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On December 17, eight Senate Democrats wrote to CFPB Director Kathy Kraninger urging the Bureau to fulfill its statutory obligations related to the oversight of student loan servicers who collect loans guaranteed by the federal government. In the letter, the Senators express concern over what they consider the Bureau’s “unacceptable” abandonment of its supervision and enforcement activities related to federal student loan servicers, and discuss the Department of Education’s termination of two Memoranda of Understanding (MOUs) in 2017 that previously permitted the sharing of information in connection with the oversight of federal student loans. (Previously covered by InfoBytes here.) According to the Senators, Kraninger’s testimony before the Senate Banking Committee in October (covered by InfoBytes here) reaffirmed the Bureau’s responsibility and ability to examine entities engaged in federal and private student loans. In addition, the Senators claim that Kraninger testified that the Bureau and the Department were “discussing how to move forward in an effective way” to ensure they were overseeing student loan servicers. However, the Senators note that “nearly two months later, the Bureau and Department still have not reestablished MOUs, and the Bureau still has not resumed examinations of federal student loan servicers.” In addition to calling on Kraninger to “take immediate steps, including seeking a court order” requiring the Department to provide access to borrower information so the Bureau can resume examinations of student loan servicers, the Senators request information concerning the MOUs as well as a timeline from the Bureau on when it will resume its examinations.
On October 28, 23 Senate Democrats wrote to CFPB Director Kathy Kraninger urging the Bureau to open an enforcement investigation into a Pennsylvania-based student loan servicer’s alleged mismanagement of the Public Service Loan Forgiveness (PSLF) program. The Senators contend that the servicer’s failure to properly administer the PSLF program “has resulted in widespread violations of federal law,” referring to reports by the CFPB, the Government Accountability Office, and the Department of Education Inspector General that claim that missteps and errors have caused public service workers to be denied loan forgiveness. The CFPB’s Student Loan Ombudsman’s report cites to the servicer’s “‘flawed payment processing, botched paperwork and inaccurate information,’” while the GAO report claims “that public service workers [have] improperly been denied loan forgiveness because of [the servicer’s] inability to properly account for qualifying payments and reliance on inaccurate information.” The letter requests that the Bureau investigate the servicer’s servicing practices, its management of the PSLF program, and other potential violations of federal consumer financial laws.
As previously covered by InfoBytes, on October 3, the New York attorney general filed an action against the servicer for violating the Consumer Financial Protection Act and New York law through its mishandling of income driven repayment plans and misconduct related to the administration of PSLF program applications.
On October 9, NYDFS announced the creation of the Student Debt Advisory Board, which will advise on consumer protection, student financial products and services, as well as issues facing communities significantly impacted by student debt. The new advisory board is a part of NYDFS’s “Step Up for Students” initiative intended to “safeguard student loan borrowers from discriminatory or predatory practices by student loan servicers.” The announcement comes the same day legislation to protect student borrowers takes effect in the state. As previously covered by InfoBytes, the law requires student loan servicers to comply with requirements set forth in amendments to the state’s banking law and be licensed by NYDFS in order to service student loans owned by residents of New York. Additionally, servicers must adhere to standards similar to regulations that govern mortgages and other lending products.
On September 24, the Washington State Department of Financial Institutions (DFI) will hold a rulemaking hearing to discuss amendments concerning mortgage loan originators (MLOs) as well as provisions related to student loan servicers. The proposed amendments will amend rules impacting Washington’s Consumer Loan Act and the Mortgage Broker Practices Act, including those related to the regulation of student loan servicers under a final rule that went into effect January 1. (See previous InfoBytes coverage on DFI’s adoption of amendments concerning student loan servicers here.) According to DFI, the proposed amendments are currently scheduled to take effect November 24.
Among other proposed changes impacting MLOs are additional disclosure requirements concerning interest rate locks. Under the proposed amendments, MLOs will be required to provide a new interest rate lock agreement to a borrower within three business days of a locked interest rate change. Valid reasons for a change in a locked interest rate include changes in loan value, credit score, or other factors that may directly affect pricing. The amendments will also permit MLOs to include a prepayment penalty or fee on an adjustable rate residential mortgage loan provided “the penalty or fee expires at least sixty days prior to the initial reset period.” Among other provisions, the amendments also stipulate that a loan processor may work on files from an unlicensed location provided the processor accesses the files directly from the licensed mortgage broker’s main computer system, does not conduct any of the activities of a licensed MLO, and the licensed MLO has in place safeguards to protect borrower information.
The proposed amendments also contain several changes applicable to student loan servicers regulated under the Consumer Loan Act, including that: (i) licensees servicing student loans for borrowers in the state “may apply to the director to waive or adjust the annual assessment amount”; (ii) licensees are required to disclose to all service members their rights under state and federal service member laws and regulations connected to their student loans; and (iii) student loan servicers must review all student loan borrowers against the Department of Defense’s database to ensure borrower entitlements are applied appropriately, and maintain written policies and procedures for this practice. The proposed amendments also state that compliance with federal law is sufficient for complying with several Washington requirements applicable to student loan servicers, including borrower payment provisions.
