BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2251


                                                                    Page  1





          ASSEMBLY THIRD READING


          AB  
          2251 (Mark Stone)


          As Amended  May 31, 2016


          Majority vote


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Banking         |9-2  |Dababneh, Achadjian,  |Travis Allen, Kim   |
          |                |     |Bonilla, Brown, Chau, |                    |
          |                |     |Gatto, Low,           |                    |
          |                |     |Ridley-Thomas, Mark   |                    |
          |                |     |Stone                 |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Appropriations  |15-5 |Gonzalez, Bloom,      |Bigelow, Gallagher, |
          |                |     |Bonilla, Bonta,       |Jones, Obernolte,   |
          |                |     |Calderon, Chang,      |Wagner              |
          |                |     |Daly, Eggman, Eduardo |                    |
          |                |     |Garcia, Roger         |                    |
          |                |     |Hernández, Holden,    |                    |
          |                |     |Quirk, Santiago,      |                    |
          |                |     |Weber, Wood           |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
           ------------------------------------------------------------------ 










                                                                    AB 2251


                                                                    Page  2





          SUMMARY: Establishes the Student Loan Borrower's Bill of Rights  
          and requires servicers of student loans to get a license from  
          the Department of Business Oversight (DBO).  Specifically, this  
          bill:  


          1)Provides that it is the it is the intent of the Legislature to  
            promote all of the following:
             a)   Meaningful access to federal affordable repayment and  
               loan forgiveness benefits. 
             b)   Reliable information about student educational loans and  
               loan repayment options.


             c)   Quality customer service and fair treatment.


          2)Specifies that a person shall not act as a student loan  
            servicer, directly or indirectly, without a license from the  
            Commissioner of DBO (Commissioner).


          3)Requires a licensee shall do all of the following:


             a)   Maintain staff adequate to meet the requirements of this  
               chapter, as prescribed by regulation or 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 chapter, and with any  
               regulation or order of the Commissioner;


             d)   Submit to periodic examination by the Commissioner as  








                                                                    AB 2251


                                                                    Page  3





               required by this chapter;


             e)   Advise the Commissioner by amendment to its application  
               of any material judgment filed against, or bankruptcy  
               petition filed by, the licensee within five days of the  
               filing;


             f)   Comply with all applicable state and federal laws and  
               tax return filing requirements; and,


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


             h)   Provide information on a publically accessible Internet  
               Web site concerning affordable repayment and loan  
               forgiveness options.


             i)   Appoint a single point of contact for a borrower that  
               seeks information about repayment plans, or seeks a  
               modification to the terms of the loan.


             j)   Notify the borrower concerning the sale or assignment of  
               their loan to another entity.


             aa)  Respond to qualified written request.


          4)Exempts from licensing 


             a)   A bank, trust company, insurance company, or industrial  
               loan company doing business under the authority of, or in  








                                                                    AB 2251


                                                                    Page  4





               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;


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


             c)   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; and,


             d)   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.


          5)Prohibits a licensee from engaging in servicing a student  
            education loan as a student loan servicer under a name other  
            than the name that appears on a license.


          6)Allows the Commissioner to promulgate regulations on the  
            business activity that may be conducted at a location where a  
            licensee engages in servicing student education loans to  
            prohibit the conduct of business activity that facilitates  
            evasions of the licensing requirements.


          7)Requires a licensee to make available to the Commissioner all  
            of the licensee's records pertaining to servicing a student  
            educational loan for a student loan borrower, including, but  
            not limited to, all books, accounts, papers, and files,  








                                                                    AB 2251


                                                                    Page  5





            regardless of the location of those records, within 10  
            calendar days of a request from the Commissioner.


          8)Provides that the Commissioner shall issue a license to a  
            person to engage in business as a student loan servicer if all  
            of the following requirements have been met:


             a)   The person filed a complete application for a license in  
               a form prescribed by the Commissioner;


             b)   The person signed the application under penalty of  
               perjury;


             c)   The person made a payment of  a reasonable fee  
               (currently the amount of the fee is blank) to pay the  
               actual costs for the department to investigate the  
               application; and,


             d)   The DBO has completed an investigation of the  
               application.


