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Rhode Island creates Student Loan Bill of Rights Act
On July 15, the Rhode Island governor signed HB 5936, which creates the “Student Loan Bill of Rights Act” to define responsibilities for student loan servicers and establish guidelines related to the issuance of postsecondary loans. Notably, federal or state chartered banks or credit unions, as well as their wholly owned subsidiaries, that originate student loans or act as servicers are exempt from the majority of the act’s requirements, including sections 19-33-4, 19-33-6 through 19-33-11, 19-33-12(9), and 19-33-14.
The act requires non-exempt student loan servicers that service at least six or more postsecondary student loans within a consecutive 12 month period to comply with certain requirements, including (i) registering with the Department of Business Regulation (Department) no later than September 30 “or within 30 days of conducting student loan servicing, whichever is earlier”; (ii) maintaining loan transaction records; (iii) filing annual reports with the Department; (iv) disclosing repayment program terms and refinance options to borrowers; and (v) responding to borrower inquiries within specified time frames concerning, among other things, credit reporting disputes, application of payments, and record transfers.
Additionally, the act prohibits student loan servicers from, among other things, (i) employing any scheme designed to defraud or mislead borrowers; (ii) engaging in unfair or deceptive practices; (iii) misapplying payments; (iv) failing to report payment histories to credit bureaus; (iv) failing to communicate with a borrower’s authorized representative; (v) making false statements or omitting material facts in connection with information filed with a government agency or provided in the course of an investigation; and (vi) failing to properly evaluate a borrower’s eligibility for public service loan forgiveness programs or income-driven repayment programs.
The act gives the Department authority to conduct investigations and examinations of registered servicers, as well as impose fines of not more than $2,000 per violation. Furthermore, the Rhode Island attorney general may enforce violations of prohibited conduct as unlawful acts or practices. The act is effective immediately.
The Department of Education has issued an interpretation that servicers that are servicing Direct Loans for the Department of Education would be exempt from state licensing and substantive requirements, but the act does not accommodate that interpretation.
FTC seeks permanent injunction against student loan debt relief operation
On July 11, the FTC announced it was charging a student loan debt relief operation with violations of the FTC Act and the Telemarketing Sales Rule for allegedly engaging in deceptive practices when marketing and selling their debt relief services. The complaint alleges the operators of the scheme allegedly, among other things, (i) charged borrowers illegal advance fees; (ii) falsely claimed they would service and pay down their student loans; and (iii) obtained borrowers’ credentials in order to change consumers’ contact information and prevent communications from loan servicers. According to the FTC, the defendants allegedly collected more than $23 million from consumers, and when asked why their payments were not being applied to their loans, the defendants “informed consumers that their entire payments had been collected as ‘handling’ or ‘management’ fees.” On July 10, the U.S. District Court for the Central District of California issued a temporary restraining order and asset freeze at the FTC’s request. The FTC seeks a permanent injunction against the defendants to prevent future violations, as well as redress for injured consumers through “rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.”
Maine adopts legislation to license and regulate student loan servicers
On June 20, the Maine governor signed LD 995, which establishes a student loan bill of rights to license and regulate student loan servicers. Notably, supervised financial organizations, financial institution holding companies, mutual holding companies, and their wholly owned subsidiaries are exempt from the entire requirements of the bill; and licensed banks, credit unions, and their wholly owned subsidiaries, as well as certain Maine financial institutions, are exempt from the licensing requirements.
The bill requires that any student loan servicer who is not exempt from the provisions of the bill—defined as, “a person, wherever located, responsible for the servicing of a student education loan to a student loan borrower”—obtain a license from the Superintendent of Consumer Credit Protection within the Department of Professional and Financial Regulation. Licenses may be renewed for 24-month periods, and renewal applications must be filed on or before September 1 of the year in which the license expires (or will be subject to a late fee); if not renewed, a license will expire on September 30 of the odd-numbered year following its issuance. Student loan servicers under contract with the U.S. Department of Education will be automatically issued limited, irrevocable licenses.
The bill requires non-exempt student loan servicers, including licensed banks or credit unions and their wholly owned subsidiaries, to comply with certain requirements, including (i) responses to written inquires; (ii) application of payments; and (iii) repayment program evaluations. Additionally, the bill prohibits student loan servicers from, among other things, (i) engaging in unfair or deceptive practices; (ii) misapplying payments; (iii) failing to report payment histories to credit bureaus; and (iv) failing to respond within 15 days to borrower complaints submitted to the servicer by the student loan ombudsman. Violations of the bill are considered an unfair trade practice under the Maine Unfair Trade Practices Act. The bill gives the Superintendent the authority to conduct investigations and examinations and requires the Superintendent to adopt rules implementing the legislation. The law is effective January 1, 2020.
