BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: SB 501 Hearing Date: April 29,
2015
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|Author: |Wieckowski |
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|Version: |April 6, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Eileen Newhall |
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Subject: Wage garnishment restrictions: student loans
SUMMARY Reduces the amount of disposable earnings that may be
levied from a judgment debtor under an earnings withholding
order; provides that an earnings withholding order shall not be
used to enforce a judgment to collect on private student loan
debt; and stipulates the contents of an "application for
issuance of earnings withholding order" and a "request to
terminate an earnings withholding order enforcing a judgment for
student loan debt."
DESCRIPTION
1. Reduces the maximum amount of disposable earnings of an
individual judgment debtor for any workweek subject to levy
under an earnings withholding order, by providing that the
maximum amount shall not exceed the lesser of 10% of the
individual's disposable earnings for that week (down from
25%) or one-third of the amount by which the individual's
disposable earnings for that week exceed 40 times the state
minimum hourly wage in effect at the time the earnings are
payable (or 40 times the local minimum hourly wage, if the
judgment debtor works in a location where the local minimum
hourly wage is higher than the state minimum hourly wage;
down from the entire amount by which the individual's weekly
earnings exceed 40 times the state minimum hourly wage).
2. Provides that an earnings withholding order shall not be
used to enforce a judgment for the collection of debt that
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the judgment debtor proves is from a student loan that is
not made, insured, or guaranteed by the United States
government pursuant to the Federal Family Education Loan
Program or the William D. Ford Federal Direct Loan Program.
a. Provides that an earnings withholding order issued
on or after July 1, 2016 shall be terminated or modified
if it enforces a judgment in violation of the bill.
b. Authorizes a judgment debtor to make a request to
terminate an earnings withholding order enforcing a
judgment for student loan debt, pursuant to rules
specified in the bill.
c. Provides that a judgment creditor is liable to the
judgment debtor for all amounts collected by the judgment
creditor in violation of this provision of the bill.
3. Effective July 1, 2016, requires an "application for
issuance of earnings withholding order" to include a
statement regarding whether the judgment is based in whole
or in part on a claim for debt from a student loan that is
not made, insured, or guaranteed by the United States
government pursuant to the Federal Family Education Loan
Program or the William D. Ford Federal Direct Loan Program.
4. Prescribes the contents and method of filing of a "request
to terminate an earnings withholding order enforcing a
judgment for student loan debt," the method by which the
judgment creditor must be notified that such a request has
been filed with a court, methods by which a judgment
creditor may contest such a request, and the way in which
the contents of a terminated or modified earnings
withholding order shall be transmitted to the employer of
the judgment debtor.
EXISTING LAW
5. Provides for the Wage Garnishment Law, which prescribes the
procedure for withholding an employee's earnings for
purposes of paying a debt (Code of Civil Procedure Section
706.010 et seq.). At present, this state law does not
provide special treatment related to the collection of
unpaid student loan debt.
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COMMENTS
1. Purpose: This bill is sponsored by the author to improve
the ability of low-wage working families to meet their basic
needs by reforming California's wage garnishment law. The
provision of this bill that is the subject of this analysis
is intended to prohibit wage garnishment of private student
loan debtors, to create an incentive for private student
loan creditors to work constructively with these debtors,
and agree to repayment plans that the debtors can afford.
2. Scope of This Analysis: This bill is double-referred to the
Senate Banking and Financial Institutions Committee and the
Senate Judiciary Committee. It contains three provisions
that are solely within the jurisdiction of the Judiciary
Committee and one provision whose jurisdiction is shared by
both committees. This analysis will focus only on the
provision of this bill that is shared by both committees:
the provision that would prohibit the issuance of an
earnings withholding order to enforce a judgment to collect
private student loan debt. The bill's other provisions
(which propose to reduce the maximum size of earnings
withholding orders against judgment debtors, prescribe the
content of an "application for issuance of earnings
withholding order," and prescribe the content of a "request
to terminate an earnings withholding order enforcing a
judgment for student loan debt") will be analyzed only by
the Senate Judiciary Committee.
