is another significant win for ACICS, which one year ago convinced the D.C. Circuit to affirm the federal district court’s denial of the CFPB’s petition to enforce a Civil Investigative Demand (CID) issued to ACICS. In that opinion, the D.C. Circuit concluded the CID failed to adequately describe the nature of the unlawful conduct under investigation. It did not reach the broader question of whether the CFPB had jurisdiction to investigate the accreditation process based on the possible connection to ACICS-accredited schools’ lending practices.

The Student Loan Servicing Alliance, a trade group representing student loan servicers, has sued the District of Columbia to enjoin the operation of Law 21-214, the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.  The Act, which became effective February 18, 2017, established a student loan ombudsman within the D.C. Department of Insurance, Securities, and Banking with the authority to create rules for student loan servicers. The DISB issued initial emergency regulations on September 8, 2017 and revised regulations on December 26, 2017. The DISB also issued an initial borrower “bill of rights” on October 11, 2017 and revisions earlier this year.

The D.C. regulations and bill of rights impose significant restrictions upon servicers, including requirements that servicers be licensed, pay application and annual fees (including a now-revised annual assessment fee of $.50 per borrower), file a surety bond, and comply with recordkeeping requirements.  The bill of rights purports to dictate further requirements for handling complaints, applying payments, disclosing fees, providing access to default aversion services, and notifying borrowers of payment application methodologies when handling multiple loans.

SLSA seeks a declaratory judgment that the application of the Act and its regulations to federal student loan servicers is precluded by both field and conflict preemption.  In particular, SLSA notes that Federal Direct Loan and the Federal Family Education Loan Programs were created with the intent of providing uniform servicing standards and the Higher Education Act, 20 U.S.C. § 1098g, expressly states that federal loans “shall not be subject to any disclosure requirements of any State law.”

As further evidence of preemption, SLSA emphasizes that the HEA does not contemplate the assessment of state fees and will not permit a myriad system of state licensing and regulatory regimes that would inevitably result in severe cost increases to the federal government.  The Department of Education compensates servicers on a per-borrower basis depending on loan performance, with a maximum compensation of $34.20 per year.  If state licensing is not preempted and states are allowed to assess servicer fees with impunity, the resulting system will siphon ED compensation and require potentially exorbitant increases in ED compensation to servicers in order for those servicers to recoup the money lost to state fees.

SLSA’s suit comes on the heels of ED’s recent interpretation of the HEA, which stresses that the preemption of state regulation of federal student loan servicers expressly prohibits licensing schemes like that in the District of Columbia.   SLSA also relies upon the recent Statement of Interest, filed by the Department of Justice in litigation brought by the Commonwealth of Massachusetts against the Pennsylvania Higher Education Assistance Agency.  The DOJ likewise stresses that the Commonwealth’s efforts to oversee the handling of borrower benefits and payment application for federal student loans are preempted by the HEA.

A bipartisan coalition of 30 state attorneys general led by New York AG Eric Schneiderman and Colorado AG Cynthia Coffman have sent a letter to members of Congress urging them to reject a proposed amendment to the Higher Education Act (HEA) that would preempt state law requirements for servicers of federal student loans.

The letter followed (but did not mention) the U.S. Department of Education’s publication of an interpretation asserting that the HEA preempts state regulation of federal student loan servicers.  Both the AGs’ letter and the ED’s interpretation come in the wake of a wave of new state student loan servicing laws and enforcement activity.

The proposed HEA amendments would preempt state law requirements regarding licensing, disclosures, communications with borrowers that apply to the origination, servicing, or collection of a federal student loan.

The AGs assert that, contrary to ED’s interpretation, the amendments “would represent a stark departure from the traditional cooperative state-federal approach to enforcement—and would wrongly cast aside the long tradition of congressional deference to state prerogatives under the HEA.”  Despite the AGs’ characterization, the ED’s interpretation is based on, and consistent with, the HEA and federal preemption law.