BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 2251| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 2251 Author: Mark Stone (D), et al. Amended: 8/1/16 in Senate Vote: 21 SENATE BANKING & F.I. COMMITTEE: 5-2, 6/29/16 AYES: Glazer, Galgiani, Hall, Hueso, Lara NOES: Vidak, Morrell SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/11/16 AYES: Lara, Beall, Hill, McGuire, Mendoza NOES: Bates, Nielsen ASSEMBLY FLOOR: 56-24, 6/2/16 - See last page for vote SUBJECT: Student loan servicers: licensing and regulation: Student Loan Servicing Act SOURCE: Attorney General Kamala Harris DIGEST: This bill enacts the Student Loan Servicing Act, operative July 1, 2018, which establishes a new licensing law applicable to student loan servicers, administered by the Department of Business Oversight (DBO), as specified. ANALYSIS: Existing Law grants DBO authority to administer the California Finance Lenders Law (CFLL; Financial Code Section 22000 et seq.) and the California Residential Mortgage Lending Act (Financial Code Section 50000 et seq.), both of which authorize licensees to service loans taken out for personal, family, or household purposes, but neither of which is specific to loans taken out to finance postsecondary educational expenses. AB 2251 Page 2 This bill: 1)Contains findings and declarations regarding the magnitude of outstanding student loan debt in the United States, the challenges that this debt places on the state's economy, the lack of consistent federal standards for student loan servicing, and the results of a September 2015 report issued by the Consumer Financial Protection Bureau (CFPB), which documented several challenges faced by student loan borrowers when attempting to gain answers to questions from their servicers and gain assistance from their servicers in correcting payment processing errors. States the intent of the Legislature to promote meaningful access to federal affordable repayment and loan forgiveness benefits, reliable information about student educational loans and loan repayment options, and quality customer service and fair treatment. 2)Establishes, on and after July 1, 2018, a new division within the Financial Code, named the Student Loan Servicing Act, administered by DBO, which requires persons engaged in the business of servicing student loans in this state, as defined, to obtain licenses, as specified. a) The following entities are exempted from the requirement to be licensed as student loan servicers: state- or federally-chartered depository institutions, nonprofit postsecondary educational institutions servicing student loans they extend to borrowers, and persons who are licensed in good standing pursuant to the CFLL. b) The Commissioner of Business Oversight (commissioner) is given authority to administer the Student Loan Servicing Act and to promulgate regulations and issue orders consistent with that authority; conduct investigations and examinations of applicants and licensees, as specified; grant or deny licenses based on specified criteria; impose AB 2251 Page 3 and collect license fees and fees related to regulatory examinations, as specified; and pursue enforcement actions against licensees and unlicensed persons who are acting in a manner that requires licensure, as specified. c) Licensees are required to submit to background information checks as a condition of licensure; maintain a minimum $25,000 surety bond on file with the commissioner; maintain a minimum net worth of $250,000 at all times; submit an annual financial audit prepared by an independent certified public accountant; obtain approval from the commissioner prior to opening any new branch office; file any report required by regulation or order of the commissioner, including an annual report; refrain from engaging in certain prohibited practices deemed harmful to consumers; and submit to periodic examination by the commissioner. Each licensee is also required to do all of the following: i) Provide, free of charge on its Internet Web site, information or links to information regarding repayment and loan forgiveness options that may be available to borrowers and provide this information or these links to borrowers via written correspondence or email at least once per calendar year. ii) Respond to a qualified written request, as defined, by acknowledging receipt of the request within five business days, and within 30 business days, to the extent possible, provide information relating to the request and, if applicable, the action the licensee will take to correct the account or an explanation for the licensee's position that the account is correct. iii) Refrain from submitting adverse information regarding any payment that is the subject of a qualified written request to any consumer reporting agency during the 60 business-day period starting on the date the AB 2251 Page 4 servicer receives a qualified written request related to a dispute on a borrower's payments, as specified. iv) Inquire of each borrower how to apply an overpayment by that borrower on his or her student loan, as specified. v) 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, notify that borrower in writing at least 15 days before he or she is required