By: Benjamin Brickner, Brett Natarelli, Charles Washburn, Jr. – Manatt, Phelps & Phillips, LLP
Oversight of student loan servicing remains top of mind for state regulators, with new regulations taking effect in New York, California, Colorado and Maine, and with several other states considering similar measures.
The ramped up state-level enforcement may well be triggered both by the Consumer Financial Protection Bureau’s gutting of its former student lending unit, as we’ve previously reported, and the Education Department’s apparent directive to student loan servicers not to produce documents requested in CFPB supervisory exams.
States are addressing the issue of student lending differently, but generally in ways that favor student borrowers and place greater oversight over lenders and loan servicers.
Earlier this year, New York amended the state’s banking law to add a host of new requirements for student loan servicers. The legislation took effect on October 9.
On the same day, the New York Department of Financial Services (DFS) announced the creation of a Student Debt Advisory Board. The board will advise on consumer protection, student financial products and services, and communities that have been significantly impacted by student debt, the DFS said.
Days later, the DFS issued a final regulation that obligates student loan servicers to provide clear and complete information concerning fees, payments due, and the terms and conditions of loans. The final regulation also governs the required manner of application of payments, such that payments are applied in borrowers’ best interest, rather than in ways that maximize servicer fees.
In addition, student borrowers must be informed of income-based repayment and loan forgiveness options, and servicers must maintain and provide to consumers a “detailed history” of their accounts. Accurate information must be provided to credit reporting agencies, and timely and substantive responses are required for consumer complaints.
When a borrower’s loan is transferred to a new servicer, the former servicer must ensure that all necessary information is transferred with the loan, and the borrower must be timely informed of where to direct payments during the transfer.
The final regulation also prohibits student loan servicers from defrauding or misleading borrowers; engaging in any unfair, deceptive, abusive or predatory act or practice; and misapplying borrowers’ payments.
Other states have similarly enacted new laws and regulations.
In California, the Department of Business Oversight (DBO) published final student loan servicer regulations earlier this year, promulgated after the passage of the state’s Student Loan Servicing Act, mandating that servicers apply for and obtain a license from the DBO to operate in the state.
Colorado enacted a bill establishing a student borrower bill of rights and oversight of student loan servicers. That state’s Student Loan Servicers Act took effect on August 2, 2019. Maine’s Student Loan Bill of Rights, passed in June, imposes similar licensing and conduct requirements on servicers.
Also on the list of states with new servicer laws this year: Maryland, Nevada, New Jersey and Rhode Island. Several other legislatures considered bills to regulate services, including California (tightening the existing law), Massachusetts, North Carolina and Pennsylvania.
Why it matters
As the CFPB dialed back its enforcement in the area of student lending and the Department of Education adopted a reduced oversight role, states have stepped up to fill in the regulatory gaps, particularly with regard to student loan servicers. With several states now weighing actions similar to those New York, California, Colorado and Maine have recently taken, we expect the trend toward greater state-level oversight of student lending and loan servicing to continue.