INITIAL STATEMENT OF REASONS

STATE OF CALIFORNIA

Department of Financial Protection and Innovation

GOVERNOR Gavin Newsom · COMMISSIONER Clothilde V. Hewlett

2101 Arena Blvd., Sacramento, CA 95834

(866) 275-2677

www.dfpi.ca.gov

INITIAL STATEMENT OF REASONS

FOR THE ADOPTION OF RULES UNDER THE STUDENT LOAN SERVICING ACT

PRO 06-21

As required under Government Code section 11346.2(b), the Department of Financial

Protection and Innovation (Department) has prepared the following initial statement of

reasons for this proposed rulemaking regarding student loan servicing.

SPECIFIC PURPOSE OF REGULATIONS [Government Code Section 11346.2,

Subdivision (b)(1)]

The Student Loan Servicing Act

(Act or SLSA) expanded the authority of the

Commissioner to include the licensure, regulation, and oversight of student loan

servicers. The Act became effective on January 1, 2017, and operational on July 1, 2018.

As of July 1, 2018, persons engaged in the business of student loan servicing, unless

expressly excluded from the Act’s coverage,

must be licensed and are subject to

supervision and regulation by the Department. The Act also provides specified borrower

protections.

California augmented borrower protections and servicer oversight with the enactment of

the Student Loans: Borrower Rights law,

which became effective January 1, 2021.

When the Act first became effective, student loans were comprised of traditional student

loans, defined in the proposed rules as federal student loans and private student loans

offered by traditional lenders such as banks and credit unions. These loans used

longstanding terminology and traditional loan forms such as promissory notes and loan

agreements.

In the five years which have elapsed since the Act became effective, education financing

products (defined in the proposed rules as private loans which are not traditional student

loans, including income share agreements and installment contracts) have emerged and

their use has increased. These education financing products use terminology and

documentation distinct from traditional student loans.

Providers of income share agreements say they do not replace government-subsidized

student loans but offer students another option to pay for their education should they need

additional resources or a more income-flexible funding alternative.

AB 2251 (Chap. 824, Stats. 2016).

Fin. Code, § 28102, subd. (b).

Civ. Code, § 1788.100 et seq.

FAQ About Back a Boiler – ISA Fund, < https://www.purdue.edu/backaboiler/FAQ/index.html> (as of

January 26, 2022).

PRO 06-21 INITIAL STATEMENT OF REASONS Page 2

Lenders and servicers of education financing products have asserted that these products

are not within the Act’s definition of student loans and not subject to the Act. However,

these education financing products do the same thing as traditional student loans: help

finance the cost of a student’s higher education.

The Commissioner has determined that, in addition to traditional student loans, all

education financing products used to pay for higher education, including but not limited

to income share agreements and installment contracts, are student loans

covered by the

Act and that servicers of these education financing products are student loan servicers

covered by the Act and must be licensed. Similarly, the Consumer Financial Protection

Bureau recently held that income share agreements are within the definitions of “credit”

and “private education loan” and subject to the Truth in Lending Act, 12 U.S.C. § 1601,

et seq. and implementing Regulation Z, 12 C.F.R. Part 1026.

This proposed rulemaking is necessary in order to clarify the types of products that are

subject to the Act. It defines terms and documents specific to education financing

products.

The proposed rulemaking also amends certain existing rules, based on the Department’s

experience licensing student loan servicers and conducting regulatory examinations. This

includes removing rules which the Commissioner has determined to be burdensome to

servicers and unnecessary.

The proposed rulemaking also includes revisions to rules necessitated by the enactment

of the Student Loans: Borrower Rights law.

The Commissioner is expressly authorized to promulgate rules, consistent with the

Commissioner’s authority to administer the Act

and the Student Loans: Borrower Rights

law.

Consent Order, In the Matter of the Student Loan Servicing Act license application of: Meratas Inc.,

August 5, 2021, <https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/08/Meratas-Consent-Order.pdf

(as of January 20, 2022)

See 2021-CFPB-0005, In the Matter of Better Future Forward, Inc., et al., pp. 3,8,11-13,

https://files.consumerfinance.gov/f/documents/cfpb_better-future-forward-inc_consent-order_2021-

09.pdf> (as of October 15, 2021).

Fin. Code, § 28106, subd. (a).

Civ. Code, § 1788.103, subd. (i).

PRO 06-21 INITIAL STATEMENT OF REASONS Page 3

PROPOSED RULES

By this rulemaking, the Commissioner proposes to amend Sections 2032; 2033.5; 2034.5;

2035; 2036.5; 2040; 2040.5; 2041; 2042; 2042.5; and 2043; and to adopt Sections

2033.75; 2042.65; and 2042.75 in Chapter 3 of Title 10 of the California Code of

Regulations.

Section 2032. Definitions.

The Department proposes to amend Section 2032 to define certain terms used in the

proposed regulations.

Subsection (a)(2): This subsection adds the definition of “annual percentage rate” or

“APR.” It is necessary to add this definition because proposed rules 2042.65 and 2042.75

require servicers of education financing products to maintain and make available to the

Commissioner the APR of all of their loans on an aggregated basis. This definition

specifies that APR is to be calculated using the same methodology in Regulation Z, which

implements the Truth in Lending Act, 15 U.S.C. section 1601, et seq. It is necessary to

define APR as using the same methodology in Regulation Z because servicers of

education financing products are also subject to Regulation Z. Using the same

methodology here provides consistency and will facilitate servicer compliance.

