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:  8/19/16 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.


          Senate Floor Amendments of 8/19/16 revise definitions, revise  
          licensee operational and financial requirements, augment  
          regulatory enforcement authority, and renumber code sections.  


          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  








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          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.


          This bill:


          1)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 not subject to the provisions  
               of the bill:  state- or federally-chartered depository  
               institutions; public postsecondary educational institutions  
               or private nonprofit postsecondary educational institutions  
               servicing student loans they extend to borrowers; nonprofit  
               debt settlement and debt management companies exempt from  
               the Check Sellers, Bill Payers, and Proraters Law; and  
               persons who are licensed in good standing pursuant to the  
               CFLL.  


             b)   A student loan is defined as any loan primarily for use  
               to finance a postsecondary education and costs of  
               attendance at a postsecondary institution and includes a  
               loan made to refinance a student loan.  A student loan does  
               not include an extension of credit under an open-end  
               consumer credit plan; a loan that is secured by real  
               property or a dwelling; or an extension of credit made by a  
               postsecondary educational institution, if one of the  
               following apply:


               i)     The term of the extension of credit is no longer  
                 than the borrower's education program.









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               ii)    The remaining, unpaid principal balance of the  
                 extension of credit is less than $1,500 at the time of  
                 the borrower's graduation or completion of the program.


               iii)   The borrower fails to graduate or successfully  
                 complete his or her education program and has a balance  
                 due at the time of his or her disenrollment from the  
                 postsecondary institution.


             c)   A private postsecondary educational institution that is  
               subject to the provisions of the bill is not required to  
               comply with the bill with respect to loans that a licensee  
               services on behalf of that private postsecondary  
               educational institution, pursuant to a servicing agreement  
               with that institution.


             d)   The Commissioner of DBO (commissioner) is given  
               authority to administer the Student Loan Servicing Act and  
               to promulgate rules and 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  
               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.


             e)   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, as  
               documented in audited financial statements; 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  








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               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, 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 to any  
                 consumer reporting agency for 60 days following receipt  
                 of a qualified written request related to a dispute on a  
                 borrower's student loan payment.


               iv)    Except as provided in federal law or required by a  
                 student loan agreement, 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  








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                 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, unless prohibited by federal law. 


             f)   The commissioner is granted several enforcement tools,  
               including desist and refrain orders; censure, suspension,  
               and bar 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, including the ability to immediately revoke a  
               licensee's license if a licensee fails to comply with any  
               order issued by the commissioner; 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  
               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 the  
          Consumer Financial Protection Bureau (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  








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          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,  
          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  








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          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, public and 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  
          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  








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          servicing practices.  


          New Federal Student Loan Servicing Blueprint.  On July 20, 2016,  
          Ted Mitchell, Undersecretary for the USDOE, issued a 56-page  
          memorandum, providing a detailed blueprint for the future of  
          federal student loan servicing.  Within the next two years, the  
          USDOE envisions that all federal direct student loans will be  
          serviced from "a single servicing platform on which all borrower  
          accounts held by USDOE will reside, and to which multiple  
          customer service providers will have access...This new ecosystem  
          will function in a manner that will clarify for borrowers that  
          the USDOE is the servicer of their loan."  Through a  
          USDOE-branded portal, borrowers will be able to log onto a  
          single website to get information about their federal Direct  
          student loans, make payments, apply for benefits, and manage  
          their accounts.  Although the actual servicing of loans will  
          continue to be performed by USDOE contractors, borrowers will  
          not know the identities of the entities behind the USDOE  
          curtain.  At the present time, the new portal is envisioned as  
          covering all federal direct student loans (which currently total  
          about $1 trillion).  FFELP loans, Perkins loans, and private  
          student loans will not initially be part of the new portal,  
          although additional loans may be migrated to the portal over  
          time.  As discussed further in the Arguments in Opposition  
          section, some have questioned whether the provisions of this  
          bill can be applied to entities that service loans "behind the  
          USDOE curtain."  


          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  








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          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:   (Verified8/22/16)


          Attorney General Kamala Harris (source)
          California Association of Nonprofits
          National Association of Social Workers - California Chapter
          Nextgen Climate
          UA Local 2865


          OPPOSITION:   (Verified8/22/16)


          Consumer Bankers Association
          Education Finance Council
          National Council of Higher Education Resources
          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:     19 specific issues form the basis  
          for opposition from the Student Loan Servicing Alliance, which  
          writes that "the legislation in its current form has many  








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          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)  
          identifies six items in AB 2251 that require amendment, which  
          relate to the broad scope of the bill and its conflicts with  
          federal servicing regulations.  

          The Consumer Bankers Association (CBA) writes, "AB 2251 is  
          complex and detailed, and with its application to anyone with a  
          California nexus, would have a national impact.  Given recent  
          and continuing major federal initiatives on student loan  
          servicing, AB 2251 would add a complex layer of regulation that  
          will be duplicative of and possibly contradictory to the federal  
          initiatives." 

          The Education Finance Council (EFC) represents nonprofits that  
          contract as federal direct loan servicers.  EFC shares the  
          concerns of CBA and SLSA regarding conflicts with federal law  
          and regulations.  EFC is also concerned that smaller servicers  
          would be unable to manage the financial requirements of the  
          bill.  "This may cause additional organizations to terminate  
          their servicing contracts rather than bear these exorbitant  
          costs, resulting in a loss of some of the best servicers - those  
          that already provide most, if not all, of the consumer  
          protections AB 2251 seeks to provide."

          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,  








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            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
          8/22/16 23:01:09


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