Existing law, the Student Loan Servicing Act, prohibits a person from engaging in the business of servicing a student loan in California without first obtaining a license. Existing law commits the administration of these provisions to the Commissioner of Financial Protection and Innovation and grants the commissioner various powers in this regard, including the authority to conduct investigations of applicants and licensees.

Existing law, the Unfair Competition Law (UCL), makes various practices unlawful and makes a person who engages, has engaged, or proposes to engage in unfair competition liable for a civil penalty, as specified. Existing law authorizes actions for relief prosecuted under the UCL to be brought by certain public attorneys and requires the penalty collected from those actions to be paid to the treasurer of the county or city in which the judgment is entered, as specified.

This bill would specify that a student loan servicer under the Student Loan Servicing Act, is subject to the UCL.

Existing law, the Rosenthal Fair Debt Collection Practices Act, regulates the collection of consumer debts by debt collectors, as defined. Under existing law, a debt collector who violates the act is liable to a debtor for actual damages resulting from the violation, and is subject to additional civil penalties for any willful or knowing violation of the act, and other specified remedies. Existing law also makes certain violations of the act punishable as a crime.

The bill would specify that a student loan is a debt that is subject to the Rosenthal Fair Debt Collection Practices Act. The bill would further specify that a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Fair Debt Collection Practices Act. By expanding the scope of an existing crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anna Caballero, Chair

2025 - 2026 Regular Session

AB 866 (Ortega) - Student loan servicing

Bill Summary:

AB 866 specifies that a student loan servicer is a person for purposes of the Unfair Competition Law (UCL), and specifies that a student loan is a debt and a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act).

Fiscal Impact:

• The Department of Justice (DOJ) reports costs of approximately $229,000 in Fiscal Year (FY) 2025-26 and $406,000 in FY 2026-27 and annually ongoing to address increased enforcement workload (Unfair Competition Law Fund).
• The Department of Financial Protection and Innovation (DFPI) anticipates absorbable costs to update staff guidance and trainings on the expansion of the Rosenthal Act and to respond to questions regarding the changes proposed by this bill (Financial Protection Fund).
• Unknown ongoing fiscal impact for DFPI for potential increased enforcement activities. While the total fiscal impact of this bill is unknown at this time, any impact on enforcement workload to the DFPI would depend on numerous factors, including the volume of complaints received and complexity of any subsequent investigations. To the extent that this workload is significant, there may be enforcement cost pressures to DFPI.
• Unknown, potentially significant workload cost pressures to the state funded trial court system to adjudicate any civil cases filed as a result of this bill (Trial Court Trust Fund, General Fund). The fiscal impact of this bill to the courts will depend on many unknowns, including the number of cases filed and the factors unique to each case. An eight-hour court day costs approximately $10,500 in staff in workload. If court days exceed 10, costs to the trial courts could reach hundreds of thousands of dollars. While the courts are not funded on a workload basis, an increase in workload could result in delayed court services and would put pressure on the General Fund to fund additional staff and resources and to increase the amount appropriated to backfill for trial court operations.

Background:

The UCL prohibits unlawful, unfair, or fraudulent business acts or practices, including deceptive advertising, and allows for civil penalties (in enforcement actions brought by the Attorney General and other public prosecutors), injunctive relief, and restitution.

The Rosenthal Act seeks to protect consumers and small business owners from unfair and deceptive practices by a person collecting consumer debt or certain forms of commercial debt. The law prohibits or restricts a variety of activities designed to intimidate or annoy, such as calling a debtor in the middle of the night; letting a phone ring incessantly; threatening actions that the debt collector cannot or does not plan to take; threatening or using violence; contacting a debtor’s friends, employers, or extended family to notify them of the debtor’s debt; and using obscene or threatening language. The law also prohibits various false representations, unfair practices, and improper use of judicial proceedings.

Proposed Law:

• Specifies a student loan servicer is a person for purposes of the UCL.
• Specifies a student loan is a debt for purposes of the Rosenthal Act.
• Specifies a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Act.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2025-2026 Regular Session

Bill No: AB 866 (Author:Ortega)

Version: February 19, 2025

Hearing Date: July 15, 2025

Fiscal: Yes

Urgency: No

Consultant: CK

SUBJECT

Student loan servicing

DIGEST

This bill clarifies that a student loan servicer is a person for purposes of the Unfair Competition Law (UCL). This bill clarifies that a student loan is a debt and a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act).

