HOUSE BILL REPORT

E2SSB 6029

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As Reported by House Committee On:

Higher Education

Title: An act relating to establishing a student loan bill of rights.

Brief Description: Establishing a student loan bill of rights.

Sponsors: Senate Committee on Ways & Means (originally sponsored by Senators Liias, Ranker, Fain, Frockt, Billig, Darneille, Palumbo, Rolfes, Keiser, Cleveland, Pedersen, Hunt, Wellman, Conway, Chase, Saldaña, Kuderer, Hasegawa and Mullet; by request of Attorney General).

Brief History:

Committee Activity:

Higher Education: 2/21/18, 2/23/18 [DP].

Brief Summary of Engrossed Second Substitute Bill

  • Creates the Student Education Loan Advocate to receive, review, and provide assistance to student education loan borrowers who file complaints.

  • Requires student loan servicers (servicers) to obtain a license from the Department of Financial Institutions (DFI) to operate in the state, and permits the DFI to establish fees.

  • Requires servicers to comply with various provisions regarding assessing and crediting fees; account information and dispute requests; acquiring, transferring, and selling servicing rights; and reporting information.

  • Prohibits third-party student loan modification servicers from various practices that may misrepresent the student loan situation or encourage a borrower to do something counterproductive to their situation.

  • Requires the Washington State Institute for Public Policy to study student loan authorities who refinance student loans from proceeds of tax-exempt bonds.

HOUSE COMMITTEE ON HIGHER EDUCATION

Majority Report: Do pass. Signed by 9 members: Representatives Hansen, Chair; Pollet, Vice Chair; Holy, Ranking Minority Member; Van Werven, Assistant Ranking Minority Member; Haler, Orwall, Sells, Stambaugh and Tarleton.

Staff: Megan Mulvihill (786-7304).

Background:

Consumer Loan Act.

The Consumer Loan Act (CLA) authorizes the Department of Financial Institutions (DFI) to regulate consumer loan companies who conduct business in Washington. Consumer loan companies include mortgage lenders and consumer finance companies. The CLA limits the rates and fees lenders may charge on loans, restricts certain loan provisions such as prepayment penalties, requires lenders to fully disclose the terms of loans, and prohibits lenders from engaging in unfair and deceptive acts and practices. A violation of the CLA is a violation of the Washington Consumer Protection Act.

Student Loan Servicers.

Student loan servicers are a link between borrowers and lenders. Lenders often contract with servicers to manage borrowers' accounts, process monthly payments, manage enrollment in alternative repayment plans, and communicate directly with borrowers. The United States Department of Education (US DOE) holds contracts with nine servicers for the Federal Direct Loan Program and the Federal Family Education Loan Program. A lender can switch servicers many times over the course of a student loan.

According to the Consumer Financial Protection Bureau, there are no consistent market-wide standards for student loan servicing, and servicers generally have discretion in determining policies related to many aspects of servicing operations.

Washington Student Loan Transparency Act.

In 2017 the Legislature passed Substitute Senate Bill 5022, also known as the Washington Student Loan Transparency Act (Act). Subject to appropriations, the Act mandates that state educational institutions provide notification to student borrowers regarding their student education loans. Required information includes total payoff amount, total loans taken out, monthly repayment amounts, and percentage of aggregate federal direct loan borrowing limit applicable to the program of study. Additionally, certain information on how to access resources for borrowers must be provided. Starting July 1, 2018, educational institutions must begin providing notifications to borrowers each time a financial aid package that includes a new or revised student education loan is offered.

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Summary of Bill:

Student Loan Advocate.

The Student Loan Advocate (Advocate) is created within the Student Achievement Council (Council) to provide assistance to student loan borrowers. In collaboration with the Office of the Attorney General (AGO), the Advocate receives and reviews borrowers' complaints. A complaint regarding a student education loan servicer (servicer) licensed, or subject to licensing, must be referred to the DFI. Complaints regarding servicers not subject to licensure are referred to the AGO's Consumer Protection Division. The Advocate, the DFI, and the AGO must confer annually on complaints received, the referral processes, and reporting requirements. The Advocate may hire additional staff as necessary to implement its duties.

The Advocate is also tasked with, among other things, compiling and analyzing data on complaints; assisting borrowers in understanding their rights and responsibilities under the terms of their student loans; providing information to the public and state regarding problems and concerns of borrowers; analyzing and monitoring the development and implementation of federal, state, and local laws relating to borrowers; assessing the number of residents with federal student loans who have applied for, received, or are awaiting a decision on forgiveness or discharge of a student loan; disseminating information on the availability of the Advocate; and taking action to assist student loan borrowers, such as communicating with a servicer to resolve a complaint.

The Advocate must also establish a student loan borrower education course by October 1, 2020. The Council must report to the Legislature by December 31, 2020, on the implementation and effectiveness of the Advocate, the types of complaints received, how the complaints have been resolved, and data on student loan issues.

Student Loan Notices.

The student loan notices sent to enrolled students by higher education institutions about their student loans must also include a statement that income-driven repayment plans allow a federal student loan borrower to reduce their monthly payment according to a percentage of their income, along with a brief summary of the applicable plans. The notices must also include the contact information for the Advocate, and the provisions mandating the notices are no longer subject to appropriations.

Student Loan Servicers.

Educational institution, student education loan, student education loan borrower, student education loan servicer, student education loan servicing, and third-party student education loan modification services are all defined.

