Amended in Assembly May 31, 2016

Amended in Assembly May 10, 2016

Amended in Assembly April 20, 2016

Amended in Assembly March 28, 2016

California Legislature—2015–16 Regular Session

Assembly Bill No. 2251

Introduced by Assembly Member Mark Stone

begin delete

(Coauthor: Assembly Member Dababneh)

end delete begin insert

(Coauthors: Assembly Members Dababneh and Gonzalez)

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(Coauthor: Senator Leno)

February 18, 2016

An act to add Division 12.5 (commencing with Section 28100) to the Financial Code, relating to student loan servicers.

LEGISLATIVE COUNSEL’S DIGEST

AB 2251, as amended, Mark Stone. Student loan servicers: licensing and regulation: Student Loan Borrower’s Bill of Rights.

(1) Existing law establishes the Department of Business Oversight as headed by the Commissioner of Business Oversight who, among other things, generally provides for the licensure and regulation of persons who are engaged in various consumer financial businesses, including, but not limited to, the business of making consumer or commercial loans.

This bill would enact the Student Loan Borrower’s Bill of Rights providing for the licensure, regulation, and oversight of student loan servicers engaging in the servicing of student loans for borrowers, as those terms are defined, by the commissioner. The bill would prohibit a person from acting as a student loan servicer without a license, unless exempt from the licensing begin delete requirement end delete begin insert requirement, end insert and would require a licensee to provide specific services to a student loan borrower. The bill would require a person applying for a license to, among other things, pay the actual costs for processing an application and the investigation of the application, sign the application under penalty of perjury, and submit to a criminal background check by the Department of Justice. By expanding the scope of the crime of perjury and increasing who is authorized to receive criminal record information, this bill would impose a state-mandated local program. The bill would specify the basis for the commissioner to deny, revoke, or suspend a license that includes, among other begin delete basis, end delete begin insert bases, end insert a failure to comply with an investigation by the commissioner. The bill would make legislative findings in support of its provisions.

(2) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: yes.

The people of the State of California do enact as follows:

SECTION 1.  

The Legislature finds and declares all of the
following:

(a) Student loan debt is a national crisis. More than 40,000,000
people in the United States owe some amount of student
educational loan debt. Total student educational debt in the United
States currently exceeds $1.2 trillion, surpassing both the amount
of credit card debt and car loans. With college costs continuing to
rise, student educational debt continues to rise, and there is no
reduction in sight.

(b) While California’s financial aid programs are some of the
strongest in the nation and our state’s college graduates have among
the lowest educational debt burdens, California students and
graduates still incur significant debt. According to The Institute
for College Access & Success, 55 percent of California’s
graduating class of 2014 has student educational loan debt.
According to the United States Department of Education, as of
January 2015, there were approximately begin delete 4,156,00 end delete begin insert 4,156,000 end insert student
educational loan borrowers in California, and the total student
educational loan debt outstanding for Californians was
approximately $1.2 billion.

(c) Student educational loan debt is a hindrance on the state’s
economy, preventing borrowers from achieving financial
independence, buying property, and starting businesses.

(d) Student educational 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, marketwide federal standards for student
educational loan servicing.

(e) The CFPB released a report in September 2015 that found
that student educational loan borrowers encounter servicers that
discourage borrower-friendly alternative payment plans, fail to
respond to questions and payment processing errors, and fail to
provide sufficient information to borrowers regarding payments,
benefits, interest rates, and other charges.

(f) It is the intent of the Legislature to promote all of the
following:

(1) Meaningful access to federal affordable repayment and loan
forgiveness benefits.

(2) Reliable information about student educational loans and
loan repayment options.

(3) Quality customer service and fair treatment.

SEC. 2.  

Division 12.5 (commencing with Section 28100) is
added to the Financial Code, to read:

 

Division 12.5.  California Student Loan
Borrower’s Bill of Rights

 

Chapter  1. General Provisions

 

Article 1.  Short Title

 

28100.  

This division may be known and cited as the “California
Student Loan Borrower’s Bill of Rights.”

 

Article 2.  Requirement for License

 

28102.  

(a) A person shall only act as a student loan servicer,
directly or indirectly, as a licensee pursuant to this division. A
license shall not be transferable or assignable.