EXECUTIVE SUMMARY

The Rosenthal Act establishes a set of basic norms that debt collectors must adhere to when going about their work. Without excusing anyone from paying what they rightly owe, Rosenthal requires debt collectors to treat debtors civilly and honestly throughout the process. It prohibits things like threatening debtors, trying to trick them, humiliating them in front of others, or calling them up repeatedly in the middle of the night to demand payment.

Unfair business practices encompass fraud, misrepresentation, and oppressive or unconscionable acts or practices by businesses, often against consumers. In California, individuals and specified governmental agencies are authorized to bring civil actions for unfair competition and to recover civil penalties, restitution, and injunctive relief pursuant to the UCL, Business and Professions Code Section 17200 et seq., as provided.

In response to concerns about misconduct in the student loan servicing industry, this bill clarifies that a student loan servicer is a person for purposes of the UCL. It also clarifies that a student loan is a “debt” and a transaction giving rise to a student loan is a “consumer credit transaction” for purposes of the Rosenthal Act. This bill is supported by the Consumer Federation of California. No timely opposition has been received by this Committee. The bill passed out of the Senate Banking and Financial Institutions Committee on a 7 to 0 vote.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Establishes the UCL, which provides a statutory cause of action for any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising, including over the internet. (Bus. & Prof. Code § 17200 et seq.)
2. Defines “unfair competition” to mean and include any unlawful, unfair, or fraudulent business act or practice and any unfair, deceptive, untrue, or misleading advertising, and any act prohibited by the False Advertising Law, Business and Professions Code section 17500 et seq. (Bus. & Prof. Code § 17200.)
3. Provides that any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. (Bus. & Prof. Code § 17203.)
4. Requires that actions for relief pursuant to the UCL be prosecuted exclusively in a court of competent jurisdiction and only by the following:
   1. the Attorney General;
   2. a district attorney;
   3. a county counsel authorized by agreement with the district attorney in actions involving violation of a county ordinance;
   4. a city attorney of a city having a population in excess of 750,000;
   5. a county counsel of any county within which a city has a population in excess of 750,000;
   6. a city attorney in a city and county;
   7. a city prosecutor in a city having a full-time city prosecutor in the name of the people of the State of California upon their own complaint or upon the complaint of a board, officer, person, corporation, or association with the consent of the district attorney; or
   8. a person who has suffered injury in fact and has lost money or property as a result of the unfair competition. (Bus. & Prof. Code § 17204.)
5. Provides that any person who engages, has engaged, or proposes to engage in unfair competition is liable for a civil penalty not to exceed $2,500 for each violation. (Bus. & Prof. Code § 17206.)
6. Establishes the Rosenthal Act to regulate the collection of consumer debt, generally prohibiting deceptive, dishonest, unfair, and unreasonable debt collection practices by debt collectors and regulates the form and content of communications by debt collectors to debtors and others. (Civ. Code §§ 1788 et seq.)
7. Defines, for purposes of the Rosenthal Act, the following terms:
   1. “Debt” means money, property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person.
   2. “Consumer debt” and “consumer credit” means money, property, or their equivalent, due or owing or alleged to be due or owing from a natural person by reason of a consumer credit transaction. The term “consumer debt” includes a mortgage debt.
   3. “Consumer credit transaction” means a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes.
   4. “Debt collector” means any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection. (Civ. Code § 1788.2.)
8. Prohibits, pursuant to the Rosenthal Act, a debt collector from the following conduct or practices, among others, when collecting or attempting to collect a consumer debt:
   • 1. The use or threat of physical force or violence. (Civ. Code § 1788.10.)
     2. Threats and communications that rely on false representations. (Civ. Code §§ 1788.10 and 1788.13.)
     3. Using obscene or profane language. (Civ. Code § 1788.11.)
     4. Communicating with the debtor with such frequency as to be unreasonable, and to constitute harassment of the debtor under the circumstances. (Civ. Code § 1788.11.)
     5. Communicating unnecessarily about the debtor’s debt with the debtor’s employer or extended family. (Civ. Code § 1788.12.)

This bill:

1. Provides that a student loan servicer is a person for purposes of the UCL.
2. Provides that a student loan is a debt for purposes of the Rosenthal Act.
3. Provides that a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Act.

