Recent Developments in Student Loan Licensing: Kentucky Licenses Student Loan Servicers, Virginia Restricts Scope of Existing Law – Consumer Protection

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United States: Recent Developments in Student Loan Licensing: Kentucky Licenses Student Loan Servicers, Virginia Restricts Scope of Existing Law

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Earlier this month, Kentucky and Virginia enacted significant legislation relating to student loan servicing. Kentucky joined the growing list of states to pass legislation regulating student loan servicing activities while Virginia scaled back its existing student loan servicing law.

The new Kentucky Student Loan Service, Licensing, and Protection Act of 2022 (“KY Act”) will require student loan servicers doing business in the state to obtain a license. The KY law also contains certain practice restrictions. For example, KY law prohibits student loan servicers from, among other things, misrepresenting or omitting any material information related to the following:

  • Fees or payments due;

  • Terms and conditions of the loan agreement or any modification of this agreement; or

  • Availability of a specific program or protection for military borrowers, elderly borrowers, borrowers working in the public service or borrowers with disabilities.

Licensees will also be required to file annual reports regarding their business activities; the content of these reports will be dictated by future regulations. The KY law will come into effect later this summer.

On April 11, 2022, the Governor of Virginia signed identical companion bills, House Bill 203 and Senate Bill 496 (the “VA Legislation”). The VA legislation significantly narrows the range of businesses subject to the Virginia Student Loan Servicer Licensing Act of 2020 (the “VA Act”).

As previously described, while many states have recently enacted licensing laws and registration requirements for student loan servicers (and, in some cases, private student lenders), Virginia law was much broader than laws enacted by other states. In particular, the VA Act applied to a “qualified education loan servicer”, a term that has been defined to include an entity that has performed any of the following activities:

  1. (i) Receives all scheduled periodic payments from a qualified student loan borrower or notification of such payments or (ii) applies the payments to the account of the qualified student loan borrower in accordance with the terms of the loan qualified studies or the contract governing the service;

  2. During a period when no payment is required on a Qualified Student Loan, (i) maintain account records for the Qualified Student Loan and (ii) communicate with the Qualified Student Loan Borrower regarding the qualified student loan, in the name of the holder of the qualified student loan;
    or

  3. Interacts with a qualified student loan borrower, which includes conducting activities to help prevent the failure to perform obligations under qualified student loans or to facilitate any activity described in clause (i) or (ii) of [section 1
    above].

The VA legislation simply changes the “or” connection to an “and”. As a result of this small change, a company is not a “qualified education loan administrator” under VA law – and therefore not subject to licensing – unless she does not execute
all three activities described above. The VA legislation also similarly changes the definition of “service” in the VA law, which essentially repeats the definition of “qualified education loan servicer” above.

The most significant ramification of this change appears to be that entities that merely “interact” with student borrowers will no longer need to obtain a student loan agent license in the state. Previous language in the VA Act could have been interpreted to extend to student lenders who contact borrowers after origination or other entities that provide career-related services after origination to borrowers. Since it is not unusual for private student lenders to check in with borrowers after loan issuance and provide them with career-related resources, many entities that do not engage in core service activities (e.g. payment processing) could have fallen within the scope of the original VA Act. As such, the license trigger to simply interact with a student loan borrower has positioned Virginia as having one of the broadest student loan servicing laws in the nation. The VA legislation significantly narrows the scope of the VA law and aligns it more closely with similar licensing laws in other states.

The VA legislation comes into force on July 1, 2022.

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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.

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