STUDENT LOAN Licensing Laws - PowerPoint Presentation

STUDENT LOAN Licensing Laws & Regulations~~~Presentation to NCHER 2019 Annual ConferenceJune 3-5, 2019

PresentersLinda J. Randby Deputy General CounselPHEAA Legal Services DivisionJaye O’ConnellDirector of ComplianceVermont Student Assistance Corporation All views expressed are those of the presenters and are not attributable to PHEAA, VSAC or NCHER 2

Commonalities of State Student Loan Licensing Laws 3

What prompted the State level push for Student Loan Servicer Licensing laws?CFPB oversight changesStudents burdened with debtBackground 4

HistoryStates that have passed licensing laws16 States with pending licensing legislation 5 California Connecticut Washington Illinois District of Columbia New York Colorado Washington D.C. AZ, CA, IA, ME, MA, MD, MN, MO, NC, NJ, NV, NY, OR, PA, RI, SC

Common Themes in the LegislationImposing servicing requirementsImposing licensing requirementsEstablishing an Ombudsman's office6

Common Themes in the LegislationEXAMPLES:New Jersey's pending bill would impose servicing requirements and establish an Ombudsman's office.Pennsylvania’s pending bill establishes an Ombudsman’s office, but has no licensing requirements. 7

Overview of LegislationFrequently, the legislative intent expressed by states includes enhanced oversight of federal servicers in light of perceived gaps from the Federal Student Aid office. For example, Colorado includes this language:Section 1: Legislative Intent The General Assembly hereby....(b) Determines that:(I) Student loan servicers administer student loans, serving as a critical link between borrowers and lenders in managing accounts, processing payments, and communicating directly with borrowers. Despite this critical relationship, according to the federal consumer financial protection bureau (CFPB), there are no consistent, market-wide federal standards for student loan servicing . 8

Overview of LegislationThe bills are neutral to the loan holder/originator. Typically, the legislative intent of the bills is to regulate privately and federally held loans. Example:Illinois – Definition in Section 1-5 > "Student loan" or "loan" means any federal education loan or other loan primarily for use to finance a postsecondary education….” 9

Overview of LegislationAnother example:Colorado – Section 5 "STUDENT EDUCATION LOAN": (a) MEANS A LOAN THAT IS MADE, INSURED, OR GUARANTEED UNDER TITLE IV OF THE FEDERAL "HIGHER EDUCATION ACT OF 1965", 20 U.S.C.SEC. 1070 ET SEQ., AS AMENDED, OR THAT IS EXTENDED TO A STUDENT LOAN BORROWER FOR THE PURPOSE OF FUNDING, IN WHOLE OR IN PART, EDUCATION EXPENSES. 10

Overview of Legislation Another example:Washington - Section 2 “Consumer information about the differences between private student loans and federal student loans, including a brief overview of the availability of income-driven repayment plans and loan forgiveness programs for federal loans…”Washington - Section 14 “(5) In addition for all consumer loans made by a licensee that are a refinance of a federal student education loan, the licensee must provide to the borrower a clear and conspicuous disclosure that some repayment and forgiveness options available under federal student education loan programs, including without limitation income-driven repayment plans, economic hardship deferments, or public service loan forgiveness, will no longer be available to the borrower if he or she chooses to refinance federal student education loans with one or more consumer loans. 11

Scope & ExclusionsThe scope of the bills tends to be broad upon introduction and, as the bill moves through the legislative process and negotiations occur, exceptions to licensing requirements are introduced. For example, guaranty agencies are frequently excluded from licensing requirements or there are exclusions for servicers with minimum volume in a licensing state.12

Scope & ExclusionsCalifornia - Example of change in definitionsOriginally, the CA Student Loan Servicer Bill (AB 2155) defined the term "servicing" broadly enough to encompass guarantors. AB 38 changed the definition of "student loan servicer" to carve out a limited exemption for those engaged in post-default activities. Section 28104 of the CA Financial Code- "A “student loan servicer” does not include a debt collector … whose student loan debt collection business, and business operations, involve collecting, or attempting to collect, on defaulted student loans, that is, federal student loans for which no payment has been received for 270 days or more, or private student loans, in default, according to the terms of the loan documents. Debt collectors who also service non-defaulted student loans, as part of their business, and business operations, are “student loan servicers.” 13

