The New York State Department of Financial Services issued a new proposed regulation Wednesday that would set new standards for financial institutions that service student loans to better help consumers, the agency said.

Gov. Andrew Cuomo said the new regulation will help curb “unscrupulous practices” in the student loan servicing industry while putting New York ahead of federal officials on the issue.

“While the federal administration ignores the growing problem of student loan debt, New York is taking action to protect borrowers,” Cuomo said. “This measure will help curb unscrupulous practices of the student loan servicing industry and empower borrowers to make better informed choices about how to finance their education.” 

The new regulation comes after Cuomo and the state Legislature included a provision in this year's state budget, passed in March, that allows DFS to regulate and license student loan servicers that serve New York borrowers. The agency did not previously have that explicit power.

The Student Protection Unit at DFS, which was established in 2014, had received complaints about student loan servicers in New York in recent years and launched an investigation into the industry. 

The unit found that many of the issues student loan borrowers face in New York are similar to what's been reported about the state's mortgage loan servicing industry in the past. Those include problems with how servicers handle borrowers' payments, a lack of information given to borrowers, and other issues.

The new regulation proposed Wednesday for student loan servicers seeks to address those issues. DFS Superintendent Linda Lacewell said the agency is looking forward to regulating the industry.

“New York's more than 2 million student loan borrowers, who are already bearing the enormous burden of debt, should not have to suffer abuse by student loan servicers after investing in their education,” Lacewell said. “We look forward to protecting New York students, their families and their futures under this new regulatory regime.”

Under the regulation, those companies would have to apply payments in a way that's in the best interest of borrowers, rather than in ways that maximize servicer fees. They would also have to provide clear and complete information to borrowers on fees, payments due, and the terms and conditions of loans.

Borrowers would be made aware of income-based repayment and loan forgiveness options under the proposed regulation. Companies will also be required to maintain a detailed history of a borrower's account and be able to provide it to them.

Student loan servicers would be required to respond to consumer complaints submitted by DFS within 15 days, according to the proposed regulation. They'll also have to provide accurate information to credit reporting agencies and ensure a smooth transition if a borrower transfers their loan to a new servicer.

The proposed regulation would also bar student loan servicers from misleading or defrauding borrowers in any way, or engaging in any unfair, deceptive, abusive, predatory act of practice. They would also be prohibited from misapplying borrowers' payments. 

The regulation won't be finalized by DFS until after a 60-day public comment period, which started Wednesday. 

Student loan servicers, under the law approved earlier this year, still have to apply for a license from the agency. That can be done through the Nationwide Multistate Licensing System, DFS said.

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