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California Releases Revised Student Loan Servicer Regulations

The California Department of Business Oversight (DBO) has published modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published notice of its initial proposed rules on September 8, 2017.  A blackline of the changes is available here.

The initial regulations mandated extensive customer service obligations.  Among other things, the regulations required that a servicer post a plain language description of the repayment and loan forgiveness options available for federal student loans on its website, with links to specified Department of Education resources.  The initial regulations also required this same repayment and loan forgiveness information be sent to each borrower, with the servicer’s toll-free customer service telephone number, at least once per calendar year (i.e., an “annual notice”).  The initial regulations provided similar requirements for a servicer of private student loans, with the added requirement that a private student loan servicer establish policies and procedures to ensure the provision of accurate private student loan repayment arrangement information and consistent presentation of those arrangements to similarly situated borrowers.  The initial regulations also provided requirements for handling borrower inquiries (“Qualified Written Requests”).  All communications were required to be sent according to the borrower’s preferred method of communication.

The proposed modifications:

  • clarify that only a servicer of federal student loans must post information about federal repayment and forgiveness options on its website or in its annual notices
  • permit a servicer of private student loans to provide information about repayment options customized to the borrower by eliminating the requirement that servicers must prominently post information about “any alternative repayment plan” for the student loans it services on its website homepage (though private loan servicers must still provide an annual notice);
  • allow a servicer to provide information about repayment and loan forgiveness options through links on its homepage, instead of aggregating the information on the homepage.
  • create a new rule that private student loan servicer representatives available at the servicer’s toll-free number must be “fully trained about, inform and discuss with callers, any alternative repayment plan offered by the servicer or promissory note holder” for the private student loan(s);
  • provide that annual notices may be sent with any other annual communications;
  • require that borrowers who do not consent to electronic communications receive communications through the U.S. Postal Service and, only if undeliverable, through email; and
  • create a new rule (that is somewhat ambiguous) that a servicer is only required to send a borrower a total of three notices stating that there will be no response to a Qualified Written Request because the borrower has previously submitted the same request, received a response, and provided no new information in its subsequent, duplicative Qualified Written Request.

The initial regulations also established payment requirements, including that a servicer credit any electronic payment on the day “electronically paid by the borrower” if received before a posted cut-off time and that a servicer credit physical payments on the day received.  The initial regulations also mandated that account information reflect payments within three days and be available to the borrower via a secure log-in system with a consolidated report of the borrower’s transaction history.

The proposed modifications:

  • clarify that, for payments (primarily, if not exclusively, paper checks) received without payment instructions, a servicer has a reasonable period of time (not to exceed ten business days) to research and apply the payment and update a borrower’s account; and
  • revise the rule regarding co-signers to require that a servicer provide a process for co-signers to follow to check to be sure that co-signer payments are credited only to the loan(s) the co-signer has co-signed.

The initial regulations provided that a servicer must maintain a current student loan servicing report (a record of all loans being serviced) including, with respect to each student loan serviced: the borrower’s name; the number of student loans serviced for each borrower; the loan number for each loan; the loan type; the origination amount; the interest rate(s) and maturity date for each loan; the loan balance and status for each loan; the cumulative balance owing for each borrower; whether a borrower has an application pending for, or is repaying under, an alternative repayment plan, listing the plan chosen; and whether the borrower has an application pending for any loan forgiveness benefit.  For each individual loan, the servicer must also maintain borrower records, including the borrower’s application, agreement, qualified written requests, and other disclosures and statements provided to the borrower.  The initial regulations also provided specific technical requirements for electronic document storage.

The proposed modifications:

  • clarify that servicers may provide the required aggregated servicing information through reports segregated by loan type;
  • revise the recordkeeping rule to require that a servicer maintain records for three years after pay off, assignment, or transfer unless a contract requires a shorter period; and
  • eliminate the specific optical image reproduction and electronic record storage requirements of Section 2056(b).

The initial rules also provided a variety of miscellaneous rules regarding licensing (including provisions requiring a servicer to submit policies and procedures related to borrower protection requirements) and account management.

The proposed modifications:

  • remove the requirement that a servicer appoint the Commissioner as their agent for service of process;
  • provide that, between regulatory examinations, a servicer need not submit changes to their policies and procedures related to borrower protection requirements; and
  • delete the rule requiring monthly reconciliations of trust accounts.

The modifications are subject to comment until June 18, 2018 and will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.  The short comment period suggests that the DBO intends to have the rules finalized by the effective date of the Student Loan Servicing Act, July 1, 2018.

Copyright © by Ballard Spahr LLP

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About this Author

Brian Slagle, Philadelphia lawyer, Ballard Spahr law firm
Associate

Brian J. Slagle is an associate in the Business and Finance Department and a member of the Consumer Financial Services Group. His practice focuses on providing regulatory advice to clients on state and federal consumer finance laws. He regularly assists clients with a range of compliance and transactional issues relating to licensing, the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Electronic Funds Transfer Act (EFTA), Electronic Signatures in Global and National Commerce Act (ESIGN), the Telephone Consumer Protection Act (TCPA), the Fair Credit...

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