(b) Notwithstanding subdivision (a), any of the following shall
not be required to be a licensee to engage in servicing a student
loan to borrowers:

(1) A person authorized to service student loans to borrowers
pursuant to federal law.

(2) A bank, trust company, insurance company, or industrial
loan company doing business under the authority of, or in
accordance with, a license, certificate, or charter issued by the
United States or any state, district, territory, or commonwealth of
the United States that is authorized to transact business in this
state.

(3) A federally chartered savings and loan association, federal
savings bank, or federal credit union that is authorized to transact
business in this state.

(4) A savings and loan association, savings bank, or credit union
organized under the laws of this or any other state that is authorized
to transact business in this state.

(5) A wholly owned service corporation of a savings and loan
association or savings bank organized under the laws of this state
or the wholly owned service corporation of a federally chartered
savings and loan association or savings bank that is authorized to
transact business in this state.

 

Article 3.  Definitions

 

28104.  

For the purposes of this division, the following terms
have the following meanings:

(a) “Applicant” means a person applying for a license pursuant
to this division.

(b) “Borrower” means either of the following:

(1) A person who is a resident of the state who has received or
agreed to pay a student loan.

(2) A person who is a resident of the state who shares
responsibility for repaying a student loan with a person described
in paragraph (1).

(c) “Commissioner” means the Commissioner of Business
Oversight.

(d) “Control” means the possession, directly or indirectly, of
the power to direct, or cause the direction of, the management and
policies of a licensee under this division, whether through voting
or through the ownership of voting power of an entity that
possesses voting power of the licensee, or otherwise. Control is
presumed to exist if a person, directly or indirectly, owns, controls,
or holds 10 percent or more of the voting power of a licensee or
of an entity that owns, controls, or holds, with power to vote, 10
percent or more of the voting power of a licensee. A person shall
not be deemed to control a licensee solely by reason of his or her
status as an officer or director of the licensee.

(e) “Department” means the Department of Business Oversight.

(f) “Licensee” means a natural person licensed under this
division.

(g) “Person” means a natural person, a sole proprietorship, a
corporation, a partnership, a limited liability company, an
association, a trust, a joint venture, an unincorporated organization,
a joint stock company, a government, or a political subdivision of
a government, and any other entity.

(h) “Qualified written request” means a written correspondence
made by a borrower, other than notice on a payment medium
supplied by a licensee, transmitted by mail, facsimile, or
electronically through an email address or Internet Web site
designated by the licensee to receive communications from
borrowers that does all of the following:

(1) Enables the licensee to identify the name and account of the
borrower.

(2) Includes, to the extent applicable, either of the following:

(A) Sufficient detail regarding the information sought by the
borrower.

(B) A statement of the reasons for the belief of the borrower
that there is an error regarding the account of the borrower.

(i) “Servicing” means any of the following activities related to
a student loan of a borrower:

(1) Performing both of the following:

(A) Receiving any scheduled periodic payments from a borrower
or any notification that a borrower made a scheduled periodic
payment.

(B) Applying payments to the borrower’s account pursuant to
the terms of the student loan or the contract governing the
servicing.

(2) During a period when no payment is required on a student
loan, performing both of the following:

(A) Maintaining account records for the student loan.

(B) Communicating with the borrower regarding the student
loan on behalf of the student loan’s holder.

(3) Interactions with a borrower, including, but not limited to,
activities to help prevent default on obligations arising from a
student loan or conducted to facilitate the activities described in
paragraph (1) or (2).

(j) “Student loan” means any loan primarily for personal use to
finance education or other school-related expenses.

(k) “Student loan servicer” means, to the extent authorized by
federal law, a person responsible for servicing a student loan for
a borrower.

 

Chapter  2. Licensing

 

Article 1.  Commissioner of Business Oversight

 

28108.  

(a) The commissioner shall administer the provisions
of this division.

(b) The commissioner may promulgate regulations and issue
orders to further the purposes of this division.

28110.  

(a) The commissioner shall have the authority to
conduct investigations and examinations of an applicant or licensee
as follows:

(1) For purposes of determining whether an applicant is eligible
for a license, or that a licensee is complying with the provisions
of this division or any regulation or order of the commissioner,
the commissioner may access, receive, and use any books,
accounts, records, files, documents, information, or evidence,
including, but not limited to, any of the following relating to the
intent to, or the practice of, servicing student loans for borrowers:

(A) Criminal, civil, and administrative history information.