3. Background:
a. Size of the Student Loan Market: Among all
types of debt held by U.S. consumers, student loan debt
is second in size only to mortgage debt. According to
the federal Consumer Financial Protection Bureau (CFPB;
the Bureau), there is approximately $1.2 trillion in
student loan debt currently outstanding. Although the
vast majority of this student loan debt ($1 trillion)
is federal and thus outside the scope of this bill,
there is a sizeable amount of outstanding private
student loan debt.
As of May 2013, the CFPB estimated that total outstanding
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private student loan debt equaled $165 billion, a 10%
increase over 2011. Measure One, a consortium of the
nation's six largest private student loan lenders,
estimates the private student loan market to be
smaller, but still substantial ($93 billion as of July
2014). Whichever estimate one uses, there is little
doubt regarding the importance of this segment of the
student loan market. Quoting the CFPB, "While private
student loans have a small share of the total
outstanding, they are an important part of the market,
given their disproportionate use by high-debt
borrowers... for borrowers graduating around the time
of the financial crisis with over $40,000 in student
debt, 81% used private student loans."
b. What Types of Education Are Private Student
Loans Financing? In a 2012 report issued jointly with
the U.S. Department of Education, the CFPB observed
that private student loans are used most often among
students at for-profit institutions. At two-year
schools, 42% of students attending for-profit
institutions had private student loans, versus 5% of
students at public, two-year institutions and 18% of
students at private, not-for-profit two-year
institutions. At four-year schools, private student
loans were held by 46% of students attending for-profit
institutions, 15% of students at public institutions,
and 25% of students at private, not-for-profit
institutions. The report also makes it clear that
virtually all students with private student loans are
also federal student loan borrowers. Federal law
offers several different types of income-based
repayment plans and student loan forgiveness for
federal student loans, but does not mandate similar
repayment plans or loan forgiveness for private student
loans.
c. How Burdensome Are Student Loans To Repay? Not
surprisingly, the burden of student loan debt falls
differently on different people. In its 2012 report,
the CFPB found that 63% of the students it studied had
monthly student loan payments (including both private
and federal loans) that were 5% or less of their
monthly income; 80% of students had monthly student
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loan payments (including both private and federal
loans) that were 10% or less of their monthly income.
Only 5% had student loan payments that exceeded 25% of
their monthly income.
d. Delinquency Rates: Delinquency rates among
federal student loans are higher than those for the
private student loans that are the subject of this
bill. Although data on defaults and delinquencies are
reported differently for federal and private student
loans, general comparisons are still possible.
According to the U.S. Department of Education, 2.4
million out of nearly 30 million total outstanding
federal student loan borrowers (8% of the total) are
currently in default. An additional 3.3 million
borrowers (11% of the total) are in deferment, an
option that is available to full- and part-time
students and to students who are unemployed or
experiencing economic hardship. Another 2.2 million
federal student loan borrowers (7% of the total) are in
forbearance, an option available to students who are
ineligible for a deferment, which can allow students to
temporarily stop making payment, make smaller payments,
or lengthen the life of the loan without triggering a
default.
Delinquency rates among private student loan borrowers
are considerably lower. Although delinquency rates
rose significantly during the mortgage market-induced
recession of 2008, they have since declined to historic
levels. According to Measure One, 2.55% of the private
student loans made or serviced by lenders in its
consortium were 90 days or more delinquent as of the
first quarter of 2014, down from a high of 5.72% during
the second quarter of 2009. Measure One characterizes
the positive trends as resulting from improved
underwriting combined with an improving economy.
4. Concerns About Repayment Options For Private Student Loan
Borrowers: As summarized below, SB 501 is similar to a bill
carried by its author during the prior Legislative Session.
Thus, the concerns this bill is intended to address are not
new. There is, however, new evidence to support the
author's contention that some private student loan borrowers
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are not being offered affordable repayment plans by their
lenders or servicers.