COMMENTS

1. The Rosenthal Fair Debt Collection Practices Act

Since 1977, the Rosenthal Act has protected debtors against the most egregious tactics that creditors might otherwise be tempted to utilize while pursuing their money. The Rosenthal Act prohibits creditors from engaging in deceptive, harassing, humiliating, threatening, or otherwise unreasonable conduct while seeking payment. For example, under the Rosenthal Act, a creditor cannot try to extract payments by waking the debtor up in the middle of the night with repeated phone calls; trying to embarrass the debtor in front of family members or their employer; threatening to have the debtor sent to jail; cursing at the debtor; or telling the debtor that the creditor will drop the matter in exchange for a payment when the creditor has no actual intention of doing so. Nothing in the Rosenthal Act excuses a debtor from having to pay, but the Rosenthal Act does demand that creditors treat the people who owe them money with honesty and civility.

The Rosenthal Act applies to “consumer debt,” which is defined as “money, property, or their equivalent, due or owing or alleged to be due or owing from a natural person by reason of a consumer credit transaction.” (Civ. Code § 1788.2(f).) “Debt” means money, property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person. “Consumer credit transaction” is defined as “a transaction between a natural person and another person in which property, services or money is acquired on credit by that natural person from such other person primarily for personal, family, or household purposes.” (Civ. Code § 1788.2(e).)

1. California’s consumer protection laws

The Legislature has long considered consumer protection to be a matter of high importance. State law is replete with statutes aimed at protecting California consumers from unfair, dishonest, or harmful market practices. These consumer-protection laws authorize consumers to enforce their own rights and seek remedies to make them whole.

The UCL (Bus. & Prof. Code § 17200) provides remedies for “anything that can properly be called a business practice and that at the same time is forbidden by law.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 [citations omitted].) The UCL provides that a court “may make such orders or judgments . . . as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.” (Bus. & Prof. Code § 17203; see also Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1146 [“An order for restitution, then, is authorized by the clear language of the [UCL.”]].) The law also permits courts to award injunctive relief and, in certain cases, to assess civil penalties against the violator. (Bus. & Prof. Code §§ 17203, 17206.)

1. Protecting student loan borrowers from abusive practices

Reports of student loan servicer misconduct have skyrocketed in recent years. An investigation into one infamous servicer highlights some of the issues:

The Higher Education Loan Authority of the State of Missouri—better known as MOHELA—was created in 1981 by the Missouri legislature “to assure that all eligible postsecondary education students have access to student loans” and to support capital projects and technological innovation at Missouri colleges and universities. Despite its legal independence, MOHELA is arguably most infamous for its central role in Biden v. Nebraska, in which the U.S. Supreme Court determined that the State of Missouri had standing to challenge President Biden’s debt relief plan because of potential harm to MOHELA, leading to the denial of critical debt relief to 40 million federal student loan borrowers. . .

As the sole servicer for the PSLF program, MOHELA’s servicing failures particularly harm public service workers. The obtained documents uncover that MOHELA’s processing of PSLF has prevented hundreds of thousands of borrowers from progressing towards relief. Specifically:

• MOHELA allowed the PSLF backlog to explode, with over 800,000 unprocessed forms;
• MOHELA provided borrowers with incorrect payment counts; and
• MOHELA is denying PSLF credit to public service workers with eligible employment.

Troublingly, the documents expose MOHELA’s potential financial windfall for making improper denials: MOHELA is paid for each processed application—for the wrongful denial and then again for the approval—a backwards incentive. MOHELA’s customer service problems—including the “call deflection” scheme—exacerbated problems for both public service workers and vulnerable, often low-income, borrowers alike. Evidence showed that:

• MOHELA borrowers were unable to reach customer service representatives to address errors;
• MOHELA miscalculated borrowers’ payment amounts;
• MOHELA lost borrowers’ payments, refunds, and records; and
• MOHELA misinformed borrowers about their options.

In all, nearly 3.5 million student loan borrowers serviced by MOHELA have experienced a documented servicing failure since loan payments resumed in September 2023 after a three-and-a-half-year-long pause on bills and interest charges.^[1]

In its annual Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman report, the CFPB catalogues many of the harms:

During the 2023-2024 Award Year, the student loan system experienced many transformations and challenges. In October 2023, 28 million federal student loan borrowers returned to repayment after an unprecedented payment pause. Throughout the year, the Department of Education made several attempts to correct servicing errors and enact systemic reforms. In July 2024, legal challenges halted the implementation of certain repayment plans.

