Washington, D.C., and New York recently moved forward with efforts to license and regulate student loan servicers. In Washington, D.C., servicers of student loans made to District of Columbia residents are subject to a new licensing requirement under the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016 (Student Loan Act), D.C. Act No. 21-571. In New York, proposed legislation in Governor Andrew Cuomo's 2018 Fiscal Year Executive Budget would likewise empower the state Department of Financial Services (DFS) to license servicers of student loans made to New York residents.

These developments follow the enactment of student loan servicing laws by Connecticut and California in 2015 and 2016, respectively. Like Connecticut's law, Washington, D.C., has created the position of a Student Loan Ombudsman within the Department of Insurance, Securities and Banking to assist student loan borrowers. Like California's law, New York's proposal contains detailed servicing conduct requirements, but it includes payment application and servicing transfer provisions that are more prescriptive than those in effect in California.

The licensing requirements in D.C. and New York share many similarities, and both jurisdictions define "student loan servicing" by relying in large part on the definition in the Consumer Financial Protection Bureau’s student loan servicer larger participant rule.

Washington, D.C.

The Student Loan Act, which became effective on February 18, 2017, provides that no person or entity can service a "student education loan" of a "student loan borrower" in the District, directly or indirectly, without first obtaining a license. Servicers located within or outside the District are covered by the Act. The Act defines "student education loan" broadly as "a loan obtained for personal use to finance education or other school-related expenses." "Student loan borrower" is defined as a District resident who has received or agreed to pay a student education loan or a person who shares legal responsibility for repayment.

Entities exempt from licensure include:

  • "A bank, trust company, or other loan company doing business under the authority of, or in accordance with, a license, certificate, or charter issued by the United States or any state, district, territory, or commonwealth of the United States that is authorized to transact business in the District;"

  • A federally or state- or District-chartered savings and loan association, savings bank, or credit union that is authorized to transact business in the District; and

  • A public or private nonprofit postsecondary educational institution servicing a student education loan that it made.

Among other licensing-related requirements, licensees must submit annual reports showing "the number of loans that were sold, assigned, or transferred in the preceding calendar year" and any other business information required by the Commissioner of the Department of Insurance, Securities and Banking. The Act empowers the Commissioner to "make the reports available to the public by publishing them on the Department's website."

The Act also creates the position of a Student Loan Ombudsman within the Department whose duties include examining each servicer not less than once every three years, assisting the Commissioner with enforcing the Act's licensing provisions, educating borrowers, reviewing borrower complaints, compiling and analyzing complaint data, and making recommendations to the Commissioner for resolving borrowers' problems.

The Act directs the Commissioner to issue rules implementing the Act's Ombudsman and licensing provisions within 180 days of the Act’s effective date. The Commissioner also has authority to revoke a license by written order after notice and hearing if the licensee has "committed any fraudulent acts, engaged in any dishonest activities, or made any misrepresentation in any business transaction" or "demonstrated incompetency or untrustworthiness to act as a licensee," among other violations. The Commissioner may refer written orders to the D.C. Attorney General for enforcement.

New York

The New York proposal provides that no person can "engage in the business" of servicing loans made to finance postsecondary education or related expenses that are "owed by one or more borrowers residing in this state" without obtaining a student loan servicer license from the DFS. Like D.C.'s law, "borrower" means a New York resident who has received or agreed to pay a student loan or any person who shares responsibility with a New York resident for repayment.

Entities exempt from licensure include federally and state-chartered banks, trust companies, savings and loan associations, savings banks, credit unions, and state or federal instrumentalities with the power to service student loans. However, those entities would still need to notify the DFS superintendent that they are acting as student loan servicers and would still need to comply with the requirements of the law and any applicable regulations.

As in California and Connecticut, the New York proposal would prohibit misapplying payments or refusing to communicate with the borrower's authorized representative. Likewise, the proposal would require servicers to retain records for two years, accurately report borrower payment performance to at least one nationwide consumer reporting agency if the servicer regularly reports to a consumer reporting agency, and reply to written inquiries from the borrower or his or her representative within 30 days.

The New York proposal would impose heightened requirements related to servicing transfers where the borrower must send payments or direct loan-related communications to a new person. The reach of these requirements would be felt by sellers and assignees of portfolios containing loans owed or cosigned by New York residents. In particular:

  • A servicer would be required to provide to the new servicer all information regarding the borrower, the account, and the loan, including repayment status and borrower benefits. The new servicer must have policies and procedures in place to verify the receipt of all such information. The proposal contains a 45-day deadline for transferring this information, although it is unclear whether the clock would begin to run on the date of the sale/assignment or the date of the servicing transfer.

  • Any sale, assignment or other transfer of servicing rights would need to be completed at least seven days before the borrower's next payment is due. Unless this requirement is clarified, it may prove complicated to carry out where a portfolio contains loans with different payment due dates.

  • As a condition of any sale, assignment, or other transfer of servicing rights, the new servicer would need to honor all borrower benefits originally represented as available during the repayment period, including benefits the borrower may qualify for in the future. "Borrower benefit" is defined in the proposal as "an incentive offered to a borrower in connection with the origination of a student loan, including but not limited to an interest rate reduction, principal rebate, fee waiver or rebate, loan cancellation, or cosigner release."

These proposed servicing transfer provisions are more prescriptive and detailed in certain respects than California's law, which requires student loan servicers to transfer to the new servicer information about the borrower and his or her account and loan and to notify the borrower in writing of the new servicer's contact information and when to begin sending it payments. 

The New York proposal also would require servicers to ask the borrower how to apply a payment that is more or less than the required payment amount. The servicer would need to implement those instructions to future underpayments and overpayments unless the borrower provides different directions, except as provided by federal law or required by the student loan agreement. California's law is similar but applies only to overpayments.

Legislation included in the Governor's budget package is developed in coordination with the state's executive agencies. As such, the proposal signals DFS' increased interest in licensing, examining, and regulating student loan servicers. This follows the 2014 creation of DFS's Student Protection Unit, which educates student loan borrowers and coordinates DFS's student loan investigations.

The proposed law authorizes the superintendent to examine licensees at any time and frequency and to examine any nonexempt affiliate based on evidence of unlawful activity between the licensee and affiliate "benefitting, affecting, or arising from the activities regulated by" the student loan servicing law. The superintendent would be able to assess a civil penalty of $2,500 to $75,000 per day for a violation of the student loan servicing law, the banking law, or any regulation or order. The proposed law also preserves the rights of any person to bring "any action in any court for any act."

Ballard Spahr'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. The firm's Higher Education Group regularly advises educational institutions on compliance with applicable laws.

Copyright © 2017 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.