BILL ANALYSIS Ó
AB 2251
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CONCURRENCE IN SENATE AMENDMENTS
AB
2251 (Mark Stone)
As Amended August 19, 2016
Majority vote
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|ASSEMBLY: |56-24 |(June 2, 2016) |SENATE: |26-12 |(August 29, |
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Original Committee Reference: B. & F.
SUMMARY: Establishes the Student Loan Servicing Act and
requires servicers of student loans to get a license from the
Department of Business Oversight (DBO). Specifically, this
bill:
1)Provides that it is the it is the intent of the Legislature to
promote all of the following:
a) Meaningful access to federal affordable repayment and
loan forgiveness benefits.
b) Reliable information about student educational loans and
loan repayment options.
c) Quality customer service and fair treatment.
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2)Specifies that a person shall not act as a student loan
servicer, directly or indirectly, without a license from the
Commissioner of DBO (Commissioner).
3)Requires a licensee shall do all of the following:
a) Develop policies and procedures reasonably intended to
promote compliance with this division.
b) File with the Commissioner any report required by
regulation or order of the Commissioner;
c) Comply with the provisions of this chapter, and with any
regulation or order of the Commissioner;
d) Submit to periodic examination by the Commissioner as
required by this chapter;
e) Advise the Commissioner by amendment to its application
of any material judgment filed against, or bankruptcy
petition filed by, the licensee within five days of the
filing;
f) Comply with any other requirement established by
regulation or order of the Commissioner.
g) 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 to borrowers via written
correspondence or email at least once per calendar year.
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h) Notify the borrower concerning the sale or assignment of
their loan to another entity.
i) Respond to qualified written request.
4)Provides that a licensee does not have to provide a qualified
written request if the following apply:
a) A qualified written request is substantially the same as
a qualified written request previously made by the
borrower, for which the licensee has previously complied
with its obligation to respond, unless the borrower
provides new and material information to support the more
recent qualified written request. New and material
information means information that was not reviewed by the
licensee in connection with a prior qualified written
request submitted by the same borrower and that is
reasonably likely to change the licensee's prior response
related to that request.
b) A qualified written request is overbroad. A qualified
written request is overbroad if the licensee cannot
reasonably determine from the qualified written request the
specific error that the borrower asserts has occurred on
his or her account or the specific information the borrower
is requesting related to his or her account.
c) A qualified written request is delivered to the licensee
more than one year after the licensee sells, assigns, or
transfers the servicing of the student loan that is the
subject of the qualified written request to another
servicer.
d) If a licensee determines that it is not required to
comply with the requirement to respond, the licensee shall
notify the borrower of the determination, and the basis for
its determination, in writing not later than five business
days after making such determination.
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5)Exempts from licensing:
a) A bank, trust company, or industrial loan company doing
business under the authority of, or in accordance with, a
license, certificate, or charter issued by the United
States or any state, district, territory, or commonwealth
of the United States that is authorized to transact
business in this state;
b) A federally chartered savings and loan association,
federal savings bank, or federal credit union that is
authorized to transact business in this state;
c) A savings and loan association, savings bank, or credit
union organized under the laws of this or any other state
that is authorized to transact business in this state; and,
d) A wholly owned service corporation of a savings and loan
association or savings bank organized under the laws of
this state or the wholly owned service corporation of a
federally chartered savings and loan association or savings
bank that is authorized to transact business in this state.
6)Prohibits a licensee from engaging in servicing a student
education loan as a student loan servicer under a name other
than the name that appears on a license.
7)Allows the Commissioner to promulgate regulations on the
business activity that may be conducted at a location where a
licensee engages in servicing student education loans to
prohibit the conduct of business activity that facilitates
evasions of the licensing requirements.
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8)Requires a licensee to make available to the Commissioner all
of the licensee's records pertaining to servicing a student
educational loan for a student loan borrower, including, but
not limited to, all books, accounts, papers, and files,
regardless of the location of those records, within 10
calendar days of a request from the Commissioner.
9)Provides that the Commissioner shall issue a license to a
person to engage in business as a student loan servicer if all
of the following requirements have been met:
a) The person filed a complete application for a license in
a form prescribed by the Commissioner;
b) The person signed the application under penalty of
perjury;
c) The person made a payment of a reasonable fee (currently
the amount of the fee is blank) to pay the actual costs for
the department to investigate the application; and,
d) The DBO has completed an investigation of the
application.