A recent report issued by the CFPB suggests that borrowers whose
student loan debt payments are burdensome are struggling to
obtain loan workouts from their private student lenders and
servicers. In October, 2014, the CFPB's Student Loan
Ombudsman issued a report analyzing over 5,300 private
student loan complaints received during the 2013-14 federal
fiscal year. On the basis of these complaints, the CFPB
concluded that many consumers would repay their private
student loans, if they could qualify for a repayment plan
that reflected their current financial circumstances.
Instead, many borrowers reported being driven to default by
their lenders, because no viable repayment options were
available to them.
Among the complaints received by CFPB: 1) Information about the
availability of and eligibility for loan modifications is
not readily available; borrowers also reported receiving
conflicting or inaccurate information from different
customer service representatives at the same lender or
servicer. 2) Unlike federal student loan borrowers, who are
entitled, by law, to a range of affordable loan modification
options, including income-based repayment plans, extended
loan terms, and plans that start with a small payment and
increase over time, private student loan borrowers are not
entitled to any relief. Instead, consumers complained that
their private student loan lenders and servicers tell them
that they are not eligible for any affordable repayment
plans that would allow them to avoid default. 3) Although
some private student lenders offer temporary forbearance in
lieu of affordable repayment plans, borrowers report that
even these temporary forbearance options carry burdensome
enrollment fees and processing delays.
In an effort to help borrowers, the CFPB created and has posted
online a sample letter that borrowers can use to ask their
lenders or servicers to respond with accurate information
about alternative repayment plans and loan modification
options.
Independently, in November, 2014, Wells Fargo, the nation's
largest private student lender among U.S. banks, announced a
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new private student loan modification program intended to
help students experiencing financial hardships. Through the
program, Wells Fargo private student loan customers
experiencing a hardship will be reviewed to determine their
eligibility for a short- or long-term loan modification. If
a borrower is eligible, Wells will lower that borrower's
interest rate to achieve a loan payment determined to be
affordable based on the customer's income level. The
program has not been in existence long enough to have
generated any useful data regarding its impact.
5. The Logic Behind This Bill: In 2005, changes to federal
bankruptcy law established special treatment for private
student loans, making it considerably more difficult for
consumers to discharge this debt. The CFPB asserts that
these changes to the bankruptcy code created a disincentive
for lenders to offer flexible options for borrowers seeking
help. In a comprehensive report issued to Congress in 2012,
the CFPB and U.S. Department of Education recommended that
Congress examine whether the 2005 bankruptcy code changes
had met their desired policy goals, and whether changes were
needed.
To date, however, Congress has not acted to change the
bankruptcy treatment of private student loan debt. Because
of this, the debt remains owed until paid. This bill's
author reasons that, because debtors cannot get rid of their
private student loan debt through bankruptcy, preventing
wage garnishment as a means of collecting that debt will
make creditors more inclined to work with debtors to
negotiate repayment plans that the debtors can afford. The
author points to other states, such as Texas, Pennsylvania,
North Carolina, and South Carolina, which prohibit wage
garnishment of student loans and other unsecured debt
without the negative consequences predicted by this bill's
opponents. Furthermore, by lengthening amount of time in
which student loan debtors have to repay their loans, the
author reasons that creditors will end up receiving more
money in the long run than they do under existing law,
because interest will be accruing on the unpaid principal
during the period of time the debt remains unpaid.
The opposition counters that removing wage garnishment from
their collection toolbox will send the message to debtors
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that repayment can be delayed indefinitely; student loan
borrowers will have no incentive to repay their delinquent,
private student loan debt. Although a student loan default
will initially tarnish a borrower's credit score, the
negative impact of that default is generally limited to the
seven years immediately following default.
6. Are There Other Enforceable Collection Methods Creditors
Could Use In Lieu of Wage Garnishment? The author and this
bill's opponents disagree on this question. The author
asserts that this bill would not impact a creditor's ability
to use a bank levy or seizure of personal property to
satisfy unpaid student loan debt. Opponents counter that
bank levies and personal property seizure are unworkable
alternatives to wage garnishment in this context.