CFPB issues latest fair lending report to Congress
On June 28, the CFPB issued its seventh fair lending report to Congress, which outlines the Bureau’s efforts in 2018 to fulfill its fair lending mandate. According to the report, in 2018, the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities that continued from years past such as mortgage origination, mortgage servicing, and small business lending. The Bureau also noted two new focus areas for fair lending examinations or investigations: (i) student loan origination, specifically, whether there is discrimination in underwriting and pricing; and (ii) debt collection and model use, specifically, whether there is discrimination in governing auto servicing and credit card collections, including the use of models that predict recovery outcomes. Additionally, the report highlighted several other Bureau activities from 2018, including, among other things (i) issuing guidance to facilitate the implementation of the August 2018 HMDA final rule (covered by InfoBytes here); and (ii) recommending supervisory reviews of third-party credit scoring models, noting that the “use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.”
7th Circuit: HEA does not preempt affirmative misrepresentation claims against student loan servicer
On June 27, the U.S. Court of Appeals for the 7th Circuit vacated the dismissal of an action against a student loan servicer, concluding a borrower is not barred by the Higher Education Act from asserting state-law claims against a student loan servicer if the borrower reasonably and detrimentally relied on affirmative misrepresentations. The class action filed against a federal student loan servicer alleged that the servicer steered borrowers who were struggling to make payments into repayment plans that benefited the servicer to the detriment of borrowers, notwithstanding claims on the servicer’s website indicating that trained experts would assist each borrower choose among options beneficial to the borrower based on individual circumstances. In addition to violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, the complaint alleged that the servicer’s conduct constituted constructive fraud and negligent misrepresentation under Illinois law. The district court dismissed the claims, holding that they were expressly preempted by Section 1098g of the Higher Education Act (HEA), which states “‘[l]oans made, insured, or guaranteed pursuant to a program authorized by title IV of the [HEA] of 1965 (20 U.S.C. 1070 et seq.) shall not be subject to any disclosure requirements of any State Law.’”
On appeal, the 7th Circuit disagreed, concluding the district court’s decision was “overly broad.” Specifically, the appellate court found that the statements made on the servicer’s website were “affirmative misrepresentations,” which would not be covered under the HEA. The appellate court distinguished the instant case from the 9th Circuit’s decision in Chae v. SLM Corp, noting the plaintiffs in Chae complained about alleged “failures to disclose key information in specific ways, such as loan terms and repayment requirements.” Here, however, the 7th Circuit panel determined that the preemption principles enunciated in the Chae opinion do not extend to claims about the servicer’s “affirmative misrepresentations in counseling, where [the servicer] could have avoided liability under state law by remaining silent (or telling the truth) on certain topics.”
CFPB settles with defunct schools’ student loan management company
On June 14, the CFPB announced a settlement with a company that manages student loans for a defunct for-profit educational institution resolving allegations it provided substantial assistance to the institution in engaging in unfair acts and practices in violation of the Consumer Financial Protection Act (CFPA). As previously reported by InfoBytes, the Bureau filed suit against the now-defunct for-profit institution in February 2014. The Bureau’s complaint against the institution alleged that the institution offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The complaint asserts that the institution then forced borrowers into “high-interest, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations, when their short-term loans became due. In the complaint in the current matter, filed the same day as the proposed stipulated judgment, the Bureau alleges that the management company: (i) was substantially involved in the creation and operation of the loan program, including raising money and overseeing the origination and servicing of the loans; and (ii) knew, or was reckless in not knowing, the risks associated with the loan program. The stipulated judgment requires the company to (i) cease enforcement and collection efforts on all outstanding loans associated with the program; (ii) discharge all outstanding loans associated with the program; and (iii) direct credit reporting agencies to delete consumers’ trade lines associated with the loan program. The company must also provide notice of these actions to affected consumers. The proposed judgment does not include a monetary penalty or require refunds to consumers.
State AGs request automatic discharge of disabled veterans’ student loan debt
On May 24, Attorneys General from 47 states, American territories, and Washington D.C., sent a letter to Secretary Betsy DeVos of the U.S. Department of Education (Department) to implement an automatic discharge process for the student loans of veterans who are totally and permanently disabled or otherwise unemployable (known as a “TPD discharge”). The letter asserts that while the Higher Education Opportunity Act of 2008 requires that the Department discharge the student loans of veterans who are totally and permanently disabled as a result of service, the Department requires eligible veterans to take “affirmative steps to secure the loan forgiveness,” which “may prove [to be] insurmountable obstacles to relief for many eligible veterans due to the severe nature of their disabilities.” According to the letter, the Department has identified over 42,000 veterans who are eligible for discharges and carry over $1 billion in dischargeable student loan debt, yet fewer than 9,000 of the eligible veterans had applied for the discharge as of April 2018. In response to the Department’s concerns about the veterans’ potential tax liability, the Attorneys General pointed out that federal tax law excludes loan discharges for disabled borrowers from taxable income. Even if the discharge increases their state tax bill, the Attorneys General argued that most borrowers would prefer to have their outstanding loans completely discharged, and those that do not could be given notice and an opportunity to opt out. Because there is no statutory requirement that eligible veterans apply for the TPD discharges, the Attorneys General urged the Department to implement a program to automatically discharge the outstanding loans as expeditiously as possible.
