After a number of failed efforts and amid the COVID-19 national emergency, Virginia enacted a law that requires student loan servicers to obtain a license. On April 22, 2020, Virginia House Bill 10 and the identical Senate Bill 77 (collectively, the "Legislation") were enacted into law after state representatives agreed to certain recommendations made by Virginia's Governor earlier last month. Although eleven other states require student loan servicers to obtain a license, registration, or make a notice filing, Virginia's new law is unique in that it could reach a much wider range of companies.
The Legislation requires "those act[ing directly or indirectly] as a qualified education loan servicer" to obtain a license. Qualified education loans are loans primarily used to finance a postsecondary education and the associated cost of attendance, including tuition, fees, books and supplies, room and board, transportation, and miscellaneous personal expenses. This licensing requirement generally applies regardless of whether the person has an office or physical presence in Virginia. As with other licensing laws, the Legislation expressly exempts banks and certain other financial institutions, and certain wholly owned subsidiaries thereof, as well as nonprofit institutions of higher education. Loans made under an open-end credit plan (like a credit card) and loans secured by real property are also functionally excluded.
The most distinctive aspect of Virginia's Legislation is how broadly the term "qualified education loan servicer" is defined. The term includes those that interact with applicable borrowers, including (but not limited to) activities designed to prevent default. In many ways, this definition mirrors those in other states that extend their student loan servicer licensing laws to persons that provide "other administrative services" with regard to student loans. However, the use of the term "interact" could trigger licensing among a much wider class of entities, as many student lenders contact borrowers after origination to check in with them or to provide career-related services, even though those student lenders do not otherwise service borrower accounts. Virginia may attempt to rein in this broad definition through regulation or subsequent guidance.
As with other recent student loan servicer licensing laws, Virginia's new law imposes numerous practice requirements on qualified education loan servicers. Most notably, such servicers are required to (1) evaluate borrowers for income-driven repayment program eligibility before placing them in forbearance or default, (2) respond to inquiries and complaints within a specific period of time, and (3) apply partial loan payments in a particular way. Although the practice requirements themselves are not unique, Virginia's requirements are arguably more specific than those within other recent student loan servicer licensing laws.
The Legislation also provides a private right of action to borrowers who have suffered damage due to student loan servicers' failure to comply with applicable law. Most student loan servicer licensing laws do not contain a private right of action.
Unlike most other states, Virginia does not license mortgage loan servicers. Yet, with the Legislation's enactment, Virginia is also part of a relatively select group of states that license the servicers of student loans. It is interesting that the legislature decided that the student loan servicing industry merits state regulation before the mortgage loan servicing industry.
The Legislation becomes effective July 1, 2021. It requires the State Corporation Commission to begin accepting license applications by March 1, 2021. License applications are to be submitted through the Nationwide Multistate Licensing System.
The Legislation will undoubtedly raise a number of questions for those in the student loan industry, including loan originators, servicers, and debt collection companies. Regulators may eventually clarify how they intend to apply the Legislation through regulation or written guidance, although other states with similar licensing laws have generally not done so.
Virginia regulators informed Mayer Brown of the Legislation as it was being considered. If you have questions about the Legislation, we can seek to have them clarify how the new law will be applied. We continue to monitor developments related to student loans and will report on any additional updates.
Originally published Mayer Brown, May 2020
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