7. Should This Bill Be More Narrowly Focused? This bill treats
all private student loan borrowers identically, regardless
of their willingness to repay their student loans. It
therefore protects strategic defaulters (those who can
afford to pay back their loans but choose not to) to the
same extent as students who actively try to avoid default,
but are unable to, because they cannot qualify for a
repayment plan from their lender or servicer. If this
Committee wishes to ensure that the beneficiaries of his
bill are those who are motivated to pay their loans back, it
may wish to ask the author to limit the bill's protections
to student loan borrowers whose annual household incomes
fall below a certain threshold. In that way, a highly paid
professional with an advanced degree would not receive the
bill's protections, but someone who is un- or underemployed
because he/she is unable to find employment in his/her
chosen field would be protected from wage garnishment.
8. Should This Bill Apply Proactively? As drafted, this bill
would apply its provisions to earnings withholding orders
issued on or after July 1, 2016 rather than to private
student loans taken out on or after that date. Because the
bill affects contracts entered into prior to the operative
date of the bill, some have suggested that the bill may be
an unconstitutional violation of the federal Contract
Clause. The author contends that this bill does not alter
pre-existing contracts; instead, it alters the remedies
available to creditors for breach of a contract by the
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debtor, and is thus not a violation of the Contract Clause.
If this Committee is concerned about the bill's constitutional
implications, it may wish to ask the author to apply the
bill proactively to contracts entered into on and after the
bill's effective date, rather than to earnings withholding
orders issued on or after a specified date.
9. Summary of Arguments in Support:
a. SB 501 is co-sponsored by the East Bay Community Law
Center (EBCLP) and the Western Center on Law and Poverty
(WCLP). WCLP writes: "About one-fifth (19%) of the
college Class of 2013's debt was comprised of private
student loans, which are typically more costly and
provide fewer consumer protections and repayment options
than safer federal loans. Private loans, which are
little more than a line of credit, typically have much
higher costs and provide little, if any, relief for
struggling borrowers. While there is broad consensus that
private loans should be used only as a last resort, 47
percent of undergraduates who took out risky private
loans in 2011-12 did not use the maximum available in
safer federal student loans. This is because private
loan [lenders] market their product to students who don't
have family resources to pay for college and often are
the first in their families to attend college...By
banning wage garnishment of private student loan debt, SB
501 will encourage creditors to work with financially
encumbered graduates to figure out a payment plan that
will keep the payments coming in until all the debt is
paid off."
EBCLP works on behalf of low-income consumers who are
experiencing problems with debt collectors. Often, those
of their clients who are struggling with private student
loan debt were unable to obtain jobs in their chosen
fields and cannot afford to have 25% of their paychecks
taken without other bills going unpaid. SB 501 would
help protect some of California's most vulnerable
citizens.
b. The Public Law Center (PLC), a non-profit
organization that offers free legal services to
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low-income residents of Orange County, regularly works
with individuals facing the prospect of paying private
student loans. More and more, private student lenders or
the collection agencies working on behalf of those
lenders are giving student loan borrowers the option of
"pay" or "don't pay." If the student opts for the latter
choice, the lender or its collection agency typically
files a lawsuit alleging non-payment of student loans.
In many cases, the borrower has few, if any, income
prospects to be able to make payments. Eliminating wage
garnishment for private student loans would provide at
least one form of relief for borrowers with no other
options, and will hopefully encourage more payment plans,
based on income or otherwise, to allow borrowers to repay
their debts.
c. Western Regional Advocacy Project (WRAP) and the
California Rural Legal Assistance Foundation are
concerned about the private student loan debt loads of
many students who have fallen behind in payments, because
jobs they aspired to are not available to them following
graduation. Both organizations believe that SB 501 will
encourage creditors to work with financial encumbered
graduates to figure out workable payment plans.
d. Consumers Union observes that, in recent years, many
for-profit college programs have come under fire with
state and federal agencies for steering students into
low-quality education programs that do little more than
saddle them with debt. A recent lawsuit filed by the
CFPB against Corinthian Colleges alleges that the company
pushed students into taking out expensive private loans
to pay for tuition and expenses, and engaged in abusive
collection practices such as pulling students out of
classes until they started repaying their loans. SB 501
would provide crucial relief to students and families
that have been damaged by these outrageous practices.