Subsection (a)(3): This subsection adds the definition of “borrower.” It is necessary to

adopt this rule to clarify that the statutory definition of borrower in the SLSA and the

Student Loans: Borrower Rights law includes person(s) responsible for repaying an

income share agreement or an installment contract. Because the rules are being

amended to clarify that education financing products, which include income share

agreements and installment contracts, are student loans, it is necessary to also clarify

that recipients of education financing products are likewise borrowers for the purposes of

the SLSA and the Student Loans: Borrower Rights law.

Subsection (a)(4): This subsection adds the definition of “education financing products.”

It is necessary to define education financing products as all private loans which are not

traditional student loans, including but not limited to income share agreements and

installment contracts, so that all these products will be subject to the Act. It is necessary

to clarify that private loans other than traditional student loans are also subject to the Act

because lenders and servicers of income share agreements and installment contracts

have argued that these products are not loans or credit and not subject to regulation.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 4

Subsection (a)(12): This subsection adds the definition of “income.” It is necessary to add

this definition to clarify that income means gross compensation, not post-tax

compensation. It is necessary to use this definition because it aligns with the industry

definition, which is used in borrowers’ income share agreements. Using this definition

results in borrowers being treated equally, regardless of their tax benefits, such as the

home mortgage interest deduction.

Subsection (a)(13): This subsection adds the definition of “income share agreement” or

“ISA.” Proposed subsection (a)(25) adds the definition of student loans, defining student

loans to include income share agreements; therefore, it is necessary to define “income

share agreement.” It is also necessary to add this definition as proposed rules 2042.65

and 2042.75 require servicers of income share agreements to maintain and make

available to borrowers and the Commissioner specified information. It is necessary to use

this definition because it is based on the definition commonly used by industry.

Subsection (a)(14): This subsection adds the definition of “income share percentage,”

“income share,” or “contractual payment percentage.” Proposed rules 2042.65 and

2042.75 require servicers of education financing products to maintain and make available

to borrowers and the Commissioner the income share percentage for all loans. It is

necessary to define income share percentage as a percentage of income because this is

the definition used by industry participants.

Subsection (a)(15): This subsection adds the definition of “installment contract.” It is

necessary to add this definition because installment contracts are included in the

proposed definition of student loan. It is necessary to add this definition because it is

based on a definition commonly used and understood by industry and borrowers.

Subsection (a)(16): This subsection adds the definition of “minimum income threshold,”

“minimum threshold, “payment floor” or “floor.” It is necessary to include this definition

because proposed rules 2042.65 and 2042.75 require servicers to maintain and make

available to borrowers and the Commissioner this information. The proposed definition is

<https://www.purdue.edu/backaboiler/disclosure/contract.html> (as of January 26, 2022).

Income Share Agreements: A Glossary of Key Terms, Anna, Meratas, Inc., June 24, 2020

<https://meratas.com/blog/income-share-agreement-key-terms/

> (as of January 19, 2022).

The Ultimate Guide to Income Share Agreements, Anna, Meratas, Inc., October 9, 2020,

https://meratas.com/blog/guide-income-share-agreement/

(as of January 19, 2022).

See fn. 9, supra.

https://www.bankrate.com/glossary/i/installment-contract/ (as of March 1, 2022).

PRO 06-21 INITIAL STATEMENT OF REASONS Page 5

based on the definition used by industry participants in income share agreements.

It is

necessary to use this definition for consistency.

Subsection (a)(18): This subsection defines “payment cap” or “ceiling” as the maximum

amount payable under an income share agreement. It is necessary to adopt this definition

because this is the definition used by industry participants in income share agreements.

This will ensure consistency between the way the term is used by industry and the way

the information is reported pursuant to proposed rules 2042.65 and 2042.75.

Subsection (a)(19): This subsection adds the definition of “payment term,” “payment

window,” “maximum payment term,” or “repayment term.” It is necessary to include this

definition because proposed rules 2042.65 and 2042.75 require servicers of income share

agreements to maintain and make available to borrowers and the Commissioner this

information. The proposed definition is based on the definition used by industry

participants in income share agreements.

It is necessary to use this definition for

consistency between how the term is used by industry and how the information is reported

pursuant to proposed rules 2042.65 and 2042.75.

Subsection (a)(21): This section amends the current definition of “private student loan” to

mean all student loans which are not federal student loans. It is necessary to amend this

definition to make clear that all private loan products used to finance a student’s higher

education, including income share agreements and installment contracts, are private

student loans. It is necessary to amend this definition to clarify that education financing

products are private student loans.

Subsection (a)(22): This subsection adds the definition of “qualifying payment.” It is

necessary to include this definition because proposed rules 2042.65 and 2042.75 require

servicers of income share agreements to maintain and make available to borrowers and

the Commissioner the number of qualifying payments a borrower has made. It is

necessary to define “qualifying payment” as a monthly payment that counts toward the

payment cap or payment window because this is how the term is used by industry

participants.

Subsection (a)(23): This section adds the definition of “startup.” This is necessary

because the Department revised section 2033.5, subsection (a)(4), to allow startup

See fn. 9, supra.

Ibid.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 6

companies which apply for a student loan servicer license to submit a statement of

condition in lieu of audited financial statements. There are many definitions of startup. It

is necessary to use this definition because it captures the companies that, due to their

short amount of time in existence, cannot be reasonably expected to have audited

financial statements.

Subsection (a)(25): This subsection clarifies the definition of “student loan” that is in the

Act and the Student Loans: Borrower Rights law. It is necessary to define student loan to

expressly include education financing products such as income share agreements and

installment contracts to make clear that these products are subject to the Act, the Student

Loans: Borrower Rights law, and these regulations. This is necessary to protect the

borrowers of these products.

Subsection (a)(26): This subsection clarifies the definition of “student loan servicer” that

is in the Act and the Student Loans: Borrower Rights law. It is necessary to expressly

define student loan servicer to include servicers of education financing products so it is

clear that these servicers must be licensed and are otherwise subject to the Act, the

Student Loans: Borrower Rights law, and these regulations. This is necessary to protect

borrowers of these products.

