New Jersey Shores Up Student Loan Servicer Regulations
Author: Tim Rotondi
As the nation grapples with a growing student loan debt crisis, a wave of states have pushed through so-called “Student Loan Bill of Rights” legislation aiming to educate generally unsophisticated borrowers and regulate student loan services at the state level. New Jersey’s version, Assembly Bill 455 passed in June 2019, establishes a new regulatory office known as the Office of Student Loan Ombudsman and institutes a licensing requirement for student loan servicers by January 1, 2021. To add some teeth to the regulations, lenders are required to post a $30,000 surety bond with the new Student Loan Servicing License application. Below is a guide to the new Student Loan Servicer Bond for carriers and brokers looking to offer the bond and New Jersey insurance agents looking to help their customers who act as loan servicers in this market.
How Does the New Legislation Impact Loan Servicers in New Jersey?
Federal student loan servicers contract with the U.S. Department of Education to service loans provided by and regulated by the federal government. Not without controversy, New Jersey’s new bill subjects student loan servicers to state-level oversight and requires them to maintain a license and surety bond, guaranteeing compliance with the Bill. Private student loan servicers are also subject to the requirements. The Office of Student Loan Ombudsman regulates student loan servicers, meaning servicers will need to remain compliant with all directives stemming from the office. The purpose of the bill is to benefit students receiving loans and require servicers to adhere to strict compliance requirements (more on these below). Servicers will also need to pay $5,500 a year for application and renewal fees to the state.
Who is Required to Have the New Jersey Student Loan Servicing License?
New Jersey Assembly Bill 455 defines a student loan servicer as “any person, wherever located, responsible for the servicing of any student education loan to any student loan borrower.” In practice, this means that any student loan servicer operating in New Jersey or servicing loans for New Jersey residents is subject to the new license requirements, with the exception of banks or subsidiaries of banks which are subject to state and federal banking regulations.
How Should Surety Companies Underwrite The New Jersey Student Loan Servicer Bond?
Although the requirement is new, surety companies should be familiar with similar loan servicing requirements and the risk involved with writing these compliance obligations. We assess the risk to be comparable to mortgage loan servicers and recommend a credit check on the owners and a review of the servicer’s experience for the $30,000 bond amount.
For servicers with multiple locations who may require a larger bond, we recommend a review of business and personal financial statements; however, it’s important to note that servicers must submit a CPA reviewed financial statement showing a minimum net worth of $250,000 to be eligible for the license, mitigating the risk to surety companies.
The bond form will be released in the Nationwide Multistate Licensing System (“NMLS”) on October 15, 2020, and we expect the language to be fairly standard. The bond will guarantee compliance with Assembly Bill 455 and Surety companies should be aware of the following requirements imposed on bond principals:
- Respond to all written inquiries by borrowers within 10 days and correct any relevant issues within 30 days
- Solicit instructions from borrowers on how to apply overpayments and adhere to those instructions for all future overpayments unless instructed otherwise
- Disperse partial payments in a way that minimizes late fees and bad credit reporting for the borrower
- Implement policies that verify all information regarding the borrower
- Evaluate whether a borrower is eligible for an income-driven repayment program before placing them in forbearance or default
- When a servicer sells a borrower’s loan they must:
- Ensure the new loan servicer agreement honors all benefits already in place for the borrower
- Ensure that benefits promised to the borrower for meeting certain requirements remain in the new servicer agreement
- Transfer all relevant data to the new loan holder within 45 days
- The sale must be completed at least 7 days before the borrower’s next payment is due
How Should Surety Companies Rate the Student Loan Servicer Bond?
Assuming there is no adverse bond language when the form is released, we recommend surety companies price the New Jersey Student Loan Servicer Bond with an annual premium rate of between 1%-10% of the bond amount based on the servicer’s experience and the personal credit of the owner(s). Sureties should offer the lowest rates to Principals with excellent credit and an established business, while principals with challenged credit and/or new businesses receiving rates on the higher end of the range.
What Information is Required to Obtain the New Jersey Student Loan Servicing License?
The process for obtaining the New Jersey Student Loan Servicer License is pretty complex, and readers should refer to the bulletin notice for details on the process. Below are the general guidelines for obtaining the license:
- Pay a $5,000 application fee and a $500 inspection fee
- Obtain a $30,000 surety bond for each branch location
- Submit a reviewed financial statement prepared by a certified CPA indicating a net worth of at least $250,000
- Submit a business plan that contains all:
- Marketing Strategies
- Target Markets
- Fee Schedule
- Operating Structure
- Submit a chart showing the percentage of ownership for all direct and indirect owners as well as subsidiaries and affiliates
- Submit a certified copy of formation documentation
- Submit a Certificate of Good standing
- Authorize the FBI to conduct a background check
- Authorize the NMLS to conduct a personal credit check on all owners with a 10 percent or more beneficial ownership stake in the business
- Submit a certified memorandum stating there is no outstanding tax balance
- Submit a complete company resume
What Actions Could Cause a Claim on the Bond?
Any violation of the regulations imposed by Assembly Bill 455 could result in a bond claim. Since this is a new requirement without historical data, our analysis of the statutes and experience with similar bonds leads us to believe the bulk of claim payouts will result from the following violations:
- Late or non-payment of licensing fees
- Disputes from borrowers related to loan forbearance or defaults
- Failure to maintain records or respond to borrower’s written inquiries
Does New Jersey Have Other Loan Servicing Bond Requirements?
In addition to the new Student Loan Servicing License, New Jersey loan servicers involved in the mortgage industry may be subject to the following licenses and bond requirements:
- Correspondent Residential Mortgage Lender License: $150,000
- Exempt Company Registration: $50,000
- Federal Contract Student Loan Servicer License: $30,000
- Mortgage Servicer License: $100,000
- Registered Depository Institution: $150,000
- Residential Mortgage Broker License: $150,000
- Residential Mortgage Lender License: $150,000
- RMLA-Licensed Mortgage Servicer Registration: $100,000
All of these licenses and bonds, including the Student Loan Servicer license, are administered by the NMLS.
How is the New Jersey Student Loan Servicer Bond Filed?
The New Jersey Student Loan Servicer Bond is filed online through the NMLS licensing portal. The principal can take the following steps to authorize their bond issuer authority to file the bond on their behalf:
- Login to the NMLS Licensing Portal
- Click on “Surety Bonds”
- Click on “Surety Entity Access” to search for the surety bond producer and/or surety company.
- It is easiest to search for the bond producer/surety company via their National Producer Number (NPN) or their National Association of Insurance Commissioners (NAIC) code.
After the bond principal has assigned Surety Entity Access, surety bond carriers or agents with appropriate authority can file the bond by taking the following steps:
- Login to the NMLS Licensing Portal
- Click on “Tasks”
- Click on “Surety Bond Management”
- Click “Create New Bond”
- Find your principal/license holder’s name and click “Create Bond”
- Select your Bond Reporting Type
- Converted – to transition from an already filed paper bond to and electronic surety bond
- New – for a new bond that hasn’t been previously filed
- Select the appropriate:
- Licensing State
- License Type
- Surety/Underwriting Company
- Provide the Bond Number and Bond Amount
- Click Save & Proceed to be prompted to electronically sign the bond.
- Once the bond is signed and submitted, no additional changes can be made unless the principal/license holder returns the bond for amendments.
The electronic bond form will be released in the NMLS system on October 15, 2020.