Amid these developments, student loan servicers routinely made blunders, oversights, and errors that harmed millions of borrowers and likely cost them millions of dollars. Servicing mistakes like these are nothing new—they have persisted for well over a decade and have been thoroughly documented in prior CFPB Student Loan Ombudsman reports and other publications. In complaints submitted to the CFPB during the Award Year, thousands of borrowers described experiencing consequential harms because of their servicers’ mistakes.^[2]

The author highlights another infamous actor in this space and explains the need for the bill:

In 2022, the Attorney General was able to return $11.5 million to California student loan borrowers, victims of widespread misconduct by the massive student loan servicer Navient, and to cancel $261 million in student debt. AB 866 makes clear that all student loan servicers, regardless of their affiliation with other states, cannot engage in misconduct to defraud Californians struggling under ballooning student loan debt. AB 866 will make sure that all student loan borrowers, regardless of who services their loans, are protected by California’s robust consumer protection laws and that the Attorney General, along with other public prosecutors, can enforce those laws against those servicers.

The bill accomplishes this by clarifying that a student loan servicer is a person for purposes of the UCL and that a student loan is a “debt” and a transaction giving rise to a student loan is a “consumer credit transaction” as those terms are used in the Rosenthal Act.

The Consumer Federation of California writes in support:

While CFPB has continued to identify significant and ongoing violations of consumer protection laws, the new federal administration’s efforts to dismantle CFPB (as well as the federal Department of Education) and potentially stop efforts to rein in bad practices by student loan servicers necessitates a response by California to ensure that California law effectively protects student borrowers from misconduct by these servicers.

AB 866 protects student borrowers from such misconduct by removing any uncertainty regarding the Attorney General’s ability to use California’s Unfair Competition Law (UCL) and our state's Rosenthal Fair Debt Collection Practices Act against servicers of federal student loans, as well as servicers established as agencies or instrumentalities of a state, in the same way that the Attorney General is currently able to bring actions against for-profit and nonprofit entities that service private student loans. Such clarification is necessary to ensure that servicers are held accountable for servicing failures that can cause significant financial distress and result in long-term consequences for California student borrowers, including borrowers losing eligibility for mortgages and homeownership, foregoing saving for retirement or starting a family, and even putting some borrowers at risk of homelessness.

SUPPORT

Consumer Federation of California

The Institute for College Access and Success

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation: SB 825 (authorizes the Department of Financial Protection and Innovation (DFPI) to enforce prohibitions against unlawful, unfair, deceptive, or abusive acts or practices against specified entities acting under the authority of certain licenses, certificates, or charters issued by DFPI. SB 825 is currently in the Assembly Appropriations Committee.

Prior Legislation:

SB 908 (Wieckowski, Ch. 163, Stats. 2020) established the Debt Collection Licensing Act, which provides for licensure, regulation, and oversight of debt collectors by the Department of Financial Protection and Innovation.

SB 187 (Wieckowski, Ch. 545, Stats. 2019) added mortgage debt to the definition of consumer debt covered by the Rosenthal Act and removed the exception for an attorney or counselor at law from the definition of debt collector under the Rosenthal Act.

AB 969 (Papan, Ch. 319, Stats. 1999) incorporated some components of the federal Fair Debt Collection Practices Act, including its remedies provisions, into the Rosenthal Act, with specified exceptions.

SB 237 (Robbins, Ch. 907, Stats. 1977) enacted the Rosenthal Fair Debt Collection Practices Act.

PRIOR VOTES:

Senate Banking and Financial Institutions Committee (Ayes 7, Noes 0)

Assembly Floor (Ayes 79, Noes 0)

Assembly Appropriations Committee (Ayes 14, Noes 0)

Assembly Banking and Finance Committee (Ayes 9, Noes 0)

Assembly Judiciary Committee (Ayes 12, Noes 0)

**************

1. The Mohela Papers: The Rise of a Student Loan Servicing Giant and the Fall of the Student Loan System (February 2024) Student Borrower Protection Center & American Federation of Teachers, https://www.mohelapapers.org/the-archives. All internet citations current as of June 26, 2025. ↑

2. Annual Report of the CFPB Student Loan Ombudsman (November 2024) CFPB, https://files.consumerfinance.gov/f/documents/cfpb_2024-annual-student-loan-ombudsmans-report_2024-11.pdf. ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 866

Author:(Ortega)

As Introduced Ver:February 19, 2025

Majority vote

SUMMARY

This bill clarifies that student loans servicers are subject to the Unfair Competition Law and that student loan debts are considered debts for purposes of the Rosenthal Fair Debt Collection Act.

