California Continues Oversight of Student Loan Servicers

Financial Services Law

Following in the recent footsteps of the California attorney general’s lawsuit against the country’s largest student loan servicer, the state’s Department of Business Oversight (DBO) sent letters to 12 servicers seeking information about why they have not applied for licenses pursuant to California’s Student Loan Servicing Act.

The statute mandates that no student loan servicer can operate in the state without a license as of July 1, 2018, but the DBO said 12 servicers had yet to apply.

What happened

As of July 1, the Student Loan Servicing Act requires student loan servicers operating in California to apply for and obtain a license from the state’s financial regulator. The act provides borrower protections that require servicers to provide information on their websites about alternative repayment plans and loan forgiveness options (and share that information, in writing, with borrowers at least once per year).

In addition, the act mandates that borrowers be notified 15 days in advance when their loans will be transferred to another servicer and provide information related to the transfer to help borrowers remain current with their payments. Servicers must respond to borrowers’ written requests for information related to potential account errors within 30 business days, and for 60 days after such a request, the servicer must refrain from furnishing adverse information to any consumer reporting agency regarding any payment that is the subject of the written request.

As of the July 1 effective date, the DBO developed a list of 36 companies it believed service student loans in the state and require a license. Of the 24 servicers that submitted license applications, 17 have been approved, and decisions are pending on the other seven. Twelve of the companies on the list have not filed applications.

In the letters, the DBO instructed recipients to respond in writing within 10 days, advising the regulator of the date it may expect to receive a license application or, in the alternative, an explanation of the factual and legal bases explaining why the company plans not to apply.

One company has already pushed back. In an earlier letter to NelNet, Inc., the parent company of Great Lakes Educational Loan Services, Inc., one of the largest federal student loan servicers in the country, DBO Commissioner Jan Lynn Owen asked the company to explain its position that Great Lakes is not subject to California’s licensing regulation.

In response, NelNet pointed to an interpretation issued by Secretary of Education Betsy DeVos and published in the Federal Register on March 7 noting the recent adoption of state licensing and disclosure schemes relating to student loans (without specifically naming California) and asserting that the U.S. Department of Education believes federal law pre-empts such state regulation. “Federal student loans, which include Federal Deposit, Federal Family Education, and Perkins loans, are each made, insured, or guaranteed under a federal program, as authorized by Title IV of the Higher Education Act,” NelNet’s senior compliance officer wrote to the DBO. “In its Notice, the Department indicates that state regulations surrounding the licensing of federal student loan servicers impede federal interests.”

The Department of Education’s position is that state licensing requirements “interfere with the government’s selection of contractors, and that state-imposed registration and licensure requirements conflict with and add to federal requirements,” the servicer said. “Therefore, these state requirements are preempted by federal law.”

To read the letter from the DBO, click here.

To read the Department of Education interpretation regarding federal pre-emption, click here.

Why it matters

California regulators are taking a hard line with respect to student loan servicers. In June, California Attorney General Xavier Becerra filed a lawsuit against Navient Corporation and its subsidiaries on behalf of the estimated 1.5 million borrowers living in the state, alleging misconduct in the servicing and collection of federal student loans. Now the DBO has begun enforcement of the state’s Student Loan Servicing Act, seeking an explanation from those servicers that have yet to file a license application. It appears that at least one servicer intends to push back against the state law, citing federal pre-emption based on an interpretation issued by a Trump administration appointee, and it is uncertain whether California will challenge this servicer’s position through an enforcement action or otherwise. Stay tuned.