BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2251|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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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
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