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.

Education Finance Council, a national trade association representing state-based nonprofit higher education finance organizations, has asked the Department of Education to “publicly state” that the ED’s rules governing servicers of federal student loans preempt state laws and regulations that would impose conflicting requirements on such servicers.

In a letter to Education Secretary Betsy DeVos, EFC expresses concern that state efforts to impose regulations on student loan servicers contracted by the federal government to service federal student loans threaten “to add an unnecessary web of regulations which are both duplicative and potentially contradictory to existing federal regulations and policies.”  EFC notes that the ED has previously “made clear its position on the preeminence of federal law in student loan servicing,” and asks the ED to make it clear “to both the public and to state entities that seek to impose their own conflicting regulations on federal student loan servicing contractors” that federal law takes precedence in the event of a conflict between federal and state laws.

 

 

The CFPB will hold a public event on June 22, 2017 in Raleigh, N.C. about student loan servicing. The CFPB’s announcement provides no description other than that the event will feature remarks from Director Cordray and North Carolina Attorney General Josh Stein.

The CFPB may be labeling the event a “public event” rather than a “field hearing” because it is not inviting “witnesses” to provide “testimony” as it typically does for field hearings.  However, similar to its field hearings, it is likely the CFPB will use the event as a venue for announcing a new development involving student loan servicing.  Isaac Boltansky of Compass Point has suggested that that the CFPB may announce the release of either an update on the industry’s consumer complaint profile or an updated supervisory highlights report.  It is also possible that the CFPB will discuss the comments it has received in response to the notice it published in the Federal Register in February 2017 regarding its plan to require student loan servicers to report quarterly data on aggregated servicing metrics and borrower outcomes.

Mr. Stein, the North Carolina AG, was among the group of state AGs who sent a letter to U.S. Department of Education Secretary Betsy DeVos in April 2017 criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.  He also recently announced the settlement of a lawsuit involving an alleged student loan debt relief scam.  Mr. Stein might discuss these developments at the CFPB event.

The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016.  The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers.  The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:

  • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default.  According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
  • Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
  • Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
  • Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting.  The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
  • Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.

The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers.  The CFPB also urged policymakers and industry to consider various actions, including enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment.

In the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.”  It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.

Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards.  The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”

 

The CFPB’s newly-released Spring 2017 edition of Supervisory Highlights covers supervisory activities generally completed between September and December 2016.  The report indicates that  supervisory resolutions resulted in restitution payments of approximately $6.1 million to more than 16,000 consumers and notes that “[r]ecent non-public resolutions were reached in several auto finance origination matters.”  It also indicates that recent supervisory activities have either led to or supported five recent public enforcement actions, resulting in over $39 million in consumer remediation and $19 million in civil money penalties.  The five enforcement actions are described in the report.  (They include the CFPB’s March 2017 consent order with Experian and its December 2016 consent order with Moneytree.)

The report includes the following:

Mortgage origination.  The report discusses compliance with the Regulation Z ability-to-repay (ATR) requirements, specifically how examiners assess a creditor’s ATR determination that includes reliance on verified assets rather than income.  It states that to evaluate whether a creditor’s ATR determination is reasonable and in good faith, examiners will review relevant lending policies and procedures and assess the facts and circumstances of each extension of credit in sample loan files.  After determining whether a creditor considered the required underwriting factors, examiners will determine whether the creditor properly verified the information it relied upon to make an ATR determination.  When a creditor relies on assets and not income for an ATR determination, examiners evaluate whether the creditor reasonably and in good faith determined that the consumer’s verified assets were sufficient to establish the consumer’s ability to repay the loan according to its terms in light of the creditor’s consideration of other required ATR factors (such as the consumer’s mortgage payments on the transaction and other debt obligations).  The report states that in considering such factors, a creditor relying on assets and not income could, for example, assume income is zero and properly determine that no income is necessary to make a reasonable determination of the consumer’s ability to repay the loan in light of the consumer’s  verified assets.  (The report notes that a creditor that considers monthly residual income to determine repayment ability for a consumer with no verified income could allocate verified assets to offset what would be a negative monthly residual income.)

