New Jersey has enacted a law, P.L. 2019, c. 200 (Act), that is designed to assist potential and existing student loan borrowers in understanding and managing their student loans. Briefly, the Act: 1) authorizes the New Jersey Department of Banking and Insurance (Department) to designate and oversee a Student Loan Ombudsman (Ombudsman), whose job it will be to serve as a resource for such borrowers, and 2) requires the Department to license and regulate student loan servicers.
Some key questions and answers concerning the new legislation, which was enacted on July 30, 2019, are set forth below.
When will the Ombudsman be appointed?
The Act requires the Department to designate the Ombudsman by no later than Oct. 1, 2020.
What will the Ombudsman do?
Once appointed, the Ombudsman will be required to provide various educational, dispute resolution and advocacy services aimed at helping student loan borrowers. These services specifically include the following:
- Disseminate information concerning the Ombudsman's availability to assist potential and existing student loan borrowers
- Help student loan borrowers understand their rights and responsibilities under the terms of their loan agreements
- Establish and maintain, in consultation with the Department and the Higher Education Student Assistance Authority (HESAA), a student loan borrower education course to teach student loan borrowers about such things as key loan terms, documentation requirements, monthly payment obligations, income-based repayment options, loan forgiveness and disclosure requirements
- Review and attempt to resolve (in collaboration with institutions of higher education, student loan servicers and other student loan education participants) complaints received from student loan borrowers, and compile and analyze data concerning those complaints
- For any student loan borrower who provides written consent, review the borrower's complete student education loan history
- Provide information and recommendations to the public, agencies, legislators and others regarding the problems and concerns of student loan borrowers
- Analyze and monitor the development and implementation of federal, state and local laws, regulations and policies relating to student loan borrowers
- Annually report to the Department and the Commissioner of Higher Education on the Ombudsman's efforts to implement his/her duties, the overall effectiveness of the office and any additional steps the Ombudsman thinks the Department needs to take to adequately regulate student loan servicers
Licensing of Student Loan Servicers
Does the Act require student loan servicers to be licensed in New Jersey?
Yes. Before passage of the Act, virtually all of New Jersey's efforts to assist student loan borrowers appear to have been channeled through the HESAA, which was authorized, among other things, to 1) administer federal student loans to New Jersey residents, 2) make and service state student loans funded through the issuance of state bonds, 3) implement several different student loan redemption programs, and 4) develop and disseminate a student loan repayment information document. The only area in which others played a role involved the making of private education loans. The New Jersey Banking Code and the New Jersey Savings and Loan Act expressly authorized banks and savings associations to make such loans, and the New Jersey Consumer Financing Licensing Act authorized licensed nonbank consumer lenders to make consumer-purpose loans in an amount of $50,000 or less, which clearly include student education loans. Until now, however, no New Jersey law imposed a licensing requirement upon servicers of federal, state or private student educational loans. The Act remedies this omission. With certain exceptions, it requires every person who services a student education loan (a "student loan servicer") to be licensed, and to renew those licenses on an annual basis. There appears to be no de minimis exception.
What exactly is a "student education loan"?
The Act defines a student education loan to mean a loan expressly extended to a student loan borrower to finance postsecondary education expensesor other school-related expenses. However, the term excludes open-end and real estate-secured loans.
Who is covered by the term "student loan servicer"?
Student loan servicers are persons who 1) receive, or receive notification of, scheduled periodic payments from a student loan borrower and apply those payments to the borrower's account, 2) maintain loan account records and communicate with the student loan borrower regarding the loan, during a period when no payment is required, or 3) interact with a student loan borrower to facilitate servicing of the loan, including helping to prevent loan default. This obviously includes makers of private student loans – such as banks, savings associations and nonbank lenders – although as indicated below, banks and savings associations are exempted from the licensing provisions of the Act.
Are there any exemptions from this licensing requirement?
Yes. Banks, credit unions, as well as their wholly owned subsidiaries and certain operating subsidiaries (collectively, Banking Institutions) are exempt. In addition, the Act includes a limited exemption for any person who services federal student loans under contract with the U.S. Department of Education (DOE). The Department is required by the Act to automatically issue a limited, irrevocable license to such a person, subject only to a requirement that the person document, in a manner prescribed by the Department, that the individual or entity, as well as the entity's key people, are properly qualified, are of good character and have not have made any incorrect statement of a material fact in the license application, or in any report or statement made pursuant to the Act. These limited licenses are not subject to the annual renewal requirement. In addition, to the extent that these student loan servicers are servicing federal student loans, they will not be subject to investigation or examination by the Department.