Scope & ExclusionsState Agencies have not been exempt from licensing. In Missouri, a licensing bill has been introduced and there is also a state agency that is a not-for-profit federal student loan servicer.However, Colorado does include an exemption for Colorado government servicers.(8) "STUDENT LOAN SERVICER": (b) DOES NOT INCLUDE: (V) AN AGENCY, INSTRUMENTALITY, OR POLITICAL SUBDIVISION OF THIS STATE, BUT ONLY TO THE EXTENT THAT SERVICING IS PERFORMED THROUGH SECTION 23-1-112 AND PURSUANT TO ARTICLE 3.1 OF TITLE 23. THIS SUBSECTION (8)(b)(V) DOES NOT EXEMPT A NONGOVERNMENTAL ENTITY THAT PERFORMS STUDENT LOAN SERVICING PURSUANT TO A CONTRACT WITH AN AGENCY, INSTRUMENTALITY, OR POLITICAL SUBDIVISION OF THE STATE. 14

UDAAP (Unfair, Deceptive or Abusive Acts or Practices)State servicer licensing bills are frequently drafted to make any failure to meet servicing requirements or engaging in a prohibited practice a UDAAP under the state's existing consumer protection law.15

UDAAP (Unfair, Deceptive or Abusive Acts or Practices)For example, Maryland's Student Loan Servicers Law, Chapter 546, enacted in May, focused on UDAAPs.Prohibiting a student loan servicer from employing any scheme, device, or artifice to mislead a student loan borrower; prohibiting a student loan servicer from engaging in any unfair, abusive, or deceptive trade practice toward any person; prohibiting a student loan servicer from knowingly or recklessly misapplying or refusing to correct a misapplication of a certain payment; requiring a student loan servicer to respond to a certain inquiry or complaint in a certain manner; etc. 16

UDAAPExamples of UDAAPs under MARYLAND’s Law:A reckless or knowing misapplication of a borrower's payment or a refusal to correct the misapplication. Failure to follow a borrower's direction for application of a non-conforming payment. Borrower direction can be given at the time of payment, for future payments, or to previous and future payments, where direction is in response to a student loan servicer inquiry. Failure to report positive credit history of a student loan borrower to a nationwide consumer reporting agency at least once a year, if the servicer reports to a nationwide CRA. 17

Federal Law ReferencesThe servicing requirements frequently include a requirement to comply with Federal consumer protection laws, such as the Truth in Lending Act. Some states make noncompliance with Federal law a UDAAP.Regardless of whether a state has passed a student loan servicing law, compliance with Federal consumer protection laws when servicing loans is required.18

State Student Loan Licensing Requirements19

Licensing RequirementsRequirements Typically Include:Submissions are made on-line through the NMLS Resource CenterLicensing and/or investigation fees and renewal fees Documents that affirm the servicer’s financial soundness requirements 20

Licensing RequirementsRequirements Typically Include:Credit reports, fingerprinting and/or criminal histories for officers, principals, or directors Submission of loan servicing volume and other reports (annual assessment fees may apply) Compliance with investigations or examinations and production of financial records as part of the state's ongoing oversight of the servicer 21

Licensing Requirements Annual Assessment Fees: Some states require the calculation of annual fees based on loan volume in their state. 22

Licensing Requirements Annual Assessment Fee EXAMPLES: CA – By Sept 30th, Commissioner will notify the servicer of pro rata fee due by Oct 31, based on the loan volume in the annual report submitted on March 15th. Fee no less than $250/year.CT – After July 1 st , Commissioner will notify the servicer of pro rata assessment, based on loan volume. WA – Due March 1st annually, based on loan volume and calculated at $38.46 per $1 million WA loan volume. 23

Servicing RequirementsThe servicing requirements can be either:SPECIFIC, such as the requirement to send responses to inquires from customers within a specific time frame, or BROAD, such as the prohibition against obtaining property by fraud or misrepresentation. 24

Servicing RequirementsSpecific requirements may be pre-empted due to conflict with a federal loan requirement. If a requirement is overly broad, concerns may be raised with industry groups.25

Managing ChangeMonitor – for changes in the lawsAnalyze – laws, early and oftenCommunicate – with internal and external stakeholdersDecide Document, document, document – every step of the way! 26

Example of “Conflict” between Federal & State RequirementsFEDERAL REQUIREMENT34 CFR 682.411 contains substantial due diligence requirements when a borrower becomes delinquent that include timing and communication requirements.STATE REQUIREMENTThe state laws contain disclosure requirements that many times are different than the federal requirements. 27

