On April 22, Virginia enacted a comprehensive new law imposing a licensing obligation on private student loan servicers and substantive restrictions on both private and federal student loan servicers.
Effective July 1, 2021, House Bill 10 and Senate Bill 77 (the “Law”) will require the licensing of and regulate student loan servicers. Notably, the Law applies to both private servicers and those with contracts with the U.S. Department of Education (“USDOE”). Entities who will be subject to the Law’s licensure requirement may begin applying for a license March 1, 2021 through the Nationwide Mortgage Licensing System.
A New Licensing Obligation
The Law provides that “[n]o person shall act as a qualified education loan servicer…without having first obtained a license under this chapter from the [State Corporation] Commission.”
Who is a Servicer?
A “qualified education loan servicer” (“Servicer”) means any person, wherever located that:
- Receives any scheduled periodic payments from a qualified education loan borrower or notification of such payments or applies payments to the qualified education loan borrower’s account pursuant to the terms of the qualified education loan or the contract governing the servicing;
- During a period when no payment is required on a qualified education loan, (i) maintains account records for the qualified education loan and (ii) communicates with the qualified education loan borrower regarding the qualified education loan, on behalf of the qualified education loan’s holder; or
- Interacts with a qualified education loan borrower, which includes conducting activities to help prevent default on obligations arising from qualified education loans or to facilitate any activity described above.
The term does not include a wholly owned subsidiary of a depository institution, a financial institution subject to regulation under the farm credit system, or any public or private institution of higher education.
The term “qualified education loan borrower” (“Borrower”) means any current resident of Virginia who has received or agreed to pay a qualified education loan or any person who is a co-signer to a qualified education loan.
A “qualified education loan” is any loan primarily used to finance a postsecondary education and costs of attendance at a postsecondary public or private educational institution. The term also includes a refinancing of a qualified education loan. However, the term does not include an extension of credit under an open-end credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.
Notably, the Law provides for the automatic issuance of a license to any person under contract with the USDOE to service federal student loans; such entities must satisfy eligibility criteria for this exemption. Despite being exempt from licensing, federal student loan servicers remain subject to the Law’s substantive requirements.
The Law does not specifically address whether those servicing student loans in the secondary market are subject to licensing.
Duties of a Licensed Qualified Education Loan Servicer
The Law also imposes a series of duties on a licensed Servicer.
First, a Servicer must evaluate a Borrower for eligibility for an income-driven repayment program prior to placing the Borrower in forbearance or default, if an income-driven repayment program is available to the Borrower.
Second, a Servicer must respond to a written inquiry from a Borrower or the representative of a Borrower within 10 business days after the receipt of the request, and within 30 business days after receipt, provide information relating to the request, and if applicable, any action the Servicer will take to correct the account or an explanation that the account is correct. Such 30-day period may be extended for not more than 15 days if, before the end of the 30-day period, the Servicer notifies the Borrower, or the Borrower’s representative, as applicable, of the extension and the reasons for delay in responding.
Third, a Servicer must not furnish to a consumer reporting agency, during the 60 days following receipt of a written request related to a dispute on a Borrower’s payment on a qualified education loan, information regarding a payment that is the subject of the written request.
Fourth, except as provided in federal law or required by a qualified education loan agreement, a Servicer must inquire of a Borrower how to apply an overpayment to a qualified education loan. A Borrower’s direction on how to apply an overpayment to a qualified education loan shall remain in effect for any future overpayments during the term of a qualified education loan or until the Borrower provides different directions. (For purposes of that requirement, “overpayment” means a payment on a qualified education loan that exceeds the monthly amount due from a Borrower on the qualified education loan, which payment may be referred to as prepayment.)
Fifth, a Servicer must apply partial payments in a manner that minimizes late fees and negative credit reporting. If loans on a Borrower’s qualified education loan account have an equal level of delinquency, a Servicer shall apply partial payments to satisfy as many individual loan payments as possible on a Borrower’s account. As used in this subdivision, “partial payment” means a payment on a qualified education loan account that contains multiple individual loans in an amount less than the amount necessary to satisfy the outstanding payment due on all loans in the qualified education loan account, which payment may be referred to as an underpayment.
Sixth, a Servicer must require, as a condition of sale, an assignment, or any other transfer of the servicing of a qualified education loan, that the new loan servicer honor all benefits originally represented as available to a Borrower during the repayment of the qualified education loan and preserve the availability of the benefits, including any benefits for which the Borrower has not yet qualified. If a Servicer is not also the loan holder or is not acting on behalf of the loan holder, the Servicer satisfied this requirement of this subsection by providing the new loan servicer with information necessary for the new loan servicer to honor all benefits originally represented as available to a Borrower during the repayment of the qualified education loan and preserve the availability of the benefits, including any benefits for which the Borrower has not yet qualified.