To fully understand the Act's scope, stakeholders will have to wait and see whether and how the Department, when developing implementing regulations, chooses to interpret the Act's definition of a student education loan, particularly the requirement therein that the loan be expressly extended to a student loan borrower to finance postsecondary education expensesor other school-related expenses. A broad interpretation of that phrase could, for example, extend the Act's licensing and substantive requirements to entities that are already licensed as consumer lenders and service their own loans, so long as the purpose of the loan is stated in writing by the applicant on or as part of the loan application (or other loan document) to be for post-secondary educational purposes.
Is the licensing requirement confined to persons who service student education loans made to New Jersey resident students?
Although the Act clearly imposes a licensing requirement on servicers of education loans made to New Jersey resident students, its coverage appears broader than that. It defines a "student loan borrower" to include not only New Jersey residents who have received a student education loan, but also any other resident of New Jersey who has agreed to pay or who shares responsibility with a New Jersey resident for repaying a student education loan. The latter phrase in particular appears to be broad enough to cover guarantors. For example, assume that a student education loan is made to a student who resides in a state other than New Jersey but who has a benefactor (a parent, grandparent, aunt, uncle or even a non-relative) who lives in New Jersey and agrees to pay or guarantee the student's loan. Based on the broad language in the Act as to who qualifies as a "student loan borrower," the servicer of that loan would arguably be required to be licensed in New Jersey as a student loan servicer.
What are the qualifications to obtain a student loan servicer license?
In addition to the two qualifications that servicers under contract with the DOE must meet, applicants for a student loan servicer license must establish to the Department's satisfaction that:
- their financial condition is sound
- their business will be conducted "honestly, fairly, equitably, carefully and efficiently within the purposes and intent of [the Act], and in a manner commanding the confidence and trust of the community
- neither the applicant nor any person on behalf of the applicant has knowingly omitted to state any material fact necessary to give the Department any information it has lawfully required
- they have paid the required nonrefundable $5,000 license fee, the required nonrefundable investigation fee in the amount prescribed by the Department, and the fee established by the Nationwide Mortgage Licensing System and Registry (NMLS&R) to which the application will be required to be submitted; note also that, once licensed, student loan servicers will be subject to annual assessments by the Department
- they have satisfied any other similar requirements that the Department determines to be necessary
Many of these qualifications can be expected to be fleshed out in regulations issued by the Department. To establish these qualifications, applicants will have to submit a financial statement prepared by a certified public accountant or a public accountant and a surety bond in the minimum amount of $30,000; undergo, or – if the applicant is an entity, have each of its key people undergo – a criminal justice background check; and provide information as required by the Department concerning any criminal convictions that are found to exist.
Student Loan Servicer Obligations/Prohibitions
Are there record-keeping and/or reporting requirements?
Yes. Licensees as well as exempt Banking Institutions must maintain adequate records of each student education loan transaction for at least two years following payoff or assignment, whichever occurs first. In addition, licensees must file an annual report of their activities during the prior year with the Department and a call report of condition with the NMLS&R in accordance with its requirements.
Does the Act impose any procedural and/or operational obligations upon Student Loan Servicers?
Yes. The Act imposes obligations upon servicers regarding Department communications, borrower inquiries, overpayments, partial payments, servicing transfers and nonpayment. These obligations are set forth below.
- Department communications. Servicers must respond to 1) Department inquiries within 15 business days (or sooner if the Department so requests), and 2) consumer complaints referred by the Department within 15 business days (which can be extended by the Department to a total of no more than 45 business days, upon request of the borrower and a showing that the extension is reasonable and necessary).
- Borrower Inquiries. Servicers must acknowledge receipt within 10 business days of any written inquiry from a student loan borrower or his/her representative, and substantively respond to such inquiry within 30 business days.
- Overpayments. If a student loan borrower makes an overpayment on his/her loan, the servicer must request instruction from the borrower as to how to apply the overpayment, and act in accordance with such instruction until the borrower advises otherwise.
- Partial payments. If a student loan borrower makes a partial payment on his/her loan, the servicer must apply the partial payment in a manner that minimizes late fees and negative credit reporting. In instances where the borrower has multiple loans on his/her account and submits a payment that is less than the total amount due, the servicer must apply the payment to satisfy as many individual loan payments as possible.