to send a payment to the new servicer. This notification is required to contain specified information identifying and providing contact information for the new servicer, and specifying the date on which the new servicer will begin accepting payments. The servicer is also required to transfer all information regarding a borrower, a borrower's account, and a borrower's student loan to the new licensee within 45 calendar days of a sale, assignment, or transfer. vi) 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. d) The commissioner is granted several enforcement tools, including desist and refrain orders; civil penalties of up to $2,500 per violation; citation and fine authority of up to $2,500 per citation; administrative penalties of up to $100 per day for failure to submit reports; license suspension and revocation; and the ability to petition a court for ancillary relief on behalf of persons injured by the act or practice of a licensee. Licensees are entitled to challenge enforcement actions brought by the commissioner pursuant to procedures specified in the Administrative Procedures Act (Chapter 5 of Part 1 of AB 2251 Page 5 Division 3 of Title 2 of the Government Code). Background Student loan debt is second in size only to mortgage debt, among all types of debt held by U.S. consumers. According to CFPB, more than 41 million Americans collectively owed more than $1.2 trillion in outstanding federal student loan debt as of September, 2015. In less than a decade, the volume of outstanding federal student loan debt has more than doubled, rising from $516 billion in 2007 to over $1.2 trillion in the third quarter of 2015. During the same time period, the average student loan debt burden of individual borrowers grew by nearly 60%, rising from about $18,000 in 2007 to nearly $30,000 in the third quarter of 2015. Measure One, a consortium of the nation's six largest private student loan lenders, estimated that total outstanding private student loan debt totaled approximately $100 billion in the third quarter of 2015 (http://www.measureone.com/reports). Approximately 92% of outstanding student loan debt is federal, while 8% is private. Types of federal student loans. According to the U.S. Department of Education (USDOE), there are four main types of postsecondary education loans under which borrowers have outstanding balances. Direct Loans are federal loans made directly to borrowers by USDOE 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. New FFELP loan originations ended in 2010, pursuant to the Student Aid and Fiscal Responsibility Act, but a significant number of FFELP loans remain outstanding. Federal Perkins Loans, which are co-funded by institutions of higher education and the federal government, are originated and administered by participating educational institutions. Private student loans are made by depository and non-depository financial institutions, states, AB 2251 Page 6 institutions of higher education, and other entities. Who services student loans? 10 entities are currently authorized to service federal student loans, including CornerStone, FedLoan Servicing, Granite State-GSMR, Great Lakes Educational Loan Services, Inc., HESC/Edfinancial, MOHELA, Navient, Nelnet, OSLA Servicing, and VSAC Federal Loans (https://studentaid.ed.gov/sa/repay-loans/understand/servicers). A variety of institutions service private student loans, including Citizens Bank, Discover, Navient, PNC Bank, SallieMae, Wells Fargo Bank, AES, ACS, Aspire, Nelnet, and several private educational institutions, among others. A different group of companies, including SoFi, Earnest, CommonBond, CollegeAve, LendKey, U-Fi, and others offer student loan borrowers the opportunity to refinance their outstanding student loans, which can involve additional servicers beyond those listed above. This bill applies its provisions to entities which service federal or private student loans, or both, "in this state." This bill's definition of "in this state" covers loans that originate in California and are directed outside California, loans that originate outside California and are directed to persons in California, and loans that originate in and are directed to persons in California. The national scope of loans covered by this bill, together with its application to both federal and private student loan servicers, means that the vast majority of student loan servicers operating in the United States will be subject to this bill's provisions. Exemptions provided for depository institutions, nonprofit private postsecondary educational institutions, and entities already licensed in good standing under the CFLL may reduce the number of covered entities slightly, but the majority of the entities listed immediately above will be subject to this bill. Concerns about student loan servicing. In May, 2015, the CFPB joined with USDOE and the Department of the Treasury to launch a public inquiry into federal and private student loan servicing practices. That inquiry led to publication of a September, 2015 report by the CFPB titled, "Student Loan Servicing: Analysis of AB 2251 Page 7 Public Input and Recommendations For Reform" (http://files.consumerfinance.gov/f/201509_cfpb_student-loan-serv icing-report.pdf). Analyzing over 30,000 comments, including over 8,000 comments from individual borrowers with outstanding student loans, that report identified a myriad of frustrations and challenges faced by student loan borrowers. Concerns related to five specific areas, including borrower benefits and consumer protections, servicing transfers, customer service and error resolution, payment processing, and practices that affect specific borrower segments, such as military families and older borrowers. AB 2251 includes provisions intended to begin addressing the findings of CFPB's inquiries into student loan servicing practices. