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Democratic lawmakers have introduced several new bills to prohibit the use of mandatory arbitration provisions, ranging from bills that broadly target consumer transactions to bills that target schools that receive Title IV assistance under the Higher Education Act (HEA).

A bill introduced by Senator Sherrod Brown, the Senate Banking Committee’s ranking member, would amend the Consumer Financial Protection Act to provide that “no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a consumer dispute between a covered person and a consumer that relates to a consumer financial product or service.”  The bill is obviously an attempt to resurrect through legislation the CFPB’s failed attempt to ban predispute arbitration agreements in its final arbitration rule that was overturned by Congress pursuant to the Congressional Review Act.

The bill defines a consumer dispute as a dispute between a seller or provider of real or personal property, services (including services related to digital technology), securities or other investments, money, or credit where the transaction is for personal, family, or household purposes.  A “predispute joint-action waiver” is an agreement, whether or not part of a predispute arbitration agreement, “that would prohibit, or waive the right of one of the parties to the agreement to participate in a judicial, arbitral, administrative or other forum, concerning a dispute that has not yet arisen at the time of the making of the agreement.”  The bill would require a court, rather than an arbitrator, to decide any issue as to whether the prohibition applies to an arbitration agreement.

According to a press release issued by House Judiciary Committee Chairman Jerrold Nadler, two companion bills entitled “The Forced Arbitration Injustice Repeal (FAIR) Act” have been introduced in the House and Senate by Democratic lawmakers.  The text of the bills is not yet available.  The press release states that the bills “would end the use of forced arbitration in consumer, worker, civil rights, and antitrust disputes.”

The other two bills are previously introduced bills seeking to enact the “Court Legal Access & Student Support (CLASS) Act.”  They have been reintroduced by Congresswoman Maxine Waters (who chairs the House Financial Services Committee) and Senator Dick Durbin.  The bills would prohibit the use of mandatory pre-dispute arbitration agreements and class action waivers in enrollment agreements by schools receiving Title IV assistance under the HEA.  They appear to be an attempt to circumvent efforts by the Department of Education to remove the arbitration agreement and class action waiver ban that is part of the “borrower defense” final rule (Final Rule) issued by the ED in November 2016 and initially scheduled to take effect on July 1, 2017.

In July 2018, the ED issued a proposal that would rescind the Final Rule and replace it with “Institutional Accountability regulations” that would not ban the use of arbitration agreements and class action waivers.  Instead, the ED is proposing to require schools that use pre-dispute arbitration agreements and class action waivers in student agreements to provide disclosures to students regarding such use.

Shortly before the Final Rule’s initial July 1, 2017 effective date, the California Association of Private Postsecondary Schools (CAPPS) filed a motion for a preliminary injunction in a D.C. federal district court to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019.  Despite the ED’s efforts to stay the Final Rule’s effective date, the Final Rule’s ban on arbitration agreements and class action waivers became effective in October 2018 when the court refused to grant the preliminary injunction sought by CAPPS.  The ED has indicated that it will issue guidance on the ban.

 

The Labor, Health and Human Services, Education, and Related Agencies subcommittee of the House Appropriations Committee is scheduled to hold a hearing on March 6, 2019 entitled “Protecting Student Borrowers: Loan Servicing Oversight.”

The witnesses for the hearing are:

  • Colleen Campbell, Director, Postsecondary Education, Center for American Progress
  • Preston Cooper, Research Analyst in Higher Education Policy, American Enterprise Institute
  • Joanna Darcus, Massachusetts Legal Assistance Corporation Racial Justice Fellow, National Consumer Law Center
  • Bryon Gordon, Assistant Inspector General for Audit, Department of Education Office of Inspector General
  • Shennan Kavanagh, Deputy Chief of the Consumer Protection Division, Office of Massachusetts Attorney General Maura Healy

 

 

The FDIC and the Federal Reserve Board of Governors issued a joint advisory to make financial institutions aware of a 2018 amendment to the Fair Credit Reporting Act that provides that a financial institution may, but is not required, to offer a loan rehabilitation program (Section 602 Program) to private education loan borrowers whose credit reports contain a reported default on a private education loan.

The amendment was contained in Section 602 of the Economic, Growth, Regulatory Relief and Consumer Protection Act which was enacted on May 24, 2018.  Section 602 amended FCRA Section 623 to allow financial institutions to offer a 602 Program.  The advisory addresses the requirements for a Section 602 Program, including the need for a financial institution that intends to offer a Section 602 Program to submit a written request for approval to its appropriate federal banking agency.

The advisory states that if a borrower meets the requirements of a financial institution’s Section 602 Program that satisfies the statutory requirements for such a program, the institution can remove a reported default from the borrower’s credit report and the institution will be shielded (i.e. have a safe harbor) from potential FCRA claims related to the removal.