10. Summary of Arguments in Opposition:
a. The California Bankers Association (CBA), California
Association of Collectors (CAC), DBA International, and
California Creditors Bar Association believe that SB 501
unnecessarily and unfairly discriminates against private
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student loan debt. Without the ability to garnish wages
as a result of a student loan borrower's refusal to pay,
lenders will have little incentive to or ability to lend
to future students. The organizations listed above
believe that SB 501 will have at least four negative
consequences for the private student loan market and the
students that rely on these types of loans. First, the
bill will harm future students who need access to private
student loans. As it becomes clearer to the already
small number of private student lenders that the tool of
last resort for collecting on a delinquent private
student loan is not available, lenders will be less
likely to lend in this space. The ability of responsible
students to obtain the money they need to pay for their
education will shrink considerably.
Second, there is no public rationale for treating private
student loans differently than federal student loans. If
what is proposed in SB 501 was applied to federal student
loans, the entire student loan system would be
endangered.
Third, the bill will protect affluent borrowers and
co-signers. Much of private student lending is to
professional and graduate students, who have higher
incomes and a greater ability to repay their loans.
Because this bill does not consider a borrower's ability
to pay, it provides an opportunity for those who want to
abuse the system at the expense of those that need
financial assistance. It would also let affluent
co-signers avoid garnishment, despite their contractual
agreement and ability to repay the loan.
Finally, CAC believes that SB 501 is unnecessary. Private
student loans require an up-front assessment of a
borrower's ability to repay the loan and have
dramatically superior repayment performance, relative to
federal student loans. According to the associations in
opposition, the default rate on private student loans is
approximately 5%, while the federal student loan default
rate is above 13%. There is no rational reason to punish
a responsible industry that uses garnishment as a tool of
last resort.
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b. The San Diego Regional Chamber of Commerce is
concerned that the bill would alter a well-established
and court-supervised process that could unnecessarily
impact the availability of affordable credit.
c. Encore Capital Group is a publicly traded company
that includes debt purchaser and debt collector
subsidiaries. Encore shares the concerns of the
opponents whose arguments are summarized above. Encore
also believes that the bill will create unintended
consequences that will harm the very consumers the bill
seeks to protect and will be detrimental to the majority
of consumers who pay their bills on time. Encore cites a
2013 study by a visiting scholar at the Federal Reserve
Bank of Philadelphia, which concluded that placing more
restrictions on the collection of validly owed debt
causes the availability of credit to decrease, while
increasing the cost of credit (Working Paper No. 13-38:
Debt Collection Agencies and the Supply of Consumer
Credit, by Viktar Fedaseyeu, May 20, 2013).
Finally, Encore notes that the CFPB is currently engaged in
a broad rulemaking of debt collection and has indicated
that it intends to issue a proposed rulemaking later this
year. Based on the nearly 500 questions the CFPB has
asked interested parties as part of its rulemaking,
Encore expects that many of the rules will impact debt
collection litigation and how collectors may recover on
judgments. For that reason, Encore asks that the
Legislature wait until the CFPB finalizes its debt
collection rules before making significant changes to
collectors' ability to recover on judgments.
11. Prior and Related Legislation:
a. AB 233 (Wieckowski), 2013-14 Legislative Session:
Substantially similar to this bill, although this bill
includes one additional provision that was not contained
in AB 233 (the provision which proposes to reduce the
maximum size of earnings withholding orders). Failed
passage on the Senate Floor.
b. AB 1755 (Wieckowski), Chapter 474, Statutes of
2012): Amended the allowable maximum sizes of earnings
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withholding orders. SB 501 proposes to further amend
this provision by reducing it below the amounts specified
in AB 1755.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Western Center on Law and Poverty (co-sponsor)
East Bay Community Law Center (co-sponsor)
Bay Area Legal Aid
California Reinvestment Coalition
California Rural Legal Assistance Foundation
Consumers Union
Public Counsel
Public Law Center
Western Regional Advocacy Project
Opposition
California Association of Collectors
California Bankers Association
California Creditors Bar Association
DBA International
Encore Capital Group
PRA Group
San Diego Regional Chamber of Commerce
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