On January 6, the California Department of Financial Protection and Innovation issued modified proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) The initial proposed rules also (i) defined the term “education financing products” (which now fall under the purview of the Act) along with other related terms; (ii) amended various license application requirements, including financial requirements for startup applicants; (iii) outlined provisions related to non-licensee filing requirements (e.g., requirements for servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021)); (iv) specified that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI; and (v) outlined new clarifications to the Student Loans: Borrower Rights Law to provide new requirements for student loan servicers (covered by InfoBytes here).
Following its consideration of public comments on the initial proposed rulemaking, DFPI is proposing the following changes:
- Amendments to definitions. The modified regulations revise the definition of “education financing products” by changing “private loans” to “private education loans,” which are not traditional loans. DFPI explained that changing the term to what is used in TILA will provide consistency for servicers and eliminate operational burdens. While the definition of “education financing products” also no longer includes “income share agreements and installment contracts” in order to align it with TILA, both of these terms were separately defined in the initial proposed rulemaking. The definition of “traditional student loan” has also been revised to distinguish which private student loans are traditional loans and which are education financing products (in order to help servicers determine the applicable aggregate reporting and records maintenance rules). The modifications also revise the definitions of “federal student loan,” “income,” “income share agreement,” “installment contract,” “payment cap,” “payment term,” and “qualifying payments,” remove unnecessary alternative terms for “income share,” and add “maximum payments” as a new defined term.
- Time zone requirement revisions. The modified regulations revise the time zone in which a payment must be received to be considered on-time to Pacific Time in order to protect California borrowers.
- Additional borrower protections. The modified regulations specify that servicers are required to send written acknowledgement of receipt and responses to qualified written requests via a borrower’s preferred method of communication. For borrowers who do not specify a preferred method, servicers must send acknowledgments and responses through both postal mail to the last known address and to all email addresses on record.
- Examinations, books, and records requirement updates. The modified regulations revise the information that servicers must provide in their aggregate reports for traditional student loans, including with respect to: (i) loan balance and status; (ii) cumulative balances and amounts paid; and (iii) aggregate information specific to ISAs, installment contracts, and other education financing products. Additionally, DFPI clarified that while the amount a borrower will be required to pay to an ISA provider in the future is unknown, many ISAs contain an “early completion” provision to allow a borrower to extinguish future obligations, and ISA providers must give this information to borrowers. DFPI further clarified that while servicers may choose to maintain records electronically, they must also be able to produce paper records for inspection at a DFPI-designated servicer location to allow an examination to be conducted in one place.
Comments on the modified regulations are due January 26.
This content originally appeared in the InfoBytes blog, a collection of news and alerts covering legal and regulatory developments for the financial services industry. To read more or have the InfoBytes weekly newsletter delivered to your inbox, please visit infobytesblog.com.