Major Provisions

1. Specifies that a student loan servicer is a ″person″ for purposes of the Unfair Competition Law.
2. Specifies that a student loan is a ″debt″ for purposes of the Rosenthal Fair Debt Collection Act.
3. Provides that a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Act.

COMMENTS

1. Student Loan Debt. There is $1.77 trillion in student loans, and the average undergraduate borrower owes $29,300. Starting May 5, 2025, the Department of Education resumed involuntary collections for defaulted student loans. This includes taking money from tax refunds and Social Security through the Treasury Offset Program. Borrowers will get a 30-day warning before wage garnishment begins. A loan is considered default if no payment is made for 270 days.
2. Recently, the Secretary of the Department of Education said the Treasury has begun garnishing wages of defaulted borrowers by withholding tax refunds and will start withholding up to 15% of their income later this summer^[1]
3. Clarity in the Law. Existing enforcement measures are not consistently applied because the Rosenthal Fair Debt Collection Act (Rosenthal Act) and the Unfair Competition Law (UCL) do not explicitly reference student loan debt and student loan servicers.
4. Clarifying that student loan debt is ″debt″ under the Rosenthal Fair Debt Collection Act (Rosenthal Act) can lead to consistent application of the law. Unlike the federal Fair Debt Collection Act, the Rosenthal Act is broader and applies to original creditors and third-party collectors.

AB 866 also reinforces that student loan servicers are ″persons″ subject to the UCL, eliminating any ambiguity about the statute′s applicability to the student loan industry. This is particularly important given the increasing volume of borrower complaints about misapplied payments, misinformation, and servicing delays.

According to the Author

In 2022, the Attorney General was able to return $11.5 million to California student loan borrowers, victims of widespread misconduct by the massive student loan servicer Navient, and to cancel $261 million in student debt. AB 866 makes clear that all student loan servicers, regardless of their affiliation with other states, cannot engage in misconduct to defraud Californians struggling under ballooning student loan debt. AB 866 will make sure that all student loan borrowers, regardless of who services their loans, are protected by California′s robust consumer protection laws and that the Attorney General, along with other public prosecutors, can enforce those laws against those servicers.

Arguments in Support

The Department of Justice writes:

While the Consumer Financial Protection Bureau (CFPB) has continued to identify significant and ongoing violations of consumer protection laws, the new federal administration′s efforts to dismantle CFPB and potentially stop efforts to rein in bad practices by student loan servicers necessitates a response by California to ensure that California law effectively protects student borrowers from misconduct by these servicers.

Arguments in Opposition

None on file.

FISCAL COMMENTS

1. Likely minor and absorbable costs to the Department of Financial Protection and Innovation, which has broad authority over financial products and services.
2. Costs of approximately $229,000 in fiscal year (FY) 2025-26 and $406,000 in FY 2026-27 and annually thereafter to the Department of Justice for two positions to investigate and prosecute additional UCL and Rosenthal Act violations (Unfair Competition Law Fund).
3. Annual cost pressures (General Fund (GF) or Trial Court Trust Fund (TCTF)) of an unknown amount, potentially up to $150,000, to the courts in additional workload. Although this bill does not substantively change the remedies or enforcement mechanisms under the UCL or Rosenthal Act, by clarifying the ability to bring an action, this bill may result in additional actions filed that would not have otherwise occurred. It is unclear how many additional civil actions may be filed statewide, but the estimated workload cost of one hour of court time is $1,000. Although courts are not funded on the basis of workload, increased pressure on staff and the TCTF may create a demand for increased court funding from the GF to perform existing duties. The Budget Act of 2024 included $37.3 million ongoing GF to backfill declining TCTF revenue.

VOTES

ASM JUDICIARY: 12-0-0

YES: Kalra, Dixon, Wicks, Bryan, Connolly, Harabedian, Pacheco, Papan, Sanchez, Stefani, Zbur, Tangipa

ASM BANKING AND FINANCE: 9-0-0

YES: Valencia, Chen, Dixon, Fong, Krell, Michelle Rodriguez, Blanca Rubio, Schiavo, Soria

ASM APPROPRIATIONS: 14-0-1

YES: Wicks, Arambula, Calderon, Caloza, Dixon, Elhawary, Fong, Mark González, Hart, Pacheco, Pellerin, Solache, Ta, Tangipa

ABS, ABST OR NV: Sanchez

UPDATED

VERSION: February 19, 2025

CONSULTANT: Darci Sears / B. & F. / (916) 319-3081 FN: 0000834

1. https://www.investopedia.com/department-of-education-has-collected-usd100-million-in-loans-after-resuming-collection-efforts-11740188 ↑

Date of Hearing: May 14, 2025

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 866

Author:(Ortega) – As Introduced Ver:February 19, 2025

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill provides that a student loan servicer is subject to the Unfair Competition Law (UCL) and a student loan is a debt subject to the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act).

