California regulator proposes changes to student loan servicing laws

On August 30, the California DFPI Commissioner issued a rulemaking notice proposing new regulations and changes to current regulations implementing the state’s student loan servicing laws. The proposed regulations are intended to implement the provisions of the Student Loans Servicing Act and the Student Loans: Rights of Borrowers Act by:

  • clarify that all education finance products – including traditional loans, revenue-sharing agreements and installment contracts – are student loans for regulatory purposes under the Student Loans Service Act and student loan law: rights of borrowers;
  • clarify that servicers of all education finance products must be licensed as student loan servicers under the Student Loans Servicing Act;
  • specifying that managers of all education finance products must submit an annual report to the DFPI regarding the volume and dollar amount of all education finance products disbursed during the previous year, on a form specified by the DFPI; and
  • revise some existing regulations to remove requirements deemed unnecessary in order to reduce the regulatory burden on student loan servicers.

According to the regulator, when the state began regulating student loan servicers in 2017 with the enactment of the Student Loan Servicing Act, student loans consisted of federal and private student loans, most commonly issued by banks and credit unions using traditional forms of lending such as promissory notes and loan agreements. Since then, other education finance products have emerged, such as revenue-sharing agreements and installment contracts, which use different documentation and terms than those associated with traditional loans. This proposed legislation makes it clear that these products are subject to the State of California licensing requirements for student loan servicers.

Members of the public can submit comments to the regulator on these proposed laws until October 28, 2022.

Put into practice : As we recently reported, the DFPI recently discovered that revenue-sharing arrangements offered by a fintech company to fund higher education are student loans for licensing purposes under the Student Loans Service Act. Given recent California regulator activity, companies offering student loan financing products should review the proposed regulations to see if their products would fall under state licensing laws.

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