Recent Student Loan Licensing Developments: Kentucky to License Student Loan Servicers, Virginia Narrows Scope of Existing Law
Earlier this month, both Kentucky and Virginia enacted significant legislation related to student loan servicing. Kentucky joined the ever-growing list of states to pass legislation regulating student loan servicing activities while Virginia pared back its existing student loan servicing law.
Kentucky’s new Student Education Loan Servicing, Licensing, and Protection Act of 2022 (“KY Law”) will require student loan servicers doing business in the state to obtain a license. The KY Law also contains certain practice restrictions. For example, the KY Law prohibits student loan servicers from, among other things, misrepresenting or omitting any material information related to the following:
- Fees or payments due;
- Terms and conditions of the loan agreement or any modification to such agreement; or
- Availability of a program or protection specific to military borrowers, older borrowers, borrowers working in public service, or borrowers with disabilities.
Licensees also will be required to file annual reports regarding their business activities; the content of such reports will be dictated by future regulations. The KY Law will go into effect later this summer.
On April 11, 2022, the Governor of Virginia signed identical companion bills House Bill 203 and Senate Bill 496 (the “VA Legislation”). The VA Legislation dramatically reduces the range of companies subject to Virginia’s unusually broad 2020 student loan servicer licensing law (the “VA Law”).
As we previously described, while many states have recently enacted licensing laws and registration requirements for student loan servicers (and, in some cases, private student lenders), Virginia’s law was significantly broader than the laws enacted by other states. In particular, the VA Law applied to a “qualified education loan servicer,” a term that was defined to include an entity that conducted any of the following activities:
- (i) Receives any scheduled periodic payments from a qualified education loan borrower or notification of such payments or (ii) applies payments to the qualified education loan borrower’s account pursuant to the terms of the qualified education loan or the contract governing the servicing;
- During a period when no payment is required on a qualified education loan, (i) maintains account records for the qualified education loan and (ii) communicates with the qualified education loan borrower regarding the qualified education loan, on behalf of the qualified education loan’s holder; or
- Interacts with a qualified education loan borrower, which includes conducting activities to help prevent default on obligations arising from qualified education loans or to facilitate any activity described in clause (i) or (ii) of [section 1 above].
The VA Legislation simply changes the connecting “or” to an “and.” As a result of this small change, a company is not a “qualified education loan servicer” under the VA Law–and therefore is not subject to licensing–unless it performs all three of the activities described above. The VA Legislation also similarly amends the VA Law’s definition of “servicing,” which essentially repeats the definition of “qualified education loan servicer” above.
The most important ramification of this change appears to be that entities that merely “interact” with student loan borrowers will no longer need to obtain a student loan servicer license in the state. The VA Law’s previous language could have been read to extend to student lenders that contact borrowers post-origination or other entities that provide post-origination career-related services to borrowers. Since it is not atypical for private student lenders to check in with borrowers after loan origination and to provide them with career-related resources, a large number of entities that do not engage in core servicing activities (e.g., payment processing) could have fallen within the scope of the original VA Law. As such, the licensing trigger for merely interacting with a student loan borrower positioned Virginia as having one of the broadest student loan servicer laws in the country. The VA Legislation significantly narrows the scope of the VA Law and aligns it more closely with similar licensing laws in other states.
The VA Legislation takes effect July 1, 2022.