FISCAL EFFECT:

1. Likely minor and absorbable costs to the Department of Financial Protection and Innovation, which has broad authority over financial products and services.
2. Costs of approximately $229,000 in fiscal year (FY) 2025-26 and $406,000 in FY 2026-27 and annually thereafter to the Department of Justice for two positions to investigate and prosecute additional UCL and Rosenthal Act violations (Unfair Competition Law Fund).
3. Annual cost pressures (General Fund (GF) or Trial Court Trust Fund (TCTF)) of an unknown amount, potentially up to $150,000, to the courts in additional workload. Although this bill does not substantively change the remedies or enforcement mechanisms under the UCL or Rosenthal Act, by clarifying the ability to bring an action, this bill may result in additional actions filed that would not have otherwise occurred. It is unclear how many additional civil actions may be filed statewide, but the estimated workload cost of one hour of court time is $1,000. Although courts are not funded on the basis of workload, increased pressure on staff and the TCTF may create a demand for increased court funding from the GF to perform existing duties. The Budget Act of 2024 included $37.3 million ongoing GF to backfill declining TCTF revenue.

COMMENTS:

1. Purpose. According to the author, this bill “will make sure that all student loan borrowers, regardless of who services their loans, are protected by California’s robust consumer protection laws and that the Attorney General, along with other public prosecutors, can enforce those laws against those servicers.” This bill is sponsored by Attorney General Rob Bonta and supported by a consumer group and social equity group.
2. Background. UCL. The UCL is a broad consumer protection statute that prohibits an unlawful, unfair, or fraudulent business act or practice. The UCL allows both public and private enforcement actions for injunctive relief, restitution, and civil penalties for public enforcement, but not compensatory damages. This bill clarifies that a student loan servicer is a “person” under the UCL, thereby eliminating ambiguity about the law’s applicability to the student loan industry, in light of some servicers’ arguments that the law does not apply to them as federal student loan servicers or entities acting as public instrumentalities of other states.

Rosenthal Act. The Rosenthal Act is a consumer protection statute that prohibits abusive, unfair, or deceptive practices by debt collectors and creditors engaged in the collection of consumer debt, including third-party debt collectors. Under the Rosenthal Act, a debtor who suffers a violation may bring a civil action for actual damages, statutory damages, and attorneys’ fees and costs. Unlike the UCL, the Rosenthal Act does not contain an express public enforcement provision, but the Attorney General may bring a public enforcement action under the UCL using a Rosenthal Act violation as the predicate “unlawful act.” This bill clarifies that a student loan constitutes a “debt” arising from a “consumer credit transaction” under the Rosenthal Act, thereby ensuring the law’s applicability to a student loan borrower, in light of some servicers’ historical arguments that student loans fall outside the law’s scope. Student loan servicers often frame their conduct as “servicing,” not collecting, and courts have been divided on whether the Rosenthal Act applies to loan servicers acting on behalf of the original creditor.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: April 28, 2025

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Avelino Valencia, Chair

ABPCA Bill Id:AB 866 (

Author:Ortega) – As Introduced Ver:February 19, 2025

SUBJECT: Student loan servicing

SUMMARY: Clarifies that student loans servicers are subject to the Unfair Competition Law and that student loan debts are considered debts for purposes of the Rosenthal Fair Debt Collection Act.

Specifically, this bill:

1. Specifies that a student loan servicer is a “person” for purposes of the Unfair Competition Law.

2) Specifies that a student loan is a “debt” for purposes of the Rosenthal Fair Debt Collection Act.

3) Provides that a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Act.

EXISTING LAW:

1. Regulates the collection of consumer debt under the Rosenthal Fair Debt Collection Practices Act, which generally prohibits deceptive, dishonest, unfair, and unreasonable debt collection practices by debt collectors and regulates the form and content of communications by debt collectors to debtors and others. (Civil Code § 1788 et seq.)
2. Establishes the Unfair Competition Law (UCL), which provides a statutory cause of action for any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising, including over the internet. (Business and Professions Code § 17200 et seq.)
   
