Alston & Bird Consumer Finance Blog

State Law

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.

North Carolina Enacts Servicemember Protections

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North Carolina is the latest state to extend the protections of the federal Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. §§ 3901 et seq., to active duty members of its National Guard.  What does the new law require?

North Carolina Servicemembers Civil Relief Act

On July 25, North Carolina Governor Roy Cooper signed into law the North Carolina Servicemembers Civil Relief Act, which extends the protections of the federal SCRA to North Carolina residents serving on active National Guard duty.  Although the statute generally mirrors federal law, a few distinctions are worth note.

Who is a Servicemember?

For purposes of the new law, a “servicemember” has the same meaning as under the federal SCRA.  The term also includes a member of the North Carolina National Guard (or a resident of North Carolina in another state’s National Guard) called to active duty by the governor for more than 30 consecutive days.  However, for the statute’s protections to apply, a member of the National Guard must provide the lender or servicer with a written or electronic copy of the order to military service no later than 30 days after the termination of such service.  As a result, some servicemembers must act affirmatively in order to receive the law’s protections.

The law also grants a dependent of a servicemember the same rights and protections as are provided to a servicemember under Subchapter II of the federal SCRA.  Thus, dependents are eligible for protection against default judgments, stays of proceedings, and restrictions on the maximum rate of interest an obligation may bear.

Who Can Enforce the Statute?

The new North Carolina law provides various enforcement mechanisms.  First, a violation of the federal SCRA is a violation of the North Carolina law.  Second, a violation of the North Carolina law is an unfair or deceptive trade practice for purposes of Chapter 75 of the North Carolina General Statutes.  Finally, either the North Carolina Attorney General or an aggrieved servicemember (through a private right of action) may bring an action to enforce the statute.

Rhode Island Requires Licensure for Virtual Currency Business Activity

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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.

Student Loan Servicers Remain Liable Under State Law for Affirmative Misrepresentations to Borrowers

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The Seventh Circuit recently held that the federal Higher Education Act does not preempt state law consumer protection and tort claims where student loan servicers made affirmative misrepresentations to borrowers regarding repayment options. As such, student loan servicers should be aware that representations they make to borrowers may be subject to state consumer protection laws.

Background

The Seventh Circuit, in Nelson v. Great Lakes Educational Loan Services Inc., No. 18-1531 (7th Cir. June 27, 2019), reversed the dismissal of a class action brought by student loan borrowers alleging that their loan servicer misled them regarding their repayment options.  The plaintiff, Nelson, alleged that her loan servicer—which communicated with borrowers about the repayment of their loans and assisted borrowers with alternative repayment plans—steered borrowers away from income-driven repayment plans and towards more burdensome options like forbearance.

When Nelson contacted Great Lakes about alternative repayment plans, a Great Lakes representative did not inform her of income-driven repayment plans that were available, and instead steered her towards forbearance.  Nelson argued that forbearance was not appropriate for borrowers experiencing long‑term financial difficulties like those she was facing, and that Great Lakes intentionally steered her away from other plans that would have been more appropriate for her situation.

Procedural History

Nelson brought claims for violations of Illinois’s Consumer Fraud and Deceptive Business Practices Act, as well as claims for fraud and negligent misrepresentation under Illinois common law.  The district court granted dismissal in favor of Great Lakes, finding that each of Nelson’s claims were premised on Great Lakes allegedly failing to disclose certain information to her, and were thus preempted by the federal Higher Education Act (“HEA”) because the HEA expressly provides that student loan servicers are “not [] subject to any disclosure requirements of any State Law.” (See 20 U.S.C. § 1098g.)

The Seventh Circuit, however, held that the district court’s ruling was overly broad, and drew a distinction between a failure to disclose and an affirmative misrepresentation.

When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information.  Those are affirmative misrepresentations, not failures to disclose.

As such, the court held that the HEA does not preempt the state law consumer protection and tort claims of a borrower who reasonably relied on a loan servicer’s representations.

Takeaway

As a result of this ruling, student loan servicers should be aware going forward that representations they make to borrowers regarding alternative repayment plans may very well be subject to state consumer protection laws.  The Seventh Circuit’s ruling suggests that just because a representation by a student loan servicer involves the disclosure of information, it does not necessarily fall under the preemptive protections of the HEA which shield student loan servicers from complying with state disclosure requirements. Rather, in contrast to merely failing to make a disclosure that would otherwise have been required under state law, student loan servicers remain liable for affirmative misrepresentations.

 

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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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.