Alston & Bird Consumer Finance Blog

Licensing

New Jersey Joins Other States Regulating Student Loan Servicers

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A&B Abstract

New Jersey recently enacted its own version of a Student Loan Bill of Rights, which requires the licensing of any person acting “directly or indirectly” as a student loan servicer. In light of the growing number of states enacting similar language to regulate the student loan industry, what might this mean for the future for passive, secondary market investors in student loan debt?

Background

On July 30, 2019, acting New Jersey Governor Sheila Oliver signed into law Senate Bill 1149 (2019 N.J. Laws 200), New Jersey’s “Student Loan Bill of Rights.” Following suit with other states regulating student loan servicers, this legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the state.

Effective November 27, 2019 (120 days after enactment), SB 1149 prohibits any person from “act[ing] as a student loan servicer, directly or indirectly, without first obtaining a license” from the Department of Banking and Insurance (“DOBI”).  The measure also creates the office of a student loan ombudsman.

SB 1149 bears many similarities to the efforts of other states (including Maine and Maryland) to regulate the student loan servicing industry. Like the regulators in other states, DOBI has not yet released formal guidance regarding the applicability of SB 1149’s licensing obligations to passive, secondary market investors in New Jersey student loan debt.  However, the language of the new law appears to be broad enough to allow DOBI to regulate such persons upon a recommendation from the student loan ombudsman.  It also raises the question of whether DOBI will require such investors to be licensed or registered to invest in New Jersey student education loans.

Responsibilities of the Student Loan Ombudsman

Effective November 27, 2019, the measure requires Commissioner of DOBI to designate an “Ombudsman.” The Ombudsman’s responsibilities are to:

  • Receive, review, and attempt to resolve any complaints from student loan borrowers, including, but not limited to, attempts to resolve those complains in collaboration with institutions of higher education, student loan servicers, and any other participants in student education loan lending;
  • Compile and analyze data on student loan borrower complaints as further described in the amended laws;
  • Assist student loan borrowers to understand their rights and responsibilities under the terms of student education loans;
  • Provide information to the public, agencies, legislators, and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
  • Analyze and monitor the development and implementation of federal, State, and local laws, regulations, and policies relating to student loan borrowers and recommend any changes the student loan ombudsman deems necessary;
  • Review the complete student education loan history for any student loan borrower who ahs provided written consent for review;
  • Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, including disseminating the information to institutions of higher education, student loan servicers, and any other participant in student education loan lending, with any student loan servicing concerns; and
  • Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in the amended laws.

Moreover, the Ombudsman must report to the Commissioner of DOBI and the Secretary of Higher Education on the statute’s implementation, the overall effectiveness of the student loan ombudsman position, and any additional steps that need to be taken for DOBI to gain regulatory control over the licensing and enforcement of student loan servicers.

SB 1149 grants the Ombudsman broad authority to regulate New Jersey’s student loan industry, particularly with respect to those that are deemed to “service” New Jersey student education loans. With respect to the bolded language above, it appears that the Ombudsman has the authority to recommend changes to New Jersey’s regulation of such persons, including recommending that passive, secondary market investors in New Jersey student education loans be licensed as New Jersey Student Loan Servicers, which is further supported by the new student loan servicer licensing requirements in SB 1149.

Licensing of Student Loan Servicers

SB 1149 provides that “[n]o person shall act as a student loan servicer, directly or indirectly, without first obtaining a license” from DOBI, unless specifically exempt. (Emphasis added.)  The term “student loan servicer” means “any person, wherever located, responsible for the servicing of any student education loan to any student loan borrower.” Similarly, “servicing” means:

  • receiving any scheduled periodic payments from a student loan borrower or notification of such payments, and applying payments to the borrower’s account pursuant to the terms of the student education loan or the contract governing the servicing of the loan;
  • during a period when no payment is required on the student education loan, maintaining account records for the loan and communicating with the student loan borrower regarding the loan, on behalf of the holder of the loan; or
  • interacting with a student loan borrower to facilitate the loan servicing as described in [the amended laws], including activities to help prevent loan default on obligations arising from a student education loan.

Importantly, the only entities exempt from licensing are: (1) a State or federally chartered bank, savings bank, savings and loan association, or credit union; (2) a wholly owned subsidiary of a bank or credit union; and (3) “any operating subsidiary where each owner of the operating subsidiary is wholly owned by the same bank or credit union.”

Potential Impact on Investors

The “directly or indirectly” language in the licensing obligation may raise concerns for entities that invest: (1) in student loan debt, or (2) in stand-alone master servicing rights in various types of debt.  Other state laws with similarly broad language have given state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in that type of debt without the passage of new laws or regulations. For example, state mortgage regulators may utilize such language to regulate entities that passively invest in whole residential mortgage loans on a servicing-released basis or the stand-alone mortgage servicing rights (“MSRs”) in such loans. Such regulators use this language to impose state mortgage servicer licensing obligations on persons that passively invest in that type of debt, and they are able to do so without any further legislative or regulatory action.