10)Specifies that the Commissioner may deny an application of a
person to engage in business as a student loan servicer for
any of the following reasons:
a) The person made a false statement of a material fact on
the application;
b) The person or an officer, director, general partner, or
other person owning or controlling, directly or indirectly,
10% or more of the outstanding interests or equity
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securities of the person applying for the license has,
within the last 10 years of the date of application,
committed any act involving dishonesty, fraud, or deceit,
or been convicted of, or pleaded nolo contendere to, a
crime substantially related to the qualifications,
functions, or duties of a person engaged in the business of
servicing student education loans; or,
c) The person or an officer, director, general partner, or
other person owning or controlling, directly or indirectly,
10% or more of the outstanding interests or equity
securities of the person applying for the license has
violated any provision of this chapter.
11)Requires the Commissioner, within 60 days from the filing of
a full and complete application for a license, including the
receipt of background and investigative reports from the
Department of Justice or other government agencies, and the
payment of required fees, either grant a license pursuant to
this chapter or provide a written explanation for a license
denial.
12)Allows the Commissioner to suspend or revoke a license issued
under this chapter if the Commissioner finds that the licensee
violated any provision of this chapter or if any fact or
condition exists which, if it had existed at the time of the
initial application for the license, clearly would have
warranted a denial of the license. The Commissioner shall not
refund a license fee if the license is surrendered, revoked,
or suspended prior to the expiration of the period for which
it was issued.
13)Specifies that a licensee shall only engage in business as a
student loan servicer at the place of business on the license.
A change of location of a place of business of a licensee
shall require prior written notice to the Commissioner. Only
one place of business shall be authorized to engage in
business under a license. A license shall not be transferable
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or assignable.
14)Prohibits a licensee from doing any of the following:
a) Directly or indirectly employ any scheme, device, or
artifice to defraud or mislead a student loan borrower;
b) Engage in any unfair or deceptive practice toward any
student loan borrower or misrepresent or omit any material
information in connection with the servicing of a student
education loan, including, but not limited to,
misrepresenting the amount, nature or terms of any fee or
payment due or claimed to be due on a student education
loan, the terms and conditions of the student education
loan agreement, or the student loan borrower's obligations
under the student education loan;
c) Knowingly misapply or recklessly apply payments made by
a student loan borrower to the outstanding balance of a
student education loan;
d) Fail to report both the favorable and unfavorable
payment history of the student loan borrower to a
nationally recognized consumer credit bureau at least
annually if the loan servicer regularly reports information
to a credit bureau;
e) Refuse to communicate with an authorized representative
of the student loan borrower who provides a written
authorization signed by the student loan borrower, provided
the licensee may adopt procedures reasonably related to
verifying that the representative is in fact authorized to
act on behalf of the student loan borrower; or
f) Negligently or intentionally make any false statement or
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knowingly and willfully make any omission of a material
fact in connection with any information or reports filed
with the Commissioner, DBO, or another governmental agency.
15)Allows the Commissioner to conduct investigations and
examinations as follows:
a) For purposes of initial licensing, license suspension,
license revocation, or general or specific inquiry or
investigation to determine compliance application
requirements, the Commissioner may access, receive, and use
any books, accounts, records, files, documents,
information, or evidence, including, but not limited to,
any of the following relating to the business of servicing
student education loans:
i) Criminal, civil, and administrative history
information;
ii) Personal history and experience information,
including, but not limited to, independent credit reports
obtained from a consumer credit reporting agency; and,
iii) Any other documents, information, or evidence that
the Commissioner deems relevant to the inquiry or
investigation regardless of the location, possession,
control, or custody of those documents, information, or
evidence.
16)Provides for the following authority for the Commissioner:
a) If, upon inspection, examination, or investigation, the
commissioner has cause to believe that a licensee or a
person is violating or has violated any provision of this
division or any rule or order thereunder, the commissioner
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or his or her designee may issue a citation to that
licensee or person in writing, describing with
particularity the basis of the citation. Each citation may
contain an order to correct the violation or violations
identified and provide a reasonable time period or periods
by which the violation or violations must be corrected. In
addition, each citation may assess an administrative fine
not to exceed $2,500 that shall be deposited in the State
Corporations Fund. In assessing a fine, the commissioner
shall give due consideration to the appropriateness of the
amount of the fine with respect to factors including the
gravity of the violation, the good faith of the person or
licensees cited, and the history of previous violations. A
citation issued and a fine assessed pursuant to this
section, while constituting punishment for a violation of
law, shall be in lieu of other administrative discipline by
the commissioner for the offense or offenses cited, and the
citation and fine payment thereof by a licensee shall not
be reported as disciplinary action taken by the
commissioner.
