Student Loans

A New Frontier: Massachusetts Steps Up Its Focus on Student Loan Servicers

In Short

The Situation: Student loan debt in the United States stands at an all-time high of approximately $1.5 trillion spread across more than 44 million borrowers. According to some observers, Massachusetts ranks 12th among states with the highest student debt burden, with average debt exceeding $30,000 per borrower. Against this backdrop, Massachusetts and other states have aspired to a larger regulatory and enforcement role with respect to student loan servicers, the industry participants with the closest relationship to borrowers.

The Issue: Two current developments in Massachusetts have significant implications for student loan servicers: (i) state lawmakers are considering enacting a "student loan bill of rights" that would establish state-level regulations specifically aimed at servicers; and (ii) Massachusetts Attorney General Maura Healey has increased enforcement activities against servicers.

Looking Ahead: Student loan servicers should begin preparing for the possibility of new state-level regulations and should adopt appropriate contingency plans. Servicers should also expect continued scrutiny from Attorney General Healey even if new regulations never materialize.

The Massachusetts Proposed Student Loan Bill of Rights

The Student Loan Bill of Rights ("SL Bill of Rights") was introduced in the Massachusetts legislature in 2017 as Senate Bill No. 129. An amended version of the bill passed unanimously in the Massachusetts Senate in 2018 but did not come up for a vote in the Massachusetts House of Representatives. The sponsors of the SL Bill of Rights refiled a House version (as amended, H. 3977) and Senate version (S. 160) for the 2019 session. The Joint Committee on Consumer Protection and Professional Licensure held a hearing on the Senate version in July 2019, and the Joint Committee on Financial Services held a hearing on the House version in May 2019. The House version was reported favorably by the Joint Committee and then referred to the House Committee on Ways and Means. Neither version of the bill has been scheduled for a full vote, but the bill sponsors continue to lobby heavily for its passage.

If enacted, the SL Bill of Rights would substantially change the legal landscape for student loan servicers in Massachusetts. It would create a state licensure and regulatory regime for servicers overseen and administered by the Massachusetts Division of Banks. All nonbank servicers would, for the first time, be required to apply for licenses subject to annual renewal. The Division of Banks would grant licenses depending on criteria related to the applicant's financial condition and servicing practices. Only banks, credit unions, and their subsidiaries would be exempt from this license requirement.

As to the regulatory regime, servicers would generally be prohibited from engaging in unfair servicing practices or conduct that violates federal laws or regulations. They would be subject to investigations and examinations, and the Division of Banks would have the authority to suspend or revoke a license or impose fines for servicing violations. The Division of Banks would be required to promulgate implementing regulations likely to provide further detail concerning what constitutes a servicing violation and the scope of regulated activities. Unlike the licensure regime, the SL Bill of Rights suggests that this state oversight would apply to both nonbank and bank servicers, although it is unclear whether and how the degree or type of oversight might differ among those institutions.

The SL Bill of Rights would also create a "student loan ombudsman" to assist in resolving specific complaints from borrowers. This appears to be modeled after the Consumer Financial Protection Bureau's student loan ombudsman. The bill contemplates that the ombudsman could address issues, for example, related to repayment options, wage garnishments, defaults, billing disputes, collection efforts, and loan discharge applications. The ombudsman would also educate the public about student loan repayment options and related issues. The ombudsman would address issues related to both nonbank and bank servicers.

None of these provisions would become immediately effective if the bill became law, providing servicers with a short buffer for preparation. The provisions related to the ombudsman would take effect in September 2020, and the licensing and regulatory regime would take effect in January 2021.

Finally, passage of the SL Bill of Rights would put Massachusetts in line with other states that have enacted legislation specifically addressing student loan servicing. Connecticut, Colorado, Illinois, Maine, Maryland, Nevada, New Jersey, New York, Rhode Island, and Washington have all enacted student loan bills of rights. Similar legislation has recently been introduced in Iowa, Minnesota, Missouri, New Mexico, North Carolina, California, and Oregon. While some of these laws are facing federal preemption questions, it remains to be seen whether any law might, in whole or in part, be invalidated on preemption grounds. Most importantly, Massachusetts lawmakers do not appear to be dissuaded by this potential uncertainty.

Enforcement and Other Activities of Massachusetts Attorney General Maura Healey

State legislators are not the only public officeholders in Massachusetts focused on student loan servicers. Massachusetts Attorney General Healey has been active in targeting servicers since her election in 2014. Among other things, she entered into a settlement with ACS Education Services for abusive student loan collection practices, under which ACS agreed to pay a $2.4 million fine and review certain borrowers' income-based plan applications. She also sued Pennsylvania Higher Education Assistance Agency ("PHEAA") in Suffolk Superior Court for violations of Massachusetts Chapter 93A and the federal Consumer Financial Protection Act, and that case remains pending following the court's denial of PHEAA's motion to dismiss. These enforcement actions are consistent with the activities of other state attorneys general focused on student loan servicing practices.

Separately, Attorney General Healey has joined in student loan servicing lobbying efforts. She led a group of state attorneys general in criticizing Secretary of Education Betsy DeVos's revocation of student loan servicing reforms. She also joined a coalition of attorneys general to call on Secretary DeVos "to reject an ongoing campaign by student loan servicers … to secure immunity … from state-level oversight," and another group of attorneys general in lobbying Congress not to pass amendments to the Higher Education Act ("HEA") that would similarly immunize student loan servicers. These efforts seem to have been at least somewhat successful. For example, while Secretary DeVos issued a memorandum arguing that state regulation of student loan servicers is preempted by federal law, the amendment to the HEA never became law.

Three Key Takeaways

  1. If the SL Bill of Rights is enacted, servicers will be subject to even greater scrutiny in Massachusetts. Among other things, nonbank servicers will likely need to become licensed, and all servicers will need to ensure compliance with new regulations moving forward.
  2. The SL Bill of Rights could be enacted within a relatively quick time frame, and it would be wise for servicers to begin crafting contingency plans now. Lenders and other industry participants should also keep apprised of developments, as their relationship with servicers may be impacted.
  3. We also expect that Attorney General Healey will continue to prosecute enforcement actions against student loan servicers and will seek to impose monetary and other penalties.
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