Applying this logic to SB 1149, DOBI could require passive, secondary market investors in New Jersey student education loans to be licensed as New Jersey Student Loan Servicers without any further legislative or regulatory action.  SB 1149 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan; further, the licensing obligation extends to those “indirectly” acting as a student loan servicer.  Both provisions could be read to require licensure for persons that passively invest in New Jersey student education loans and hire appropriately-licensed or exempt third-party subservicers to handle the servicing of such loans and all borrower-facing interactions.

Expectations for Future Regulation of Investors in New Jersey Student Loan Debt

As noted above, neither DOBI nor the New Jersey legislature appears to have released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt.  However, a growing number of states are regulating the student loan industry amid growing fears that there is waning federal regulation and oversight of the industry under the Trump administration.  As a result, it would not be surprising to see the Ombudsman or the Commissioner of DOBI release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in New Jersey student loan debt, in the months to come.

Rhode Island Requires Licensure for Virtual Currency Business Activity

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A&B Abstract:

Effective January 1, 2020, Rhode Island will regulate virtual currency under its money transmission laws.

Background

Forty-nine states and the District of Columbia regulate money transmission.  Almost all of those jurisdictions have different definitions and exemptions that determine whether their laws apply to certain businesses or activities. The result is a complex, patchwork regulatory landscape. Further complicating the issue is the question of whether virtual currency is considered money or monetary value for purposes of current state money transmitter laws.

States have started to answer this question. Through official guidance, regulatory agency opinion letters, and/or legislation, states are clarifying whether their laws apply to the sale, exchange or transfer of virtual currency.  On July 15, Rhode Island’s governor signed House Bill 5847, which clarifies that certain virtual currency business activities will be subject to the state’s money transmitter regime.  The measure also adds provisions to the current law related to currency transmissions and licensing requirements.

What Activity Is Regulated?

The bill generally requires a person engaging in “currency transmission” for a fee or other consideration to be licensed with the state. “Currency transmission” explicitly includes “maintaining control of virtual currency or transactions in virtual currency on behalf of others.” The bill provides several exemptions from licensure requirements, including for persons using virtual currency for personal, family or household purposes.

For purposes of the bill, virtual currency means “a digital representation of value that: (A)[i]s used as a medium of exchange, unit of account, or store of value; and (B) [i]s not legal tender, whether or not denominated in legal tender.” The definition excludes:

  • rewards or affinity program value that cannot be taken from or exchanged with the merchant for “legal tender, bank credit or virtual currency;”
  • digital representations of value used within online games;
  • “[n]ative digital token used in a proprietary blockchain service platform;” and
  • gift certificates, gift cards, and general-use prepaid cards.

The bill requires licensees engaging in virtual currency business activities to provide certain specified disclosures to residents.  Further, licensees must create and maintain certain compliance programs, including business continuity and disaster recovery programs, anti-fraud programs, anti money-laundering programs and information and operational security programs.

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.

Will Maine begin to regulate passive, secondary market investors in student loan debt?

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A&B Abstract: 

Maine’s New Student Loan Bill of Rights requires the licensing of any person acting as “directly or indirectly” as a student loan servicer.  What might that mean for passive, secondary market investors in student loan debt?

Background

On June 20, 2019, Maine Governor Janet Mills signed into law LD 995, Maine’s “Student Loan Bill of Rights.” The legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the State of Maine.

Effective January 1, 2020, LD 995 adds a new Article 14 to Title 9-A of Maine Revised Statutes that, among other things:

  • Creates a student loan ombudsman with responsibilities that include reviewing and possibly resolving complaints from borrowers, analyzing borrower data, and helping borrowers understand rights and responsibilities; and
  • Provides that a person may not act as a student loan servicer, “directly or indirectly,” without first obtaining a license from the Maine Bureau of Consumer Credit Protection (the “Bureau”).

LD 995 bears certain similarities to other states’ efforts to regulate the student loan servicing industry and passive, secondary market investors in student loan debt, in particular Maryland’s SB 1068, which took effect on October 1, 2018. Although it appears that the Bureau has not yet released formal guidance regarding the applicability of LD 995’s licensing obligations to passive, secondary market investors in Maine student loan debt, the language of the new laws appears to be broad enough to allow the Bureau to regulate such persons upon a recommendation from the student loan ombudsman and raises the question of whether the Bureau will require such persons to be licensed or registered to engage in business.

