STUDENT LOAN Licensing Laws & Regulations ~~~ Presentation to NCHER 2019 Annual Conference

1. STUDENT LOAN Licensing Laws & Regulations ~~~ Presentation to NCHER 2019 Annual Conference June 3-5, 2019

2. Presenters Linda J. Randby Deputy General Counsel PHEAA Legal Services Division Jaye O’Connell Director of Compliance Vermont Student Assistance Corporation All views expressed are those of the presenters and are not attributable to PHEAA, VSAC or NCHER

3. Commonalities of State Student Loan Licensing Laws

4. Background What prompted the State level push for Student Loan Servicer Licensing laws? • CFPB oversight changes • Students burdened with debt

5. History • States that have passed licensing laws • 16 States with pending licensing legislation

6. Common Themes in the Legislation • Imposing servicing requirements • Imposing licensing requirements • Establishing an Ombudsman's office

7. Common Themes in the Legislation EXAMPLES: New Jersey's pending bill would impose servicing requirements and establish an Ombudsman's office. Pennsylvania’s pending bill establishes an Ombudsman’s office, but has no licensing requirements.

8. Overview of Legislation • Frequently, the legislative intent expressed by states includes enhanced oversight of federal servicers in light of perceived gaps from the Federal Student Aid office. • For example, Colorado includes this language: Section 1: Legislative Intent The General Assembly hereby.... (b) Determines that: (I) Student loan servicers administer student loans, serving as a critical link between borrowers and lenders in managing accounts, processing payments, and communicating directly with borrowers. Despite this critical relationship, according to the federal consumer financial protection bureau (CFPB), there are no consistent, market-wide federal standards for student loan servicing.

9. Overview of Legislation • The bills are neutral to the loan holder/originator. • Typically, the legislative intent of the bills is to regulate privately and federally held loans. Example: • Illinois – Definition in Section 1-5 > "Student loan" or "loan" means any federal education loan or other loan primarily for use to finance a postsecondary education….”

10. Overview of Legislation Another example: • Colorado – Section 5 "STUDENT EDUCATION LOAN": (a) MEANS A LOAN THAT IS MADE, INSURED, OR GUARANTEED UNDER TITLE IV OF THE FEDERAL "HIGHER EDUCATION ACT OF 1965", 20 U.S.C.SEC. 1070 ET SEQ., AS AMENDED, OR THAT IS EXTENDED TO A STUDENT LOAN BORROWER FOR THE PURPOSE OF FUNDING, IN WHOLE OR IN PART, EDUCATION EXPENSES.

11. Overview of Legislation Another example: • Washington - Section 2 “Consumer information about the differences between private student loans and federal student loans, including a brief overview of the availability of income-driven repayment plans and loan forgiveness programs for federal loans…” • Washington - Section 14 “(5) In addition for all consumer loans made by a licensee that are a refinance of a federal student education loan, the licensee must provide to the borrower a clear and conspicuous disclosure that some repayment and forgiveness options available under federal student education loan programs, including without limitation income-driven repayment plans, economic hardship deferments, or public service loan forgiveness, will no longer be available to the borrower if he or she chooses to refinance federal student education loans with one or more consumer loans.

12. Scope & Exclusions • The scope of the bills tends to be broad upon introduction and, as the bill moves through the legislative process and negotiations occur, exceptions to licensing requirements are introduced. • For example, guaranty agencies are frequently excluded from licensing requirements or there are exclusions for servicers with minimum volume in a licensing state.

13. Scope & Exclusions California - Example of change in definitions • Originally, the CA Student Loan Servicer Bill (AB 2155) defined the term "servicing" broadly enough to encompass guarantors. • AB 38 changed the definition of "student loan servicer" to carve out a limited exemption for those engaged in post-default activities. • Section 28104 of the CA Financial Code- "A “student loan servicer” does not include a debt collector… whose student loan debt collection business, and business operations, involve collecting, or attempting to collect, on defaulted student loans, that is, federal student loans for which no payment has been received for 270 days or more, or private student loans, in default, according to the terms of the loan documents. Debt collectors who also service non-defaulted student loans, as part of their business, and business operations, are “student loan servicers.”