          9)Specifies that the Commissioner may deny an application of a  
            person to engage in business as a student loan servicer for  
            any of the following reasons:


             a)   The person made a false statement of a material fact on  
               the application;


             b)   The person or an officer, director, general partner, or  
               other person owning or controlling, directly or indirectly,  
               10% or more of the outstanding interests or equity  








                                                                    AB 2251


                                                                    Page  6





               securities of the person applying for the license has,  
               within the last 10 years of the date of application,  
               committed any act involving dishonesty, fraud, or deceit,  
               or been convicted of, or pleaded nolo contendere to, a  
               crime substantially related to the qualifications,  
               functions, or duties of a person engaged in the business of  
               servicing student education loans; or,


             c)   The person or an officer, director, general partner, or  
               other person owning or controlling, directly or indirectly,  
               10% or more of the outstanding interests or equity  
               securities of the person applying for the license has  
               violated any provision of this chapter.


          10)Requires the Commissioner, within 60 days from the filing of  
            a full and complete application for a license, including the  
            receipt of background and investigative reports from the  
            Department of Justice or other government agencies, and the  
            payment of required fees, either grant a license pursuant to  
            this chapter or provide a written explanation for a license  
            denial.


          11)Allows the Commissioner to suspend or revoke a license issued  
            under this chapter if the Commissioner finds that the licensee  
            violated any provision of this chapter or if any fact or  
            condition exists which, if it had existed at the time of the  
            initial application for the license, clearly would have  
            warranted a denial of the license. The Commissioner shall not  
            refund a license fee if the license is surrendered, revoked,  
            or suspended prior to the expiration of the period for which  
            it was issued.


          12)Specifies that a licensee shall only engage in business as a  
            student loan servicer at the place of business on the license.  
            A change of location of a place of business of a licensee  








                                                                    AB 2251


                                                                    Page  7





            shall require prior written notice to the Commissioner. Only  
            one place of business shall be authorized to engage in  
            business under a license. A license shall not be transferable  
            or assignable.


          13)Prohibits a licensee from doing any of the following:


             a)   Directly or indirectly employ any scheme, device, or  
               artifice to defraud or mislead a student loan borrower;


             b)   Engage in any unfair or deceptive practice toward any  
               student loan borrower or misrepresent or omit any material  
               information in connection with the servicing of a student  
               education 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 education  
               loan, the terms and conditions of the student education  
               loan agreement, or the student loan borrower's obligations  
               under the student education loan;


             c)   Obtain property of a student loan borrower by fraud or  
               misrepresentation;


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


             e)   Knowingly or recklessly provide inaccurate information  
               to a credit bureau regarding a student loan borrower;


             f)   Fail to report both the favorable and unfavorable  
               payment history of the student loan borrower to a  








                                                                    AB 2251


                                                                    Page  8





               nationally recognized consumer credit bureau at least  
               annually if the loan servicer regularly reports information  
               to a credit bureau;


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


             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, DBO, or another governmental agency.


          14)Allows the Commissioner to conduct investigations and  
            examinations as follows:


             a)   For purposes of initial licensing, license suspension,  
               license revocation, or general or specific inquiry or  
               investigation to determine compliance application  
               requirements, 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 business of servicing  
               student education loans:


               i)     Criminal, civil, and administrative history  
                 information;


               ii)    Personal history and experience information,  
                 including, but not limited to, independent credit reports  








                                                                    AB 2251


                                                                    Page  9





                 obtained from a consumer credit reporting agency; and,


               iii)   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.


