BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                       AB 2251|
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                                   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.








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          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  








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               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  








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                 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  








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               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,  








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          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  








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          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










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          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.









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          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  ****









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