Responsibilities of the Student Loan Ombudsman

Effective January 1, 2020, Maine Revised Statutes, title 9-A, section 14-104 requires the Superintendent of the Bureau to support, maintain, and designate a “student loan ombudsman” to provide timely assistance to student loan borrowers. In consultation with the Superintendent, the student loan ombudsman must:

  • Receive, review, and attempt to resolve complaints from student loan borrowers;
  • Compile and analyze data on such student loan borrower complaints;
  • Assist student loan borrowers to understand their rights and responsibilities under the terms of their student education loans;
  • Provide information to the public, agencies, Legislators and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
  • Analyze and monitor the development and implementation of federal, state, and local laws, ordinances, regulations, rules, and policies relating to student loan borrowers and recommend any necessary changes;
  • Review the complete student education loan history for a student loan borrower who provides written consent for such a review;
  • Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, public institutions of higher education, student loan servicers, and any other participants in student education loan lending with any student education loan servicing concerns;
  • Establish and maintain a student loan borrower education course within existing resources that includes educational presentations and materials regarding student loans; and
  • Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in new Article 14.

Section 14-104 grants the student loan ombudsman broad authority to regulate Maine’s student loan industry, particularly with respect to those that service Maine student education loans. With respect to the bolded language above, it appears that the student loan ombudsman will have the ability to recommend changes to Maine’s regulation of passive, secondary market investors in Maine student loan debt, which is further supported by the new student loan servicer licensing requirements in Section 14-107.

Licensing of Student Loan Servicers

Section 14-103(4) defines the term “student loan servicer” to mean “a person, wherever located, responsible for the servicing of a student education loan to a student loan borrower,” and Section 14-103(1) defines the term “servicing” to mean:

(A) Receiving scheduled periodic payments from a student loan borrower pursuant to the terms of a student education loan;

(B) Applying the payments of principal and interest and such other payments with respect to the amounts received from a student loan borrower as may be required pursuant to the terms of a student education loan; and

(C) Performing other administrative services with respect to a student education loan.

Section 14-107 provides that “[a] person may not act as a student loan servicer, directly or indirectly, without first obtaining a license from the superintendent[,]” unless otherwise exempt. Importantly, this section provides that only “[a] licensed bank or credit union, a wholly owned subsidiary of such a bank or credit union and an operating subsidiary of such a bank or credit union as long as each owner of the operating subsidiary is wholly owned by that bank or credit union” is exempted from this licensing requirement.

For those readers tracking the development of state regulatory agencies’ policies on state licensing requirements applicable to entities that (1) invest in student loan debt (e.g., Maryland) or (2) invest in stand-alone mortgage servicing rights (“MSRs”), this language may raise some concerns. State legislators across the country have enacted laws containing broad language, similar to the language in LD 995, that gives state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in those types of debt without the passage of new laws or regulations. Specifically, persons tracking such developments may be concerned by the fact that LD 995 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan, as that terminology could be read by the Bureau to include those entities that hold the servicing rights in Maine student education loans and contract with appropriately-licensed or exempt third-party subservicers to handle the servicing functions on the loans and borrower-facing interactions. Further, such persons also may be concerned that the licensing obligation extends to those “indirectly” acting as a student loan servicer, as many state regulatory agencies have used this specific verbiage to require entities that passively invest in MSRs to be licensed to engage in business, even if they do not directly service such MSRs or maintain any borrower contact.

Expectations for Future Regulation of Investors in Student Loan Debt

As noted above, neither the Bureau nor the Maine Legislature has released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt; however, as we watch other states’ legislative measures and regulatory policies unfold in the context of student loan debt and MSRs, it would not be surprising to see the Bureau or student loan ombudsman release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in Maine student loan debt, in the months to come.

 

 

Alston & Bird Issues Client Alert on Ohio Division of Financial Institution Guidance Requiring Mortgage Loan Servicer Registration for Passive Secondary Market Investors in Ohio MSRs

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On March 12, Alston & Bird Partner Nanci Weissgold, and Senior Associate Lisa Lanham issued a Client Alert on Ohio Division of Financial Institution’s (“Division”) guidance on clarification of legislative amendments (as enacted by HB 489 and currently in effect as of March 20, 2019) to the Ohio Residential Mortgage Lending Act (“RMLA”), that requires mortgage loan servicers to be registered under the RMLA.  The Division answered the industry’s question as to whether the registration requirement would apply to passive secondary market investors in Ohio Mortgage Servicing Rights (“MSRs”).  Accordingly, the Division issued answers to its Frequently Asked Questions to provide guidance and explicitly stated that even though a passive secondary market investor in MSRs is not conducting any direct servicing activities, it is still required to be licensed or registered as a mortgage servicer under the RMLA amendments.

The Client Alert can be found here on our website.