Subsection (a)(27): This subsection adds the definition of “Student Loans: Borrower

Rights law.” It is necessary to add this definition so that applicants and licensees can refer

to the text of the law because the law is referenced in these proposed rules.

Subsection (a)(28): This subsection adds the definition of “traditional student loans.” It is

necessary to add this definition because sections 2042 and 2042.5 apply specifically to

traditional student loans, whereas proposed rules.2042.65 and 2042.75 apply specifically

to education financing products. This rulemaking makes this distinction because

traditional student loans use terms and loan documents different from education financing

products. It is necessary to define traditional student loans to clarify the rules which apply

to each product type so the relevant rules are applied to each product type.

Section 2033.5. License Application for Student Loan Servicer.

Subsection (a)(3)(B): This proposed rule removes the requirement that individuals required

to submit an MU2 who live outside the United States submit fingerprints. The current rules

require that individuals living outside the United States submit a comprehensive

investigative report, which includes a criminal history. The Department has determined that

requiring these individuals to locate a place in their home country where they can be

fingerprinted is very difficult and unnecessary. The Department has found the investigative

PRO 06-21 INITIAL STATEMENT OF REASONS Page 7

reports submitted in the years of regulating student loan servicers to be sufficiently

comprehensive to protect borrowers. It is necessary to remove the fingerprinting

requirement to eliminate an unnecessary and burdensome regulatory requirement.

Subsection (a)(4): This proposed subsection (a)(4) authorizes start up applicants for

licensure to submit an attested statement of condition in lieu of audited financial statements.

This rule is necessary because it is difficult for startups to obtain audited financial

statements. Startups commonly do not have audited financial statements because of their

brief time in existence. However, startups do have or can readily obtain statements of

condition which show the company’s financial condition and verify that the applicant has at

least the $250,000 net worth required by the Act. This amendment also makes clear that

acceptance of a statement of condition is limited on a one-time basis to startup applicants

and that, if granted a license, the startup licensee must submit audited financials each

succeeding year of licensure as required by Financial Code section 28148. This amendment

is necessary based on the Department’s experience in licensing applicants, including

startups. Making this change removes a potential barrier to entry into business while

simultaneously using a reliable alternative to verify financial soundness.

Subsection (a)(7): The amendment to subsection (a)(7) removes a reference to specific

subsections of the Act. It is necessary to remove this reference as two of these subsections

were repealed by the Student Loans: Borrower Rights law. Moreover, the new Student

Loans: Borrower Rights law includes additional borrower protections. The revised rule

provides that the Policies and Procedures which an applicant must upload to NMLS as part

of the application requirements must demonstrate compliance with the borrower protection

provisions not just of the Act but also the new Student Loans: Borrower Rights law and these

rules. It is necessary to require the Policies and Procedures to demonstrate compliance with

the Student Loans: Borrower Rights law so that compliance is built into the servicer’s daily

operations.

Subsection (a)(12): The amendment to subsection (a)(12) clarifies that the individual

attesting to the truthfulness of the company’s application also attests that the applicant will

comply with not just the Act but also the new Student Loans: Borrower Rights law, these

rules and all applicable federal laws related to student loan servicing and regulations

promulgated thereunder. The current rule only references compliance with the Act, as the

Student Loans: Borrower Rights law was enacted in 2020, four years later than the Act. It is

necessary to include specific reference to the new state law, these revised rules and

applicable federal laws and regulations to make clear to applicants that they must comply

with all applicable state and federal laws and regulations.

Subsection (e): This subsection is being added to the application and licensure requirements

PRO 06-21 INITIAL STATEMENT OF REASONS Page 8

to ensure the Department is able to contact the licensee via email. The Department has

found that emails listed in an entity’s application for licensure frequently go to one or more

individuals who handle a specific and limited part of the licensee’s operations and that these

mailboxes are not always monitored. It is necessary to require student loan servicers to

designate an email address that complies with Financial Code section 331.5, which requires

that licensees designate an email address that is not the address of an individual employee.

Requiring an email address that is regularly monitored and not tied to one individual is

necessary so that the Commissioner may communicate electronically with licensees at all

times.

Section 2033.75. Non-Licensee Filing with the Department.

The newly enacted Student Loans: Borrower Rights law, in Civil Code section 1788.103,

authorizes student borrowers to file private rights of action, individually or as a class, after

having given notice of the alleged violations underlying the prospective suit to servicers.

The required notice is to give servicers the opportunity to cure such alleged violations and

eliminate the need for a lawsuit. The law requires borrowers to send notices by certified

or registered mail, return receipt requested, to the servicer’s address on file with the

Department or the servicer’s principal place of business in California. The problem is that

servicers exempt from licensure under the Student Loan Servicing Act but subject to the

Student Loans: Borrower Rights law, such as banks, may not have an address on file with

the Department. The proposed rule requires such non-licensees to file with the

Department an address where they will receive certified or registered mail. This

requirement is necessary so that borrowers have a place to send the notice required by

Civil Code section 1788.103.

