Alston & Bird Consumer Finance Blog

Student Loans

Virginia Enacts Student Loan Servicing Law

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A&B ABstract:

On April 22, Virginia enacted a comprehensive new law imposing a licensing obligation on private student loan servicers and substantive restrictions on both private and federal student loan servicers.

Effective July 1, 2021, House Bill 10 and Senate Bill 77 (the “Law”) will require the licensing of and regulate student loan servicers.  Notably, the Law applies to both private servicers and those with contracts with the U.S. Department of Education (“USDOE”). Entities who will be subject to the Law’s licensure requirement may begin applying for a license March 1, 2021 through the Nationwide Mortgage Licensing System.

A New Licensing Obligation

The Law provides that “[n]o person shall act as a qualified education loan servicer…without having first obtained a license under this chapter from the [State Corporation] Commission.”

Who is a Servicer?

A “qualified education loan servicer” (“Servicer”) means any person, wherever located that:

  • Receives any scheduled periodic payments from a qualified education loan borrower or notification of such payments or applies payments to the qualified education loan borrower’s account pursuant to the terms of the qualified education loan or the contract governing the servicing;
  • During a period when no payment is required on a qualified education loan, (i) maintains account records for the qualified education loan and (ii) communicates with the qualified education loan borrower regarding the qualified education loan, on behalf of the qualified education loan’s holder; or
  • Interacts with a qualified education loan borrower, which includes conducting activities to help prevent default on obligations arising from qualified education loans or to facilitate any activity described above.

The term does not include a wholly owned subsidiary of a depository institution, a financial institution subject to regulation under the farm credit system, or any public or private institution of higher education.

Other Terms

The term “qualified education loan borrower” (“Borrower”) means any current resident of Virginia who has received or agreed to pay a qualified education loan or any person who is a co-signer to a qualified education loan.

A “qualified education loan” is any loan primarily used to finance a postsecondary education and costs of attendance at a postsecondary public or private educational institution. The term also includes a refinancing of a qualified education loan.  However, the term does not include an extension of credit under an open-end credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.

Exemption

Notably, the Law provides for the automatic issuance of a license to any person under contract with the USDOE to service federal student loans; such entities must satisfy eligibility criteria for this exemption. Despite being exempt from licensing, federal student loan servicers remain subject to the Law’s substantive requirements.

The Law does not specifically address whether those servicing student loans in the secondary market are subject to licensing.

Duties of a Licensed Qualified Education Loan Servicer

The Law also imposes a series of duties on a licensed Servicer.

First, a Servicer must evaluate a Borrower for eligibility for an income-driven repayment program prior to placing the Borrower in forbearance or default, if an income-driven repayment program is available to the Borrower.

Second, a Servicer must respond to a written inquiry from a Borrower or the representative of a Borrower within 10 business days after the receipt of the request, and within 30 business days after receipt, provide information relating to the request, and if applicable, any action the Servicer will take to correct the account or an explanation that the account is correct. Such 30-day period may be extended for not more than 15 days if, before the end of the 30-day period, the Servicer notifies the Borrower, or the Borrower’s representative, as applicable, of the extension and the reasons for delay in responding.

Third, a Servicer must not furnish to a consumer reporting agency, during the 60 days following receipt of a written request related to a dispute on a Borrower’s payment on a qualified education loan, information regarding a payment that is the subject of the written request.

Fourth, except as provided in federal law or required by a qualified education loan agreement, a Servicer must inquire of a Borrower how to apply an overpayment to a qualified education loan. A Borrower’s direction on how to apply an overpayment to a qualified education loan shall remain in effect for any future overpayments during the term of a qualified education loan or until the Borrower provides different directions. (For purposes of that requirement, “overpayment” means a payment on a qualified education loan that exceeds the monthly amount due from a Borrower on the qualified education loan, which payment may be referred to as prepayment.)

Fifth, a Servicer must apply partial payments in a manner that minimizes late fees and negative credit reporting. If loans on a Borrower’s qualified education loan account have an equal level of delinquency, a Servicer shall apply partial payments to satisfy as many individual loan payments as possible on a Borrower’s account. As used in this subdivision, “partial payment” means a payment on a qualified education loan account that contains multiple individual loans in an amount less than the amount necessary to satisfy the outstanding payment due on all loans in the qualified education loan account, which payment may be referred to as an underpayment.