The report also discusses a creditor’s reliance on a down payment to support the repayment ability of a consumer with no verified assets or income.  It states that a down payment cannot be treated as an asset for purposes of considering a consumer’s assets or income under the ATR rule and, standing alone, will not support a reasonable and good faith determination of ability to repay.  The report also indicates that even where a loan program as a whole has a history of strong performance, the CFPB “cannot anticipate circumstances where a creditor could demonstrate that it reasonably and good faith determined ATR for a consumer with no verified income or assets based solely on down payment size.”

Mortgage servicing.  The report indicates that examiners continue to find “serious problems” with the loss mitigation process at certain servicers, including “one or more servicers” that after failing to request additional documents from borrowers needed to obtain complete loss mitigation applications denied the applications for missing such documents.  In particular, examiners found that “one or more servicers” did not properly classify loss mitigation applications as facially complete after receiving the documents and information requested in the loss mitigation acknowledgment notice and failed to provide the Regulation X foreclosure protections for facially complete applications to those borrowers.  Examiners also determined that “servicer(s)” violated Regulation X by failing to maintain policies and procedures reasonably designed to properly evaluate a loss mitigation applicant for all loss mitigation options for which the applicant might be eligible.  Another servicing issue observed by examiners was the use of phrases such as “Misc. Expenses” or “Charge for Service” on periodic statements.  Examiners found such phrases to be insufficiently specific or adequate to comply with the Regulation Z requirement to describe transactions on periodic statements.

Student loan servicing.  Examiners found that “servicers” had engaged in an unfair practice by failing to reverse the financial consequences of an erroneous deferment termination, such as late fees charged for non-payment when the borrower should have been in deferment, and interest capitalization.  Examiners also found that “one or more servicers” had engaged in deceptive practices by telling borrowers that interest would capitalize at the end of a deferment period but, for borrowers who had been placed in successive periods of forbearance or deferment, capitalized interest after each period of deferment or forbearance.  Although the CFPB provides no support for this statement, it asserts that “[r]easonable consumers likely understood this to mean interest would capitalize once, when the borrower ultimately exited deferment and entered repayment.”

Service provider examinations.  We recently blogged about the announcement made at an American Bar Association meeting by Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, that the CFPB had begun to examine service providers on a regular, systematic basis, particularly those supporting the mortgage industry.  In the report, the CFPB discusses its plans to directly examine key service providers to institutions it supervises.  It states that its initial work involves conducting baseline reviews of some service providers to learn about their structure, operations, compliance systems, and compliance management systems.  The CFPB also confirms that “in more targeted work, the CFPB is focusing on service providers that directly affect the mortgage origination and servicing markets.”  The CFPB plans to shape its future service provider supervisory activities based on what it learns through its initial work.

Fair lending.  The report indicates that as of April 2017, examiners are relying on updated proxy methodology for race and ethnicity in their fair lending analysis of non-mortgage products.  The updated methodology reflects new surname data released by the U.S. Census Bureau in December 2016.

Spike and trend complaint monitoring.  The report indicates that, for purposes of its risk-based prioritization of examinations, the CFPB is now continuously monitoring spikes and trends in consumer complaints.  To do so, the CFPB is using an automated monitoring capability that relies on algorithms to “identify short, medium, and long-term changes in complaint volumes in daily, weekly, and quarterly windows.”  The CFPB states that the tool works “regardless of company size, random variation, general complaint growth, and seasonality” and is intended to be an “early warning system.”  Unfortunately, the validity of the complaints does not seem to factor into the algorithm.