Non-licensees (such as banks) with branches in California may have designated a central

location for service of process, pursuant to Code of Civil Procedure section 684.115, by

filing this information with the Department. However, a designation pursuant to Code of

Civil Procedure section 684.115 does not necessarily constitute an agreement to accept

certified or registered mail at that location. Therefore, the proposed rule provides that if a

non-licensee has complied with Code of Civil Procedure section 684.115 but has not filed

an address with the Department pursuant to the proposed rule, the non-licensee is

deemed to accept certified or registered mail at the location it designated pursuant to

section 684.115. This provision is necessary to enable borrowers to comply with the

notice requirement in Civil Code section 1788.103 by sending the notice to the designated

location for service of process if the non-licensee has not filed another address with the

Department.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 9

Additionally, there are non-licensees which do not have branches in California and are

not required to designate a central location for service of process under Code of Civil

Procedure section 684.115. The proposed rule provides that if a non-licensee does not

comply with Code of Civil Procedure section 684.115 and fails to file an address with the

Department pursuant to this rule, the non-licensee is deemed to accept certified or

registered mail at any branch. This provision is necessary for the protection of borrowers

because if a non-licensee fails to comply with the filing requirement in this rule, the

borrower should not be penalized with inability to comply with the notice requirement in

Civil Code section 1788.103. Instead, the borrower should be permitted to send the notice

to any branch.

Section 2034.5. Fingerprints and Background Checks.

The proposed revision to subdivision (d) of the current rule removes the requirement that

applicants upload proof of live scan completion. The Department has learned through

experience that this requirement is unnecessary. The Department receives live scan results

from the California Department of Justice (DOJ) very quickly. Commonly, the Department

has received DOJ results days before applicants upload their proof of live scan completion.

It is necessary to remove this requirement from applicants to reduce their regulatory burden.

The revision to subdivision (e) of the current rule changes the requirement that applicants

using fingerprint cards pay the specific fingerprinting fee of $49 to the Department of Justice,

to generic language requiring applicants to pay “Department of Justice fees.” This change

is necessary to require applicants to pay whatever fee is required by the Department of

Justice for fingerprinting.

Section 2035. Information Regarding Individuals Who Are Not Residents of the United

States.

The revision to the current rule removes references to rules which may be read to require

fingerprinting for an individual who does not currently reside or has not resided in the

United States for at least ten years. This revision aligns with the Department’s proposed

change to section 2033.5(a)(3)(B), removing the requirement that such individuals submit

fingerprints and a comprehensive investigative report, which includes a criminal history. The

Department has learned from its license applicants that it is very time consuming, difficult

and burdensome to find an entity out of country to do fingerprinting acceptable to the FBI.

The Department has learned through experience that fingerprinting in this case is

unnecessary. The required comprehensive investigative report gives the information the

Department needs to determine if the individual merits approval. It is necessary to remove

the fingerprinting requirement as unnecessarily duplicative and to reduce regulatory burden

PRO 06-21 INITIAL STATEMENT OF REASONS Page 10

on these individuals and the applicant entities by which they are employed.

Section 2036.5. Notice of Changes by Student Loan Servicer.

This proposed revision removes a reference to Financial Code section 28130 and adds a

reference to section 2033.5(a)(7) of these proposed rules. The deletion is necessary

because the Student Loans: Borrower Rights law repealed subdivisions (g) and (h) of

Financial Code section 28130. The addition is necessary because 2033.5(a)(7) is the

provision requiring the applicant to upload its Policies and Procedures to demonstrate it will

comply with borrower protections. This change is necessary in order for the rule to clearly

describe the types of changes that do not require an amendment to the application.

Section 2040. Borrower Information and Statements of Account, Payment Processing,

Co-signer Payments.

Subsection (b): Section 2040 requires servicers to maintain consolidated reports of account

for each borrower and references the rule which specifies the information required in the

consolidated report. It is necessary to amend the current rule to reference a second rule

which governs the information servicers must maintain for education financing products,

including income share agreements and installment contracts. Different information is

required depending on the type of student loan serviced. It is necessary to add the second

reference to clarify how this rule would apply to servicers of education financing products.

Subsection (c): Section 2040 requires servicers to maintain loan histories for each student

loan serviced and references the rule which specifies the information required in the loan

history. It is necessary to amend the current rule to add a reference to a second proposed

rule which specifies the information which servicers must maintain for education financing

products, including income share agreements and installment contracts. Different

information is required depending on the type of student loan serviced. It is necessary to

add the second reference to clarify how this rule would apply to servicers of education

financing products.

Subsection (d): It is necessary to amend the current rule to clarify Civil Code section

1788.102(a)(1), a provision of Student Loans: Borrower Rights law. This statutory provision

specifies that payments made by student borrowers on the date due count as a timely

payment if made by 11:59 p.m. but does not specify the operative time zone. The proposed

rule clarifies that 11:59 p.m. means the time in the time zone in which the payment is made.

It is reasonable that a borrower would assume that the applicable time zone is the one in

which the borrower makes the payment. It is necessary to add this clarification to protect

consumers from incurring late fees or other penalties for any payments made on the due

PRO 06-21 INITIAL STATEMENT OF REASONS Page 11

date.

Section 2040.5. Qualified Written Requests.

The proposed revision to the rule adds the requirement that all acknowledgments of

receipt and responses to Qualified Written Requests (QWRs) be in writing. A QWR is a

borrower communication to a servicer claiming an error in his/her account and asking for

a response or requesting specific information such as a loan history or a copy of a

promissory note. The Student Loans: Borrower Rights law requires an acknowledgement

of receipt if not resolved within ten business days and a response in 30 business days,

which may be extended an additional 15 days if the servicer notifies the borrower and

provides the reason for the delay. The servicer’s response must provide the requested

information or the action the servicer will take to correct the account or an explanation for

the servicer’s position that the borrower’s account is correct.

When asked by the Department during regulatory examinations to provide the

acknowledgements and responses to QWRs sent by the servicer, some servicers told

examiners that the servicer acknowledged and responded to QWRs verbally and believed

this satisfied the requirement.

