October 14, 2019

October 14, 2019

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NY Department of Financial Services Issues Proposed Student Loan Servicer Regulations

The New York Department of Financial Services (NYDFS) has issued proposed regulations to implement the legislation enacted in April 2019 that requires servicers of student loans to be licensed, imposes servicing standards, and prohibits certain practices.  On July 31, the NYDFS published a notice of proposed rulemaking in the State Register, triggering a 60-day comment period.

The licensing requirement would apply to “every person engaged in the business of servicing student loans owed.”  The activities that would constitute “servicing” include any of the following:

  • “receiving any payment from a borrower pursuant to the terms of any student loan”
  • “applying any payment to a borrower’s account pursuant to the terms of a student loan or the contract governing the servicing of any such loan”
  • “during a period where a borrower is not required to make a payment on a student loan, maintaining account records for the student loan and communicating with the borrower regarding the student loan on behalf of the owner of the student loan promissory note”
  • in conjunction with the activities above, providing notice of amounts owed on a student loan, performing other administrative services with respect to a student loan, or interacting with a borrower with respect to an attempt to avoid default and facilitating either of the first two activities above

“Servicing” would not include “collecting, or attempting to collect, on a defaulted student loan for which no payment has been received for 270 days or more.”  Exempt entities would include banks and credit unions, servicers of only federal student loans, and debt collectors whose student loan collection business involves collecting or attempting to collect on student loans for which no payment has been received for 270 days or more and who do not service non-defaulted student loans as part of their business.

A “student loan” would mean “any loan to a borrower to finance postsecondary education or expenses related to postsecondary education” and includes federal and private student loans.  A “borrower” is defined as “any resident of this state who has received a student loan or agreed in writing to pay a student loan or any person who shares a legal obligation with such resident for repaying a student loan.”  The servicing standards in the proposal include:

  • Rules for crediting payments and applying “nonconforming payments,” which are defined as “an overpayment or a partial payment”
  • Requirements regarding consumer reporting and transfers of servicing
  • Required disclosures of loan repayment options and loan forgiveness benefits
  • Making specified account information available free of charge on the servicer’s website
  • For servicers of private student loan, a required disclosure regarding the availability and criteria for a cosigner release
  • Rules for providing customer service and handling consumer complaints and inquiries

Student loan servicers would also be required to comply with New York regulations on cybersecurity.  The practices prohibited by the proposal include “misapplying payments to the outstanding balance of any student loan or to any related interest or fees” and engaging in any “unfair, deceptive, abusive, or predatory act or practice.”  The proposal includes definitions for the terms “unfair” and “abusive.”

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About this Author

Culhane, Ballard, Partner
Partner

John L. Culhane, Jr., is known for his work advising on interstate direct and indirect consumer and residential mortgage loan and leasing programs, through both traditional brick-and-mortar facilities and e-commerce. Before joining Ballard Spahr, Mr. Culhane was associate counsel with Mellon Bank, N.A.; associate counsel with Bank of America NT&SA; and senior attorney (section chief) with the National Credit Union Administration, the federal agency regulating federal credit unions.

Mr. Culhane addresses issues involving licensing,...

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