          15)Provides for the following definitions:


             a)   "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 chapter,  
               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% or more of the voting power of a licensee or of an  
               entity that owns, controls, or holds, with power to vote,  
               10% or more of the voting power of a licensee. No person  
               shall be deemed to control a licensee solely by reason of  
               his or her status as an officer or director of the  
               licensee.


             b)    "Department" means the DBO.


             c)   "Licensee" means a person licensed under this chapter.


             d)    "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  








                                                                    AB 2251


                                                                    Page  10





               entity.


             e)   "Servicing" means both of the following activities:


               i)     Receiving any scheduled periodic payments from a  
                 student loan borrower or any notification that a borrower  
                 made a schedule periodic payment.


               ii)    Applying the payments to the borrower's account.


             f)   In the case in which no payment is required on the  
               student loan, "servicing" means performing both of the  
               following:


               i)     Maintaining account records for the student loan;  
                 and


               ii)    Communicating with the borrower regarding the  
                 student loan on behalf of the student loan's holder.


             g)   "Qualified written request" means a written  
               correspondence made a borrower that identifies certain  
               information concerning the account of the borrower.


             h)    "Student education loan" means any loan primarily for  
               personal use to finance education or other school-related  
               expenses.


             i)   "Student loan servicer" means, to the extent authorized  
               by federal law, an entity or person, wherever located,  








                                                                    AB 2251


                                                                    Page  11





               responsible for the servicing of a student educational loan  
               for a student loan borrower.  "Student loan servicer" shall  
               not include a bank or credit union.


          EXISTING LAW:  Provides for the California Finance Lenders Law,  
          administered by DBO, which authorizes the licensure of finance  
          lenders, who may make secured and unsecured consumer and  
          commercial loans (Financial Code Section 22000 et seq.).  


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee DBO will incur significant special fund costs of $1.8  
          million in the first year and $1.7 million each year thereafter.  
           Cost drivers include enforcement staff, overhead, and the  
          reimbursement of DOJ for the cost of criminal history  
          inspections.  Ongoing costs will be offset by regulatory fees as  
          DBO is authorized to charge an applicant or licensee the actual  
          costs of conducting inspections or examinations. 


          COMMENTS:  


          According to the author, 


            Student loan debt in America has become a national crisis.   
            Total student debt exceeds $1.2 trillion, surpassing both  
            the amount of credit card debt and car loans.  In California  
            alone there are 4,156,000 student loan borrowers with debt  
            totaling $1.2 billion.  High levels of student debt  
            negatively affect the saving and spending habits of the  
            individual and have negative effects on the greater economy.  



            Students graduating with high levels of student must delay  
            or forgo starting new households, buying new homes,  








                                                                    AB 2251


                                                                    Page  12





            investing in further education, taking entrepreneurial  
            risks, and returning to rural areas. 


            Student loan servicers serve as a critical link between  
            borrower and lenders: they manage accounts, process  
            payments, and communicate directly with borrowers.   
            According to the federal Consumer Finance Protection Bureau,  
            there are no consistent market-wide federal standards for  
            student loan servicing.  California should be one of the  
            first states to enact statewide student loan servicing  
            regulation by creating a student loans servicer licensure  
            program.  With so many Californians struggling to repay  
            their loans or defaulting on their loans, it is important  
            that the state ensures that servicers communicate  
            effectively with consumers on repayment programs and helps  
            remove industry-created barriers to repayment.  In creating  
            this licensure requirement, California will take a necessary  
            step to protect student loan borrowers.  Licensure will  
            create accountability from the servicer to the consumer and  
            provide oversight of the servicing industry.


          Student loan options


          There are four types of postsecondary education loans.  Direct  
          Loans are federal loans made directly to borrowers by Department  
          of Education (DOE) through the William D. ford Federal Direct  
          Loan program.  Federal Family Education Loan Program (FFELP)  
          loans were originated by private lenders and guaranteed by the  
          federal government.  Federal Perkins Loans are co-funded by  
          higher education institutions and the federal government and are  
          originated and administered by the education institutions.   
          Federal law ended new originations of FFELP loans in 2010 but  
          many remain outstanding.  Private student loans are made by  
          depository and non-depository financial institutions, states,  
          institutions of higher education, and other entities.  These  
          loans and their servicing come with varying levels of consumer  








                                                                    AB 2251


                                                                    Page  13





          protections.


