July 13, 2020

State Regulation of Student Loan Servicing Continues to Evolve

Jeremy Sairsingh

With the CARES Act [1]  effectively pausing loan payments for the tens of millions of borrowers with student loans owned by the Department of Education, and members of Congress increasingly proposing various forms of loan forgiveness as a possible response to the Covid-19 crisis, the federal government’s involvement in student lending has been front and center over the past couple of months. It is thus easy to forget that states are increasingly playing a central role in student lending, particularly when it comes to the regulation of student loan servicing.

As recently as 2015, no state had laws primarily targeted at regulating student loan servicers. As of this writing, such legislation has been enacted in at least 13 states, and proposed in over a dozen more.

Connecticut was the first state to enact a first-of-its-kind law (“An Act Concerning a Student Loan Bill of Rights”) in 2015 [2] that required licensure of student loan servicers, in addition to imposing a host of requirements on servicers and prohibiting various forms of conduct. A year later, California became the second state to pass such legislation with its “Student Loan Servicing Act,” [3] and shortly thereafter the District of Columbia enacted the “Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.” [4]

During the latter years of the Obama administration, student loan servicing had received significant attention from the Consumer Financial Protection Bureau, and the Connecticut, California, and D.C. laws could be characterized as an extension of servicers being a target of regulatory focus. In the wake of the 2016 presidential election, following policy and personnel changes at the Department of Education and the CFPB, state legislatures began taking up servicer legislation with a new sense of urgency.

Each of these enacted laws regulate servicer activities, largely addressing consumer-facing conduct by prohibiting various practices and requiring affirmative acts. While there is a degree of variation in terms of the topics addressed, at least one of two recurring features appears in virtually all of these statues: (1) a requirement that student loan servicers obtain a license unless exempt and (2) the creation of the role ombudsperson to assist student loan borrowers and handle related complaints. When Connecticut passed its law, both features were adopted, as was the case in a number of other jurisdictions, including Colorado, the District of Columbia, Illinois, Maine, New Jersey, Rhode Island, and Washington. Other states, like California and New York opted to include a licensing component, but chose to forgo establishing an ombudsperson. Conversely, other states have created the role of student loan ombudsperson, but stopped short of requiring licensing. This approach, typically the product of political compromise, was taken in Maryland, Nevada, and Virginia (but as described below, subsequent legislation has since added a licensing requirement).

Student loan servicer laws in each of these formats are now being proposed at a rapid clip in what has become a truly national trend. While 2020 deadlines in most states have passed for introducing (and, in many cases, passing) new legislation, Arizona, Iowa, Louisiana, Massachusetts, Minnesota, Missouri, New Hampshire, New Mexico, Oklahoma, Oregon, Pennsylvania, South Carolina, and Vermont either have or had new legislation pending this year. Additionally, each of the first three jurisdictions to enact servicer legislation—Connecticut, California, and the District of Columbia—have had bills introduced to expand their prior enactments. On April 22, 2020, Virginia became the latest state (as of this writing) to require licensure of servicers (SB 77/HB10, which goes into effect July 1, 2021). [5]

Virginia’s new law presents an interesting case. In 2018, the state enacted legislation to establish its Office of the Qualified Education Loan Ombudsman, but efforts to require licensure failed. After Democrats gained control of the legislature in the November 2019 election, Virginia swiftly enacted a new bill that provided for licensure. For now, expansive servicer licensing laws tend to be more of a “blue state” phenomenon, though not strictly so. The range of states considering servicer legislation suggests that such laws are well on their way to becoming a common component of state consumer financial services law.

In Virginia, the 2020 enactment was significantly broader than previous licensing legislation the state had considered in the prior session. Perhaps most notably, the law creates a private cause of action available to “[a]ny person who suffers damage as a result of the failure of a qualified education loan servicer to comply” with Virginia’s law or with applicable federal student loan servicing laws and regulations. In light of the range of prohibited practices and affirmative requirements set forth in SB 77/HB10, as well as the authority of the regulator to adopt rules, the potential scope of activities that could give rise to servicer liability is quite expansive. Private enforcement mechanisms, increasingly viewed by advocacy groups as a key form of borrower protection, are being considered elsewhere, including in Connecticut, California, and the District of Columbia, where the laws currently in effect rely primarily on public enforcement.

Another topic we can expect to see as more states consider servicer legislation is expanded protections for cosigners. Having a cosigner is generally the norm rather than the exception in the private student lending space. An active effort is underway to include provisions in servicer legislation designed to inform potential cosigners of the implications of being a cosigner, to keep active consigners aware of the status of the loan (by sending annual notices to cosigners and borrowers), and to allow a procedure for cosigner release.

The scope of exemptions has been another important issue. All of the servicer laws enacted to date, and most of those with status pending, have some sort of exemption for financial institutions. However, the legislation has not always been clear about which institutions are covered, especially with respect to whether out-of-state banks must comply. While some of these bills only offer an exemption from licensing, others provide that those exempt are not subject to the statute in its entirety.

Similarly, these laws raise a host of preemption issues as applied to entities with Department of Education contracts to service federal student loans. A common new approach, as exemplified by Virginia’s law, is the creation of a process whereby such servicers are automatically issued a license upon demonstrating eligibility. Whether this approach will survive judicial scrutiny remains to be seen. Recent legislation has also attempted to draft around potential preemption issues, including those related to federal student loan records, by providing that state law provisions are essentially only effective to the extent not inconsistent with federal law.

Additionally, the threshold questions of who counts as a “servicer” has been approached in various ways. While virtually every definition covers traditional servicing activities, such as receiving and applying payments and maintaining borrower accounts, some laws and draft legislation cover variants of borrower interaction that could conceivably be read to cover a lender or other party that does not perform traditional servicer functions.

The movement toward further regulation of student lending at the state level may not stop with servicing. In April, New Jersey legislators introduced a bill (S 2358) [6] that would require registration of private student lenders, impose a number of requirements on such lenders, and provide for a private right of action. This bill’s provisions would be added to the state’s more general lending requirements, such as those imposed by New Jersey’s usury and licensed lending laws. While a number of other states have provisions in their lending laws that apply to private student loans, this standalone registration law would be the first of its kind—though, as Connecticut revealed in 2015, it only takes one state to spark a trend.

 

1. H.R. 748, Pub. Law 116-136 (2020).
2. Public Act No. 15-162, available at: https://www.cga.ct.gov/2015/ACT/PA/2015PA-00162-R00HB-06915-PA.htm.
3. Assembly Bill No. 2251 (2016), available at: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB2251.
4. D.C. Law 21-214, available at: https://code.dccouncil.us/dc/council/laws/21-214.html.
5. VA SB 77/HB10 (2020), available at: https://legiscan.com/VA/bill/SB77/2020.
6. NJ S2358 (2020), available at: https://legiscan.com/NJ/text/S2358/id/2178248.

Jeremy Sairsingh

Ballard Spahr LLP

Jeremy Sairsingh is an Associate at Ballard Spahr LLP, in the firm's Philadelphia office.