New Laws Facing Student Loan Servicers – What Higher Ed Leaders Need to Know

By Benjamin Breitbart, Vice President, TFC Tuition Financing

Keeping abreast of the changing regulatory landscape in the higher education sector is a full-time job. Private postsecondary educational institutions face ongoing regulatory challenges, and it can be daunting to be aware of, let alone meet, all of the state and federal guidelines. With government regulators, lawmakers and consumer advocates voicing concerns after the high-profile collapse of several large for-profit institutions, and the collective outcry of rising student debt in the last decade, there is an increased inspection of industry business practices. In California, the attorney general’s lawsuit against the country’s largest student loan servicer has brought national attention to the issues and is, at least part of, the reason for California’s new statute mandates, and regulatory changes continue.

With the educational sector facing additional state and federal government scrutiny, proprietary schools must be aware of new laws as they unfold and be prepared for any new guidelines that must be followed.

Accreditors are also facing added scrutiny and additional pressure and are being asked to play a larger role in the regulatory and oversight processes. Partnerships are more important than ever as we navigate the rules together to ensure compliance in all aspects.

One emerging trend appears to be state legislation regarding student loan servicers. Several states are enacting laws with a licensing requirement for their state’s servicers. While each state’s requirements are different, the licensing requirement may extend beyond traditional third-party servicers, and may apply to individual schools as well. If your institution offers in-house financing and you are collecting tuition payments, you may be considered a servicer depending on the states where your students reside. And if you draw students from multiple states, it is important to also note that the regulations could apply to other states than where the school is located. This is because most states require licensure if a loan is being serviced to any of their residents, regardless of where the school is located.

One state that has launched such a licensure program is California. The Golden State’s new Student Loan Servicing Act went into effect on July 1, 2018. It requires that student loan servicers located in California servicing loans made to residents of any state, and servicers located outside of California servicing loans made to California residents, obtain a license from the California Department of Business Oversight. The law applies to any private for-profit postsecondary educational institution, and it applies to existing as well as new loan agreements that bear interest or extend past graduation.

Among other things, the act provides borrower protections that require servicers to provide information on their websites about alternative repayment plans and loan forgiveness options.

It also mandates that borrowers be notified in advance when their loans will be transferred to another servicer, and also requires timely responses to borrowers’ written requests for information related to potential account errors while refraining from furnishing adverse information to any consumer reporting agency in the meantime.

The requirements of the licensing process are arduous and can take several months to complete. In California, the Department of Business Oversight conducts a full on-site evaluation, requiring background checks for qualified individuals, dedicated surety bonds, and providing the Department with many documents ranging from security plans to operation plans.

Aside from time, there are also financial costs including licensing fees, paying for site visits, in addition to an assessment based on the volume of covered loans.

It should be noted that the team at the Department of Business Oversight is not out to be a burden, and the team there has already developed strong relationships with many third-party servicers. However, their role is to ensure that the legislation and associated regulations are followed. They are aware of how the law applies to self-servicing schools and will hold them to the same standards and expectations that third-party servicers are held to.

As the penalties for not being licensed can be substantial, it is important that schools that have institutional loans either start the licensing process right away or outsource the function to a licensed third-party servicer. In California, penalties are up to $2,500 for each violation, which could add up quickly.

Once licensed, it is important that you stay on top of what is happening. As a new frontier in regulation, the underlying legislation has already been tweaked, but further changes may occur in further legislative sessions. As most schools are already aware, regulations are also eligible for constant revisions which may impact the way you communicate to students and process payments.

It is also important to stay in touch with the regulator to respond to any complaints regarding servicing. While they understand that not every complaint may be legitimate, they want to ensure that all borrower complaints are investigated and responded to.

California’s Department of Oversight has already begun enforcement of their new law.

They have sent letters to those servicers that haven’t yet filed a license application, asking for a date that the license application will be received or an explanation of the reasons they plan not to apply. While some companies are pushing back on the new servicer licensure law, citing that state regulations impede federal interests, most believe that these laws are likely here to stay.

You may be wondering how it’s possible to stay up-to-date with each state’s changes. I encourage active participation in sector associations – state and national higher education associations, trade associations and accrediting agencies. Get familiar with your state and federal resources. Stay informed by subscribing to sector publications and opting into email notices. Read the newsletters and sign up for those “What’s New” webinars from all of your sector associations and agencies. Many associations and agencies host local, regional and annual conferences as well, and being able to network with your industry peers can offer valuable insight into best practices.

What does this mean for proprietary institutions? School administrators must be willing to invest the time necessary to stay current on evolving laws, not only in the school’s home state, but also in the states where they do business, and where their students normally reside. Ignoring the requirements can be costly. Partnering with a third-party loan servicer is a sensible option for many private postsecondary schools – just make certain that they are licensed in the states that they need to be.

References:
http://www.dbo.ca.gov/Laws_&_Regs/Student_Loan_Servicing_Act