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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

 

 

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.

 

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 CFPB recently issued its final rule amending the timing requirements for transitioning between unmodified periodic statements and modified statements for consumers in bankruptcy.  Initially proposed on October 4, 2017, the CFPB finalized the amendments without further revision.  These changes will go into effect on April 19, 2018, along with the other servicing rule amendments adopted in 2016 that require sending periodic statements to consumers in bankruptcy.  (Part of the 2016 amendments were implemented in October 2017, and the remaining amendments will be implemented April 19, 2018.)

Under the amended rule, the single billing cycle exemption is replaced with a more uniform single statement exemption, when a mortgage servicer transitions between an unmodified and a modified bankruptcy periodic statement.  Accordingly, after a triggering event (e.g., the borrower enters bankruptcy, personal liability is discharged, or the borrower exits bankruptcy), the servicer is exempt from providing the next periodic statement or coupon book that would otherwise be required, regardless of when in the billing cycle the triggering event occurs.  As previously drafted, the exemption applied for the next periodic statement or coupon book only if the payment due date for that ensuing billing cycle was 14 days or less after the triggering event.

The amendments provide welcome help to mortgage servicers by eliminating an aspect of the new bankruptcy requirements that was unnecessarily complex and difficult to operationalize.

 

 

 

The District of Columbia Department of Insurance, Securities, and Banking (DISB) has released for comment a revised “Student Loan Borrower’s Bill of Rights.”  The District of Columbia Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 (Servicing Act), which became effective February 18, 2017, directed the DISB to draft the Bill of Rights.  (In September 2017, pursuant to the Servicing Act, the DISB began licensing student loan servicers operating in D.C.)

As originally released in October 2017, the Bill of Rights contained five articles.  We commented that instead of tracking the student loan servicing principles articulated by other regulators, the Bill of Rights seemed to borrow copiously from principles for the origination, servicing, and collection of small business loans adopted by the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates.  In the revised Bill of Rights, which contains 17 articles, the DISB now appears to be proposing student loan servicing principles that more closely resemble those articulated by other regulators.

The revised Bill of Rights contains numerous requirements that were not in the original version.  For example, the revised version contains requirements concerning payment allocation and partial payments (Article IV), monthly billing statements (Articles V and VI), annual tax statements (Article VII), schedule of fees (Article IX), reporting to credit bureaus (Article XI), access to default diversion services (Article XII), and refinancing disclosures (Article XIII).  However, the DISB does not identify the source of those rights, which are not separately set forth in the Servicing Act.

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has sent a letter to the DISB commenting on the revised Bill of Rights.  As a general matter, NCHER expresses its view that the principles should not create enforceable obligations and highlights the enormous compliance burden that would be created for servicers if the DISB were to attempt to require federal and private student loan servicers to follow separate servicing routines for D.C. residents.  We agree, and find it particularly troubling that the DISB appears to be seeking to create obligations that may not only be inconsistent with the terms of the underlying loans but also preempted by federal law.  

With respect to specific provisions of the revised Bill of Rights, NCHER’s comments include the following:

  • Article IV provides that a borrower “has the right to have his or her payments applied to outstanding loan balance(s) timely, appropriately, and fairly” and that the servicer’s application process “shall result in partial payments being applied in the best interest” of the borrower.  NCHER questions what it means to apply payments “appropriately,” “fairly,” and “in the best interest” of the borrower and states that servicers currently post their payment allocation procedures but “should not be held to a vague standard that could be interpreted to create fiduciary responsibilities.”
  • Articles V and VI provide that a borrower has a right to “a monthly billing statement” and quarterly periodic statements containing certain information.  NCHER questions whether these articles establish separate servicing requirements for D.C. residents and comments that if so, they “would be overly burdensome to require that monthly payments be sent to borrowers in an in-school deferment.”
  • Article IX provides that a borrower has a right to have the servicer’s current schedule of fees that could be charged to the borrower.  NCHER comments that this article “seems to be based on an inaccurate understanding of roles of the various players in the student loan industry.”  It notes that as a general matter, “loan fees such as late fees and NSF fees are charged by lenders, not servicers, and are disclosed as part of the lender’s Truth-in-Lending Act requirements.”  NCHER also comments that if the article purports to cover expedited payment or convenience fees, “it should be understood that these optional payment services are selected by the borrower.”
  • Article XII provides that a borrower has the right to access “default diversion services” from the servicer that notifies the borrower when he or she is at risk of default and requires the servicer to assist the borrower with avoiding a default.  NCHER raises numerous questions about this article, including what timeframe the DISB contemplates using when measuring whether a servicer has appropriately notified a borrower that he or she is at risk of default and what “default diversion services” are contemplated by the DISB.
  • Article XIII provides that to the extent a servicer or an agent of a servicer provides any financing to a borrower, including a loan modification or refinancing, the borrower has a right  to receive financing that complies with certain principles.  Such principles include that the financing “is in the best interest” of the borrower.  NCHER comments that this article also “misconstrues the role of servicers since they do not make loans or extent credit” and that the reference to financing that “is in the best interest” of the borrower “sets up a fiduciary or suitability standard where compliance may be impossible.”

 

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

The Act includes the following key provisions:

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

 

 

 

 

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

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

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

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

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

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

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

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

The standards address the following ten areas:

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

The CFPB recently issued two updates for its Mortgage Servicing Rule amendments to Regulations X and Z.  Issued on August 4, 2016, the Mortgage Servicing Final Rule amended various aspects of the existing Mortgage Servicing Rules.  These changes will become effective either on October 19, 2017 or April 19, 2018.

First, the CFPB issued non-substantive, technical corrections to the Mortgage Servicing Final Rule issued in 2016.  The corrections include several typographical errors, revisions to show the correct effective date for certain provisions, and a citation correction.

The CFPB also issued non-binding policy guidance for a three-day period of early compliance with the amended Mortgage Servicing Rules.  According to the Bureau, the policy guidance was issued in response to industry concerns over operational challenges presented by the mid-week effective date.  Industry participants sought the ability to implement and test these changes over the weekend prior to the effective date.

Accordingly, the non-binding policy guidance states that the CFPB does not intend to take supervisory or enforcement action for violations of existing Regulation X or Regulation Z provisions, resulting from a servicer’s compliance with the new requirements, up to three days before the applicable effective dates.  Therefore, for amendments that become effective on October 19, 2017, the three-day period will cover Monday, October 16 through Wednesday, October 18.  For amendments that will take effect on April 19, 2018, the three-day period will cover Monday, April 16 through Wednesday, April 18.