A regulatory proposal from New York Gov. Andrew Cuomo aiming to strengthen protections for student loan borrowers may pose an additional compliance burden for the industry.
The proposed regulation requires entities servicing student loans held by New Yorkers to meet new standards. Failure to do so could lead to big fines for institutions and credit union service organizations.
However, the proposal has stricter requirements for non-depository institutions. This could lead to some companies to bow out of servicing student loans in the Empire State, creating an opportunity for credit unions to fill the void.
“In New York, this is a big big deal,” said Henry Meier, general counsel of the New York Credit Union Association.
Making student loans and servicing these credits is an important line of business for many credit unions. Private student loans at credit unions increased in the first quarter by 16.8%, to $5.3 billion, from a year earlier, according to data from the National Credit Union Administration.
Nationally, Americans have more than $1 trillion in student loans. Residents of the state of New York owe $90.6 billion with the average debt totaling about $38,000, according to data from the Student Borrower Protection Center. More than half of New Yorkers between the ages of 18 and 35 have student loan debt.
Cuomo’s proposal would amend New York’s current banking law and seeks to ensure that student loan servicers are treating borrowers fairly.
The regulatory change would require servicers, including credit unions, to inform borrowers of loan forgiveness options, clearly outline fees and loan conditions, maintain a detailed history of a consumer's account and more. The new proposal also prohibits servicers from defrauding or misleading borrowers as well as engaging in lending behaviors deemed as deceptive, abusive or predatory.
Some student loan servicers, though not banks and credit unions, would also be required to submit licensing applications through the Nationwide Multistate Licensing System. This includes CUSOs.
Meier noted that New York is labeling itself as the first in the country to have state-level licensing requirements for student loan servicers. As Meier puts it, the new requirements are analogous to mortgage servicers needing to be licensed in each state.
"While the federal administration ignores the growing problem of student loan debt, New York is taking action to protect borrowers," Cuomo said in a press release. "This measure will help curb unscrupulous practices of the student loan servicing industry and empower borrowers to make better informed choices about how to finance their education."
The changes would cap violation penalties at the greatest of three options. Unintentional violations would yield $2,000 in fines while a willful violation would be a $10,000 fine.
There’s also the option where a fine would be double the amount of damages the borrower suffered or double the economic gain of the servicer.
For example, a single unintentional violation of the law could qualify a $2,000 fine, but if it also caused $1,500 in damage to a student borrower, that could warrant a $3,000 fine. And if the student loan servicer reported a gain of $2,000 from the violation, the fine could be up to $4,000.
The proposed regulation was published in the state register on July 31 and is now in a 60-day comment period.
Overall the proposal seems to more directly target private services than depository institutions. That means credit union service organizations would be more directly affected than credit unions since they are corporations and are treated like any other company.
“Any impact that this particular proposal would have is likely to be indirect, but that said there could be a situation where it affects a CUSO directly,” said Alexander Monterrubio, who serves as the senior director of advocacy and counsel at the Credit Union National Association.
CUSOs and other servicers already run the risk of being penalized by other regulators if they violate consumer regulations. For example,
Under the terms of the agreement, the CUSO was instructed to cease collection on all outstanding loans, discharge all of its outstanding loans and notify consumers that their debt had been discharged for ITT students. Overall, the group is expected to forgive $168 million in loans.
"The CUSO has worked cooperatively with the CFPB and other government entities, and with ITT’s trustee in bankruptcy, to reach a global resolution of issues related to the student loan program," Susan Schwartz, a lawyer for Student CU Connect said in an e-mail. "It is gratified that these coordinated settlements are now effective, and that they are beneficial to ITT’s former students."
The New York proposal would mirror some of the capabilities of the CFPB. Though the CFPB already has the ability to oversee and take action against CUSOs and other services, the New York proposal focuses oversight and penalties at the state level. This would create a whole new licensing framework for non-depository entities that want to provide student loan servicing in New York.
As of now, similar laws are not in place in other states. But the New York Department of Financial Services is one of the more influential state regulators so other states could eventually follow suit — with an even wider scope, Monterrubio said.
Besides the increase in fines, credit unions should be wary of the increased litigation that they could be subject to, Meier and Monterrubio warned.
Despite these concerns, it could create an additional opportunity for the 355 credit unions serving more than 5 million members in the Empire State. These changes could make student loan servicing less appealing to non-depository institutions, allowing credit unions to pick up the slack.
Of course there is the additional cost of compliance that credit unions will face. But credit unions already comply with a number of regulations when it comes to student lending, such as the Higher Education Act, Lending Regulations Act, state specific requirements and so on. Because of that, depository institutions are likely well positioned to meet any requirements under the updated New York regulations.
“There’s potential here because I guess you could say that servicing has become less attractive because of increased regulation, so there’s more lending to be done by traditional institutions,” Meier said.
This story was updated at 10:12 A.M. on Aug. 30, 2019.