 

The CFPB has issued its April 2017 complaint report that highlights student loan complaints.  The report also highlights complaints from consumers in Nevada and the Las Vegas metro area.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

General findings include the following:

  • As of April 1, 2017, the CFPB handled approximately 1,163,200 complaints nationally, including approximately 28,000 complaints in March 2017.
  • Debt collection continued to be the most-complained-about financial product or service in March 2017, representing about 31 percent of complaints submitted.
  • Debt collection complaints, together with complaints about credit reporting and student loans, collectively represented about 65 percent of the complaints submitted in March 2017.
  • Complaints about student loans showed the greatest month-over-month decrease, decreasing 20 percent from February 2017.  At the same time, student loans had the greatest percentage increase based on a three-month average, increasing about 325 percent from the same time last year (January 2016 to March 2016 compared with January 2017 to March 2017).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior CFPB monthly complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increasing percentages represented by student loan complaints received by the CFPB most likely reflected the change in where such complaints were sent.  For the first time, the CFPB has acknowledged the impact of such change, stating “Part of [the 325 percent year-to-year increase] can be attributed to the CFPB updating its student loan complaint form to accept complaints about Federal student loan servicing, starting in late February 2016.”
  • Payday loans showed the greatest percentage decrease based on a three-month average, decreasing about 29 percent from the same time last year (January 2016 to March 2016 compared with January 2017 to March 2017).  Complaints during those periods decreased from 417 complaints in 2016 to 298 complaints in 2017.  In the February and March 2017 complaint reports, payday loans also showed the greatest percentage decrease based on a three-month average.

Findings regarding student loan complaints include the following:

  • The CFPB has handled approximately 44,400 student loan complaints since July 21, 2011, representing 4 percent of all complaints.
  • The most common issues identified in complaints involved problems dealing with lenders or servicers and being unable to repay loans.
  • Federal student loan borrowers contacting servicers about financial distress complained about receiving information about hardship forbearance and deferment instead of options such as income-driven repayment plans.  Borrowers also complained about difficulty enrolling in such plans and unclear guidance when seeking to switch plans.
  • Federal student loan borrowers reported not receiving sufficient information from servicers to meet recertification deadlines for income-driven repayment plans.  They also complained about misapplication of payments, such as payments being applied to all accounts handled by a servicer rather than specific accounts and overpayments intended to reduce the principal balance being treated as early payments that put the accounts in paid ahead status.  Borrowers also reported various problems with Public Student Loan Forgiveness and other forgiveness programs, such as not being enrolled in a qualifying program despite years of making payments.
  • Non-federal loan borrowers complained about misapplied payments and inaccurate accounting of payments.
  • Federal and non-federal loan borrowers reported issues involving incorrect reporting to consumer reporting companies.  (The CFPB does not provide enough information in the report to determine the number of complaints that involved the issues described above.)

Findings regarding complaints from Nevada consumers include the following:

  • As of April 1, 2017, approximately 14,600 complaints were submitted by Nevada consumers of which approximately 10,800 were from Las Vegas consumers.
  • Debt collection was the most-complained-about product, representing 29 percent of all complaints submitted by Nevada consumers, which was higher than the national average rate of 27 percent of all complaints submitted by consumers.
  • Average monthly complaints received from Nevada consumers increased 17 percent from the same time last year (January 2016 to March 2016 compared with January 2017 to March 2017), lower than the increase of 19 percent nationally.

 

 

A group of 20 state attorneys general, the D.C. attorney general, and the Executive Director of the Office of Consumer Protection of Hawaii have sent a letter to U.S. Department of Education Secretary Betsy DeVos criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.

The memoranda were intended to guide the development of provisions in new contracts to be entered into by the ED with servicers it selected for a new federal student loan servicing system and included directions to contractors to designate, train, and appropriately compensate specialized servicing personnel to assist at-risk and certain other borrowers. and standards to provide consistency in the handling, processing, and application of payments by servicers and other servicing practices.  Secretary DeVos had indicated that withdrawal of the memoranda was necessary to “negate any impediment, ambiguity or inconsistency” in the ED’s approach to acquiring new federal student loan servicing capabilities.

In their letter, the state AGs assert that the ED’s “stated rationale does not justify summarily denying student borrowers [the] basic protections [provided by the new servicing standards].”  The state AGs highlight requirements for servicers to apply overpayments to loans with the highest interest rates unless instructed otherwise by the borrower and to inform a borrower of income-driven repayment options before placing the borrower in forbearance or deferment.  They note that ‘[s]ervicers’ failure to comply with such standards may be independent violations of state law.”