California recently enacted the Student Loan Servicing Act, which enacts new regulations and prohibitions on student loan servicers. The act applies to anyone servicing a student loan that originates in California or is directed to persons living in California. Any such servicers will be required to obtain a license from the Department of Business Oversight.  

The Act imposes several duties on servicers that will require changes not only to the way they do business, but also to their servicing agreements with lenders. For example, servicers will be required to provide information or links to information on their websites regarding repayment and loan forgiveness options. Servicers must also send this information to borrowers via letter or email once per year. The Act also establishes procedures servicers must follow when receiving written requests for borrowers. When a written request is received, borrowers must acknowledge receipt within five days and provide a response within 30 days.  

Other requirements include asking borrowers for instruction on making an overpayment (or prepayment) to the student loan. The servicer must follow those instructions for the remaining term of the loan unless the borrower instructs otherwise. Servicers will also be required to notify borrowers at least 15 days in advance of a servicing change, with notices that contain specific, statutory disclosures.  

Penalties for violations are substantial. Laws such as the Telephone Consumer Protection Act allow for penalties of $500 per violation, but under the new act, civil penalties up to $2,500 can be levied by a court for each violation.  

The Act will impose a number of new duties on student loan servicers which will change how they do business with borrowers and their clients. Some of these changes may necessitate changes in servicers’ servicing agreements with their clients. Fortunately, the Act will not go into effect until July 1, 2018. In the meantime, the Department of Business Oversight will be empowered to make rules to help with the transition to the Act taking effect. Michael Best will continue to monitor developments as the Act draws closer to becoming effective. Any clients who service student loans in California should contact legal counsel to analyze and determine whether their servicing agreements should be amended to account for the Act’s requirements.