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: 8/19/16 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
SENATE BANKING & F.I. COMMITTEE: 5-2, 8/25/16 (pursuant to
Senate Rule 29.10)
AYES: Glazer, Galgiani, Hall, Hueso, Lara
NOES: Vidak, Morrell
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.
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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.
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:
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i) The term of the extension of credit is no longer
than the borrower's education program.
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
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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, 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
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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, 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
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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
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,
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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, 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
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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.
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
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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: (Verified8/22/16)
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."
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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
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,
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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
8/25/16 17:54:14
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