Student Loans: California’s New Requirements for Collection Activity – Finance and Banking
Manatt, Phelps & Phillips LLP
United States: Student loan: California’s new requirements for fundraising activity
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California continues to lead the way in regulating student loans. Its latest enactment further complicates efforts by financial entities to collect delinquent private student loans. We discuss the status below.
On October 6, Governor Newsom signed the Private Student Loan Collection Reform Act(the Law) into law. The law continues California’s trend to lead the way by placing onerous new demands on the financial services industry.
The requirements of the Act apply to both private education lenders and private education loan collectors. The definition of private education lender includes both a person or entity engaged in the business of obtaining, granting or extending private education loans as well as any holder of a loan for private education. private education. The law exempts deposit-taking institutions and those that, along with their affiliates, will be plaintiffs in 35 or fewer private student loan collection actions in the current calendar year.
Lenders and collectors are prohibited by law from making written statements to debtors when attempting collection without having
18 specific information regarding the loan being collected, including less obvious items such as the self-certification form and any other âneeds analysisâ performed by the original creditor before the loan is granted. This information must be provided to a debtor in the first written communication following the default and stay or a period of 12 consecutive months of default. All settlements should be in writing, and lenders and collectors should provide a final statement after accepting payment as full payment. The law also prohibits the filing of complaints unless they contain certain allegations, and it restricts the entry of default judgments or other judgments where entities have failed to comply with the provisions of the law.
Finally, the law creates a private right of action against a creditor (defined to also include entities that hold a private education loan at the time of default), a private education lender, or a private education loan collector. for having violated one of its provisions. The penalties include statutory damages of $ 500 per violation and, in the case of a class action where the court finds that the defendant has engaged in a pattern or practice of violation of any of the provisions of the law, for additional damages not exceeding $ 500,000 or 1 percent of the defendant’s net value.
Why is this important
This expansion of regulatory requirements for student loan collectors follows a consent order of the Department of Financial Protection and Innovation which claims to extend the scope of the Student Loan Servicing Act to include managers of revenue sharing agreements. Between the additional hurdles that private education lenders and loan collectors face and the possibility of significant penalties for non-compliance, some lenders may choose to withdraw from the California market. This would reduce the amount of credit available to student borrowers and make it more difficult for prospective students to finance their studies. The law will come into effect on July 1, 2022. Private education lenders and debt collectors who are not exempt should carefully review the new requirements and begin updating their practices accordingly.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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