Sixth, a Servicer must require, as a condition of sale, an assignment, or any other transfer of the servicing of a qualified education loan, that the new loan servicer honor all benefits originally represented as available to a Borrower during the repayment of the qualified education loan and preserve the availability of the benefits, including any benefits for which the Borrower has not yet qualified. If a Servicer is not also the loan holder or is not acting on behalf of the loan holder, the Servicer satisfied this requirement of this subsection by providing the new loan servicer with information necessary for the new loan servicer to honor all benefits originally represented as available to a Borrower during the repayment of the qualified education loan and preserve the availability of the benefits, including any benefits for which the Borrower has not yet qualified.

Finally, in the event of a sale, assignment, or other transfer of the servicing of a qualified education loan that results in a change of identity of the person to whom a Borrower is required to send payments or direct any communication regarding the loan, a Servicer must:

  • Within 45 days after the sale, assignment, or other transfer of the loan, transfer to the new loan servicer all records regarding the Borrower, the account of the Borrower, and the qualified education loan of the Borrower;
  • Notify the affected Borrower of the sale, assignment, or transfer, and provide the Borrower a notice, at least seven days before the Borrower’s next payment, including: (i) the identity of the new qualified education loan servicer; (ii) the effective date of the transfer to the new servicer; (iii) the date on which the existing servicer will no longer accept payments; and (iv) the contract information for the new servicer; and
  • Implement policies and procedures to verify the new qualified education loan servicer has received all records regarding the Borrower, the account of the Borrower, and the loan of the Borrower, including the repayment states of the Borrower and any benefits associated with the qualified education loan of the Borrower.

The Law also provides additional requirements for Servicers relating to recordkeeping, and to reporting obligations to the Commission.

Prohibited Activities

The Law also prohibits Servicers from engaging in certain conduct. A Servicer must not:

  1. Directly or indirectly employ any scheme, device, or artifice to defraud or mislead Borrowers;
  2. Engage in any unfair or deceptive act or practice toward any person or misrepresent or omit any material information in connection with the servicing of a qualified education loan, including misrepresenting (i) the amount, nature, or terms of any fee or payment due or claimed to be due on a qualified education loan; (ii) the terms and conditions of the loan agreement; or (iii) the Borrower’s obligation under the loans;
  3. Obtain property by fraud or misrepresentation;
  4. Misapply qualified education loan payments to the outstanding balance of a qualified education loan;
  5. Provide inaccurate information to a naturally recognized consumer credit bureau;
  6. Fail to report both the favorable and unfavorable payment history of the Borrower to a nationally recognized consumer credit bureau at least annually if the Servicer regularly reports information to such a credit bureau;
  7. Make any false statement of a material fact or omit any material fact in connection with any information provided to the Commission or another governmental authority;
  8. Engage in any other prohibited activities identified in regulations adopted by the Commission pursuant to the Law; or
  9. Commit an abusive act or practice in connection with the servicing of a qualified education loan if the act or practice does either of the following:
    • Materially interferes with the ability of a Borrower to understand a term or condition of a qualified education loan; or
    • Takes unreasonable advantage of:
      • A lack of understanding on the part of a Borrower of the material risks, costs, or conditions of the qualified education loan;
      • The reasonable reliance by the Borrower on a person engaged in the servicing of a qualified education loan to act in the interests of the Borrower; or
      • The inability of a Borrower to protect the interests of the Borrower when selecting (i) a qualified education loan or (ii) a feature, term, or condition of a qualified education loan.

Penalties and Enforcement

The Law gives the Commission broad authority to act on violations of the Law. The Commission may enter cease and desist orders against any person found to violate the Law and may assess a civil penalty not to exceed $2,500 for any violation. Each separate violation is subject to the penalty, and every day that an unlicensed person engages in the business of a Servicer constitutes a separate violation. In addition, any violation of the Law also constitutes a violation of the Virginia Consumer Protection Act and any violation is subject to any and all the enforcement provisions under that statute.

Private Right of Action

The Law allows any person who suffers damages as a result of the failure of a Servicer to comply with the law, and all applicable federal regulations, to bring a private cause of action. A person may recover actual damages, in an amount no less than $500, an order enjoining a Servicer from an offending method, act, or practice, restitution of property, punitive damages, attorneys’ fees, and any other relief the court deems proper. If, by a preponderance of the evidence, the court finds that a Servicer has engaged in conduct that substantially interferes with a Borrower’s right to an alternative payment arrangement, loan forgiveness, cancellation, or discharge, or any other financial benefit under the Higher Education Act of 1965, the court shall award treble damages in an amount no less than $1,5000 per violation.

