Legal standard might work against student borrower claims

Boston Statehouse
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BOSTON (SHNS) – With new rules being put in place to protect student loan borrowers from unfair lending practices, state Sen. Eric Lesser urged the Division of Banks on Wednesday to reduce the burden of proof that proposed regulations would put on Attorney General Maura Healey’s office to bring a claim against a student loan company.

Lesser, one of the main authors of the “Student Loan Borrower Bill of Rights,” testified in front of Banking Commissioner Mary Gallagher about the division’s emergency regulations filed July 1 as part of the new law.

The law, signed by Gov. Charlie Baker in January as part of a larger economic development bill, requires the licensure of student loan servicers and gives regulators new tools to protect student borrowers from unfair lending practices.

“We are pleased to see that the draft regulations include licensing requirements that will provide the
necessary oversight to ensure that servicers cannot engage in unfair or deceptive practices,” Lesser said.

The new licensing and oversight of student loan servicers takes effect as the pause on federal student loan payments put in place during the COVID-19 pandemic is set to expire on Oct. 1. Thousands of student borrowers are also likely to see their loans transferred to another servicing company after one of the nation’s largest loan servicers – Pennsylvania Higher Education Assistance Authority (PHEAA) and its subsidiary FedLoan Servicing – announced plans to end its contract with the U.S. Department of Education, experts said.

Lesser said he was pleased to see the draft regulations enumerate a list of prohibited activities that “generally fall in line” with the goals of the legislation.

The Longmeadow Democrat, however, said the regulations went too far in requiring borrowers to prove that their loan servicer “knowingly or recklessly” engaged in unfair practices before a claim could be brought.

“This is an unreasonable burden to place on the attorney general’s office, who is charged with seeking
protections from student loan servicers, and could lead to many meritorious opportunities for enforcement being dropped or not pursued at all,” Lesser said.

Winston Berkman-Breen, deputy director of advocacy and policy counsel at the Student Borrower Protection Center, recommended that the regulations either omit a standard of proof or be reduced to “negligence.”

“This is a higher bar than necessary for a financial service provider,” Berkman-Breen said about the “knowingly or recklessly” standard.

Lesser and Berkman-Breen also recommended that the division in the final version of the regulations make as clear as possible that guaranty agencies are covered by the rules to avoid any legal challenges. These organizations insure federal student loans and work with borrowers when they default to collect owed payments, but Lesser said the agencies have lobbied nationwide for carve-outs from student borrower protection laws.

“They act like student loan servicers, they should be regulated like student loan servicers,” Lesser said, adding, “The Legislature and the bill sponsors were aware of this nationwide lobbying effort and rejected it.”

Earlier this summer, Healey tapped Arwen Thoman, deputy director of her office’s Insurance and Financial Services Division, to take on the newly established role of student loan ombudsman.

Thoman, and deputy ombudsman Erica Harmon, will be responsible for resolving student complaints, educating borrowers, monitoring student loan servicers, and submitting annual reports on borrower complaints and trends.

More than 871,000 residents of Massachusetts have unpaid student loans totaling $36 billion in debt, the Student Borrower Protection Center said. The average borrower carries $31,821 in federal and private student loan debt, Lesser said, and this obligation has caused many to delay buying a home, getting married, starting a family or changing careers.

“The purpose of this law is to help level the playing field between student loan servicers and student loan borrowers by giving regulators powerful new tools to protect borrowers,” Lesser said, urging the Division of Banks to make the new rules “as strong and as broad as possible.”

Healey has been among the elected officials in Massachusetts, along with U.S. Sen. Elizabeth Warren and U.S. Rep. Ayanna Pressley urging President Joe Biden to cancel up to $50,000 in student debt.

House Speaker Nancy Pelosi last week disputed claims that Biden can cancel student debt. “The president can’t do it,” Pelosi said at a press briefing, according to CNBC. “That’s not even a discussion.”

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