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes According to the Senate Appropriations Committee, this bill will result in estimated costs to DBO of $900,000 in fiscal year 2016-17 and $900,000 in fiscal year 2017-18 for 11 personnel years of staff to develop regulations and create the infrastructure to implement the Student Loan Servicing Act on July 1, 2018. This bill will result in estimated costs of $1.8 million per year from the last six months of fiscal year 2017-18 through the last six months of fiscal year 2018-19 and ongoing costs of $1.7 million per year thereafter for administering the program. Starting fiscal year 2018-19, ongoing costs to DBO may be offset by application fees and application investigation fees imposed on applicants. SUPPORT: (Verified8/11/16) Attorney General Kamala Harris (source) National Association of Social Workers - California Chapter AB 2251 Page 8 OPPOSITION: (Verified8/11/16) California Association of Private Postsecondary Schools Consumer Bankers Association Education Finance Council National Council of Higher Education Resources National Foundation for Credit Counseling Student Loan Servicing Alliance ARGUMENTS IN SUPPORT: Attorney General Harris is sponsoring AB 2251 to "protect students and provide clarity in a confusing space. By passing this legislation now, California may successfully forestall a crisis like what homeowners experienced at the height of the country's mortgage fraud epidemic. This bill would ensure that bad actors who profit through harmful or deceptive business practices are held accountable, and that students can trust in the state's regulated responsibilities for servicers. AB 2251 will provide clear guidance to borrowers and empower students to pursue their educations with confidence." ARGUMENTS IN OPPOSITION: Opponents cite myriad and varied concerns with the bill. Nine specific issues form the basis for opposition from the Student Loan Servicing Alliance, which writes that "the legislation in its current form has many provisions that require further refinement, conflicts with federal student loan regulations and policies, and has the potential to create confusion for student loan borrowers, rather than protecting their interests....Although the bill has a delayed implementation date in order to allow for the possibility of further legislation to fix some of the outstanding issues, once the legislation is enacted, servicers will have to begin implementing the new requirements (regardless of any intention to change them) since there is still no clarify on what the final requirements will ultimately be." The National Council of Higher Education Resources (Council) identified six items in AB 2251 that require amendment; some of the Council's concerns overlap with those of the Student Loan Servicing Alliance, while others are unique to the Council. AB 2251 Page 9 Although some of the concerns of the California Association of Private Postsecondary Schools were addressed by amendments taken in the Senate Banking and Financial Institutions Committee, the most significant of that organization's concerns remains - namely that the measure imposes costly licensing requirements on its members, many of which are small trade schools that will be unable to afford the cost to comply with this bill and may be forced out of business. The Education Finance Council and Consumer Bankers Association share the concerns of other opponents that several provisions of the bill overlap with existing federal regulations. "AB 2251 would add a complex layer of regulation that will be duplicative of and possibly contradictory to the federal initiatives." The National Foundation for Credit Counseling "is concerned that AB 2251, as drafted, would substantially impede our agencies' ability to serve California residents by imposing costly and duplicative regulations upon our members." ASSEMBLY FLOOR: 56-24, 6/2/16 AYES: Achadjian, Alejo, Arambula, Atkins, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chang, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Hadley, Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Lopez, Low, Maienschein, McCarty, Medina, Mullin, Nazarian, O'Donnell, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Rendon NOES: Travis Allen, Baker, Bigelow, Brough, Chávez, Dahle, Beth Gaines, Gallagher, Grove, Harper, Jones, Kim, Lackey, Linder, Mathis, Mayes, Melendez, Obernolte, Olsen, Patterson, Steinorth, Wagner, Waldron, Wilk Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102 8/15/16 20:29:56 **** END **** AB 2251 Page 10