Takeaway

Virginia’s decision to license private student loan servicers and to regulate student loan servicers more broadly comes at an interesting time, as the Consumer Financial Protection Bureau and the USDOE work to coordinate the examination of student loan servicers at the federal level. There have been jurisdictional tensions between the federal government and state governments regarding oversight of federal student loan servicers, and Virginia’s regulation of student loan servicers continues to show that states are eager assert regulatory authority.

CFPB Issues Winter 2020 Supervisory Highlights

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A&B ABstract:

The Winter 2020 Supervisory Highlights identifies the CFPB’s findings from recent examinations, noting violations that resulted in compliance management system weakness.

CFPB Issues New Edition of Supervisory Highlights:

The Winter 2020 edition of the Consumer Financial Protection Bureau (“CFPB”) Supervisory Highlights details recent examination findings relating to debt collection, mortgage servicing, and student loan servicing, among other topics.

Debt Collection

 With respect to debt collection, the CFPB focused on:

  • Failure to disclose in communications subsequent to the initial written communication that the communication is from a debt collector, in violation of Section 807(11) of the FDCPA; and
  • Failure to send a written validation notice within five days after the initial communication with the consumer, in violation of Section 809(a) of the FDCPA.

As a result of these deficiencies, the CFPB reported that servicers revised their policies and procedures, and monitoring and training programs.

Mortgage Servicing and Loss Mitigation

With a focus on compliance with the loss mitigation provisions of Regulation X, the CFPB’s first finding was that servicers failed to notify borrowers in writing of the servicer’s determination that the loss mitigation application is complete or incomplete within five business days of receiving a loss mitigation application.  Second, the CFPB found that servicers failed to provide borrowers with a written notice of available loss mitigation options within 30 days of receiving the complete loss mitigation application.

Finally, the CFPB cited servicers’ failure to comply with Regulation X’s requirements, including providing a written notice to borrowers, for offering a short term loss mitigation option to a borrower based on an evaluation of an incomplete loss mitigation application. In this instance, the servicers granted short-term forbearance if the borrower in a disaster area experienced home damage or loss of income from the disaster. The borrowers received such accommodation after speaking with the servicer over the phone and responding to certain questions.

In response to that finding, the CFPB reminded servicers that an application for loss mitigation can be oral or written.   Because the servicer’s efforts to respond to a natural disaster were the partial cause of violations, the CFPB only required the servicer to develop plans to ensure staffing capacity in response to any future disaster-related increases in loss mitigation applications. The CFPB also reminded servicers of its September 2018 Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, which provides flexibility for servicers to assist borrowers during a major disaster or emergency but does not lift the Regulation X requirements.

Payday Lending

With a focus on Regulation Z, Regulation B, and unfair acts or practices, the CFPB found that lenders engaged in unfair acts or practices when they: (1) processed borrowers’ payments, but did not apply such payments to borrowers’ loan balances in lenders’ systems; (2) lacked systems to detect unapplied payments; and (3) incorrectly treated borrowers accounts as delinquent. The CFPB found that the injury was not reasonable avoidable by the borrowers because lenders conveyed incorrect information to them about their accounts and failed to follow up on borrower’s complaints. Furthermore, because the cost to lenders to implement appropriate accounting controls to reconcile payments would have been reasonable, countervailing benefits did not outweigh the injury.

Additionally, the CFPB found that a payday lender engaged in unfair acts or practices by assessing consumers a fee as a condition of paying or settling a delinquent loan when the underlying loan contract required the lender to pay that particular fee. The lender mischaracterized the fee as a court cost (which would have been paid by the borrower) or did not disclose it. According to the CFPB, a lack of monitoring and/or auditing of the lender’s collection practices caused the error. In response to this finding, the lender refunded the fee to affected consumers and made changes to its compliance management system.

Other Payday Lending Observations

Further, the CFPB found that payday lenders:

  • Violated Regulation Z by relying on employees to manually calculate APRs when the lender’s loan origination system was unavailable. The CFPB found that errors made in calculating the term of the loan, which resulted in misstated APRs, were caused by weaknesses in employee training.
  • Violated Regulation Z by charging a loan renewal fee to consumers who were refinancing delinquent loans and omitted such fee from the finance charge, resulting in inaccurate disclosure of the APR and finance charge. The CFPB found that a lack of detailed policies and procedures and training contributed to the Regulation Z violations. In response, the lender refunded the fee to the consumer explaining the reason for the refund and strengthened its policy and procedures and training program.
  • Violated record retention requirements of Regulation Z by failing to maintain evidence of compliance for two years. The CFPB found that the violation resulted in part from a lack of training and detailed policies and procedures on record retention.
  • Violated Regulation B by providing consumers with an adverse action notice that incorrectly stated the principal reason for taking an adverse action as a result of a coding error. In response, the lenders sent corrected adverse action notices to consumers and made changes to the system that generate the notices.

