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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.”
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.
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.
On March 31, the New York governor announced the passage of the state’s FY 2020 Budget, which includes an amendment (known as “Article 14-A” or “the Act”) to the state’s banking law with respect to the licensing of private student loan servicers. Article 14-A requires student loan servicers to be licensed by the New York Department of Financial Services (NYDFS) in order to service student loans owned by residents of New York. The licensing provisions do not apply to the servicers of federal student loans—defined as, “(a) any student loan issued pursuant William D. Ford Federal Direct Loan Program; (b) any student loan issued pursuant to the Federal Family Education Loan Program, which was purchased by the government of the United States pursuant to the federal Ensuring Continued Access to Student Loans Act and is presently owned by government of the United States; and (c) any other student loan issued pursuant to a federal program that is identified by the superintendent as a ‘federal student loan’ in a regulation”—as the Act treats federal servicers as though they are a licensed student loan servicer. 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, are also considered exempt from the new state licensing requirements.
In addition to the licensing requirements, Article 14-A also prohibits any student loan servicer—including those exempt from licensing requirements or deemed automatically licensed—from, among other things, (i) engaging in any unfair, deceptive, or predatory act or practice with regard to the servicing of student loans, including making any material misrepresentations about loan terms; (ii) misapplying payments to the balance of any student loan; (iii) providing inaccurate information to a consumer credit reporting agency; and (iv) making false representations or failing to respond to communications from NYDFS within fifteen calendar days. Article 14-A requires student loan servicers (not including exempt organizations) to accurately report a borrower’s payment performance to at least one credit reporting agency if the organization regularly reports information to a credit reporting agency. Additionally, the Act specifies that a student loan servicer shall inquire on how a borrower would like nonconforming payments to be applied and continue that application until the borrower provides different directions. Article 14-A also outlines examination and recordkeeping requirements and allows for the NYDFS Superintendent to penalize servicers the greater of (i) up to $10,000 for each offense; (ii) a multiple of two times the violation’s aggregate damages; or (iii) a multiple of two times the violation’s aggregate economic gain. Article 14-A takes effect 180 days after becoming law.
On April 3, six Democratic 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). In the letter, the Senators expressed concern that the Bureau’s leadership “has abandoned its supervision and enforcement activities related to federal student loan servicers.” The Senators noted that consumers owe more than $1.5 trillion in student loan debt in the U.S. and that loan servicing companies under contract with the U.S. Department of Education (the “Department”) are “covered persons” under Title X of the Dodd Frank Act, which allows the Bureau “broad oversight authority over their actions.” The Senators cited to a number of lawsuits brought by private citizens and state authorities challenging student loan servicing companies’ actions with regard to PSLF, and requested the Bureau respond to a series of questions regarding its activities overseeing student loan servicers’ handling of PSLF since December 2017. Among other things, the Senators requested information regarding (i) the Bureau’s examinations of student loan servicers’ PSLF administration; (ii) the effect of the Department’s December 2017 guidance to loan servicing contractors not to produce documents directly to other government agencies; (iii) the status of the CFPB’s alleged investigation into a specific student loan servicer’s actions; and (iv) the status of information sharing with the Department since August 2017.
On January 4, NYDFS and the New York Attorney General announced a joint $9 million settlement with a national student loan servicer to resolve allegations that the servicer, among other things, deceived student loan borrowers about their repayment options and steered them into higher-cost repayment plans. According to a press release issued by the Attorney General’s office, the servicer “steered distressed borrowers away from available income-based repayment plans towards other, more expensive options, thus costing them money and increasing their risk of default.” Additionally, the consent order alleges that the servicer misinformed borrowers—including servicemembers—about their repayment options, such as telling borrowers they were not eligible for Public Service Loan Forgiveness plans when they may have qualified after consolidating their loans. Furthermore, the servicer allegedly (i) improperly processed applications for income-based repayment; (ii) allocated underpayment for certain borrowers to maximize late fees; (iii) improperly processed payments; (iv) failed to accurately report information to credit reporting agencies; (v) failed to “properly recalculate monthly payments for servicemembers when adjusting their interest rates under the Servicemembers’ Civil Relief Act”; (vi) charged improper late fees; and (vii) did not provide borrowers notification of their eligibility for a co-signer release.
The servicer, while neither admitting nor denying the findings alleged by NYDFS and the Attorney General, has agreed to pay $8 million in restitution to New York borrowers and a $1 million fine. Moreover, the servicer has agreed to stop servicing private and federal loans—with the exception of Perkins Loans—over the next five years.
Washington State Department of Financial Institutions adopts amendments concerning student education loan servicers
On December 3, the Washington State Department of Financial Institutions (DFI) issued a final rule adopting amendments including student education loan servicing and servicers as activities and persons regulated under the state’s Consumer Loan Act. According to DFI, the amendments will provide consumers with student education loans a number of consumer protections and allow DFI to monitor servicers’ activities. Among other things, the amendments (i) change the definition of a “borrower” to include consumers with student education loans; (ii) specify that collection agencies and attorneys licensed in the state collecting student education loans in default do not qualify as student education loan servicers; and (iii) stipulate that businesses must either qualify for specific exemptions or possess a consumer loan license in order to lend money, extend credit, or service student education loans. In addition, the amendments provide new requirements for servicers concerning the acquisition, transfer, or sale of servicing activities, and specify borrower notification rights. Servicers who engage in these activities for federal student education loans in compliance with the Department of Education’s contractual requirements are exempt.
The amendments take effect January 1, 2019.
On September 14, the California governor approved AB 38 amending the state’s Student Loan Servicing Act (Act). The Act provides for the licensure, regulation, and oversight of student loan servicers by the California Department of Business Oversight (CDBO). Among other things, the amendments: (i) clarify the circumstances under which the Commissioner of the CDBO may deny a student loan servicer’s application; (ii) remove debt collectors of defaulted student loans from the definition of a “student loan servicer”; (iii) authorize the Commissioner to require license applicants and licensees to submit required filings with, and pay assessments to, the Commissioner through the Nationwide Multistate Licensing System and Registry; (iv) require the Commissioner to report violations of the Act “as well as other enforcement actions and information to the licensing system and registry to the extent that the information is a public record”; and (v) extend to 10 business days the time for a licensee to acknowledge receipt of a qualified written request from a borrower. The amendments also grant the Commissioner the authority to prescribe circumstances under which electronic records, including applications, financial statements, and reports, may be accepted.
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