3. Establishes the Student Loan Servicing Act and requires servicers of student loans to get a license from the Department of Financial Protection and Innovation (DFPI, formerly, Department of Business Oversight). (Financial Code § 28100 et seq.)
   
4. Enacts the California Consumer Financial Protection Law (CCFPL), which provides the DFPI with oversight and enforcement authority related to providers of consumer financial products and services that are not currently under the department’s authority. (Financial Code § 90000 et seq.)
5. Prohibits unlawful, unfair, deceptive, and abusive acts or practices by persons subject to the CCFPL. (Ibid.)
6. Defines the following terms:
   1. “Debt” means money, property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person. (Civil Code §1788.2(d).)
   2. “Consumer credit transaction” as a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes. (Civil Code § 1788.2(e).)
   3. “Person” means and includes natural persons, corporations, firms, partnerships, joint stock companies, associations and other organizations of persons.

FISCAL EFFECT: Unknown. This bill is keyed Fiscal by Legislative Counsel.

COMMENTS:

1. Purpose. According to the author:
   In 2022, the Attorney General was able to return $11.5 million to California student loan borrowers, victims of widespread misconduct by the massive student loan servicer Navient, and to cancel $261 million in student debt. AB 866 makes clear that all student loan servicers, regardless of their affiliation with other states, cannot engage in misconduct to defraud Californians struggling under ballooning student loan debt. AB 866 will make sure that all student loan borrowers, regardless of who services their loans, are protected by California’s robust consumer protection laws and that the Attorney General, along with other public prosecutors, can enforce those laws against those servicers.
2. Student Loan Debt. There is $1.77 trillion in student loans, and the average undergraduate borrower owes $29,300. Starting May 5, 2025, the Department of Education will resume involuntary collections for defaulted student loans. This includes taking money from tax refunds and Social Security through the Treasury Offset Program. Borrowers will get a 30-day warning before wage garnishment begins. A loan is considered default if no payment is made for 270 days.
   
3. Clarity in the Law. Existing enforcement measures are not consistently applied because the Rosenthal Fair Debt Collection Act (Rosenthal Act) and the Unfair Competition Law (UCL) do not explicitly reference student loan debt and student loan servicers.
   
   Clarifying that student loan debt is “debt” under the Rosenthal Fair Debt Collection Act (Rosenthal Act) can lead to consistent application of the law. Unlike the federal Fair Debt Collection Act, the Rosenthal Act is broader and applies to original creditors and third-party collectors. According to the Assembly Judiciary analysis of AB 866 on April 8, 2025, applying the Rosenthal Act has been mixed.

Student loan servicers often frame their conduct as “servicing,” not collecting, and courts have been divided on whether the Rosenthal Act applies to loan servicers acting on behalf of the original creditor. Codifying student loans as “debts” and servicing as arising from “consumer credit transactions” (Financial Code Section 28180.5 (b)–(c)) eliminates that ambiguity and solidifies the availability of private remedies. By closing this interpretive gap, AB 866 provides borrowers with a clear legal basis to challenge abusive collection and servicing practices under state law.

As noted in the author’s statement, the Attorney General secured restitution against Navient Corp., once the nation’s largest student loan servicer, for violations under UCL. The enforcement action brought by the Attorney General in 2018 came after an investigation revealed that Navient had violated the UCL by “steering vulnerable borrowers into costly forbearances and failing to advise them on the benefits of income-driven repayment programs, among other claims,” among other misconduct. However, not all cases have as clear applicability under UCL.

The Supreme Court decision in Nebraska v. Biden (Biden v. Nebraska (2023) 600 U.S. ___ [143 S.Ct. 2355]) ruled that the Biden administration overstepped its authority when it announced that it would cancel up to $400 billion in student loans. While this decision was focused on the extent of the Biden Administration’s authority, it reinforced that laws must be clear to ensure they will be upheld.

AB 866 also reinforces that student loan servicers are “persons” subject to the UCL, eliminating any ambiguity about the statute’s applicability to the student loan industry. This is particularly important given the increasing volume of borrower complaints about misapplied payments, misinformation, and servicing delays.

