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AB 376 – Expands Protections For Student Loan Borrowers With Respect To Student Loan Services By Creating The Student Loan Borrower Bill Of Rights
AB 376 only applies to student loan servicers as defined below. While not directly applicable to private nonprofit postsecondary educational institutions, postsecondary students have new rights pursuant to this new legislation. AB 376 amends the existing California Student Loan Servicing Act (“SLSA”), which was enacted in 2016, and requires student loan services to obtain a license and to comply with routine oversight from the Department of Business Oversight (“DBO”). AB 376 seeks to build on the SLSA by enacting a student loan borrower bill of rights, setting certain minimum standards for student loan servicing, and providing additional protections for borrowers.
AB 376 defines a “student loan servicer” as any person engaged in the business of servicing student loans. “Servicing” is defined as (1) “receiving any scheduled periodic payments from a [student loan] borrower or any notification that a borrower made a scheduled periodic payment” and “applying payments to the borrower’s account pursuant to the terms of the student loan or the contract governing the servicing;” (2) during a period when payments are not due, “maintaining account records for the student loan” and “communicating with the borrower regarding the student loan on behalf of the owner of the student loan promissory note;” or (3) “interacting with a borrower related to that borrower’s student loan, with the goal of helping the borrower avoid default on their student loan or facilitating the activities described” in (1) or (2). Excluded from the definition of “student loan servicer” are debt collectors collecting on defaulted loans, federally chartered credit unions, and guaranty agencies engaged in default aversion pursuant to an agreement with the federal government.
Students may have questions about how these new standards will impact them when they go into repayment on their student loans.
Below is a brief summary of just some of the new requirements that servicers must comply with:
Post, process, and credit borrower payments within specified timeframes;
Apply overpayments consistent with the “best financial interest” of the borrower (for example, by allocating overpayments to loans with the highest interest rate);
Apply partial payments to minimize late fees and negative credit reporting;
Discontinue the use of “minimum late fees,” which are not assessed as a percentage of the amount past due;
Maintain records, timely process paperwork, and diligently oversee any third-party service providers that a provider may contract with to engage in any aspect of the servicing;
Provide specialized training for customer service personnel who advise military borrowers, borrowers in public service, borrowers with disabilities, and older borrowers; and
Not engage in unfair, deceptive, or abusive acts or practices in connection with the servicing of a student loan, a long list of examples of which are included in AB 376 (e.g., misapplying payments or misrepresenting the amount owed).
Another very significant aspect of AB 376 is that it creates a private right of action by a consumer against the student loan servicer for failing to comply with AB 376 or other applicable federal laws relating to student loan servicing. A borrower may seek, through such an action, actual and punitive damages, injunctive relief, restitution, attorney’s fees, and other relief, including treble damages in certain circumstances. However, to maintain an action for damages or injunctive relief, a consumer must first comply with certain notice provisions that provide an opportunity to the servicer to cure the violations of law at issue.
Finally, AB 376 also establishes a Student Loan Ombudsman within the DBO who, starting on July 1, 2021, will be responsible for receiving complaints and referring them to the appropriate unit within the DBO or outside agencies for investigation. For example, the Ombudsman will refer to complaints regarding private postsecondary educational institutions licensed by the Bureau for Private Postsecondary Education to the Bureau for Private Postsecondary Education’s Office of Student Assistance and Relief.
(AB 376 adds sections 1788.100, 1788.101, 1788.102, 1788.103, 1788.104. and 1788.105 to the Civil Code, amends sections 28104, 28112, 28130, and 28140 of the Financial Code, and repeals sections 28134 and 28136 of the Financial Code.)