Student Lending: California’s New Requirements for Collection Activity

Financial Services Law

California is continuing to lead the way on student lending regulation. Its latest enactment further complicates the efforts of financial entities to collect on defaulted private student loans. We discuss the statute below.

What Happened

On October 6, Governor Newsom signed the Private Student Loan Collections Reform Act (the Act) into law. The Act continues the trend of California leading the way in imposing new and burdensome requirements on the financial services industry.

The Act’s requirements apply to both private education lenders and private education loan collectors. The definition of private education lender includes both a person or an entity engaged in the business of securing, making or extending private education loans as well as any holder of a private education loan. The Act exempts depository institutions and those that, together with affiliates, will be a plaintiff in 35 or fewer private student loan collection actions in the current calendar year.

The Act prohibits lenders and collectors from making written statements to debtors in collection attempts without possessing 18 specific pieces of information about the loan being collected, including less obvious items such as the self-certification form and any other “needs analysis” conducted by the original creditor prior to origination of the loan. This information must be provided to a debtor in the first written communication following default and acceleration or a period of 12 consecutive months of default. All settlements must be reduced to writing, and lenders and collectors must provide a final statement after accepting a payment as payment in full. The Act also prohibits complaints from being filed unless they contain certain allegations, and it restricts the entry of default or other judgments when entities have not complied with the Act’s provisions.

Finally, the Act creates a private right of action against a creditor (defined to also include entities that own a private education loan at the time of default), a private education lender or a private education loan collector for violating any of its provisions. Penalties include statutory damages of $500 per violation and in the case of a class action where the court finds that the defendant engaged in a pattern or practice of violating any of the Act’s provisions, additional damages not to exceed $500,000 or 1 percent of the defendant’s net worth.

Why It Matters

This expansion of the regulatory requirements for student loan collectors follows a consent order from the Department of Financial Protection and Innovation that purports to expand the Student Loan Servicing Act’s reach to include servicers of income share agreements. Between the additional hoops that private education lenders and loan collectors must jump through and the possibility of significant penalties for failing to do so, some lenders may choose to pull out of the California market. This would reduce the amount of credit available for student borrowers and make it harder for potential students to finance their education. The law will take effect on July 1, 2022. Private education lenders and loan collectors that are not exempt should carefully review the new requirements and begin updating practices accordingly.

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