It is necessary to require written acknowledgments of receipt and responses to be able

to verify whether the servicer has complied with the law and to provide a written record of

the exchange between the borrower and servicer and the servicer’s reasons for taking or

not taking the requested action. It is necessary for the Department and borrowers to have

a written record of the QWR and the servicer’s response and reasoning that can be

referred to in any additional follow up on this QWR, and as needed.

Section 2041. Customer Service, Alternative Repayment Plans, Loan Forgiveness

Benefits.

The current rule requires private loan servicers to inform and be able to discuss with

borrowers alternative repayment options available in the promissory note or from the

promissory note holder. The proposed amendment requires servicers to make available

repayment options offered by the contractual obligee or payee or under the contractual

agreement evidencing the student loan. Education financing products such as income share

agreements and installment contracts do not use promissory notes. Rather, these products

use a contractual agreement between the borrower and the payee or obligee. It is necessary

to add additional contractual verbiage, including “contractual obligee” or “payee” and

“contractual agreement,” so the rule includes terminology that applies to education financing

products. Without these added terms, servicers of education financing products could claim

PRO 06-21 INITIAL STATEMENT OF REASONS Page 12

that they are not obligated to offer alternative repayment options to borrowers as these

products don’t use a promissory note and there is no promissory note holder. While income

share agreements and installment contracts are based on contracts, rather than

promissory notes, they are student loans. They fall within the Act and the Student Loans:

Borrower Rights law’s definition of student loan as “made solely for use to finance a

postsecondary education and costs of attendance at a postsecondary institution,

including, but not limited to, tuition, fees, books and supplies, room and board,

transportation, and miscellaneous personal expenses.”

Section 2042. Aggregate Student Loan Servicing Report--Traditional Student Loans.

The proposed revision to the current rule clarifies that the rule applies to traditional student

loans. The revised rule references the new rule and section number applicable to

education financing products. It is necessary to specify the rule which applies to each

type of education financing product so servicers and borrowers know which rule applies

to the products they service. This is necessary in order to require the appropriate data

regarding each type of loan.

Section 2042.5. Student Loan Servicing Records--Traditional Student Loans.

The revision to the current rule removes the student loan application from the list of

records which servicers must maintain for traditional loans. These rules implement the

Act and the Student Loans: Borrower Rights law, under which the Department regulates

student loan servicing. It is unnecessary for the Department to review the application,

which relate to lending practices, not servicing practices. This change is necessary to

eliminate a books and records requirement that is not relevant to the Department’s

regulation.

The revision also deletes language that would exempt servicers from maintaining certain

loan documents if the servicer has not received or does not have access to the document.

Before commencing its regulatory examinations about four years ago, the Department

did not know if lenders provided servicers the documents listed in the rule or access to

these documents. The Department has learned through its four years of servicer

examinations that the remaining records are commonly maintained by servicers. The

promissory note or loan agreements provide proof that a servicer may begin servicing

and the terms it must follow. The remaining documents demonstrate compliance or

noncompliance with the note or loan agreement, the Act, the Student Loans: Borrower

Rights law and these rules. It is necessary to require servicers to maintain these records

Fin. Code, § 28104, subd. (l)(1) and Civ. Code, § 1788.100, subd. (q)(1), respectively.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 13

without exception so that the Department can ascertain and enforce compliance with the

Act, the Student Loans: Borrower Rights law and these rules and to investigate borrower

complaints against servicers.

Section 2042.65. Aggregate Student Loan Servicing Report--Education Financing

Products.

Subsection (a) requires servicers to maintain an aggregate student loan servicing report

for all education financing products, to be produced within ten days of Commissioner

request.

It is necessary for licensees to maintain an aggregate student loan servicing report

showing the total amount of student loans serviced, to allow for the Commissioner’s

effective examination, oversight and supervision of servicers and to enable the

Commissioner to calculate the servicer’s pro rata assessment based on total loan

volume.

It is necessary to require servicers to produce the report within ten days

because the Commissioner may need this information for an examination or investigation,

and this amount of time is reasonable because the rule requires information that servicers

should be maintaining in the ordinary course of business.

Subsection (b) itemizes information which servicers of all education financing products

must include in the aggregate report. Section 2042.75(d) requires servicers to make the

same information available to borrowers in a consolidated report.

Subsection (b)(1) requires servicers to include the borrower’s name in the aggregate

report. It is necessary to require the borrower’s name so the Department can determine

whether servicer records match the borrower’s loan documents when conducting

transaction testing during regulatory exams. This will allow the Department to assess

servicer performance and mandate resolution of deficiencies.

Subsection (b)(2) requires servicers of education financing products to include the

account number in the aggregate report. It is necessary to include the account number

so Department examiners can confirm that the servicer is maintaining correct information

for borrowers, and to investigate complaints.

Section 2042 requires the same type of basic information be maintained for traditional student loans

and provided in the aggregate to the Commissioner, upon request.

Fin. Code, §28144.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 14

Subsection (b)(3) requires servicers of education financing products to include the

number of education financing products serviced for each borrower in the aggregate

report. It is necessary to include the number of education financing products serviced to

effectively examine servicers. The Department may conduct transaction testing,

comparing the report provided by the servicer with loan documents, to determine

accuracy and mandate the resolution of servicing deficiencies.

Subsection (b)(4) requires servicers of education financing products to include in the

aggregate report the type(s) of education financing products serviced for the borrower. It

is necessary to include the type of products serviced to confirm the information

maintained by servicers matches loan documents and, if not, to mandate resolution.

Subsection (b)(5) requires servicers of education financing products to include in the

aggregate report the date of execution of the agreement evidencing the education

financing product. It is necessary to require this information to see if this date matches

the source document evidencing the loan and to facilitate effective Department

supervision of servicers. This information will also allow borrowers to check whether

servicer records match the borrower’s records and pursue resolution of discrepancies.