b) The commissioner may issue an order to desist and
refrain from engaging in a specific business or activity or
activities, or an order to suspend all business operations
to a person or licensee who is engaged in or who has
engaged in continued or repeated violations of this
division.
c) If, within 30 days from the receipt of the citation, the
person cited fails to notify the department that the person
intends to request a hearing, the citation shall be deemed
final.
d) After the exhaustion of the review procedures provided
for in this section, the commissioner may apply to the
appropriate superior court for a judgment in the amount of
the administrative fine and an order compelling the cited
person to comply with the order of the commissioner. The
application, which shall include a certified copy of the
final order of the commissioner, shall constitute a
sufficient showing to warrant the issuance of the judgment
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and order.
17)Provides that a "student loan" shall not include an extension
of credit made by a postsecondary educational institution to a
borrower if one of the following apply:
a) The term of the extension of credit is no longer than
the borrower's education program;
b) 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.
c) 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.
18)Provides for the following definitions:
a) "Control" means the possession, directly or indirectly,
of the power to direct, or cause the direction of, the
management and policies of a licensee under this chapter,
whether through voting or through the ownership of voting
power of an entity that possesses voting power of the
licensee, or otherwise. Control is presumed to exist if a
person, directly or indirectly, owns, controls, or holds
10% or more of the voting power of a licensee or of an
entity that owns, controls, or holds, with power to vote,
10% or more of the voting power of a licensee. No person
shall be deemed to control a licensee solely by reason of
his or her status as an officer or director of the
licensee.
b) "Department" means the DBO.
c) "Licensee" means a person licensed under this chapter.
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d) "Person" means a natural person, a sole proprietorship,
a corporation, a partnership, a limited liability company,
an association, a trust, a joint venture, an unincorporated
organization, a government, or a political subdivision of a
government, and any other entity.
e) "Servicing" means both of the following activities:
i) Receiving any scheduled periodic payments from a
student loan borrower or any notification that a borrower
made a schedule periodic payment.
ii) Applying the payments to the borrower's account.
f) In the case in which no payment is required on the
student loan, "servicing" means performing both of the
following:
i) Maintaining account records for the student loan;
and
ii) Communicating with the borrower regarding the
student loan on behalf of the student loan's holder.
g) "Qualified written request" means a written
correspondence made a borrower that does the following:
i) Enables the licensee to identify the name and
account of the borrower;
ii) Includes a statement of the reasons for the belief
by the borrower, to the extent applicable, that the
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account is in error or that provides sufficient detail to
the servicer regarding information sought by the
borrower, such as a complete payment history for the loan
or the borrower's account, a copy of the borrower's
student loan promissory note, or the contact information
for the creditor to whom the borrower's student loan is
owed.
h) "Student education loan" means any loan primarily for
personal use to finance education or other school-related
expenses.
i) "Student loan servicer" means, to the extent authorized
by federal law, an entity or person, wherever located,
responsible for the servicing of a student educational loan
for a student loan borrower. "Student loan servicer" shall
not include a bank or credit union.
j) Specifies a delayed operative date of July 1, 2018.
The Senate amendments:
1)Change "Student Loan Borrower's Bill of Rights" to "Student
Loan Servicing Act."
2)Clarify the powers of the commissioner consistent with other
laws administered by DBO.
3)Specify the way in which a student loan servicer
4)Provide that a "student loan" shall not include an extension
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of credit made by a postsecondary educational institution to a
borrower if one of the following apply:
a) The term of the extension of credit is no longer than
the borrower's education program;
b) 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.
c) 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.
5)Specify and clarify the powers of the commissioner of DBO to
enforce the provisions of the Student Loan Servicing Act.
6)Delay the operative date until July 1, 2018.
Make other technical changes.
EXISTING LAW: Provides for the California Finance Lenders Law,
administered by DBO, which authorizes the licensure of finance
lenders, who may make secured and unsecured consumer and
commercial loans (Financial Code Section 22000 et seq.).
FISCAL EFFECT: According to the Senate Appropriations Committee
Estimated costs to DBO of $900,000 in fiscal year 2016-17 and
$900,000 in fiscal year 2017-18 for 11 Personnel Year of staff
to develop regulations and create the infrastructure to
implement the Student Loan Servicing Act on July 1, 2018.
Estimated costs to DBO 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
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2018-19, ongoing costs to DBO may be offset by application fees
and application investigation fees imposed on applicants.
