Student borrower protection bill on verge of passage in California

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The California Legislature has passed a bill that would impose tough new standards on banks and certain other companies that service education loans.

Supporters expect the legislation, which is known as the Student Borrower Bill of Rights, to be signed into law by Gov. Gavin Newsom, a Democrat.

If that happens, California will become the first U.S. state where borrowers have the right to sue for damages when student loan servicers fail to process payments in a timely manner or fail to meet other obligations.

“The Student Borrower Bill of Rights will protect Californians from predatory loan servicing practices and help ensure they stand a fair shot at putting these debts behind them,” Suzanne Martindale, senior policy counsel at Consumer Reports, which pushed for the legislation’s passage, said in a press release.

California Gov. Gavin Newsom is expected to sign the Student Borrower Bill of Rights provided it passes the state Assembly.

The legislation, introduced by Democratic Assemblyman Mark Stone, would apply to servicers in both the federal student loan market and the smaller private student loan market. It easily passed the California Assembly last year but did not get a vote in the Senate until Friday, when it passed by a 29-9 margin.

On Sunday, the Senate-passed version passed the Assembly by a 57-15 vote. No Democrats voted against the measure in either chamber of the Legislature.

The current version of the bill includes a few concessions to student loan servicers, Martindale said in an interview. For example, the legislation now gives servicers 45 days to cure problems before borrowers’ lawsuits can proceed.

In addition, the bill provides an exemption for federally chartered credit unions, though not for banks, according to Martindale. She said language was also added to clarify that while the bill is meant to operate consistently with federal law, it can be preempted to the extent that there is inconsistency.

Beth Mills, a spokeswoman for the California Bankers Association, which opposes the bill, said Friday that the legislation still fails to include exemptions that would be necessary to properly address federal preemption conflicts.

By requiring state officials to investigate, examine and mandate the production of information held by banks, the legislation runs afoul of the exclusive visitorial authority of federal regulators, Mills argued in an email.

Consumer advocates, meanwhile, argue that legislation is necessary to provide a check on an industry where abuses are rampant.

Examples include servicers allocating partial payments toward multiple loans in ways that were deemed unfair, and servicers sending loans into automatic default if either the borrower or the co-signer filed for bankruptcy.

The California legislation is part of an effort by Democrats and advocacy groups to write stronger state-level rules for the student loan industry, in light of what they see as lax treatment by the Trump administration.

The bill would require servicers to post, process and credit student loan payments within certain time frames. It would require servicers to apply overpayments in a way that is consistent with borrowers’ best interests. And it would mandate that servicers apply partial payments in a way that minimizes late fees and negative credit reporting.

The bill would also create a borrower advocate within California’s government to receive consumer complaints.

This story has been updated to note that the student loan servicing bill passed the California Assembly on Sunday.
August 31, 2020 10:08 AM EDT
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Consumer lending Student loans State regulators Credit unions Nonbank California