Subsection (b)(6) requires servicers of education financing products to include the payoff

amount in the aggregate report. It is necessary to require this information so that it will

appear in the consolidated report servicers must provide borrowers pursuant to Section

2045.75(d). The payoff amount will allow borrowers to quickly check their financial

condition and decide whether to keep the loans or pay them off. This protects borrowers.

Subsection (c) specifies information which servicers of income share agreements must

include in the aggregate report, in addition to the information required under subsection

(b). It is necessary to require certain information that is unique to income share

agreements because each type of education financing product uses terminology that is

unique.

Subsection (c)(1) requires servicers of income share agreements to include the funded

date in the aggregate report. It is necessary to include the funded date so the Department

may conduct transaction testing during examinations to determine the accuracy of

servicing and require resolution of errors.

Subsection (c)(2) requires servicers to include the funded amount in the aggregate report.

It is necessary to include the funded amount so the Department may conduct transaction

testing during examinations to determine the accuracy of servicing and require resolution

of errors.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 15

Subsection (c)(3) requires servicers of income share agreements to include the

borrower’s income in the aggregate report. It is necessary to include the borrower’s

income so the Department may use it, along with income share percentage, to determine

the accuracy of the payment amounts.

Subsection (c)(4) requires servicers of income share agreements to include the income

share percentage in the aggregate report. It is necessary to include the income share

percentage so the Department may use it, along with the borrower’s income, to determine

the accuracy of the payment amounts.

Subsection (c)(5) requires servicers of income share agreements to include the annual

percentage rate, calculated at the minimum annual income above which payments are

required and at $10,000 income increments thereafter up to the annual income where the

maximum number of monthly payments results in the maximum amount payable. It is

necessary to require this information so borrowers will know the ISA’s interest rate and

decide whether it is best to pay off the ISA with a student loan that carries a lower interest

rate. It is necessary to require this information so the Department can determine whether,

based on the interest rates charged, the servicer may be servicing an income share

agreement that is illegal and unenforceable.

Subsection (c)(6) requires servicers of income share agreements to include the minimum

threshold or payment floor in the aggregate report. It is necessary to include the minimum

threshold or payment floor so the Department may compare the payment amounts and

determine whether the servicer is collecting payments in accordance with the contract.

Subsection (c)(7) requires servicers of income share agreements to include the payment

cap or payment ceiling in the aggregate report. It is necessary to include the payment cap

or payment ceiling so the Department may conduct transaction testing and assess

whether the servicer is complying with the income share agreement.

Subsection (c)(8) requires servicers of income share agreements to include the payment

window or maximum payment term in the aggregate report. It is necessary to include the

payment window or maximum payment term so the Department can examine servicers

to determine whether they are complying with the income share agreement.

Subsection (c)(9) requires servicers of income share agreements to include the number

of required payments in the aggregate report. It is necessary to include the number of

required payments so the Department and borrowers can determine if the information

PRO 06-21 INITIAL STATEMENT OF REASONS Page 16

provided by the servicer matches the borrower’s records and resolve any discrepancies

and so borrowers can have an accurate financial picture and the status of their loans.

Subsection (c)(10) requires servicers of income share agreements to include the monthly

payment amount in the aggregate report. It is necessary to include the monthly payment

amount so the Department can determine whether the servicer is collecting payments in

accordance with the income share agreement.

Subsection (c)(11) requires servicers of income share agreements to include the number

of qualifying payments made. It is necessary to include the number of qualifying payments

made so the Department and borrowers can determine if the information provided by the

servicer matches the borrower’s records resolve any discrepancies and so borrowers can

have an accurate financial picture and the status of their loans.

Subsection (d) requires servicers of installment contracts to include additional information

beyond that required for other education financing products. It is necessary to require

certain information that is unique to installment contracts because each type of education

financing product uses unique terminology.

Subsection (d)(1) requires servicers to include the amount advanced in the aggregate

report. This is necessary so the Department can conduct transaction testing to determine

whether the servicer is complying with the contract.

Subsection (d)(2) requires servicers to include the date the amount was advanced in the

aggregate report. It is necessary to include the date the amount was advanced so the

Department may determine whether the servicer is collecting payments in accordance

with the installment contract.

Subsection (d)(3) requires servicers to include the annual percentage rate in the

aggregate report. It is necessary to require this information so borrowers will know the

interest rate and decide whether to pay off the installment contract with a student loan

that carries a lower interest rate. It is necessary to require this information so the

Department can determine whether, based on the interest rates charged, the servicer

may be servicing an installment contract that is illegal and unenforceable.

Subsection (d)(4) requires servicers to include the installment contract term, including

date of commencement and date of termination. It is necessary to require this information

so the Department may determine whether the servicer is collecting payments in

accordance with the written agreement.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 17

Subsection (d)(5) requires servicers to include the date the first installment payment is

due. It is necessary to require this information so Department examiners may compare

this date with the written agreement to determine and resolve inconsistencies.

Subsection (d)(6) requires servicers to include the installment payment amount in the

aggregate report. It is necessary to include the installment payment amount to catch

discrepancies between the report and the written agreement, which may have resulted in

an incorrect loan history. It is necessary to provide borrowers an accurate status of their

loan, including payment amount, so the borrower can decide whether to keep the existing

loan at the same repayment schedule, change to another repayment schedule, refinance

or prepay.

Subsection (d)(7) requires servicers to include the maximum number of required

payments due, payments made, and payments remaining due until the installment

contract is paid or satisfied. It is necessary to require this information so the Department

and borrowers can determine if the information provided by the servicer matches the

borrower’s records and resolve any discrepancies and to provide borrowers an accurate

status of their loans.