          Student loan debt


          Student loan debt is the second highest outstanding consumer  
          debt in the United States, second only to mortgage debt.   
          Nationwide student loan debt is $1.2 trillion with an average  
          debt balance of $29,000.  California ranks relatively well  
          compared to the other states on the average student loan debt  
          per student.  However, even with a low ranking on the debt scale  
          a California student will rack up an average of $21,383 in  
          public education institution debt.  Data is unclear on how much  
          private education debt may add to the average per student but  
          private education debt overall is on the rise from a $55.9  
          billion in 2005 to $140.2 billion in 2011 and in large part  
          fueled by the reselling of loans on the secondary market in a  
          system very similar to mortgage funding and asset backed  
          securities (The High Economic and Social Costs of Student Loan  
          Debt, CNBC.  June 15, 2015)   According to the Wall Street  
          Journal, Congratulations, Class of 2015: You're the Most  
          Indebted Ever, May 2015, not only is average debt rising but the  
          number of students taking out loans is also on the rise with 71%  
          of bachelor's degree recipients taking out loans, double the  
          number two decades ago. 


          This growing trend toward increasing the use of loans for  
          education financing is taking a toll on graduates.  For example,  
          homeownership rates are dropping among people under the age of  
          35.  Some of this may be related to the fact that mortgage  
          lenders must look at all sources of debt, including student  
          loans and this debt can either delay homeownership or require  
          the borrower to reduce their housing expectations.  National  
          Association of Realtors has found that over half of potential  
          first time buyers that are having trouble saving for a down  
          payment for house are have trouble due to student loan debt.   
          According to CNBC student loan default rates stand around 13-15%  








                                                                    AB 2251


                                                                    Page  14





          with the average amount of default at $14,000 while the default  
          rates for some private-for profit schools is at 30%.  A recent  
          report from the Wall Street Journal, More Than 40% of Student  
          Borrowers Aren't Making Payments, April 7, 2016 found:


          1)40% of Americans who borrowed from the Government's main  
            student-loan program aren't making payments or are behind on  
            more than $200 billion owed.


          2)One in six borrowers (3.6 million) were in default on $56  
            million in student debt.


          3)Three million borrowers owing almost $110 billion were in  
            forbearance or deferment.


          The costs of education is obviously on the rise and loans are  
          filling a greater portion of the financing options.  As the use  
          of loans increases the levels of student financial literacy  
          remain for the most part, dismal.  A decade ago the biggest  
          obstacle for students entering college was the potential draw of  
          credit card offers that could lead to thousands of dollars on  
                                                                                 debt.  With rising college costs the addition of more student  
          loans is adding tens of thousands of dollars in debt.  Twenty  
          somethings reaching for the dream of a bachelor's degree are  
          able to run up massive debt with little understanding of how to  
          even balance a checkbook.  A survey on student loans by Citizens  
          Bank reveals that recent college graduates are lacking in basic  
          details about their loan debt.  For example, 45% didn't know  
          what percentage of their salary went to paying off their loans.   
          Another 37% were unaware of the interest rate on their loan and  
          59% did not know how long it would take to pay off their loans.


          Student loan servicing









                                                                    AB 2251


                                                                    Page  15






          The Consumer Financial Protection Bureau (CFPB) released a  
          report, Student Loan Servicing: Analysis of Public Input and  
          Recommendations for Reform, in September of 2015.


          The report indicated that consumers with federal and private  
          student loans report a range of problems around servicers making  
          mistakes, records getting lost, payments being processed too  
          slowly, or servicer personnel not having the latest information  
          about a consumer's account. Borrowers report that these issues  
          include:


          1)Poor customer service and bad information causing borrowers  
            distress:  Borrowers report problems accessing basic account  
            information, receiving conflicting information about repayment  
            programs and loan features, and receiving inaccurate billing  
            statements. When errors occur, borrowers report problems  
            getting them resolved and a lack of recourse. 
          2)Servicing transfers leading to surprise fees and lost  
            benefits:  More than 10 million borrowers have had their  
            servicer change in the past five years.  Consumers and  
            industry report, however, that servicing transfers can create  
            confusion when companies have different policies and  
            procedures related to payment posting, allocation, and  
            processing, as well as the administration of certain borrower  
            benefits.  When servicers change, payments may be lost,  
            consumers may incur surprise late fees, and processing  
            problems and missing account records can knock borrowers off  
            track on repaying their loans.


