Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On October 9, the Illinois Department of Financial and Professional Regulation adopted regulations implementing provisions of the Student Loan Servicing Right Act related to licensing fees, operations, and supervision. Among other things, the provisions (i) establish license, examination, and hearing fees, as well as assessment costs; (ii) require servicers to file notice within 10 business days of any application changes; (iii) require servicers to maintain websites and toll-free telephone services for borrowers and cosigners to access information on existing loans; (iv) require servicers to provide borrowers with information on alternative repayment and loan forgiveness options; (v) outline requirements related to the maintenance of account information, payment processing, cosigner payments, and books and records; (vi) provide record retention requirements; and (vii) address the preparation of independent audit reports and examination ratings. The regulations are effective immediately.
On September 15, the New Jersey Department of Banking and Insurance (Department) began accepting applications for the NJ Student Loan Servicer license through the NMLS. The license is governed by the Student Loan Servicing Act, which was enacted in July 2019, and establishes the Office of the Student Loan Ombudsman within the Department and provides licensing requirements for student loan servicers (covered by InfoBytes here). A recently released bulletin by the Department describes the process for licensing and details persons exempt from the licensing requirements, including federal or state chartered banks, savings banks, savings and loan associations, and credit unions, as well as their wholly owned subsidiaries. The Bulletin notes that all non-exempt student loan servicers must submit all requirements for a license by December 31 and may continue to operate in New Jersey while their applications are pending.
On September 25, the California governor signed AB 376, which provides new requirements for student loan servicers. Among other things, these requirements require servicers to (i) timely post, process, and credit payments within certain timeframes; (ii) apply overpayments “consistent with the best financial interest of a student loan borrower,” and apply partial payments so that late fees and negative credit reporting are minimized; (iii) diligently oversee service providers; and (iv) provide specialized training for personnel responsible for offering advice to “military borrowers, borrowers in public service, borrowers with disabilities, and older borrowers.” The bill also prohibits student loan servicers from, among other things, engaging in unfair or deceptive practices or abusive acts and practices. Additionally, the bill will allow a borrower “who suffers damages as a result of a person’s failure to comply with these provisions as well as all applicable federal laws relating to student loan servicing to bring an action for actual damages, injunctive relief, restitution, punitive damages, attorney’s fees, and other relief, including treble damages in certain circumstances.” The bill also provides for an opportunity to cure alleged violations. The bill further stipulates that, starting July 1, 2021, the Commission of Business Oversight will be authorized to compile information on student loan servicers’ business conduct and various activities in order to monitor and assess consumer risk.
On July 27, the U.S. Court of Appeals for the Third Circuit determined that the Commonwealth of Pennsylvania may pursue claims against a student loan servicer under the Consumer Financial Protection Act (CFPA) despite a concurrent action brought against the servicer by the CFPB. The appellate court also held that the Commonwealth’s claims under the Pennsylvania Unfair Trade Practices and Consumer Protection Law are not preempted by the federal Higher Education Act (HEA). The decision results from a lawsuit filed by the Commonwealth claiming the servicer, among other things, originated risky, high-cost student loans, steered borrowers into forbearance, failed to properly inform borrowers about income-driven repayment options, made misrepresentations related to cosigner release, and misapplied borrower payments. Because the CFPB filed a lawsuit alleging similar claims against the servicer nearly nine months prior to the Commonwealth’s suit, the servicer argued that under the applicable provision of the CFPA, the Commonwealth could not file a concurrent suit. The district court disagreed and denied the servicer’s motion to dismiss.
In addressing whether a concurrent suit is permitted, the appellate court noted, “that the clear statutory language of the [CFPA] permits concurrent state claims, for nothing in the statutory framework suggests otherwise.” With respect to whether the applicable provision of the HEA expressly and impliedly preempts the Commonwealth’s suit, the 3rd Circuit stated that the statute only expressly preempts claims “based on failures to disclose information as required by the statute,” and not claims “based on affirmative misrepresentations.” Thus, because the Commonwealth’s claims were based on alleged affirmative misrepresentations and misconduct, it affirmed the district court’s ruling that the Commonwealth’s case may proceed. The 3rd Circuit highlighted, however, a circuit split over whether the HEA impliedly preempts state-law claims, pointing to the 9th Circuit’s holding that “allowing state law causes of action to proceed would conflict with the purpose of uniformity.” The 3rd Circuit’s decision joins those issued by the 7th and 11th Circuits, which both rejected the argument that uniformity was an intended purpose of the HEA.
The CFPB and the defendants filed with the district court in May dueling motions for summary judgment in the concurrent CFPB action, but the court has yet to issue a ruling on those motions.
On May 20, several senators, including Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH), sent a letter to CFPB Director Kathy Kraninger requesting information regarding the Bureau’s examination of companies that service student loans guaranteed by the federal government. The senators noted that they are “encouraged to learn that the CFPB recently began its first examination of a servicer of federally-held student loans since 2017,” but they stated that, given the Department’s “record [of] obstructing CFPB oversight and enforcement, [they] are skeptical of the Department’s role in this joint examination and would strongly oppose limitations, restrictions, or other interference with the CFPB’s ability to conduct complete and thorough examinations.” Among other things, the senators also expressed concerns that the Bureau and the Department have not yet finalized the Supervisory Memorandum of Understanding (MOU), which would allow the Bureau to access student borrower loan data that the senators claim is necessary for the Bureau to conduct future examinations. As previously covered by InfoBytes, the agencies signed an MOU to share student loan complaint data last February. The senators requested clarification on measures the Bureau is taking to carry out its statutory mandate to oversee the federal student loan market, including (i) how many examinations the Bureau has planned for 2020; (ii) what progress, if any, has been made on reestablishing the supervisory MOU; (iii) how the Bureau is monitoring student loan servicers’ compliance with the CARES Act, including pausing payments, interest, and collection; and (iv) whether the Bureau has identified any trends in borrower complaints since the Covid-19 pandemic began. The senators asked that the Bureau respond to the questions by June 3.