(B) Personal history and experience information, including, but
not limited to, independent credit reports obtained from a consumer
credit reporting agency.

(C) Any other documents, information, or evidence that the
commissioner deems relevant to the inquiry or investigation
regardless of the location, possession, control, or custody of those
documents, information, or evidence.

(2) For the purposes of investigating violations or complaints
arising under this division, the commissioner may direct, subpoena,
or order the attendance of, and examine under oath, any person
whose testimony may be required about the student loan or account
of the borrower.

(b) In making any examination or investigation authorized by
this section, the commissioner may control access to any documents
and records of the licensee or person under examination or
investigation. The commissioner may take possession of the
documents and records or place a person in exclusive charge of
the documents and records in the place where they are usually
kept. During the period of control, no person shall remove or
attempt to remove any of the documents and records except
pursuant to a court order or with the consent of the commissioner.
Unless the commissioner has reasonable grounds to believe the
documents or records of a licensee have been, or are at risk of
being, altered or destroyed for purposes of concealing a violation
of this division, the licensee or owner of the documents and records
shall have access to the documents or records as necessary to
conduct its ordinary business affairs.

(c) The commissioner may charge an applicant or a licensee the
actual costs for conducting an examination pursuant to this division.

 

Article 2.  Application for License

 

28112.  

(a) Only a natural person is eligible to be an applicant
and be licensed pursuant to this division.

(b) An applicant shall apply for a license by submitting all of
the following to the commissioner:

(1) A completed application for a license in a form prescribed
by the commissioner and signed under penalty of perjury.

(2) A license fee determined by the commissioner that is
reasonable to pay the department’s actual costs to process and
investigate the application.

28114.  

(a) The commissioner shall submit to the Department
of Justice fingerprint images and related information required by
the Department of Justice of every applicant for a license pursuant
to Section 28112, for purposes of obtaining information as to the
existence and content of a record of state or federal convictions,
state or federal arrests, and information as to the existence and
content of a record of state or federal arrests for which the
Department of Justice establishes that the person is free on bail or
on his or her own recognizance pending trial or appeal.

(b) When received, the Department of Justice shall forward to
the Federal Bureau of Investigation requests for federal summary
criminal history information received pursuant to this section. The
Department of Justice shall review the information returned from
the Federal Bureau of Investigation and compile and disseminate
a response to the commissioner.

(c) The Department of Justice shall provide a response to the
commissioner pursuant to paragraph (1) of subdivision (p) of
Section 11105 of the Penal Code.

(d) The commissioner shall request from the Department of
Justice subsequent arrest notification service, as provided pursuant
to Section 11105.2 of the Penal Code, for the license applicant
described in subdivision (a).

(e) The Department of Justice shall charge the department a fee
sufficient to cover the costs of processing the requests pursuant to
this section.

28116.  

The commissioner shall, within 60 days from the date
an application pursuant to Section 28112 is complete, including
having received the information from the Department of Justice
pursuant to Section 28114, either grant a license pursuant to this
division or provide a written explanation for the denial.

28118.  

(a) The proceedings for a denial of a license shall be
conducted in accordance with Chapter 5 (commencing with Section
11500) of Part 1 of Division 3 of Title 2 of the Government Code.

(b) The commissioner may deny an application for a license for
any of the following reasons:

(1) The applicant made a false statement of a material fact on
the application.

(2) The applicant or a person with control over the applicant,
within the last 10 years of the date of application, has committed
any act involving dishonesty, fraud, or deceit, or has been convicted
of, or pleaded nolo contendere to, a crime substantially related to
the qualifications, functions, or duties related to servicing.

(3) The applicant or a person with control over the applicant
has violated any provision of this division.

28120.  

(a) The commissioner may deem an application for a
license abandoned if the applicant fails to respond to any request
for information required by the commissioner or department during
an investigation of the application.

(b) The commissioner shall notify the applicant, in writing, that
if the applicant fails to submit responsive information no later than
60 days after the date the commissioner sent the written request
for information, the commissioner shall deem the application
abandoned.

(c) An application fee paid prior to the date an application is
deemed abandoned shall not be refunded. Abandonment of an
application pursuant to this subdivision shall not preclude the
applicant from submitting a new application and fee for a license.

