Kentucky and Virginia have passed student loan servicer legislation. In Kentucky, a new student loan servicing law creates new licensing and compliance requirements. In Virginia, an amendment limits the scope of existing law on servicing state student loans. An explanation of the changes follows below.
Kentucky Student Education Loans Service, Licensing, and Protection Act
On April 7, 2022, the Governor of Kentucky signed into law HB 494, the Student Education Loan Servicing, Licensing, and Protection Act (the Kentucky law), which includes a licensing requirement applicable to student loan officers and other background requirements related to the regulation of student loan servicers in Kentucky. The Kentucky law will take effect 90 days from April 14, 2022, the adjournment date of the Kentucky legislative session. This means that the law will enter into force on July 13, 2022 and, therefore, entities subject to this law must get ready now to ensure compliance prior to the effective date.
Kentucky law requires a license to act as a student loan servicer, unless an entity is exempt from licensing. Entities exempt from the licensing requirement include, among other entities, (a) a federal or state bank, trust company, or industrial loan company licensed to do business in Kentucky; (b) a federally chartered savings and loan association, federal savings bank, or federal credit union licensed to do business in Kentucky; (c) a savings and credit association, savings bank, or credit union incorporated under state law and licensed to do business in Kentucky; and (d) a public post-secondary educational institution or a private not-for-profit post-secondary educational institution that administers a student loan granted to a borrower.
However, note that license-exempt entities are still subject to the substantive conduct requirements and prohibitions under Kentucky law.
Definition of maintenance
HB 494 defines “service” to mean participation in any of the following activities related to a student loan:
(a) do both of the following: (1) receive: (i) payments from a borrower; or (ii) notification that a borrower has made a scheduled periodic payment; and (2) apply payments to the borrower’s account in accordance with the terms of a student education loan or the contract governing the servicing of the loan; WHERE
(b) during a period when no payment is required on a student education loan, do both of the following: (1) maintain account records for the student education loan; and (2) communicate with the borrower regarding the student education loan on behalf of the owner of the student education loan promissory note; WHERE
(c) communicate with a borrower regarding the borrower’s education loan for the purpose of assisting the borrower to: (1) make payments on the student’s education; or (2) apply for a qualified forbearance program; WHERE
(d) facilitate the activities described in paragraph (a) or (b) above.
This service definition is broad because an entity only needs to trigger one of the above activities to be licensed. For example, an entity that only engages in facilitating the receipt of payments from borrowers or facilitating communications with borrowers must be licensed.
Kentucky law states that a student loan servicing officer may not engage in any abusive act or practice, including but not limited to acts or practices that: (a) materially interfere with a borrower’s ability to clarify a term or condition of a student education loan; or (b) fail to educate and inform the borrower of any of the following: (1) the material risks, costs, or terms of a student loan; (2) the selection or use of a student education loan or any feature, term or condition of a student education loan; or (3) accurate and relevant information related to loan repayments of loans managed by the servicer.
A student loans servicing officer also cannot:
- employ any scheme, device or artifice to defraud or mislead a borrower;
- engage in any unfair, deceptive, or predatory practice toward a borrower or misrepresent or omit any material information in connection with servicing a student loan, including, but not limited to: (1) misrepresenting inaccurate: (i) the amount, nature or terms of any fees or payments due or allegedly due on a student loan; (ii) the terms and conditions of the student loan agreement or any amendment to the agreement; or (iii) the borrower’s obligations under the student loan for education; and (2) with respect to a military borrower, an “older” (undefined) borrower, a borrower working in the public service, or a borrower with a disability, misrepresenting or omitting the availability of a specific program or protection to the respective borrower or applicable to the respective class of borrowers;
- mistakenly apply payments made by a borrower to the outstanding loan balance;
- refuse to communicate with an authorized representative of the Borrower, except that the Administrator may adopt reasonable procedures to: (i) request documentation that the representative is in fact authorized to act on behalf of the Borrower; and (ii) protect the Borrower against fraud or abusive practices;
- misrepresent or omit a material fact in connection with any information or report filed with any government agency or in connection with any investigation conducted by the Kentucky Commissioner of Financial Institutions (Commissioner) or any other government agency;
- if the Student Education Loans Servicer is required to report, or voluntarily reports, to a consumer reporting agency, fails to accurately report each borrower’s payment performance to at least one consumer reporting agency the consumer upon acceptance as a data provider by that consumer reporting agency; Where
- failing to respond in a timely manner to correspondence from the Borrower, the Commissioner, or to any complaints of the Borrower submitted to the Administrator by the Commissioner.
Student loan servicers also cannot prevent the commissioner from interviewing the servicer’s employees or clients and must make available and grant the commissioner access to relevant records and other assets. Among other things, the law also contains requirements for keeping records and filing reports with the commissioner.
In addition, as noted above, the substantive provisions of the law also apply to entities that are exempt from licensing.
Offenses and Penalties
The Commissioner may issue a written order to deny, suspend, or revoke a license issued under Kentucky law if he finds that a violation has occurred. In addition to any other remedy or penalty, the Commissioner may also impose a civil penalty for repeated violations or a pattern or practice that results in a violation. A civil penalty shall not be less than $1,000 and shall not exceed $25,000 per violation per day the violation is outstanding. There is no private right of action under the law.
Virginia Amendment to the Qualified Education Loan Officers Act (SB 496 / HB 203)
Virginia also recently changed its law governing student loan servicers. SB 496, enacted April 11, 2022, makes definitional changes to Virginia law governing qualified education loan servicers. The law will come into force on July 1, 2022. The amendments reduce the scope of the law by replacing the term “or” with “and” when used in the definition of “qualified student loans servicer” and “ service “. This change means that a person must meet all of the listed requirements to be considered a repairer subject to the law, rather than just one of the listed requirements. The Amended Act changes the definition of “manager” as shown below and makes a very similar change to the definition of “qualified education loan manager”. The only change is from “or” to “and” as shown below:
(1) (i) Receive scheduled periodic payments from a Qualified Student Loan Borrower or notice of such payments or (ii) apply principal and interest payments and such other payments, with respect to amounts received from a qualified student loan borrower, as required under the terms of a qualified student loan;
(2) During a period when no payment is required on an eligible student loan, (i) maintain account records for the loan and (ii) communicate with the eligible student loan borrower with respect to the Eligible Student Loan, on behalf of the Eligible Student Loan holder;
(3) Interacting with a Qualified Student Loan Borrower, including conducting activities to help prevent failure to perform obligations under Qualified Student Loans or to facilitate any activity described in paragraph (i) or (ii) Subsection 1.
Due to this minor change, an entity must now engage in all of the activities listed above to be subject to the licensing requirement. Under the way the definition was structured previously, an entity would be subject to the license requirement to simply interact with the borrower, even if the entity did not receive payments or maintain account records or other activities on behalf of the loan holder. Due to the restricted scope of Virginia law, it is possible that some licensed student loan servicers are now reasonably considering whether they can waive their Virginia licenses.