Subsection (e) requires servicers of education financing products which are not income

share agreements or installment contracts to include specified information. It is necessary

to include this provision to collect information analogous to the information required

regarding income share agreements and installment contracts for all other types of

education financing products.

Subsection (e)(1) requires servicers to include the funded date or the date the amount

was advanced. It is necessary to include this information so the Department may audit

the servicer’s loan files and identify any errors in its servicing of the loan.

Subsection (e)(2) requires servicers to include the funded amount or the amount

advanced. It is necessary to include this data point so the Department examiners may

compare the amount listed with the loan documents to assess the accuracy of servicer

performance.

Subsection (e)(3) requires servicers to include the annual percentage rate in the

aggregate report. It is necessary to include the annual percentage rate to check accuracy

and so the borrower can decide if it would be best to pay off the loan with a student loan

with a lower interest rate. It is necessary for the Commissioner to have this information to

determine if, based on the interest rates, the servicer may be servicing an education

financing product that is illegal and unenforceable. Subsection (e)(4) requires servicers

PRO 06-21 INITIAL STATEMENT OF REASONS Page 18

to include the amount of each payment due in the aggregate report. It is necessary to

include this information so Department examiners may compare the amount listed with

the loan documents to assess the accuracy of servicer performance and resolve errors.

Subsection (e)(5) requires servicers to include the maximum number of required

payments. It is necessary to include this data point so Department examiners may

compare the amount listed with the loan documents to assess the accuracy of servicer

performance and mandate the resolution of errors.

Subsection (e)(6) requires servicers to include the maximum payment term in the

aggregate report. It is necessary to include this data point so Department examiners may

compare the amount listed with the loan documents to assess accuracy, resolve errors

and ensure that borrowers have an accurate loan history. An accurate loan history and

status will allow borrowers to make informed decisions about whether to keep their

existing loans or make changes.

Section 2042.75. Student Loan Servicing Records--Education Financing Products.

A similar rule, Section 2042.5, applies to traditional student loans. It is necessary to have

a separate rule for education financing products because these products use terminology

and documentation different from that used for traditional student loans. If incorrect

terminology or documentation names are used, the servicer may not maintain critical

information and documentation about this type of student loan and borrowers could be

harmed. Subsections are discussed below.

Subsection (a): It is necessary to require servicers to maintain their books, records and

accounts at one or more licensed locations, designate the locations at which the books,

records and accounts are maintained, and make the location and books, records and

accounts accessible to the Department, to facilitate the statutorily mandated examination

of licensees.

Subsection (b): It is necessary to require servicers to maintain all education financing

contracts; disclosure statements sent to the borrower; a complete loan history; qualified

written requests (QWRs); borrower instructions how to apply overpayments; and

statements of account sent to the borrower, so the Department may examine these

documents to determine compliance with the Student Loan Servicing Act, the Student

Loans: Borrower Rights law and these regulations, including whether payments and

Fin. Code, § 28152.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 19

overpayments have been correctly applied and QWRs have been timely and

appropriately addressed.

Subsection (c): It is necessary to require servicers to maintain loan histories for borrowers

and to specify the minimum information which must be included. This is necessary so the

Department can perform examinations that determine if the borrower’s record is accurate,

including the correct application and posting of all loan disbursements, payments and

fees.

Subsection (d): requires servicers of education financing products to maintain a

consolidated report for all borrowers, individually, which contains information itemized in

section 2042.65. It is standard industry practice for lenders and servicers of consumer

financial products, including, for example, checking accounts, mortgage loans and credit

card accounts, to maintain and make readily available to consumers account information

containing all pertinent information. It is necessary for student borrowers to be able to

readily access their loan information, know where they are in the repayment process, and

have a clear picture of their financial condition in order to make informed decisions about

whether to keep their current student loans at the current repayment schedule or to

change to a different repayment schedule, refinance, or attempt to prepay the loans.

Requiring servicers to maintain this information for education financing products improves

accountability and is necessary to protect borrowers.

Section 2043. Records of Servicing Sold, Assigned, or Transferred.

The proposed revision to the current rule references a new rule proposed in this rulemaking

which mandates records which servicers of education financing products must maintain. It

is necessary to add this reference so that records of all products serviced—not just records

for traditional student loans--are transferred to the new servicer, if servicing is transferred. If

the reference is not added, education financing records may not be transferred to the new

servicer, causing harm to borrowers who need these records to assess their student loans.

BENEFITS ANTICIPATED FROM REGULATORY ACTION [Government Code Section

11346.2, Subdivision (b)(1)]

The proposed regulatory action will ensure that all those engaged in business as student

loan servicers are regulated--not just those servicers servicing the “traditional” federal

student loans and private student loans made by banks and credit unions. Regulating all

servicers will promote accountability and best serve and protect all California student loan

borrowers.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 20

The benefits anticipated from this regulatory action include protective benefits to student

loan borrowers, improving the Department’s regulatory oversight of the servicer industry,

and strengthening enforcement of the Student Loan Servicing Act and the Student Loans:

Borrower Rights Law.

Student borrowers will benefit from rules requiring servicer compliance with consumer

protection laws and regulations. This will allow borrowers to make more informed financial

decisions. Improving the financial conditions of California’s student borrowers will benefit

California’s overall economy. Borrowers will have more discretionary income available to

invest in California’s economy. The cumulative effect of these rules will positively affect

not just the individual student borrowers, but California’s overall economic health.

Student loan debt is a weight on the state’s economy, preventing borrowers from

achieving financial independence, starting businesses, attending graduate school, or

buying property or cars. Bringing servicers of all education financing products within

California’s regulatory scheme will best protect all California student loan borrowers.