Colorado enacts student loan servicer act
On May 13, the Colorado governor signed SB19-002, the “Colorado Student Loan Servicers Act,” which requires an entity that services a student education loan owned by a Colorado resident to be licensed by the state. Under the bill, “student loan servicer” is generally defined as a person that receives a scheduled periodic payment from a student loan borrower and applies the payments of principal and interest with respect to the amounts received from such a borrower, and provides other similar administrative services. The bill requires any person seeking to act as a student loan servicer to be licensed through the state on or after January 31, 2020, and specifies the procedures for obtaining and renewing the license. Federal student loan servicers are automatically issued the license under the bill.
Among other things, the bill also specifies particular acts that are required of the student loan servicer, including (i) providing substantive responses within 30 days of receiving a written inquiry from a borrower; (ii) inquiring of borrowers as to how to apply overpayments; and (iii) applying partial payments in a manner that minimizes late fees and negative credit reporting. Additionally, the bill specifies prohibited acts, including (i) engaging in an unfair or deceptive practice toward any person or misrepresenting or omitting any material information in connection with servicing student loans; (ii) misapplying payments to the loan balance; and (iii) failing to report both favorable and unfavorable payment history to a consumer reporting agency. A violation of the bill is considered a deceptive trade practice, and the bill provides a private right of action for borrowers to seek punitive damages for violations. The bill is expected to take effect on August 2.
Kraninger says Dept. of Ed hindering CFPB's supervision of student loan servicers
On May 16, Senator Warren (D-MA) released an April 23 letter from CFPB Director Kathy Kraninger outlining the Bureau’s efforts to oversee student loan servicers, which was sent in response to an inquiry by six democratic senators. As previously covered by InfoBytes, the senators wrote to the CFPB seeking additional information on the Bureau’s oversight of student loan companies and servicers involved in the administration of the federal Public Service Loan Forgiveness Program (PSLF) and asking about the effect of the Department of Education’s (Department) December 2017 guidance to loan servicing contractors not to produce documents directly to other government agencies. In response, Kraninger noted that since December 2017, the Bureau has conducted “several exams” of student loan servicers, some that included questions regarding PSLF. However, and most notably, Kraninger stated that, “[s]ince December 2017, student loan servicers have declined to produce information requested by the Bureau for supervisory examinations related to Direct Loans and Federal Family Education Loan Program (FFELP)…based on the Department’s guidance.” The Bureau has pursued “options” to obtain the information necessary for these examinations, according to Kraninger. Additionally, Kraninger noted that creating a new Memorandum of Understanding with the Department is a priority for the Bureau, once a new Student Loan Ombudsman is hired.
Maryland establishes student loan servicer provisions, prohibits unfair, abusive, or deceptive trade practices
On March 13, the Maryland governor signed HB 594, which establishes various provisions with respect to student loan servicing in the state. Among other things, student loan servicers are prohibited from (i) employing—either directly or indirectly—“any scheme, device, or artifice to mislead a student loan borrower”; (ii) engaging in any unfair, abusive, or deceptive trade practice with regard to the servicing of student loans; (iii) misrepresenting or omitting material information, including fees, payment amounts, repayment options, terms and conditions, or student borrower obligations; (iv) obtaining property through the misrepresentation or omission of material fact; (v) knowingly or recklessly misapplying or refusing to correct a misapplication of payments to the balance of any student loan; (vi) providing inaccurate information to a consumer credit reporting agency; (vii) refusing to communicate with a student loan borrower’s authorized representative; (viii) making false statements or omitting material facts in connection with an investigation; and (ix) violating federal laws concerning student loan servicing. In addition, on or after February 1, 2020, student loan servicers are also prohibited from “allocat[ing] a nonconforming payment in a manner other than as directed by the student loan borrower” provided the borrower meets certain criteria. The Act also requires student loan servicers to respond to a borrower’s inquiry or complaint within 30 days of receipt, authorizes the Commissioner of Financial Regulation (Commissioner) to enforce the Act’s provisions, and provides that the Student Loan Ombudsman many refer borrower complaints to the Commissioner for investigation. The Act is effective October 1.