As reported here, on September 9, 2022, the California Department of Financial Protection and Innovation (CA DFPI) published a notice of rulemaking action, proposing amendments to the Student Loan Servicing Act.
The proposed rules clarify that all education financing products, including income share agreements (ISAs) and installment contracts, are student loans, and servicers of all such products are covered by the Student Loan Servicing Act and must be licensed. The proposed rules also define terms used in the rules relating to education financing products.
In response to comments received to the original published rules, on January 6, the Commissioner of the CA DFPI modified the proposed rules. The modifications included, among other things: (1) revision of the definition of “education financing products” to include “private education loans,” as opposed to “private loans,” to make the regulations more consistent with the Truth in Lending Act; (2) revision of the definition of “federal student loan” to better sync with the definition of the term as used in the Higher Education Act; (3) revision of the definition of “installment contract” to list the manner in which the money to be repaid may be lent, which will ensure that installment contracts fall within the definition, regardless of how the contract is structured; and (4) revision of the time zone in which a payment must be received to be considered an on-time payment to Pacific Time, which will protect California borrowers.
On March 6, in response to comments received to the modified rules, the CA DFPI issued a notice of second modifications to the proposed rules. The second round of modifications do not materially alter the scope of the proposed rules. Instead, they make minor adjustments including:
- Revising “education financing products” to include private student loans which are not traditional loans.
- This is a change reverting back to the verbiage used in the original proposed text and is necessary for internal consistency because the term “private student loan” is defined later in the rules, but the term “private education loan” is not separately defined.
- Clarifying that the payment cap, which is the maximum amount payable under an ISA, may be expressed as an annual percentage rate (APR) or an amount or a multiple of the amount advanced, covered, credited, deferred, or funded, excluding charges related to default.
- ISA providers had commented that some providers use a payment cap that is based on an APR.
- Revising the definition of qualifying payments to clarify that qualifying payments count toward maximum payments and the payment cap, but not also the payment term.
- The payment term is a fixed length of time that is not dependent on the number of qualifying payments.
- Specifying that, if a servicer has not posted a cut off time for electronic payments to be credited on the date the payment is made, a payment made by 11:59 p.m. Pacific Time on the due date shall be credited as of that date and count as an on-time payment.
- Requiring cut off times different than those posted on the servicer’s website just for California borrowers would deviate from standard practices and could cause confusion. Limiting the exception to only those situations where the servicer has not posted the cut off time aligns with servicers’ operational capabilities and national banking standards.
The deadline to submit comments to the second modified rules is March 23, 2023.