Student Loan Servicing

With a focus on unfair practices, the CFPB found that servicers engaged in an unfair act or practice caused by a data mapping errors during the transfer of private loans between servicing systems that resulted in inaccurate calculations of monthly payment amounts. As a result, borrowers may have made payments based on the inaccurate amounts, incurred late fees on such inaccurate amounts, or had inaccurate amounts debited from their account. In response to the examination findings, the CFPB required servicers to remediate affected consumers and implement new processes to eliminate data mapping errors.

 Takeaways

Highlighting debt collection, mortgage servicing, payday lending and student loan servicing, the Supervisory Observations in the Winter 2020 Supervisory Highlights showcase the importance of adequate policies and procedures, training, monitoring and auditing and system controls to avoid consumer harm and violation of consumer financial laws.  Although they cut across multiple industries, the CFPB’s findings highlight common themes – such as entities’ liability for violations that result from system errors or the assessment of unauthorized fees, and the need for careful monitoring in connection with servicing transfers.

 

Massachusetts Poised to Regulate Student Loan Servicers

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A&B ABstract: Amid growing concerns of a student loan crisis, proposed Massachusetts H. 3977 is worth watching. If enacted, it would provide the Division of Banks and the Attorney General additional regulatory and enforcement authority over student loan servicers. It also would establish a new Consumer Assistance Unit to help consumers address complaints in any area enforced by the Division of Banks.

Discussion

As reported in Housing Wire, student loan debt has reached $1.5 trillion, enough to buy every home in the United States twice.  In response to the foreclosure crisis, Massachusetts enacted robust laws over mortgage servicers and continues to be active in enforcing those laws.  It should come as no surprise then that the Commonwealth is turning its attention to student loan servicers and proposing additional oversight by Office of Attorney General (“Office”) and the Division of Banks (“Division”). While Massachusetts legislators have proposed multiple measures to regulate student loan servicers, H. 3977 is the one to watch in 2019.

A New Licensing Obligation

Effective in January 2021 H. 3977 would  provide that “[n]o person shall directly or indirectly act as a student loan servicer” without obtaining a license from the Division unless exempt. A “student loan servicer” is defined broadly to include

companies that collect payments on a student loan, respond to customer service inquiries, and perform other administrative tasks associated with maintaining a student loan, disburse money from the student loan track student loans while borrowers are in school, process payments, respond to borrower inquiries and information requests, accept applications and process changes in repayment plans, deferments, forbearances, or other activities to prevent default, maintain student loan records, ensure the administration of loans in compliance with federal regulations and other legal requirements.

An exemption is available for banks, credit unions and their wholly owned subsidiaries as well as operating subsidiaries where each owner of the operating subsidiary is wholly owned by the same bank or credit union. It is unclear if the Commonwealth will require passive investors to become licensed.

Other Provisions of Note

While the measure doesn’t impose substantive practice requirements, it includes other provisions of note.

First, it imposes a minimum two-year record retention requirement and requires a servicer to produce records within five business days of a request from the Commissioner of Banks (“Commissioner”) or the Student Loan Ombudsman.

Second, it gives the Commissioner broad investigation and enforcement authority. Of note, the Commissioner may revoke or refuse to renew a student loan servicer licensed if he finds two or more violations during a one-year licensing period.  Further, a violation of federal law would constitute a violation of Massachusetts law. The Commissioner also may impose an administrative penalty of up to $50,000 per incident.;

Third, the measure prohibits a student loan servicer from engaging in unfair or deceptive acts. A violation of this law is also a violation of Chapter 93A, the Commonwealth’s UDAP law that allows for treble damages.

The Student Loan Ombudsman

Following the examples set by other states (including Maine, Maryland, New Jersey and New York) and the CFPB, the measure would establish as of September 1, 2020, a “student loan ombudsman” within the Office .  The Ombudsman’s responsibilities include helping borrowers explore repayment options, apply for federal programs, avoid or remove a default, resolve billing disputes or garnishments, obtain loan account details, stop harassing collection calls and apply for discharges.  The Ombudsman also would disseminate educational materials and share information with the Division.