14. Scope & Exclusions • State Agencies have not been exempt from licensing. • In Missouri, a licensing bill has been introduced and there is also a state agency that is a not-for-profit federal student loan servicer. • However, Colorado does include an exemption for Colorado government servicers. (8) "STUDENT LOAN SERVICER": (b) DOES NOT INCLUDE: (V) AN AGENCY, INSTRUMENTALITY, OR POLITICAL SUBDIVISION OF THIS STATE, BUT ONLY TO THE EXTENT THAT SERVICING IS PERFORMED THROUGH SECTION 23-1-112 AND PURSUANT TO ARTICLE 3.1 OF TITLE 23. THIS SUBSECTION (8)(b)(V) DOES NOT EXEMPT A NONGOVERNMENTAL ENTITY THAT PERFORMS STUDENT LOAN SERVICING PURSUANT TO A CONTRACT WITH AN AGENCY, INSTRUMENTALITY, OR POLITICAL SUBDIVISION OF THE STATE.

15. UDAAP(Unfair, Deceptive or Abusive Acts or Practices) • State servicer licensing bills are frequently drafted to make any failure to meet servicing requirements or engaging in a prohibited practice a UDAAP under the state's existing consumer protection law.

16. UDAAP(Unfair, Deceptive or Abusive Acts or Practices) • For example, Maryland's Student Loan Servicers Law, Chapter 546, enacted in May, focused on UDAAPs. • Prohibiting a student loan servicer from employing any scheme, device, or artifice to mislead a student loan borrower; prohibiting a student loan servicer from engaging in any unfair, abusive, or deceptive trade practice toward any person; prohibiting a student loan servicer from knowingly or recklessly misapplying or refusing to correct a misapplication of a certain payment; requiring a student loan servicer to respond to a certain inquiry or complaint in a certain manner; etc.

17. UDAAP Examples of UDAAPs under MARYLAND’s Law: • A reckless or knowing misapplication of a borrower's payment or a refusal to correct the misapplication. • Failure to follow a borrower's direction for application of a non-conforming payment. • Borrower direction can be given at the time of payment, for future payments, or to previous and future payments, where direction is in response to a student loan servicer inquiry. • Failure to report positive credit history of a student loan borrower to a nationwide consumer reporting agency at least once a year, if the servicer reports to a nationwide CRA.

18. Federal Law References • The servicing requirements frequently include a requirement to comply with Federal consumer protection laws, such as the Truth in Lending Act. • Some states make noncompliance with Federal law a UDAAP. • Regardless of whether a state has passed a student loan servicing law, compliance with Federal consumer protection laws when servicing loans is required.

19. State Student Loan Licensing Requirements

20. Licensing Requirements Requirements Typically Include: • Submissions are made on-line through the NMLS Resource Center • Licensing and/or investigation fees and renewal fees • Documents that affirm the servicer’s financial soundness requirements

21. Licensing Requirements Requirements Typically Include: • Credit reports, fingerprinting and/or criminal histories for officers, principals, or directors • Submission of loan servicing volume and other reports (annual assessment fees may apply) • Compliance with investigations or examinations and production of financial records as part of the state's ongoing oversight of the servicer

22. Licensing Requirements Annual Assessment Fees: Some states require the calculation of annual fees based on loan volume in their state.

23. Licensing Requirements Annual Assessment Fee EXAMPLES: • CA – By Sept 30th, Commissioner will notify the servicer of pro rata fee due by Oct 31, based on the loan volume in the annual report submitted on March 15th. Fee no less than $250/year. • CT – After July 1st, Commissioner will notify the servicer of pro rata assessment, based on loan volume. • WA – Due March 1st annually, based on loan volume and calculated at $38.46 per $1 million WA loan volume.

24. Servicing Requirements The servicing requirements can be either: • SPECIFIC, such as the requirement to send responses to inquires from customers within a specific time frame, or • BROAD, such as the prohibition against obtaining property by fraud or misrepresentation.

25. Servicing Requirements • Specific requirements may be pre-empted due to conflict with a federal loan requirement. • If a requirement is overly broad, concerns may be raised with industry groups.

