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.