A&B Abstract: 

Maine’s New Student Loan Bill of Rights requires the licensing of any person acting as “directly or indirectly” as a student loan servicer.  What might that mean for passive, secondary market investors in student loan debt?

Background

On June 20, 2019, Maine Governor Janet Mills signed into law LD 995, Maine’s “Student Loan Bill of Rights.” The legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the State of Maine.

Effective January 1, 2020, LD 995 adds a new Article 14 to Title 9-A of Maine Revised Statutes that, among other things:

• Creates a student loan ombudsman with responsibilities that include reviewing and possibly resolving complaints from borrowers, analyzing borrower data, and helping borrowers understand rights and responsibilities; and
• Provides that a person may not act as a student loan servicer, “directly or indirectly,” without first obtaining a license from the Maine Bureau of Consumer Credit Protection (the “Bureau”).

LD 995 bears certain similarities to other states’ efforts to regulate the student loan servicing industry and passive, secondary market investors in student loan debt, in particular Maryland’s SB 1068, which took effect on October 1, 2018. Although it appears that the Bureau has not yet released formal guidance regarding the applicability of LD 995’s licensing obligations to passive, secondary market investors in Maine student loan debt, the language of the new laws appears to be broad enough to allow the Bureau to regulate such persons upon a recommendation from the student loan ombudsman and raises the question of whether the Bureau will require such persons to be licensed or registered to engage in business.

Responsibilities of the Student Loan Ombudsman

Effective January 1, 2020, Maine Revised Statutes, title 9-A, section 14-104 requires the Superintendent of the Bureau to support, maintain, and designate a “student loan ombudsman” to provide timely assistance to student loan borrowers. In consultation with the Superintendent, the student loan ombudsman must:

• Receive, review, and attempt to resolve complaints from student loan borrowers;
• Compile and analyze data on such student loan borrower complaints;
• Assist student loan borrowers to understand their rights and responsibilities under the terms of their student education loans;
• Provide information to the public, agencies, Legislators and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
• Analyze and monitor the development and implementation of federal, state, and local laws, ordinances, regulations, rules, and policies relating to student loan borrowers and recommend any necessary changes;
• Review the complete student education loan history for a student loan borrower who provides written consent for such a review;
• Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, public institutions of higher education, student loan servicers, and any other participants in student education loan lending with any student education loan servicing concerns;
• Establish and maintain a student loan borrower education course within existing resources that includes educational presentations and materials regarding student loans; and
• Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in new Article 14.

Section 14-104 grants the student loan ombudsman broad authority to regulate Maine’s student loan industry, particularly with respect to those that service Maine student education loans. With respect to the bolded language above, it appears that the student loan ombudsman will have the ability to recommend changes to Maine’s regulation of passive, secondary market investors in Maine student loan debt, which is further supported by the new student loan servicer licensing requirements in Section 14-107.

Licensing of Student Loan Servicers

Section 14-103(4) defines the term “student loan servicer” to mean “a person, wherever located, responsible for the servicing of a student education loan to a student loan borrower,” and Section 14-103(1) defines the term “servicing” to mean:

(A) Receiving scheduled periodic payments from a student loan borrower pursuant to the terms of a student education loan;

(B) Applying the payments of principal and interest and such other payments with respect to the amounts received from a student loan borrower as may be required pursuant to the terms of a student education loan; and

(C) Performing other administrative services with respect to a student education loan.

Section 14-107 provides that “[a] person may not act as a student loan servicer, directly or indirectly, without first obtaining a license from the superintendent[,]” unless otherwise exempt. Importantly, this section provides that only “[a] licensed bank or credit union, a wholly owned subsidiary of such a bank or credit union and an operating subsidiary of such a bank or credit union as long as each owner of the operating subsidiary is wholly owned by that bank or credit union” is exempted from this licensing requirement.

For those readers tracking the development of state regulatory agencies’ policies on state licensing requirements applicable to entities that (1) invest in student loan debt (e.g., Maryland) or (2) invest in stand-alone mortgage servicing rights (“MSRs”), this language may raise some concerns. State legislators across the country have enacted laws containing broad language, similar to the language in LD 995, that gives state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in those types of debt without the passage of new laws or regulations. Specifically, persons tracking such developments may be concerned by the fact that LD 995 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan, as that terminology could be read by the Bureau to include those entities that hold the servicing rights in Maine student education loans and contract with appropriately-licensed or exempt third-party subservicers to handle the servicing functions on the loans and borrower-facing interactions. Further, such persons also may be concerned that the licensing obligation extends to those “indirectly” acting as a student loan servicer, as many state regulatory agencies have used this specific verbiage to require entities that passively invest in MSRs to be licensed to engage in business, even if they do not directly service such MSRs or maintain any borrower contact.

Expectations for Future Regulation of Investors in Student Loan Debt

As noted above, neither the Bureau nor the Maine Legislature has released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt; however, as we watch other states’ legislative measures and regulatory policies unfold in the context of student loan debt and MSRs, it would not be surprising to see the Bureau or student loan ombudsman release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in Maine student loan debt, in the months to come.

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