New York has become the latest state to enact a student loan servicing law, after several previous attempts to pass the law failed. The law, Article 14-A, covers student loan services of loans owed by New York residents. The law requires that certain services obtain a license from the New York Department of Financial Services (DFS), and puts in place requirements and prohibitions regarding certain servicing practices.
Recent challenges to state student loan servicing laws have resulted in partial preemption of state licensing requirements. Likely in response to such challenges, the New York law excludes servicers of federal student loans from the licensing requirements; however, servicers that service both federal and non-federal loans must obtain a license. The law also exempts from the licensing provisions chartered financial institutions such as banks and credit unions, as well as private nonprofit or public postsecondary educational institutions.
Even servicers that are not required to obtain a license must comply with other provisions of the law, including rules regarding the application of nonconforming payments (i.e., over- or underpayments). Borrowers must be allowed to provide instructions regarding the application of nonconforming payments (unless the application is controlled by federal law or the loan agreement itself), and servicers must follow the directions unless and until they are superseded by the borrower. The law also prohibits:
- Defrauding or misleading borrowers.
- Engaging in unfair, deceptive, or predatory acts or practices or providing misleading information.
- Misapplying payments (including noncompliance with the borrower's instructions).
- Providing inaccurate information to a consumer reporting agency. Services that furnish consumer information must report to at least one nationwide credit bureau as defined under the federal Fair Credit Reporting Act (FCRA).
- Refusing to communicate with a borrower's authorized representative.
In addition, the law prohibits student loan services from making false statements to government agencies and requires that services respond to consumer complaints submitted by, or other communications from, the department.
Services that are required to be licensed under the law are subject to examination by the DFS. Violations of the law can result in financial penalties under the Act, in addition to liabilities or penalties available under other state or federal law.