26. Managing Change • Monitor – for changes in the laws • Analyze – laws, early and often • Communicate – with internal and external stakeholders • Decide • Document, document, document – every step of the way!

27. Example of “Conflict” between Federal & State Requirements • FEDERAL REQUIREMENT 34 CFR 682.411 contains substantial due diligence requirements when a borrower becomes delinquent that include timing and communication requirements. • STATE REQUIREMENT The state laws contain disclosure requirements that many times are different than the federal requirements.

28. Preemption & IntergovernmentalImmunity

29. Preemption - Basically At a very basic level, the preemption doctrine refers to the idea that a higher authority of law will displace the law of a lower authority of law when the two authorities come into conflict.

30. Conflict Preemption • A type of conflict preemption based on the seminal case Leslie Miller, Inc. v. Arkansas, 352 U.S. 187, 189–90 (1956) , which held that Arkansas cannot require a construction company to obtain a state contractor’s license to perform work at a federal air force base because it would give the state “a virtual power of review” over the federal government’s “responsibility” determination. • At issue in Student Loan Servicing Alliance v. Taylor, et al.in the U.S. District Court of the District of Columbia. • “This case involves the important question of whether the District of Columbia – and inferentially other states – may require student loan servicers who manage federally-owned and federally-guaranteed student loans to obtain a license to operate in the District of Columbia in an effort to protect the consumers of those loans.”

31. SLSAv. Taylor Holding • “Courts have consistently held that any state law that impedes the federal government’s ability to contract – including state licensing regimes that effectively second guess the United States’ contracting decisions – are preempted.” • Because “the D.C. licensing scheme, in effect, requires SLSA’s members to ‘desist from performance until they satisfy a state officer upon examination that they are competent [to perform their duties] and pay a fee for permission to go on’” (quoting Leslie Miller, 352 U.S. at 190), “there is a risk that the federal government will contract with a servicer after evaluating its qualifications under federal law and regulations, and that servicer nevertheless will be determined to be unqualified by the Commissioner and barred from operating in the District of Columbia.”

32. Intergovernmental Immunity - Basically • At a very basic level, under this doctrine, the federal government and the states are treated as independent sovereigns. • The Supreme Court held that states may not regulate property or operations of the federal government. McCulloch v. Md., 17 U.S. 316 (1819)

33. Intergovernmental Immunity • The doctrine specifies that state laws are unconstitutional if they regulate the federal government directly or discriminate against it. • It can be characterized as a different way of looking at the issue in the Leslie Miller line of cases. • In SLSA v. Taylor, the judge explained that “Leslie Miller has also been characterized as a discussion of the intergovernmental immunity doctrine, which is logical given the overlap between second-guessing federal contracting decisions as prohibited under conflict preemption and the direct regulation by a state of the federal government prohibited under the intergovernmental immunity doctrine.”

34. Broader Impact of SLSA v. Taylor – holding is not just for student loan servicers Federal Law v. State Licensing Schemes

35. New Developments • States are proposing new student loan regulation schemes to attempt to work around SLSA v. Taylor • Example: New York • States that a license is not required to engage in the business of servicing government-owned federal student loans but . . . • Servicers must comply with requirements regarding books and records; reports and electronic filing, prohibited practices, examinations, etc., and be subject to penalties for violations. • This is licensing without the slip of paper that is the license. • Such schemes likely run afoul of principles of conflict preemption and intergovernmental immunity

36. Multi-State Compliance Program This Photo by Unknown Author is licensed under CC BY-SA

37. Getting Organized • Understand business profile re: licensing and servicing requirements • Loan volume by state • Exemptions • Compliance resources • Licensing resources • Examination support

38. Licensing “Ops” • Obtaining the license • NMLS access & use • Meeting ongoing licensing obligations • Compliance Management System • Planning for new operations & exams • Fees

39. Servicing & Implementation • Is it really final?! • Gap Analysis • Similar gaps among states – implement highest common denominator? • Common servicing gaps • Qualified Written Request • Cut-off time for receipt of online payments • Information to borrowers: online, reports, annual or periodic notices • Treatment of non-conforming payments

40. Examination Getting organized – again… • What to expect • Examination experience

41. Q&A Linda Randby: lrandby@pheaa.org