On August 15, NYDFS announced a settlement with a student loan servicer and its parent company to resolve allegations that the companies failed to comply with state financial services law requirements when servicing, purchasing, and originating student financing agreements. According to the consent order, the student loan servicer—which, among other things, services student financing agreements that constitute retail installment obligations within the meaning of N.Y. Banking Law § 491(6-a)—allegedly engaged in the business of a sales finance company without being licensed by NYDFS and failed to follow the E-Sign Act’s disclosure requirements. NYDFS also claimed the companies failed to disclose to consumers (i) their right to receive non-electronic TILA disclosures; (ii) how to withdraw consent for notice by electronic means; and (iii) the method for requesting paper copy TILA disclosures. Furthermore, the companies also allegedly failed to provide consumers with a statement of the “requirements for access to and retention of TILA disclosures provided to them electronically.” In addition, NYDFS stated that the parent company provided New York consumers with promissory notes containing clauses purportedly allowing for the capitalization/compounding of interest under certain circumstances, which violated state banking laws, even though the companies contended they did not actually capitalize interest.
In addition to paying a $203,000 civil penalty and $33,309 in disgorgement, the student loan servicer will apply for a sales finance company license and a student loan servicer license, and the companies will correct issues concerning their capitalization of interest as well as remove incorrect information from their loan documents.
According to NYDFS, New York’s student loan servicer licensing law, which requires companies servicing student loans held by state residents to meet new standards, takes effect October 9.
On July 31, NYDFS published a notice of proposed rulemaking in the New York State Register. The proposed rule would implement legislation related to the supervision, regulation, and licensing of private student loan servicers passed in March as part of the state’s FY 2020 budget. As previously covered by InfoBytes, unless exempt from certain provisions, student loan servicers must comply with the requirements set forth in the amendments to the banking law and be licensed by NYDFS in order to service student loans owned by residents of New York. Entities exempt from the licensing requirements include servicers of federal student loans, banking organizations, foreign banking organizations, national banks, federal savings associations, federal credit unions, or any bank or credit union organized under the laws of any other state.
Among other things, the proposed regulation outlines servicing standards, examination guidelines, cybersecurity compliance requirements, and definitions for the terms “unfair” and “abusive.” A list of prohibited practices is also provided, which includes: (i) employing schemes to defraud or mislead borrowers; (ii) engaging in unfair, deceptive, abusive, or predatory acts or practices; (iii) “misapplying payments to the outstanding balance of any student loan or to any related interest or fees”; (iv) making false statements or omissions connected to information provided to a government agency; (v) failing to promptly respond to communications received from NYDFS; and (vi) failing to provide responses to consumer complaints.
Generally, the requirements will take effect October 9, with the exception of a phased-in transition period for certain cybersecurity provisions related to 23 NYCRR Part 500 that gives student loan servicers until April 9, 2020 to comply. Comments on the proposed regulation are due September 30.
New Jersey establishes Office of the Student Loan Ombudsman, provides student loan servicer regulations
On July 30, the New Jersey governor signed S1149 to, among other things, establish the Office of the Student Loan Ombudsman within the Department of Banking and Insurance and provide licensing requirements for student loan servicers. Notably, federal or state chartered banks, savings banks, savings and loan associations, and credit unions, as well as their wholly owned subsidiaries, are exempt from the bill’s licensure requirements
The appointed ombudsman’s responsibilities will include (i) reviewing, analyzing, and resolving borrower complaints; (ii) providing information to the public, agencies, legislators, and others regarding borrower concerns; (iii) reviewing complete student loan histories for borrowers who have provided written consent; (iv) establishing and maintaining a student loan borrower education course, including providing information on “monthly payment obligations, income-based repayment options, loan forgiveness, and disclosure requirements”; and (v) providing a report 12 months following the date of appointment to the Commissioner of Banking and Insurance (Commissioner) conveying any additional steps that may be necessary to address the licensing and enforcement of student loan servicers.
Additionally, the bill establishes licensing provisions for student loan servicers, and requires all servicers and certain other exempt entities to maintain student loan records for at least two years after the final payment or assignment of the loan, whichever comes first.
The bill also gives the Commissioner authority to conduct investigations and examinations of licensed servicers, as well as impose fines of not more than $10,000 for the first violation, and $20,000 for the second and for offenses thereafter. Student loan servicers must also comply with applicable federal laws, including the Truth in Lending Act. The bill notes that “any violation of any federal law or regulation shall be deemed a violation of this section and a basis upon which the [C]ommissioner may take enforcement action.”
The bill will take effect November 27.
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.
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.
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.”
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