Finally, in the event of a sale, assignment, or other transfer of the servicing of a qualified education loan that results in a change of identity of the person to whom a Borrower is required to send payments or direct any communication regarding the loan, a Servicer must:
- Within 45 days after the sale, assignment, or other transfer of the loan, transfer to the new loan servicer all records regarding the Borrower, the account of the Borrower, and the qualified education loan of the Borrower;
- Notify the affected Borrower of the sale, assignment, or transfer, and provide the Borrower a notice, at least seven days before the Borrower’s next payment, including: (i) the identity of the new qualified education loan servicer; (ii) the effective date of the transfer to the new servicer; (iii) the date on which the existing servicer will no longer accept payments; and (iv) the contract information for the new servicer; and
- Implement policies and procedures to verify the new qualified education loan servicer has received all records regarding the Borrower, the account of the Borrower, and the loan of the Borrower, including the repayment states of the Borrower and any benefits associated with the qualified education loan of the Borrower.
The Law also provides additional requirements for Servicers relating to recordkeeping, and to reporting obligations to the Commission.
The Law also prohibits Servicers from engaging in certain conduct. A Servicer must not:
- Directly or indirectly employ any scheme, device, or artifice to defraud or mislead Borrowers;
- Engage in any unfair or deceptive act or practice toward any person or misrepresent or omit any material information in connection with the servicing of a qualified education loan, including misrepresenting (i) the amount, nature, or terms of any fee or payment due or claimed to be due on a qualified education loan; (ii) the terms and conditions of the loan agreement; or (iii) the Borrower’s obligation under the loans;
- Obtain property by fraud or misrepresentation;
- Misapply qualified education loan payments to the outstanding balance of a qualified education loan;
- Provide inaccurate information to a naturally recognized consumer credit bureau;
- Fail to report both the favorable and unfavorable payment history of the Borrower to a nationally recognized consumer credit bureau at least annually if the Servicer regularly reports information to such a credit bureau;
- Make any false statement of a material fact or omit any material fact in connection with any information provided to the Commission or another governmental authority;
- Engage in any other prohibited activities identified in regulations adopted by the Commission pursuant to the Law; or
- Commit an abusive act or practice in connection with the servicing of a qualified education loan if the act or practice does either of the following:
- Materially interferes with the ability of a Borrower to understand a term or condition of a qualified education loan; or
- Takes unreasonable advantage of:
- A lack of understanding on the part of a Borrower of the material risks, costs, or conditions of the qualified education loan;
- The reasonable reliance by the Borrower on a person engaged in the servicing of a qualified education loan to act in the interests of the Borrower; or
- The inability of a Borrower to protect the interests of the Borrower when selecting (i) a qualified education loan or (ii) a feature, term, or condition of a qualified education loan.
Penalties and Enforcement
The Law gives the Commission broad authority to act on violations of the Law. The Commission may enter cease and desist orders against any person found to violate the Law and may assess a civil penalty not to exceed $2,500 for any violation. Each separate violation is subject to the penalty, and every day that an unlicensed person engages in the business of a Servicer constitutes a separate violation. In addition, any violation of the Law also constitutes a violation of the Virginia Consumer Protection Act and any violation is subject to any and all the enforcement provisions under that statute.
Private Right of Action
The Law allows any person who suffers damages as a result of the failure of a Servicer to comply with the law, and all applicable federal regulations, to bring a private cause of action. A person may recover actual damages, in an amount no less than $500, an order enjoining a Servicer from an offending method, act, or practice, restitution of property, punitive damages, attorneys’ fees, and any other relief the court deems proper. If, by a preponderance of the evidence, the court finds that a Servicer has engaged in conduct that substantially interferes with a Borrower’s right to an alternative payment arrangement, loan forgiveness, cancellation, or discharge, or any other financial benefit under the Higher Education Act of 1965, the court shall award treble damages in an amount no less than $1,5000 per violation.
Virginia’s decision to license private student loan servicers and to regulate student loan servicers more broadly comes at an interesting time, as the Consumer Financial Protection Bureau and the USDOE work to coordinate the examination of student loan servicers at the federal level. There have been jurisdictional tensions between the federal government and state governments regarding oversight of federal student loan servicers, and Virginia’s regulation of student loan servicers continues to show that states are eager assert regulatory authority.