28122.  

A license shall remain effective until the license is
either suspended or revoked by the commissioner or surrendered
by the licensee.

28124.  

The commissioner may suspend or revoke a license
issued under this division if the commissioner finds that the
licensee violated any provision of this division or if any fact or
condition exists that, if it had existed at the time of the initial
application for the license, clearly would have warranted a denial
of the license.

28126.  

A licensee that ceases to service student loans to
borrowers shall inform the commissioner in writing and surrender
the license and all other indicia of license to the commissioner.
The commissioner may require a licensee to file a plan for the
disposition of the servicing business that includes, but is not limited
to, a closing audit. Upon receipt of the written notice and plan, if
required, the commissioner shall determine whether the licensee
has violated this division. The commissioner shall give a licensee
notice of accepting a surrendered license, and a license shall not
be deemed surrendered until the commissioner accepts its tender
in writing.

 

Chapter  3. Licensee Duties

 

28128.  

A licensee shall notify the commissioner, in writing,
of any change in the information provided in the application for a
license, as applicable, not later than 10 business days after the
occurrence of the event that results in the information becoming
inaccurate or incomplete.

28130.  

A licensee shall only provide servicing at the place of
business on the license. A licensee shall obtain prior written
permission from the commissioner to add or change business
locations authorized to operate under the license.

28132.  

A licensee shall do all of the following:

(a) Maintain staff adequate to meet the requirements of this
division and every regulation and order of the commissioner.

(b) File with the commissioner any report required by regulation
or order of the commissioner.

(c) Comply with the provisions of this division and any
regulation or order of the commissioner.

(d) Submit to periodic examination by the commissioner as
required by this division and any regulation or order of the
commissioner.

(e) Advise the commissioner of filing a petition for bankruptcy
within five days of the filing.

(f) Comply with all applicable state and federal laws and tax
return filing requirements.

(g) Comply with any other requirement established by regulation
or order of the commissioner.

(h) Provide information on a publicly accessible Internet Web
site concerning affordable repayment and loan forgiveness options
that may be available to borrowers and provide to borrowers, at
least once per calendar year, a written correspondence or email
describing those options, as applicable.

(i) Appoint a single point of contact for a borrower wanting any
of the following:

(1) Ability to enter into an agreement for, resolution on an issue
concerning, or general information about a repayment option that
requires subsequent submission of supporting documentation.

(2) Modification of the terms of repayment of the student
education loan because of hardship.

(j) If the sale, assignment, or other transfer of the servicing of
a student loan results in a change in the identity of the party to
whom the borrower is required to send payments, or direct any
communications concerning the student loan to, then the licensee
shall notify the borrower in writing at least 45 days before a
borrower is required to send a payment on the student loan of all
of the following:

(1) The identity of the new student loan servicer.

(2) The name and address of the new student loan servicer to
whom subsequent payments or communications begin delete is end delete begin insert are end insert required to
be sent.

(3) The telephone numbers and Internet Web sites of the new
student loan servicer.

(4) The effective date of the sale, assignment, or transfer.

(5) The date on which the current student loan servicer will stop
accepting payments on the borrower’s student loan.

(6) The date on which the new student loan servicer will begin
accepting payments on the borrower’s student loan.

(k) Respond to a qualified written request by acknowledging
receipt of the request within five business days and within 30
business days provide, to the extent possible, information relating
to the request and the applicable action the licensee will take to
correct the account or an explanation for the licensee’s position
that the borrower’s account is correct.

(l) Unless otherwise directed by the borrower of a student loan,
upon receipt of a payment, the licensee shall apply amounts in
excess of the minimum payment amount first to the interest and
fees owed on the payment due date, next to the principal balance
of the student loan balance bearing the highest annual percentage
rate, and then to each successive interest and fees and principal
balance bearing the next highest annual percentage rate until the
payment is exhausted. A borrower may instruct or expressly
authorize a licensee to apply excess payments in a different manner.
A borrower may also voluntarily increase the periodic payment
amount by various means, including, but not limited to, increasing
his or her recurring electronic payment with the right to return to
the original amortization schedule at any time.

28134.  

The licensee shall not do any of the following:

(a) Directly or indirectly employ any scheme, device, or artifice
to defraud or mislead a borrower.