Maryland regulator reminds student loan servicers of obligation to report suspended payments as current
On May 18, the Office of the Maryland Commissioner of Financial Regulation issued an advisory to student loan servicers and credit reporting agency registrants to remind them of their furnishing obligations under the federal CARES Act to ensure that suspended payments are not reported as delinquent. The advisory notes that it has come to the office’s attention that a student loan servicer of a significant amount of federal student loan debt was not accurately furnishing information and reminds servicers that under Maryland’s Student Loan Servicing Bill of Rights, it is a violation of Maryland law to knowing or recklessly provide inaccurate information or refuse to correct it.
On April 24, a proposed class of borrowers and a national student loan servicer agreed to settle a lawsuit, which alleged the servicer failed to inform the borrowers of a loan forgiveness program for public service employees. The proposed settlement, pending final court approval, settles the one remaining deceptive acts and practices claim under a section of the New York General Business Law after the U.S. District Court for the Southern District of New York dismissed the rest of the borrowers’ claims last July. The court noted in its order that it did not agree with the servicer’s argument that the claims were preempted by the federal Higher Education Act (HEA), stating that the borrowers “do not seek to impose state law ‘disclosure requirements’ on federal student loans,” but instead “seek to hold [the servicer] liable for affirmative misrepresentations made in the course of performing its duties under various contracts.” According to the court’s order, language under the HEA “does not express the ‘clear and manifest purpose of Congress’ to preempt such claims.”
While the servicer denies any allegations of wrongful conduct and damages, it has agreed to, among other things, put in place enhancements to identify borrowers who may qualify for Public Service Loan Forgiveness and “distribute comprehensive and accurate information about how to qualify, which are meaningful business practice enhancements.” The servicer will also fund a $1.75 million education and counseling program for student loan borrowers in public service.
On April 22, the Virginia legislature enacted SB 77, which requires entities servicing student loans in the Commonwealth to be licensed by the State Corporation Commission (SCC). Notably, banks, savings institutions, credit unions, and financial institutions regulated under 12 U.S.C. § 2002 are exempt from the licensing requirements. In addition to outlining specific licensing requirements, SB 77 states that non-exempt student loan servicers must also refrain from, among other things, (i) engaging in any unfair or deceptive act or practice in connection with the servicing of a qualified education loan by misrepresenting the amount, nature, or terms of any loan fees or payments, the terms and conditions of the loan agreement, or the borrower’s loan obligations; (ii) misapplying loan payments to an outstanding balance; (iii) failing to report both the favorable and unfavorable payment history of a borrower to a nationally recognized consumer credit bureau at least once a year provided the loan servicer regularly reports such information; (iv) failing to communicate with a borrower’s authorized representative; and (v) making false statements or omitting material facts in connection with information provided to the SCC or another government authority. Student loan servicers must also comply with other requirements, such as evaluating qualified borrowers for income-driven repayment programs, and responding to borrowers’ written inquiries within 30 days.
Additionally, SB 77 creates a private cause of action available to “[a]ny person who suffers damage as a result of the failure of a qualified education loan servicer to comply” with the bill’s requirements or with applicable federal student loan servicing laws and regulations. The bill further provides that violations are subject to a civil penalty not exceeding $2,500 and are considered prohibited practices under the Virginia Consumer Protection Act. SB 77 has a delayed effective date of July 1, 2021; however, the SCC will begin accepting applications starting on or before March 1, 2021.
On April 2, the California Department of Business Oversight (DBO) announced a lawsuit against one of the nation’s largest student loan servicers seeking an order requiring the production of documents related to the servicer’s administration of the Teacher Education Assistance for College and Higher Education (TEACH) grant program. According to the press release, DBO began an examination in January under the California Student Loan Servicing Act (Act) to determine whether the licensed servicer is improperly converting California teachers’ TEACH grants into loans with back interest. In its complaint, DBO states that the servicer’s refusal to produce records concerning its “handling of the TEACH program reconsideration process” is based on arguments that California law is preempted by the federal Higher Education Act, and that student borrower records are “legally owned” by the Department of Education and cannot be released under the federal Privacy Act of 1974. Because of the servicer’s refusal to produce the records, DBO claims that the servicer “has failed to satisfy its statutory duties,” and has “unduly restrained” DBO’s ability to both oversee the administration of student loan servicing in the state and protect California student loan borrowers. DBO seeks a preliminary and permanent injunction, as well as a declaratory judgment against the servicer to compel compliance with the Act.
On April 7, the New York State Department of Financial Services issued guidance to state-regulated student loan servicers urging them to “do their part” to alleviate hardships caused by Covid-19. The department stated that student loan servicers “should,” for a period of 90 days, waive late fees, provide forbearance, refrain from sending defaulted loans to debt collectors, and report any missed payments subject to forbearance as “current” to credit reporting agencies.
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Jeffrey P. Naimon to discuss "2021 - A new beginning/what's to come" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "Cyber security, incident response, crisis management" at the Legal & Diversity Summit
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "BSA/AML - Covid impact and regulatory/guidance roundup" at an NAFCU webinar