Student loan servicers located in California servicing loans made to residents of any state and those located elsewhere servicing loans made to California residents will be subject to a new licensing requirement created by the state's Student Loan Servicing Act, signed into law September 29, 2016. The law also imposes other significant new requirements and prohibitions on student loan servicers

While the Act's servicer requirements and prohibitions are effective July 1, 2018, the Act authorizes the Commissioner of Business Oversight (Commissioner), on or after January 1, 2017, to take "any necessary actions to exercise the authorities under [the Act] to prepare for the July 1, 2018, operative date."

The Act makes California the second state to have enacted a licensing statute specifically directed at student loan servicers. Last year, Connecticut enacted a law that created a new licensing requirement for servicers of student loans made to state residents and imposed other requirements and prohibitions on such servicers. The Connecticut servicer requirements and prohibitions became effective on July 1, 2016.

The California law provides that no person can engage in the business of "servicing" a student loan "in this state," directly or indirectly, without obtaining a license from the state's Commissioner. "In this state" means "any activity relating to student loans that originates from [California] and is directed to persons outside [California]," or activity "that originates from" either "outside" or "inside" California "and "is directed to persons inside [California]." Exempt entities include federally and state-chartered banks, trust companies, industrial loan companies, savings and loan associations, savings banks, and credit unions, and a public or private postsecondary educational institution servicing a student loan that it made.

The California law's definition of "servicing" is the same definition used by the Consumer Financial Protection Bureau in its student loan servicer larger participant rule. "Servicing" is broadly defined to include any of the following activities:

  • Receiving any scheduled periodic payments from a borrower or any notification that a borrower made a scheduled periodic payment and applying payments to a borrower’s account pursuant to the terms of a student loan or a servicing contract;

  • During a period when no payment is required on a student loan, maintaining account records for the loan and communicating with the borrower on behalf of the owner of the promissory note; or

  • Interacting with the borrower related to his or her loan, with the goal of helping the borrower avoid default or facilitating the activities described above.

Default aversion activities now appear to be outside the scope of this definition, since an earlier version of the Act would have deemed "[any] activities to help prevent default on obligations arising from a student loan" to constitute servicing.

A "borrower" is either a person who has received or agreed to pay a student loan or a person who shares responsibility for repaying a student loan with someone who has received or agreed to pay the loan. A "student loan" is any loan primarily financing a postsecondary education and costs of attendance, including but not limited to tuition, fees, books and supplies, room and board, transportation and personal expenses, and includes a loan made to refinance a student loan. A student loan does not include credit extended under an open-end consumer credit plan, a reverse or residential mortgage, or any other real property- or dwelling-secured loan. It also does not include credit extended by a postsecondary institution to a borrower that meets certain conditions, such as having a term that is not longer than the borrower's education program.

In addition to the licensing requirement, key provisions that become effective July 1, 2018 include:

  • A licensee must provide, free of charge on its website, information or links to information regarding potentially available repayment and loan forgiveness options and provide such information or links to borrowers in written correspondence or by email at least once each calendar year.

  • A licensee must respond to a "qualified written request" (QWR) within prescribed timetables. Moreover, after receiving a QWR "related to a dispute on a borrower’s payment on a student loan," a licensee may not, for 60 days, furnish adverse information to any consumer reporting agency regarding the disputed payment. This limitation on reporting is arguably preempted by Section 625 of the Fair Credit Reporting Act (FCRA), which identifies by type all of the state laws preempted by the FCRA. Such types of laws include state laws imposing requirements or prohibitions with respect to any subject matter regulated under FCRA Section 623. Section 623 covers the responsibilities of persons who furnish information to credit bureaus. In particular, Section 623(a)(3) permits the reporting of disputed information, while the furnisher is investigating the dispute, as long as the information is identified as having been disputed.  There is no "freeze" on reporting. 

    The Act also specifies circumstances under which a licensee is not required to respond to a QWR. A "QWR" is defined as "written correspondence made by a borrower, other than notice on a payment medium supplied by the licensee, that is transmitted by mail, facsimile, or electronically through an email address or Internet Web site designed by the licensee to receive communications from the borrower" that allows the licensee to identify the borrower's name and account and contains other prescribed information. Unfortunately, the Act seems designed to encourage somewhat spurious QWRs, since it permits the borrower to request a complete payment history of his or her loan without even asserting that the account is in error.  

  • Except as provided by federal law or required by the student loan agreement, a licensee must ask the borrower how an overpayment should be applied. The borrower’s overpayment directions stay in effect for any future overpayments unless the borrower provides different directions. An "overpayment" is defined as a payment in excess of the monthly amount due.

  • If a transfer of servicing changes the identity of the party to whom the borrower must send payments or direct communications, the licensee must provide a written notice containing prescribed information to the borrower at least 15 days before the borrower is required to send a payment. The licensee must transfer information about a borrower’s account to the new servicer within 45 calendar days. Presumably the 45 calendar days runs from the effective date of the sale, assignment, or other transfer of servicing.

  • A licensee is prohibited from engaging in certain conduct, including:

    • Engaging in any unfair or deceptive practice or misrepresenting or omitting material information including, but not limited to, misrepresenting "the amount, nature, or terms of any fee or payment," the loan agreement's "terms and conditions," or the borrower’s student loan "obligations;"

    • Misapplying payments; and
    • If the licensee is required to or voluntarily furnishes information to a consumer reporting agency, failing to accurately report each borrower’s payment performance to at least one nationwide consumer reporting agency.
  • Unless prohibited by federal law, a licensee must maintain servicing records for at least three years after the loan has been sold, assigned, transferred, or paid in full.

The Act requires the Commissioner to examine licensees at least once every 36 months and gives the Commissioner enforcement authority, including the authority to issue cease and desist orders and assess a civil penalty of up to $2,500 for a violation of the Act. The Commissioner is also authorized to file enforcement actions in state court "in the name of the people of the State of California." There is no private right of action for a violation of the Act.

Ballard Spahr's Higher Education Group regularly advises educational institutions on compliance with applicable laws. The firm's Consumer Financial Services Group is nationally recognized for its experience with the full range of federal and state consumer credit laws, its skill in litigation defense and avoidance, and its guidance in structuring and documenting new consumer financial services products.

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