- Servicing transfers. A servicer that transfers servicing of a student education loan must 1) require the new servicer to honor and preserve all benefits originally represented by the transferring servicer as being available to the borrower (whether or not the borrower had as yet qualified for those benefits), and 2) within 45 calendar days after the transfer and at least seven calendar days before the next loan payment is due, deliver to the new servicer all information regarding the borrower, the loan account and the loan, including repayment status and available benefits. In addition, a servicer to which the servicing of a student education loan has been transferred must adopt or have in place policies and procedures to verify that it has received all of the information that the transfer or servicer is required by the Act to deliver.
- Nonpayment. In the event the student loan borrower fails to fulfill his/her payment obligations under the student education loan, the servicer must evaluate the borrower for eligibility for any available income-driven repayment program before placing the borrower in forbearance or default.
Note that, under the Act, neither the record-keeping requirements nor any of the above obligations apply if federal law, a federal student education loan agreement or a contract between the federal government and the licensee provides otherwise.
What kinds of activities must student loan servicers be most careful to avoid?
Servicers are specifically prohibited under the Act from engaging in a variety of acts or practices. The most serious of these appear to be:
- employing any scheme, device or artifice to defraud or mislead student loan borrowers
- engaging in any unfair or deceptive practice, or misrepresenting or omitting any material information in connection with the servicing of a student education loan, such as misrepresenting the amount, nature or terms of any fee or payment due, the terms and conditions of the loan agreement or the borrower's obligations under the loan
- obtaining property by fraud or misrepresentation
- misapplying loan payments
- harming a student loan borrower's creditworthiness by providing inaccurate information to a credit reporting agency (CRA)
- for servicers that regularly furnish information to a CRA, failing to report to a national CRA at least annually both a borrower's favorable and unfavorable payment history
- refusing to communicate with an individual authorized in writing by the borrower to be his/her representative, subject only to the servicer's right to act in accordance with any reasonable procedures it has adopted to verify such authorization
- making false statements or knowingly and willfully omitting material facts in any filing with a governmental agency, or in connection with any investigation conducted by the Department or any other governmental agency
Can the Department demand at any time to see my business records?
Essentially, yes. The Act provides that, for purposes of investigating violations or complaints arising under the Act or for purposes of examination, the Department may 1) review, investigate or examine any licensee, 2) direct, subpoena or order the attendance of and examine under oath any person having knowledge of the business or subject matter of any examination or investigation, and 3) direct, subpoena or order any person subject to the Act to produce books, records or other documents it deems relevant. The Department may also request a licensee to make records available or send records to the Department within five business days, although the servicer may ask for more time if necessary. Notwithstanding the above, the Department can be expected to provide licensees with advance notice of upcoming examinations and information relating to the scope of the examination and the licensees' obligations in connection therewith.
What can happen to a servicer that does not do what it is required to do under the Act?
A lot, none of it good. For example, the Department can 1) suspend, revoke or refuse to renew the servicer's license, and/or 2) bring a civil suit to enjoin the violation or potential violation, and/or seek civil penalties of up to $10,000 for a first offense or $20,000 for any subsequent offense. The Department can also fine servicers up to $100 per day for failing to timely file their annual reports or call reports of condition. In addition, the Act gives borrowers who have suffered an ascertainable financial loss as a result of an act or practice the Act deems unlawful a private right of action to sue the servicer and, if successful, recover treble damages, court costs and his/her attorney's fees.
The Act does not address whether or not aggrieved consumers may join together and pursue their remedies in a class action, nor does it indicate – as do certain other statutes (for example, the New Jersey Home Ownership Security Act) – that a violation of the Act also constitutes a violation of the New Jersey Consumer Fraud Act. However, this does not necessarily mean that courts will not allow class actions based on violations of the Act or deem particular violations of the Act to also constitute violations of the Consumer Fraud Act.
When should servicers begin preparations to comply with the Act's requirements?
Now. The Act officially takes effect on Nov. 27, 2019 (i.e., 120 days after enactment), which is a very short time frame. This means that student loan servicers need to obtain a license from the Department before that date in order to continue servicing student education loans. But in order for them to do so, the Department must first adopt implementing regulations (to the extent they prove to be necessary) and develop the necessary application forms and approval processes – a tall order, to say the least. This raises the possibility that the Department might have to allow for some sort of a grace period. Nevertheless, servicers should start now to assemble the information and documentation they can expect to be required to submit as part of their license applications and begin developing comprehensive policies and procedures to comply with the Act, since it will likely take them a considerable period of time to do so.
Holland & Knight Partner Leonard A. Bernstein contributed significantly to this alert.