California, New York Increase Student Loan Servicer Oversight

Financial Services Law

Student loan servicers should prepare for heightened regulation with the passage of a new law in New York and new regulations in effect in California.

In addition, the California legislature is considering a new bill that would require servicers to provide additional information about loan benefits to borrowers, such as repayment and loan forgiveness options.

What happened

When New York Governor Andrew Cuomo signed the state’s fiscal year 2020 budget, the legislation included an amendment to the banking law that hit private student loan servicers with a host of new requirements.

Article 14-A governs servicers of student loans to New York residents and mandates that servicers obtain a license from the state’s Department of Financial Services (DFS) in order to service loans in the state, although servicers of federal student loans are deemed licensed under the new law to service federal loans.

An exemption to the licensure requirement is in place for banking organizations, foreign banking corporations, national banks, federal savings associations, federal credit unions, and private nonprofit or public postsecondary educational institutions, but even those entities subject to the exemption still must provide notice of their loan servicing in the state to the DFS.

The law requires that servicers ask borrowers how they wish to apply nonconforming payments (those that are either more or less than the required payment) and prohibits misapplication of payments. The law also forbids providing inaccurate information to a credit reporting agency, refusing to communicate with a borrower’s authorized representative, and defrauding or misleading a borrower.

Servicers are barred from misrepresenting or omitting any material information, including the terms and conditions of the loans or the borrower’s obligations, and failing to respond to communications from the DFS within 15 days. Examination and recordkeeping requirements are also included in Article 14-A.

Tasked with enforcement of the new law, DFS may order servicers to pay an amount up to the greater of $2,000 or twice the economic gain attributable to the violation for non-willful violations of the new law; for willful violations, the penalty is up to $10,000 or twice the economic gain attributable to the violation. These penalties are in addition to other remedies already available under state and federal laws.

Article 14-A takes effect in late September, 180 days after the Governor’s April 1 signature.

Across the country, California’s Department of Business Oversight (DBO) published its final student loan servicer regulations, which took effect on March 28. The authorizing statute became effective on July 1, 2018, but servicers have been operating without the final regulations over the past eight months.

The state’s Student Loan Servicing Act requires student loan servicers operating in California to apply for and obtain a license from the DBO. It also affords borrowers protection by requiring servicers to provide information on their websites about alternative repayment plans and loan forgiveness options (and to share that information, in writing, with borrowers at least once a year). The regulations also cover the license application process and recordkeeping requirements.

Servicers may face additional requirements with a new bill pending in the state legislature. Pursuant to AB 796’s amendments to the Student Loan Servicing Act, servicers would need to provide borrowers with even more information about loan forgiveness and discharge.

Via written correspondence or email at least once a year—as well as on their website—servicers would be required to provide “a detailed description of the terms and conditions under which a borrower may obtain full or partial forgiveness or discharge of principal and interest, defer repayment of principal or interest, or be granted forbearance on a federal Title IV loan, including forgiveness benefits or discharge benefits available to a Federal Family Education Loan borrower who consolidates their loan into the federal Direct Loan program.”

Specifically, servicers would need to explain the difference between forgiveness, cancellation and discharge, as well as the programs available for each and how to qualify for them. Details on the types of loans that can be forgiven or discharged as well as the impact on forgiveness of consolidation, enrollment status and new loans must be given to borrowers.

The bill is currently being considered by the Assembly’s Committee on Banking and Finance.

To read New York’s Article 14-A, click here.

To read California’s regulations, click here.

To read AB 796, click here.

Why it matters

With a record $1.5 trillion in student loans outstanding, student loan servicers have been a popular target for both state and federal regulators. The issue of student loan debt has also become a talking point in the 2020 presidential race. New York’s new law and California’s regulations could be the leading edge of greater oversight of student loan servicers across the country.