 

The Federal Reserve Board announced last week that it was launching a new article series, Consumer & Community Context, that features original analysis about the financial conditions and experiences of consumers and communities, including traditionally underserved and economically vulnerable households and neighborhoods.

According to the Fed, the series is intended “to increase public understanding of the financial conditions and concerns of consumers and communities” and will be published periodically.  Through the series, the Fed seeks “to share insights and provide context for the complex economic and financial issues that affect individuals, communities, and the broader economy.”  Each issue will have a theme, with student loans the theme of the first issue.  The authors are described as employees of the Federal Reserve Board or the Federal Reserve System.

The title of the first article is “Can Student Loan Debt Explain Low Homeownership Rates for Young Adults?”  Its authors “estimate that roughly 20 percent of the decline in homeownership among young adults can be attributed to their increased student loan debts since 2005.”  Thus, the authors observe that although their estimates “suggest that increases in student loan debt are an important factor” in explaining the lower homeownership rates, such increases are “not the central cause of the decline.”

The authors also reference a forthcoming paper in which they find that “all else equal, increased student loan debt causes borrowers to be more likely to default on their student loan debt, which has a major adverse effect on their credit scores, thereby impacting their ability to qualify for a mortgage.”  They observe that this finding “has implications beyond home ownership” and call on policymakers to consider policies “that reduce the cost of tuition, such as greater state government investment in public institutions, and ease the burden of student loan payments, such as more expansive use  of income-drive repayment.”

The second article is titled “‘Rural Brain Drain’: Examining Millennial Migration Patterns and Student Loan Debt,” and looks at the relationship between student loan debt and individuals’ decisions to live in rural or urban areas.  The authors found that “individuals with student loan debt are less likely to remain in rural areas than those without it” and that “rural individuals who move to metro areas fare better than those who stay in rural areas across several financial and economic measures, including student loan delinquency rates and balance reduction.”  They observe that higher rates and amounts of student borrowing may be causing student loan debt to “play an increased role in the dynamics of urban-rural migration” in that “factors that previously drew individuals to rural areas may be outweighed by the desire or need for greater economic opportunity in urban centers.”  They suggest that researchers “could explore community development strategies that might create conditions that lead to more college graduates living in rural areas.”

 

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.

 

As we reported, the Department of Education announced earlier this month that it would begin implementing its “borrower defense” final rule which was issued in November 2016 by providing discharges of federal student loans made to any borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  The final rule was the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.

In addition to requiring the discharges, the final rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act.  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses.  In addition, schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions that were entered into before the final rule’s effective date.

In August 2018, following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the final rule and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the final rule that would be made by the proposal is the removal of the arbitration ban.

Although the October 2018 ruling requires the Department to implement the final rule, the Department has not yet indicated whether it will enforce the arbitration ban, such as by requiring schools to retroactively cancel arbitration agreements in existing contracts.  Politico reported last week however that Department Spokeswoman Liz Hill has indicated that guidance from the Department on mandatory arbitration agreements will be forthcoming.

 

 

 

In a December 13 posting, the Department of Education announced that on December 14, it would begin sending emails to borrowers “to inform them that the company that handles billing and other services related to their federal student loans will discharge some or all of the borrower’s loans within the next 30-90 days.”

The discharges are required by Department’s “borrower defense” final rule which was issued in November 2016 and the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.  It provides for the automatic discharge of federal student loans made to borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  Borrowers are also entitled to refunds of payments made on the loans.

According to media reports, the Department is expected to discharge $150 million in federal student loans owed by approximately 15,000 borrowers, with about half of the borrowers consisting of students who attended Corinthian Colleges.

 

The CFPB is facing criticism for not yet having issued the 2018 annual report of its Student Loan Ombudsman.  The 2017 annual report was issued in October 2017 and, like previous reports, included student loan complaint data and a discussion of such data.

The Dodd-Frank Act requires the Ombudsman to prepare an annual report “that describes the activities, and evaluates the effectiveness of the Ombudsman during the preceding year.”  Those criticizing the CFPB for not yet issuing a 2018 report emphasize the non-release of complaint data.  It should be noted however that while Dodd-Frank requires the Ombudsman to “compile and analyze data on borrower complaints regarding private education loans,” it does not impose a similar requirement for federal student loans nor does it require the Ombudsman to include complaint data in the annual report.

It is possible that the CFPB has not yet released the 2018 report because the position of Student Loan Ombudsman has remained unfilled since the August 2018 resignation of Seth Frotman, the former Ombudsman.  Mr. Frotman is now the Executive Director of the Student Borrower Protection Center.  Earlier this week, the Center issued a report containing an analysis of student loan complaints submitted to the CFPB on or after September 1, 2017.

 

 

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.