COMMENTS: According to the author,
Student loan debt in America has become a national crisis.
Total student debt exceeds $1.2 trillion, surpassing both
the amount of credit card debt and car loans. In California
alone there are 4,156,000 student loan borrowers with debt
totaling $1.2 billion. High levels of student debt
negatively affect the saving and spending habits of the
individual and have negative effects on the greater economy.
Students graduating with high levels of student must delay
or forgo starting new households, buying new homes,
investing in further education, taking entrepreneurial
risks, and returning to rural areas.
Student loan servicers serve as a critical link between
borrower and lenders: they manage accounts, process
payments, and communicate directly with borrowers.
According to the federal Consumer Finance Protection Bureau,
there are no consistent market-wide federal standards for
student loan servicing. California should be one of the
first states to enact statewide student loan servicing
regulation by creating a student loans servicer licensure
program. With so many Californians struggling to repay
their loans or defaulting on their loans, it is important
that the state ensures that servicers communicate
effectively with consumers on repayment programs and helps
remove industry-created barriers to repayment. In creating
this licensure requirement, California will take a necessary
step to protect student loan borrowers. Licensure will
create accountability from the servicer to the consumer and
provide oversight of the servicing industry.
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Student loan options
There are four types of postsecondary education loans. Direct
Loans are federal loans made directly to borrowers by Department
of Education (DOE) 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. Federal Perkins Loans are co-funded by
higher education institutions and the federal government and are
originated and administered by the education institutions.
Federal law ended new originations of FFELP loans in 2010 but
many remain outstanding. Private student loans are made by
depository and non-depository financial institutions, states,
institutions of higher education, and other entities. These
loans and their servicing come with varying levels of consumer
protections.
Student loan debt
Student loan debt is the second highest outstanding consumer
debt in the United States, second only to mortgage debt.
Nationwide student loan debt is $1.2 trillion with an average
debt balance of $29,000. California ranks relatively well
compared to the other states on the average student loan debt
per student. However, even with a low ranking on the debt scale
a California student will rack up an average of $21,383 in
public education institution debt. Data is unclear on how much
private education debt may add to the average per student but
private education debt overall is on the rise from a $55.9
billion in 2005 to $140.2 billion in 2011 and in large part
fueled by the reselling of loans on the secondary market in a
system very similar to mortgage funding and asset backed
securities (The High Economic and Social Costs of Student Loan
Debt, CNBC. June 15, 2015) According to the Wall Street
Journal, Congratulations, Class of 2015: You're the Most
Indebted Ever, May 2015, not only is average debt rising but the
number of students taking out loans is also on the rise with 71%
of bachelor's degree recipients taking out loans, double the
number two decades ago.
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This growing trend toward increasing the use of loans for
education financing is taking a toll on graduates. For example,
homeownership rates are dropping among people under the age of
35. Some of this may be related to the fact that mortgage
lenders must look at all sources of debt, including student
loans and this debt can either delay homeownership or require
the borrower to reduce their housing expectations. National
Association of Realtors has found that over half of potential
first time buyers that are having trouble saving for a down
payment for house are have trouble due to student loan debt.
According to CNBC student loan default rates stand around 13-15%
with the average amount of default at $14,000 while the default
rates for some private-for profit schools is at 30%. A recent
report from the Wall Street Journal, More Than 40% of Student
Borrowers Aren't Making Payments, April 7, 2016 found:
1)40% of Americans who borrowed from the Government's main
student-loan program aren't making payments or are behind on
more than $200 billion owed.
2)One in six borrowers (3.6 million) were in default on $56
million in student debt.
3)Three million borrowers owing almost $110 billion were in
forbearance or deferment.
The cost of education is obviously on the rise and loans are
filling a greater portion of the financing options. As the use
of loans increases the levels of student financial literacy
remain for the most part, dismal. A decade ago the biggest
obstacle for students entering college was the potential draw of
credit card offers that could lead to thousands of dollars in
debt. With rising college costs the addition of more student
loans is adding tens of thousands of dollars in debt. Twenty
somethings reaching for the dream of a bachelor's degree are
able to run up massive debt with little understanding of how to
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even balance a checkbook. A survey on student loans by Citizens
Bank reveals that recent college graduates are lacking in basic
details about their loan debt. For example, 45% didn't know
what percentage of their salary went to paying off their loans.
Another 37% were unaware of the interest rate on their loan and
59% did not know how long it would take to pay off their loans.
Student loan servicing
The Consumer Financial Protection Bureau (CFPB) released a
report, Student Loan Servicing: Analysis of Public Input and
Recommendations for Reform, in September of 2015.