          3)Roadblocks to refinance keeping borrowers tied to high-rate  
            loans:  Borrowers seeking to refinance student loans often  
            depend on their current servicer to provide accurate and  
            timely information about how to pay off their student loans.   
            Public comments from borrowers and from student loan  
            refinancing companies describe payoff problems, including  








                                                                    AB 2251


                                                                    Page  16





            inaccurate payoff statements, surprise bills demanding extra  
            payments, and customer service confusion that increases costs  
            for borrowers, lenders, and servicers.


          4)Co-signer policies causing auto-defaults and borrower  
            distress:  Private student loan borrowers continue to report  
            serious financial distress when a company unexpectedly puts  
            their loan in default status.  These borrowers report paying  
            on time each month, only to discover that their loan has been  
            placed into default and sent to a debt collector following the  
            death or bankruptcy of a co-signer, causing damage to their  
            credit.


          5)Payment processing practices increasing fees and penalizing  
            borrowers:  Borrowers expect servicers to process monthly  
            payments and apply them to the loans in their account  
            correctly, in a timely manner and without needlessly  
            increasing costs. 


          Other issues reported to the CFPB include:


          1)Servicing failures may contribute to millions of distressed  
            borrowers defaulting:  The United States DOE offers numerous  
            plans to borrowers with federal student loans to make payments  
            more affordable.  These include options that let borrowers set  
            their monthly payment based on their income.  Millions of  
            borrowers may not be receiving important information about  
            repayment options or may encounter breakdowns when attempting  
            to enroll. Borrowers report servicers steering them into  
            forbearance or other short-term options that, while  
            appropriate for some borrowers, may increase costs and may not  
            be in the consumer's best interest.  Others told of servicers  
            providing conflicting or inaccurate information, preventing  
            them from accessing tools to avert default.









                                                                    AB 2251


                                                                    Page  17






          2)Sloppy practices boosting costs and causing distressed  
            borrowers to lose critical protections:  Consumers enrolled in  
            an income-based repayment plan must recertify for the program  
            on a yearly basis. Recent data sources suggest that three in  
            five borrowers in income-driven repayment plans do not  
            recertify on time although they are eligible. Borrowers report  
            that inadequate renewal notices can contribute to the missed  
            deadlines. 


          3)Debt relief scams targeting distressed borrowers:  Problems  
            with servicing can leave distressed borrowers without the  
            tools to help them avoid default.  Student debt relief scams  
            prey on these borrowers, charging up-front fees while  
            promising to enroll borrowers in free federal consumer  
            protections, including income-driven repayment plans.


          4)Student loan servicing can affect certain special populations,  
            such as servicemembers, veterans, and older consumers, at an  
            increased level due to unique circumstances associated with  
            these individuals.  Servicing practices hindering  
            servicemembers and veterans with disabilities seeking to  
            access important benefits:  Servicemembers report poor  
            servicing practices that make it harder for them to access the  
            benefits they've earned through military service, such as  
            difficulties obtaining interest rate reductions and problems  
            enrolling in a beneficial repayment program.  The Bureau has  
            also heard from service-disabled veterans who ended up with  
            damaged credit after their loan discharge was incorrectly  
            reported to the credit reporting agencies.


          5)Servicing problems may put older consumers' retirement at  
            risk:  Poor servicing practices may negatively affect many  
            older consumers, especially those who, as co-signers on  
            private student loans, become responsible for their children's  
            or grandchildren's defaulted loans. 








                                                                    AB 2251


                                                                    Page  18







          6)Borrowers with disabilities may not be accessing benefits for  
            canceling or discharging student debt:  Some borrowers with  
            disabilities report providing information about their  
            financial circumstances to servicing personnel, but never  
            being told about options to discharge student debt due to  
            their "Total and Permanent Disability," which entitles them to  
            certain loan forgiveness benefits.  In cases like these,  
            borrowers with disabilities who have limited financial  
            resources may make unnecessary extra payments toward their  
            loans.




          Analysis Prepared by:                                             
                          Mark Farouk / B. & F. / (916) 319-3081  FN:  
          0003220