In Short
The Situation: Massachusetts recently enacted a "Student Loan Borrower Bill of Rights" ("SL Bill of Rights") that went into effect on July 1, 2021, and the Massachusetts Division of Banks ("DOB") has also issued implementing regulations for the SL Bill of Rights.
The Result: The SL Bill of Rights introduces a new regulatory landscape for servicers in Massachusetts. Any servicer that services a student loan of a Massachusetts borrower must comply with the servicing standards set forth therein and in the associated regulations. Additionally, non-bank servicers should be aware that they are now generally required to apply for a servicing license.
Looking Ahead: Servicers should take appropriate measures to ensure compliance with the SL of Bill Rights and its associated regulations. Servicers should also be aware that there may be future legal challenges to the existing law and regulations and should monitor related developments.
The Massachusetts Student Loan Borrower Bill of Rights
The SL Bill of Rights came into effect on July 1, 2021, and the DOB issued its implementing regulations on the same day. Building upon and codifying earlier proposed legislation previously addressed in a 2019 Jones Day Commentary, the SL Bill of Rights establishes a framework for licensure and regulation of entities servicing any student loans for which the borrower or cosigner is a Massachusetts resident.
Under the licensure component of the law, banks, credit unions, and wholly owned subsidiaries are exempt from obtaining a license, along with institutions of higher education. All other servicers, however, are required to apply with the DOB for a servicer license, and there are currently two types of licenses: (i) an "Automatic Federal Student Loan Servicer License"; and (ii) a "Student Loan Servicer License." The automatic federal license is irrevocable and automatically granted to any applicants that service solely federal loans. The standard servicer license is for applicants that service only private student loans or both federal and private student loans.
As to regulated conduct, the SL Bill of Rights prohibits all servicers from engaging in unfair or illegal practices. The implementing regulations contain a general prohibition against "unfair, deceptive, or unconscionable" practices and a laundry list of specific conduct that violates the standards set forth in the regulations. Violative conduct includes: allocating partial payments in a way that maximizes late fees; misrepresenting the availability of repayment options to a borrower; steering borrowers into forbearance without disclosing all other available repayment options; failing to provide information to borrowers to notify or confirm changes in account status; and knowingly or willfully failing to respond to borrower complaints in a timely manner.
A violation of the SL Bill of Rights is deemed to constitute a violation of Massachusetts's statutory consumer protection laws, and the Massachusetts Attorney General may bring separate claims against servicers for violation of such laws. The DOB, meanwhile, is responsible for administrative enforcement of the SL Bill of Rights, and may conduct investigations and examinations of any servicers that service loans in Massachusetts, including those exempted from the licensing requirement. Violation of servicing standards in the SL Bill of Rights may result in the DOB issuing fines of up to $50,000 per violation and revoking a servicing license for licensed servicers (other than those with an automatic federal license). The DOB may also refer potential violations to the Massachusetts Attorney General's office.
The SL Bill of Rights also creates a "student loan ombudsman" within the office of the Massachusetts Attorney General. The ombudsman assists in the resolution of borrower complaints concerning servicers, provides educational and informational material to borrowers, monitors student loan servicers, and issues annual reports on servicing issues.
The Impact on Servicers
Servicers in Massachusetts should coordinate with their compliance advisors and confirm that they have taken any necessary steps to meet the requirements of the SL Bill of Rights and implementing regulations. Most importantly, non-exempt servicers should immediately apply for a servicing license, if they have not already done so. For further information on license issues, servicers may wish to refer to an FAQ issued by Massachusetts.
Servicers should also be aware that the SL Bill of Rights may be subject to legal challenges. Over a dozen states have passed similar student loan servicing laws, and several are, or have been, subject to challenges. Indeed, as of the date of this commentary, portions of at least two such laws have been partially struck down on federal preemption grounds, with additional litigation likely at both the trial and appellate levels. Similar issues may arise with respect to the SL Bill of Rights, and servicers should monitor any legal challenges that may develop over the coming months and years.
Three Key Takeaways
- The SL Bill of Rights and associated implementing regulations took effect on July 1, 2021. The law and regulations reshape the regulatory framework for servicers in Massachusetts.
- Servicers subject to the SL Bill of Rights should apply for a servicing license with the DOB, if necessary, and take immediate steps to ensure compliance with the law and implementing regulations.
- Servicers should monitor future developments concerning the SL Bill of Rights, including any potential legal challenges that may impact the application of the law.
