Manatt, Phelps & Phillips LLP
Student Lending: California’s New Requirements For Collection Activity
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California is continuing to lead the way on student lending
regulation. Its latest enactment further complicates the efforts of
financial entities to collect on defaulted private student loans.
We discuss the statute below.
On October 6, Governor Newsom signed the Private Student Loan Collections Reform Act
(the Act) into law. The Act continues the trend of California
leading the way in imposing new and burdensome requirements on the
financial services industry.
The Act’s requirements apply to both private education
lenders and private education loan collectors. The definition of
private education lender includes both a person or an entity
engaged in the business of securing, making or extending private
education loans as well as any holder of a private education loan.
The Act exempts depository institutions and those that, together
with affiliates, will be a plaintiff in 35 or fewer private student
loan collection actions in the current calendar year.
The Act prohibits lenders and collectors from making written
statements to debtors in collection attempts without possessing
18 specific pieces of information about the loan
being collected, including less obvious items such as the
self-certification form and any other “needs analysis”
conducted by the original creditor prior to origination of the
loan. This information must be provided to a debtor in the first
written communication following default and acceleration or a
period of 12 consecutive months of default. All settlements must be
reduced to writing, and lenders and collectors must provide a final
statement after accepting a payment as payment in full. The Act
also prohibits complaints from being filed unless they contain
certain allegations, and it restricts the entry of default or other
judgments when entities have not complied with the Act’s
Finally, the Act creates a private right of action against a
creditor (defined to also include entities that own a private
education loan at the time of default), a private education lender
or a private education loan collector for violating any of its
provisions. Penalties include statutory damages of $500 per
violation and in the case of a class action where the court finds
that the defendant engaged in a pattern or practice of violating
any of the Act’s provisions, additional damages not to exceed
$500,000 or 1 percent of the defendant’s net worth.
Why It Matters
This expansion of the regulatory requirements for student loan
collectors follows a consent order from the Department of Financial
Protection and Innovation that purports to expand the Student Loan
Servicing Act’s reach to include servicers of income share
agreements. Between the additional hoops that private education
lenders and loan collectors must jump through and the possibility
of significant penalties for failing to do so, some lenders may
choose to pull out of the California market. This would reduce the
amount of credit available for student borrowers and make it harder
for potential students to finance their education. The law will
take effect on July 1, 2022. Private education lenders and loan
collectors that are not exempt should carefully review the new
requirements and begin updating practices accordingly.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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