D.C. belatedly releases Bill of Rights for student loan borrowers
The District of Columbia Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 (Servicing Act) became effective February 18, 2017. The Servicing Act set an October 1 deadline for the Student Loan Ombudsman to prepare course materials to help borrowers understand their student loans and to draft a separate student loan Bill of Rights. While the course materials apparently have not yet been released, the D.C. Department of Insurance, Securities, and Banking (DISB) did release its “Student Loan Borrower’s Bill of Rights” on October 11.
The list of specific rights set forth by the DISB is preceded by the following statement:
Student loan borrowers in the District of Columbia deserve a loan repayment process built on fairness, professionalism, and transparency. This bill of rights sets out the basic principles and protections that borrowers can rely on as they work to reduce their student debt. Beyond that, student loan servicers in the District are expected to uphold these key tenets with respect to all student loan borrowers and each student loan they service.
The Bill of Rights contains five articles as follows:
Article I: Transparent Pricing and Terms – Rates must be disclosed transparently pursuant to the Truth in Lending Act requirements, there can be no hidden fees, plain-English terms should be used to describe key terms, and pricing and other key terms should be presented clearly and prominently.
Article 2: Receive Non-Abusive Products – There should be no debt traps, no “double-dipping” (i.e. no fees can be charged on the borrower’s outstanding principal when refinancing or modifying a loan with a fixed-fee as the primary financing charge unless there is tangible cost benefit to the borrower), and the design of loan products should be consistent with their use.
Article 3: Fair and Responsible Underwriting – Financing should be only offered only with high confidence in the borrower’s ability to repay, loans should be aligned with borrower interests and be right-sized, and servicers and lenders should engage in responsible credit reporting.
Article 4: Fair Collection Practices – Servicers should abide by the spirit of the Fair Debt Collection Practices Act, must vet and oversee the collection practices of third-party collectors and debt buyers, and must maintain and communicate accurate loan information.
Article 5: Quality Customer Service – Servicers should provide a confirmation of receipt of a complaint in writing (within five days when possible), research and resolve every complaint in a timely manner, and take proactive steps to inform borrowers of relevant organizational changes that could affect loan repayment, consumer interaction with the servicer, or the transfer of the borrower’s account. Borrowers shall not be discriminated against based on race, color, religion, national origin, sex, marital status, age, sexual orientation or identity, or any other protected classification.
Oddly, the Bill of Rights does not appear to be based on student loan servicing principles articulated by other regulators. Instead, it seems to borrow copiously from principles for the origination, servicing, and collection of small business loans adopted by the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates. Accordingly, because it is not based on anything involving student loan servicing, the Bill of Rights may be on shaky legal ground.
The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has raised questions with the DISB regarding the application of some of the requirements of the Bill of Rights to student loan lenders, as opposed to servicers, which arguably goes far beyond the activities authorized by Congress in approving the Servicing Act given that D.C. laws must be approved by Congress, and has likewise raised questions regarding the conflicts between the requirements of the Bill of Rights and the provisions of the Higher Education Act of 1965 (HEA), which arguably preempt those requirements. In July 2017, NCHER wrote to the Department of Education to express concern about the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the HEA. In its letter, NCHER urged the ED to issue preemption guidance that would clearly state that “federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”
Meanwhile, the DISB continues to accept Student Loan Servicer License applications. As we have previously reported, the Servicing Act directed the DISB to issue rules implementing its licensing provisions within 180 days of the Act’s effective date. Although it did not meet that deadline, the DISB started to accept applications and transition filings for the Student Loan Servicer License on the National Mortgage Licensing System on August 10, 2017. After nearly a month of accepting Student Loan Servicer License applications, the DISB released a Notice of Emergency and Proposed Rulemaking to implement the Act. The Student Loan Servicer emergency rules were adopted and made effective September 8, 2017. The emergency rules still have not been published in the D.C. Register, however, meaning that the deadline for comments has yet to be established. In its notice setting forth the Student Loan Borrower’s Bill of Rights, the DISB did indicate that it began licensing student loan servicers effective September 8, 2017.