On March 15, 2018, the State of Washington enacted Senate Bill 6029 ("SB 6029"), titled the "Washington Student Education Loan Bill of Rights," which takes effect June 7, 2018, and amends the state's Consumer Loan Act (the "CLA") to expand its scope to include student loan servicers. Whereas the CLA currently regulates and licenses consumer lenders (both mortgage and non-mortgage), and mortgage servicers, when SB 6029 takes effect the CLA will also regulate and license student loan servicers. As a license is needed under the CLA to make any student loans to residents of Washington, it seems reasonable that if state legislators believed student loan servicers should be licensed in Washington, the CLA should be amended to provide for such licensing rather than enact a new and separate licensing law.1
With that legislation, Washington becomes the latest state to license student loan servicers, joining California, Connecticut, the District of Columbia, and Illinois.2 California's Student Loan Servicing Act was enacted in 2016 and is slated to take effect on July 1, 2018; the California license application is currently available on the Nationwide Multistate Licensing System ("NMLS").
Who Is A Servicer Under Washington's SB 6029?
As amended, the Washington CLA will require a license to "service or modify student education loans." SB 6029 defines a "student education loan servicer" to mean "any person, wherever located, responsible for the servicing of any student education loan to any student education loan borrower." A "student education loan" is defined to include both an initial student loan and the refinance of a student loan, and excludes real estate-secured loans (although as indicated above, the CLA also requires licensing of mortgage servicers). As the term "student education loan" is worded, it would not apply to loans for tuition at private elementary schools or high schools. The servicing of a student education loan is defined to include traditional loan servicing activities as well as loan modification activities and the performance of other undefined "administrative services" with respect to a student loan. Student loan servicing excludes "third-party student education loan modification services," which are defined as the activities of a third party working on behalf of a borrower to modify a loan.
A "student education loan borrower" is defined as a resident of Washington who has received or agreed to pay a student loan or any person sharing responsibility for repayment. Therefore, it appears that student loan servicer licensing applies to loans made to borrowers who are legally Washington residents, and to any person, such as a parent or guardian, who may be a guarantor, cosigner, or co-obligor of the student loan. The definition is arguably unclear as to its applicability to a Washington resident who moves outside the state, or to a borrower who moves into the state. Forthcoming regulations will need to clarify the student loans and the student loan borrowers to which the new law will apply.
Holders of Student Loan Servicing Rights
Since a student loan servicer is defined as a person "responsible for the servicing of any student education loan," licensing arguably could apply to a passive holder of student loan servicing rights. As the Washington Department of Financial Institutions (the "Department") applies the CLA's mortgage loan servicer licensing obligation to those who hold mortgage loan servicing rights, do not be surprised if the Department applies the student loan servicer licensing obligation to those who hold student loan servicing rights. Indeed, Washington regulators informally indicated in recent conversations that they are considering requiring holders of student loan servicing rights to be licensed, and that they intend to address the issue in upcoming rulemaking.
The legislation also imposes certain practice requirements on student loan servicers, some of which may apply before the loan repayment period begins. For example, a student loan servicer that acquires or transfers servicing rights from or to another servicer must provide certain notices to the borrower. A licensed servicer must also maintain certain liquidity, operating reserves, and tangible net worth as determined by the regulator, among other requirements.
SB 6029 also creates an office of "student loan advocate" within the state's Student Achievement Council. The student loan advocate is charged with assisting student loan borrowers, receiving and referring complaints, and monitoring the marketplace.
Certain banks and other financial institutions are exempt from all of SB 6029's provisions. The legislation's student loan servicer licensing obligation does not apply to certain trade or vocational schools or schools that service their own student loans; servicers of five or fewer student loans; any federal, state, or municipal agency servicing its own loans; or (as mentioned above) persons providing "third-party student education loan modification services." SB 6029's substantive practice restrictions will apply to these entities, however.
Although SB 6029 is effective on June 7, 2018, the Department is not required to enforce the new licensing and regulation provisions until it adopts implementing rules, or until January 1, 2019, whichever is sooner. We have been advised by Department administrators that rulemaking is currently underway, and that a revised Consumer Loan Company license application may be available as soon as this summer. Applications for the revised Consumer Loan Company license must be submitted via the NMLS.
We will be keeping an eye out for similar moves by other states to license student loan servicers. Do not hesitate to contact us if you need assistance in monitoring or complying with this or similar laws.
1. Although the Washington legislature may have found a need to license student loan servicers, it apparently has not seen a need to license servicers of other consumer loans that are not secured by residential real estate, despite the CLA imposing a licensing obligation to make such consumer loans.
2. The recent trend of state regulation of student loan servicers has not escaped controversy, as the U.S. Department of Education recently announced its opinion that such state laws are federally preempted.
*Daniel Pearson is not admitted to practice law in the District of Columbia. He is practicing under the supervision of firm principals.
Originally published April 17, 2018
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