Comprehensive student loan servicing will result in decreased defaults, more spendable

income and greater access to credit, all of which will benefit borrowers and the California

economy.

This regulatory package increases transparency in government by adopting the rules in

compliance with California’s rulemaking procedures and standards. This helps ensure that

the public and those who would be subject to the proposed action are provided with a

meaningful opportunity to participate in the adoption of the regulations.

POTENTIAL FOR ADVERSE ECONOMIC IMPACT ON BUSINESS AND INDIVIDUALS

[Government Code Section 11346.3, Subdivision (a)]

The Commissioner has determined that it is unlikely that the proposed regulatory action

will have an adverse economic impact or potential for an adverse economic impact on

business, including the ability of California businesses to compete with businesses in

other states, or individuals. The Department anticipates that prospective licensees

currently maintain records and information, and take actions required by this proposed

rulemaking under their contracts with the lenders and noteholders of the education

financing products they service. Therefore, some or many of the requirements of these

proposed rules may not add additional expense, or add absorbable expense. Conversely,

the protections and benefits of these rules are expected to improve the financial condition

and long-term economic health and wealth of Californians. An improved financial

condition of student borrowers may lead to borrowers opening businesses, potentially

creating jobs, and improving California’s economic picture.

PRO 06-21 INITIAL STATEMENT OF REASONS Page 21

ECONOMIC IMPACT ASSESSMENT [Government Code Section 11346.3, Subdivision

(b)]

A. The Creation or Elimination of Jobs Within the State

The Commissioner has determined that this regulatory proposal will not have a significant

impact on the creation or elimination of jobs in the State of California. The proposed

regulations only define terms specific to education financing products, which is a small

percentage of the student loan market. The proposed regulations also remove or revise

certain existing rules, based on the Department’s experience in regulating servicers since

the Act became operational. These changes streamline and make the rules more efficient

and effective and less burdensome on servicers.

B. The Creation of New Businesses or the Elimination of Existing Businesses Within the

State

The Commissioner has determined that this regulatory proposal will not have a significant

impact on the creation of new businesses or the elimination of existing businesses in the

State of California because the proposed regulations apply only to student loan servicer

applicants and licensees under the Student Loan Servicing Act and certain student loan

servicers that are exempt from the Student Loan Servicing Act.

C. The Expansion of Businesses Currently Doing Business Within the State

The Commissioner has determined that this regulatory proposal will not result in the

expansion of businesses - student loan servicers - currently doing business in California.

The regulatory proposal will require regulation of a relatively small segment of the existing

student loan servicer industry, which has been operating unregulated. Student lending

has a defined and limited target market – post-secondary students. The market for

education financing products is a small percentage of this market. These rules will not

add to or decrease the marketplace or lending limits. Rather, the rules will increase the

scope and quality of student loan servicing and protect all California student loan

borrowers.

D. The Benefits of the Regulations to the Health and Welfare of California Residents, Worker

Safety and the State’s Environment

The Commissioner has determined that this regulatory proposal may benefit the health and

welfare of California residents by increasing protections for student loan borrowers,

PRO 06-21 INITIAL STATEMENT OF REASONS Page 22

through the licensure, regulation, and oversight of all student loan servicers, and

enforcement of the law’s protections and consumer protection statutes overall. These

rules should result in a lower percentage of defaulting borrowers. Borrowers with

improved financial conditions will have more discretionary income and greater access to

credit, positively impacting the state’s economy. This will positively affect not just the

individual student borrowers, but California’s overall economic health. The regulatory

proposal does not benefit worker safety or the state’s environment because it has no

direct impact on worker safety or the environment.

TECHNICAL, THEORETICAL AND/OR EMPIRICAL STUDIES, REPORTS OR

DOCUMENTS [Government Code Section 11346.2, Subdivision (b)(3)]

The Department did not rely on any technical, theoretical or empirical studies, reports or

documents in proposing this regulatory action.

REASONABLE ALTERNATIVES AND REASONS FOR REJECTING THOSE

ALTERNATIVES [Government Code Section 11346.2, Subdivision (b)(4)(A)]

No reasonable alternative to these regulations has been identified or brought to its

attention that would be more effective in carrying out the purpose for which the action is

proposed or would be as effective and less burdensome to affected private persons, or

would be more cost-effective to affected private persons and equally effective in

implementing the statutory policy or other provision of law than the proposal described in

this Initial Statement of Reasons.

REASONABLE ALTERNATIVES THAT WOULD LESSEN ANY ADVERSE IMPACT ON

SMALL BUSINESSES AND REASONS FOR REJECTING THOSE ALTERNATIVES

[Government Code Section 11346.2, Subdivision (b)(4)(B)]

No reasonable alternative considered by the Department or that has otherwise been

identified and brought to the attention of the Department would be as effective and less

burdensome to affected private persons or would lessen any adverse impact on small

business. Based on information and belief, the Commissioner has determined that no

small business, within the meaning of Government Code section 11342.610, subdivision

(b), conducts student loan servicing. Therefore, this rulemaking action does not impact small

businesses.

FACTS, EVIDENCE, DOCUMENTS, TESTIMONY OR OTHER EVIDENCE RELIED ON

BY AGENCY [Government Code Section 11346.2, Subdivision (b)(5)(A)]

PRO 06-21 INITIAL STATEMENT OF REASONS Page 23

Based on its examinations and other interactions with servicers, the Department believes

prospective licensees currently maintain records and information, and take actions

required by this proposed rulemaking under their contracts with the lenders and

noteholders of the education financing products they service. Therefore, some or many

of the requirements of these proposed rules may not add additional expense, or add

absorbable expense. Based on its experience, the Department determined that the

proposed regulatory action will not have a significant adverse economic impact on

business.