The report indicated that consumers with federal and private
student loans report a range of problems around servicers making
mistakes, records getting lost, payments being processed too
slowly, or servicer personnel not having the latest information
about a consumer's account. Borrowers report that these issues
include:
1)Poor customer service and bad information causing borrowers
distress: Borrowers report problems accessing basic account
information, receiving conflicting information about repayment
programs and loan features, and receiving inaccurate billing
statements. When errors occur, borrowers report problems
getting them resolved and a lack of recourse.
2)Servicing transfers leading to surprise fees and lost
benefits: More than 10 million borrowers have had their
servicer change in the past five years. Consumers and
industry report, however, that servicing transfers can create
confusion when companies have different policies and
procedures related to payment posting, allocation, and
processing, as well as the administration of certain borrower
benefits. When servicers change, payments may be lost,
consumers may incur surprise late fees, and processing
problems and missing account records can knock borrowers off
track on repaying their loans.
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3)Roadblocks to refinance keeping borrowers tied to high-rate
loans: Borrowers seeking to refinance student loans often
depend on their current servicer to provide accurate and
timely information about how to pay off their student loans.
Public comments from borrowers and from student loan
refinancing companies describe payoff problems, including
inaccurate payoff statements, surprise bills demanding extra
payments, and customer service confusion that increases costs
for borrowers, lenders, and servicers.
4)Co-signer policies causing auto-defaults and borrower
distress: Private student loan borrowers continue to report
serious financial distress when a company unexpectedly puts
their loan in default status. These borrowers report paying
on time each month, only to discover that their loan has been
placed into default and sent to a debt collector following the
death or bankruptcy of a co-signer, causing damage to their
credit.
5)Payment processing practices increasing fees and penalizing
borrowers: Borrowers expect servicers to process monthly
payments and apply them to the loans in their account
correctly, in a timely manner and without needlessly
increasing costs.
Other issues reported to the CFPB include:
1)Servicing failures may contribute to millions of distressed
borrowers defaulting: The United States DOE offers numerous
plans to borrowers with federal student loans to make payments
more affordable. These include options that let borrowers set
their monthly payment based on their income. Millions of
borrowers may not be receiving important information about
repayment options or may encounter breakdowns when attempting
to enroll. Borrowers report servicers steering them into
forbearance or other short-term options that, while
appropriate for some borrowers, may increase costs and may not
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be in the consumer's best interest. Others told of servicers
providing conflicting or inaccurate information, preventing
them from accessing tools to avert default.
2)Sloppy practices boosting costs and causing distressed
borrowers to lose critical protections: Consumers enrolled in
an income-based repayment plan must recertify for the program
on a yearly basis. Recent data sources suggest that three in
five borrowers in income-driven repayment plans do not
recertify on time although they are eligible. Borrowers
report that inadequate renewal notices can contribute to the
missed deadlines.
3)Debt relief scams targeting distressed borrowers: Problems
with servicing can leave distressed borrowers without the
tools to help them avoid default. Student debt relief scams
prey on these borrowers, charging up-front fees while
promising to enroll borrowers in free federal consumer
protections, including income-driven repayment plans.
4)Student loan servicing can affect certain special populations,
such as servicemembers, veterans, and older consumers, at an
increased level due to unique circumstances associated with
these individuals. Servicing practices hindering
servicemembers and veterans with disabilities seeking to
access important benefits: Servicemembers report poor
servicing practices that make it harder for them to access the
benefits they've earned through military service, such as
difficulties obtaining interest rate reductions and problems
enrolling in a beneficial repayment program. The Bureau has
also heard from service-disabled veterans who ended up with
damaged credit after their loan discharge was incorrectly
reported to the credit reporting agencies.
5)Servicing problems may put older consumers' retirement at
risk: Poor servicing practices may negatively affect many
older consumers, especially those who, as co-signers on
private student loans, become responsible for their children's
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or grandchildren's defaulted loans.
6)Borrowers with disabilities may not be accessing benefits for
canceling or discharging student debt: Some borrowers with
disabilities report providing information about their
financial circumstances to servicing personnel, but never
being told about options to discharge student debt due to
their "Total and Permanent Disability," which entitles them to
certain loan forgiveness benefits. In cases like these,
borrowers with disabilities who have limited financial
resources may make unnecessary extra payments toward their
loans.
Analysis Prepared by:
Mark Farouk / B. & F. / (916) 319-3081 FN:
0004824