Preemption & IntergovernmentalImmunity28

Preemption - BasicallyAt a very basic level, the preemption doctrine refers to the idea that a higher authority of law will displace the law of a lower authority of law when the two authorities come into conflict. 29

A type of conflict preemption based on the seminal case Leslie Miller, Inc. v. Arkansas, 352 U.S. 187, 189–90 (1956) , which held that Arkansas cannot require a construction company to obtain a state contractor’s license to perform work at a federal air force base because it would give the state “a virtual power of review” over the federal government’s “responsibility” determination.At issue in Student Loan Servicing Alliance v. Taylor, et al. in the U.S. District Court of the District of Columbia.“This case involves the important question of whether the District of Columbia – and inferentially other states – may require student loan servicers who manage federally-owned and federally-guaranteed student loans to obtain a license to operate in the District of Columbia in an effort to protect the consumers of those loans.” Conflict Preemption

“Courts have consistently held that any state law that impedes the federal government’s ability to contract – including state licensing regimes that effectively second guess the United States’ contracting decisions – are preempted.” Because “the D.C. licensing scheme, in effect, requires SLSA’s members to ‘desist from performance until they satisfy a state officer upon examination that they are competent [to perform their duties] and pay a fee for permission to go on’” (quoting Leslie Miller, 352 U.S. at 190), “there is a risk that the federal government will contract with a servicer after evaluating its qualifications under federal law and regulations, and that servicer nevertheless will be determined to be unqualified by the Commissioner and barred from operating in the District of Columbia.” SLSA v. Taylor Holding

Intergovernmental Immunity - BasicallyAt a very basic level, under this doctrine, the federal government and the states are treated as independent sovereigns. The Supreme Court held that states may not regulate property or operations of the federal government.McCulloch v. Md., 17 U.S. 316 (1819)32

The doctrine specifies that state laws are unconstitutional if they regulate the federal government directly or discriminate against it. It can be characterized as a different way of looking at the issue in the Leslie Miller line of cases.In SLSA v. Taylor, the judge explained that “Leslie Miller has also been characterized as a discussion of the intergovernmental immunity doctrine, which is logical given the overlap between second-guessing federal contracting decisions as prohibited under conflict preemption and the direct regulation by a state of the federal government prohibited under the intergovernmental immunity doctrine.” Intergovernmental Immunity

Broader Impact of SLSA v. Taylor – holding is not just for student loan servicers   Government-Owned Loans (Direct Loans and Government-Owned FFELP Loans) Commercial FFELP Loans (Not Government-Owned FFELP Loans) Private Loans Student Loan Servicers Preempted (because service these loans pursuant to government contractors) Up for grabs – preempted in Chae v. SLM Corp .; not preempted in SLSA v. Taylor Not preempted Student Loan Lenders  N/A Up for grabs -- preempted in Chae v. SLM Corp .; not directly addressed in SLSA v. Taylor  Not preempted Guarantors  N/A Likely preempted (because guarantees are pursuant to federal contracts)  Not preempted Federal Law v. State Licensing Schemes

New DevelopmentsStates are proposing new student loan regulation schemes to attempt to work around SLSA v. TaylorExample: New YorkStates that a license is not required to engage in the business of servicing government-owned federal student loans but . . . Servicers must comply with requirements regarding books and records; reports and electronic filing, prohibited practices, examinations, etc., and be subject to penalties for violations. This is licensing without the slip of paper that is the license. Such schemes likely run afoul of principles of conflict preemption and intergovernmental immunity

Multi-State Compliance Program36 This Photo by Unknown Author is licensed under CC BY-SA

Getting OrganizedUnderstand business profile re: licensing and servicing requirementsLoan volume by stateExemptionsCompliance resourcesLicensing resourcesExamination support 37

Licensing “Ops” Obtaining the licenseNMLS access & useMeeting ongoing licensing obligationsCompliance Management SystemPlanning for new operations & examsFees 38

Servicing & ImplementationIs it really final?!Gap AnalysisSimilar gaps among states – implement highest common denominator?Common servicing gapsQualified Written Request Cut-off time for receipt of online payments Information to borrowers: online, reports, annual or periodic notices Treatment of non-conforming payments 39

ExaminationGetting organized – again…What to expectExamination experience 40

Q&A41Linda Randby: lrandby@pheaa.org