(b) Engage in any unfair or deceptive practice toward any
borrower or misrepresent or omit any material information in
connection with the servicing of a student loan, including, but not
limited to, misrepresenting the amount, nature, or terms of any fee
or payment due or claimed to be due on a student loan, the terms
and conditions of the student loan agreement, or the borrower’s
obligations under the student loan.

(c) Obtain property of a borrower by fraud or misrepresentation.

(d) Knowingly misapply or recklessly apply payments made by
a borrower to the outstanding balance of a student loan.

(e) Knowingly or recklessly provide inaccurate information to
a credit bureau regarding a borrower.

(f) 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 licensee regularly reports information
to a credit bureau.

(g) Refuse to communicate with an authorized representative
of the borrower who provides a written authorization signed by
the borrower, provided the licensee may adopt procedures
reasonably related to verifying that the representative is in fact
authorized to act on behalf of the borrower.

(h) Negligently or intentionally make any false statement or
knowingly and willfully make any omission of a material fact in
connection with any information or reports filed with the
commissioner, the department, or another governmental agency.

28136.  

The licensee shall retain and maintain its records of
servicing a borrower’s student loan for a minimum of three years
after the student loan has been transferred, assigned, or paid in
full.

 

Chapter  4. Enforcement

 

28138.  

(a) If the commissioner has a reasonable basis to
believe that a licensee is violating or failing to comply with any
law of this state, including, but not limited to, this division or any
regulation or order of the commissioner, or servicing student loans
in an unsafe or injurious manner, then the commissioner may direct
the licensee to comply with the law by an order issued by the
commissioner. The order shall require the licensee to show cause
before the commissioner, at a time and place to be fixed by the
commissioner, as to why the order should not be observed.

(b) If, upon any hearing held pursuant to this section, the
commissioner finds that the licensee is violating or failing to
comply with any law of this state or servicing student loans in an
unsafe or injurious manner, the commissioner may make a final
order directing the licensee to comply with the law or discontinue
the unsafe or injurious practices. A licensee shall comply with the
final order unless, within 10 days after the issuance of the order,
its enforcement is restrained in a proceeding brought by the
licensee.

28140.  

(a) The commissioner may issue an order suspending
or revoking a license if, after notice and an opportunity for hearing,
the commissioner finds any of the following:

(1) The licensee is violating this division or a regulation adopted
or an order issued under this division.

(2) The licensee does not cooperate with an examination or
investigation by the commissioner.

(3) The licensee engages in fraud, intentional misrepresentation,
or gross negligence in servicing a student loan.

(4) The competence, experience, character, or general fitness
of the licensee, or any director, officer, employee, or person in
control of a licensee, indicates that it is not in the public interest
to permit the licensee to continue servicing student loans.

(5) The licensee engages in an unsafe or unsound practice.

(6) The licensee is insolvent, suspends payment of its
obligations, or makes a general assignment for the benefit of its
creditors.

(7) Any fact or condition exists that, if it had existed at the time
the licensee applied for the license, would have been grounds for
denying the application.

(b) In determining whether a licensee is engaging in an unsafe
or unsound practice, the commissioner may consider the size and
condition of the licensee’s provision of servicing, the magnitude
of the loss, the gravity of the violation of this division, and the
previous conduct of the persons involved.

28142.  

The commissioner may assess a civil penalty against
a person that violates this division, or a regulation promulgated or
order issued by the commissioner pursuant to this division, in an
amount not to exceed one thousand dollars ($1,000) for each
violation or, in the case of a continuing violation, one thousand
dollars ($1,000) for each day or part thereof during which the
violation continues, plus the department’s actual costs and expenses
for the investigation and prosecution of the matter, including, but
not limited to, reasonable attorney’s fees.

 

Chapter  5. Miscellaneous

 

28144.  

If any provision of this division or the application
thereof to any person or circumstances is held invalid, illegal, or
unenforceable, such invalidity, illegality, or unenforceability shall
not affect other provisions or applications of this division which
can be given effect without the invalid, illegal, or unenforceable
provision or application, and, to this end, the provisions of this
division are declared to be severable.

28146.  

The rights and remedies provided in this division are
in addition to any other rights and remedies provided by law.

SEC. 3.  

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of
the Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIII B of the California
Constitution.