The Consumer Assistance Unit

As of September 1, 2020, the measure would establish a new Consumer Assistance Unit housed within the Division.  The Unit would have broad authority to help consumers address complaints in (i) any area the Commissioner has authority to regulate involving state-chartered banks and credit unions, check cashers, foreign transmittal companies, sales finance companies, mortgage lenders, brokers, originators, and student loan servicers, or (ii) other areas as the Commissioner deems appropriate.

Takeaway

Student loan servicing is on the radar of Massachusetts regulators.  Companies should be mindful of H. 3977. Additionally, with the creation of the Consumer Assistance Unit and with H. 3977 granting broad investigation and enforcement authority to the Commissioner, we expect to see increased scrutiny and enforcement actions relative to student loan servicers.

New York Proposes Student Loan Servicing Rules

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A&B ABstract

Amid growing concerns over the federal government’s “hands off” approach to regulating the student loan business, New York Governor Andrew Cuomo released 3 NYCRR 409, a proposed regulation aimed at providing significant consumer protections for New York student loan borrowers, to the public for comment. The deadline for comment on the regulation is September 29.

Proposal of Part 409

Governor Andrew M. Cuomo released for public comment a new regulation (“Part 409”) aimed at providing significant consumer protections for New York student loan borrowers. The proposed rules, promulgated pursuant to Section 718 of the New York Banking Law (effective October 9, 2019), are of little surprise, given that Governor Cuomo and the Superintendent of the New York Department of Financial Services (“NYDFS”), Linda Lacewell, have been quite outspoken about their increasing concerns about the state of the student loan market in New York.

Activities within the Scope of Part 409

To further the NYDFS’ mission, Part 409 provides that, except as otherwise provided in New York laws and regulations, “every person engaged in the business of servicing student loans owed must be licensed by the [NYDFS] as a student loan servicer.”

For purposes of Part 409, “student loan servicer” means “a person engaged in the business of servicing student loans owed by one or more borrowers.” Further, Part 409 defines the term “student loan” as “any loan to a borrower to finance postsecondary education or expenses related to postsecondary education.”

An entity is deemed to be “servicing” if it is:

  • receiving any payment from a borrower pursuant to the terms of any student loan;
  • applying any payment to the borrower’s account pursuant to the terms of a student loan or the contract governing the servicing of any such loan;
  • during a period where a borrower is not required to make a payment on a student loan, maintaining account records for the student loan and communicating with the borrower regarding the student loan on behalf of the owner of the student loan promissory note; or
  • in conjunction with the activities described [above] (a) providing any notification of amounts owed on a student loan by or on account of any borrower; (b) performing other administrative services with respect to a borrower’s student loan; or (c) interacting with a borrower with respect to or regarding any attempt to avoid default on the borrower’s student loan and facilitating the [receipt or application of payments].

Notably, “servicing” excludes “collecting, or attempting to collect, on a defaulted student loan for which no payment has been received for 270 days or more.”

Other Requirements and Restrictions

Part 409 requires entities that “service” New York student loans to:

  • Provide clear and complete information concerning fees, payments due, and terms and conditions of loans;
  • Apply payments in borrowers’ best interest, rather than in ways that maximize servicer fees;
  • Inform borrowers of income-based repayment and loan forgiveness options;
  • Maintain and provide to consumers a detailed history of their account;
  • When a borrower’s loan is transferred to a new servicer, ensure that all necessary servicing information is transferred with the loan so the borrower’s repayment is not disrupted;
  • Provide accurate information to credit reporting agencies;
  • Provide timely and substantive responses to consumer complaints; and
  • Refrain from defrauding or misleading borrowers, engaging in any unfair, deceptive, abusive or predatory act or practice, or misapplying borrowers’ payments.

What’s Next?

Part 409 is open for comment until September 29, 2019. Given the messaging from Governor Cuomo and the NYDFS surrounding the regulation of the New York student loan market and the fact that the NYDFS made its New York Student Loan Servicer license application available to entities engaging in “student loan servicing” through the Nationwide Multistate Licensing System & Registry on August 1, 2019, this may only be New York’s first step into regulating student loan servicers.

UPDATE: As a complement to its regulatory efforts, the DFS is also increasing its staffing on student loan servicing issues.  Since our initial post, Superintendent Lacewell has announced: the appointment of Mr. Winston Berkman-Breen as the DFS’s first-ever Student Advocate and Director of Consumer Advocacy; and (2) the formation of the Student Debt Advisory Board. Both appointments, part of the DFS “Step Up for Students” initiative, highlight that safeguarding student loan borrowers is a priority for both Governor Cuomo and Superintendent Lacewell.

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.