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: 8/19/16 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 AB 2251 Page 2 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. AB 2251 Page 3 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 AB 2251 Page 4 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 AB 2251 Page 5 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 AB 2251 Page 6 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 AB 2251 Page 7 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 AB 2251 Page 8 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 AB 2251 Page 9 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 AB 2251 Page 10 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, AB 2251 Page 11 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 **** END ****