Licensing Requirements. A servicer must obtain a license from the DFI to service or modify student loans in Washington, and are subject to the requirements under the CLA, unless the servicer is one of the following exempt entities:

A servicer is in violation of the CLA if found to be:

Licensing Fees. The Director of the DFI must establish fees to cover administrative costs for the Student Loan Servicer Program and the Advocate. The fees collected must be deposited in the Financial Services Regulation Fund (Fund) and may include an annual assessment; late fees; hourly investigation and examination fees, including travel expenses; application fees; initial license fees; and transaction fees.

The Student Loan Advocate Account (Account) is created in the custody of the State Treasurer. Beginning in the 2020-21 fiscal year, the State Treasurer must annually transfer from the Fund to the Account the greater of: (1) $175,000; or (2) 20 percent of the student loan servicing annual assessment fee. The DFI must provide to the State Treasurer information on the amount of annual assessment collected from student loan servicing.

Servicer Assessed Fees. A servicer must assess a fee within 45 days of when the fee incurred and, the fee must be clearly explained to the borrower no more than 30 days after assessing the fee.

Servicer Credited Fees. All amounts received by the servicer must be accepted and credited within one business day of the date received. Any regularly scheduled payment made prior to the scheduled due date must be credited no later than the due date. If a payment is not credited, the borrower must be notified of why and what actions to take within 10 business days by mail.

Servicer Records and Requests for Account Information. The servicer must maintain records of each request for information regarding a dispute or error until the student loan is paid in full, sold, or otherwise satisfied. A borrower may request their account information and file a dispute, provided sufficient detail about the inquiry is provided to the servicer. The servicer must make reasonable efforts to comply with the request and respond within 15 business days. The servicer's response must include specific information, including the current balance due, any funds held in a suspense account, any known shortages, information on the current holder of the loan, the servicer's contact information, and if applicable, provide explanations on any decision made with respect a borrower's application for discharge or refund. The servicer must promptly correct any errors and refund any fees incorrectly assessed.

In addition, once per year for free, a borrower may request more detailed information that must cover the two-year period prior to the request. If the servicer claims any delinquent or outstanding sums are owed prior to the two-year period, then the account history provided must go back to the month that the servicer claims any outstanding sums are owed. The request may include a copy of the original note, or if unavailable, an affidavit of lost note, and an itemized statement of:

Servicer's Acquiring Servicing Rights. Procedures are established for servicers acquiring, transferring, or selling servicing rights from another servicer. In all cases, the servicers must provide certain notices to the borrower, including information about:

The transferring servicer must also inform the receiving servicer if a loan modification request is pending and must continue processing loan modification requests received during the transfer process. In addition, records must be retained to maintain the borrower's uninterrupted enrollment in their existing repayment plan.

Additional Requirements for Servicers. Servicers must provide information regarding repayment and loan forgiveness options and the Advocate on their websites. In addition, the information must be provided via written correspondence or electronic mail at least once per calendar year.

Servicers must collect, maintain, and report to the DFI specific information about student loans in their portfolio, such as loan volume, default, refinance and modification information, loan types, and collection practices.

A servicer must maintain liquidity, operating reserves, and a tangible net worth in accordance with generally accepted accounting principals as determined by the DFI's Director.

Third-Party Student Education Loan Modification Services.

Any person providing third-party student loan modification services (modification servicer) must:

Prohibited practices for a modification servicer include requiring or encouraging a borrower to:

In addition, the modification servicer must not:

Student Loan Refinancing.

A disclosure must be made to the borrower that some repayment and forgiveness options will no longer be available if the borrower refinances a federal student loan with a consumer loan.

The DFI does not have any enforcement, examination, or reporting obligations or duties under the Student Loan Bill of Rights Act until January 1, 2019, or until the final adoption of rules for the act, whichever is sooner.

Washington State Institute for Public Policy Student Loan Refinance Study.

The Washington State Institute for Public Policy (WSIPP) must conduct a study on student loan authorities that refinance existing federal and private student loans from the proceeds of tax-exempt bonds. The report on the findings of the study is due to the higher education committees of the Legislature by December 31, 2018. The WSIPP must:

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Appropriation: None.

Fiscal Note: Preliminary fiscal note available.

Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.

Staff Summary of Public Testimony:

(In support) There are slightly more than 800,000 borrowers who owe more than $24 billion in student loan debt. This is a growing problem. Statistics show that student loan debt used to be the cost of doing business, but it has grown so much that it has changed the economy. Student loan borrowers are delaying marriage, having families, and buying homes, and it can be a deciding factor in career choice. This provides enhanced consumer protections. The WSIPP study and Advocate are super important. While the study would not guarantee a refinancing entity, it would provide information about whether this is feasible.

All borrowers need to be treated fairly, and this treats student loan borrowers the same way other consumer borrowers are treated. This is not about debt forgiveness. While it can help the state get ahead of future problems, it will not solve the problem. This protects borrowers, allows for more certainty, simplifies the process, and empowers graduates.

(Opposed) None.

(Other) The bill can be effectively implemented.

Persons Testifying: (In support) Senator Liias, prime sponsor; Yasmine Trudeau and Ellen Austin Hall, Office of the Attorney General; and Ruben Flores, State Board for Community and Technical Colleges.

(Other) Charlie Clark, Department of Financial Institutions

Persons Signed In To Testify But Not Testifying: Matt Munoz, University of Washington.