ARGUMENTS IN SUPPORT.
The Department of Justice writes:

While the Consumer Financial Protection Bureau (CFPB) has continued to identify significant and ongoing violations of consumer protection laws, the new federal administration’s efforts to dismantle CFPB and potentially stop efforts to rein in bad practices by student loan servicers necessitates a response by California to ensure that California law effectively protects student borrowers from misconduct by these servicers.

REGISTERED SUPPORT / OPPOSITION:

Support

California Department of Justice (Sponsor)

Consumer Federation of California

Nextgen California

Opposition

None on file.

Analysis Prepared by: Darci Sears / B. & F. / (916) 319-3081

Date of Hearing: April 8, 2025

ASSEMBLY COMMITTEE ON JUDICIARY

Ash Kalra, Chair

ABPCA Bill Id:AB 866

Author:(Ortega) – As Introduced Ver:February 19, 2025

SUBJECT: Student loan servicing

KEY ISSUE: In order to ensure that student loan borrowers are fully protected by California’s consumer protection statutes, should the law clarify that student loan servicers are subject to the Unfair Competition Law (UCL) and that student loan debts are considered debts arising from consumer credit transactions under the Rosenthal Fair Debt Collection Practices Act?

SYNOPSIS

Student loan borrowers in California carry the largest total student debt burden in the country, and reports of widespread servicing breakdowns—particularly in the administration of Public Service Loan Forgiveness—have led to calls for enhanced accountability. Although the state Attorney General has successfully used the UCL and Rosenthal Act to pursue relief against private servicers, some companies continue to assert that they are beyond the reach of these laws due to their federal or out-of-state status. This bill responds to that argument by codifying the Legislature’s intent to bring student loan servicing activity within the protections afforded to other forms of consumer debt. This Attorney General-sponsored measure clarifies that student loan servicing is subject to two of California’s principal consumer protection statutes: the Unfair Competition Law (UCL) and the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act). Specifically, the bill defines student loan servicers as “persons” under the UCL and affirms that student loans are “debts” arising from “consumer credit transactions” under the Rosenthal Act. According to the author, these clarifications are needed to resolve litigation-driven ambiguity over whether these statutes apply to federal student loan servicers and entities acting as public instrumentalities of other states.

The bill makes no substantive change to the remedies or enforcement mechanisms under either statute. Instead, it affirms that the same legal standards governing deceptive or abusive collection practices in other consumer contexts apply equally to student loan servicing. The bill is sponsored by the Attorney General and has no known opposition. In the event of its successful passage by this Committee, this bill will be heard by the Assembly Committee on Banking and Finance.

SUMMARY: Clarifies that student loans servicers are subject to the UCL and that student loan debts are considered debts for purposes of the Rosenthal Act. Specifically, this bill:

1. Specifies that a student loan servicer is a “person” for purposes of the UCL.
2. Specifies that a student loan is a “debt” for purposes of the Rosenthal Act.
3. Provides that a transaction giving rise to a student loan is a consumer credit transaction for purposes of the Rosenthal Act.

EXISTING LAW:

1. Regulates the collection of consumer debt under the Rosenthal Fair Debt Collection Practices Act, which generally prohibits deceptive, dishonest, unfair, and unreasonable debt collection practices by debt collectors and regulates the form and content of communications by debt collectors to debtors and others. (Civil Code Section 1788 et seq.)
2. Establishes the Unfair Competition Law (UCL), which provides a statutory cause of action for any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising, including over the internet. (Business and Professions Code Section 17200 et seq.)
3. Establishes the Student Loan Servicing Act and requires servicers of student loans to get a license from the Department of Financial Protection and Innovation (DFPI, formerly, Department of Business Oversight). (Financial Code Section 28100 et seq.)
4. Enacts the California Consumer Financial Protection Law (CCFPL), which provides the DFPI with oversight and enforcement authority related to providers of consumer financial products and services that are not currently under the department’s authority. (Financial Code Section 90000 et seq.)
5. Prohibits unlawful, unfair, deceptive, and abusive acts or practices by persons subject to the CCFPL. (Ibid.)
6. Defines the following terms:
   1. “Debt” means money, property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person. (Civil Code Section 1788.2(d).)
   2. “Consumer credit transaction” as a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes. (Civil Code Section 1788.2(e).)
   3. “Person” means and includes natural persons, corporations, firms, partnerships, joint stock companies, associations and other organizations of persons.
7. Provides that an action for injunctive relief pursuant to the UCL can be prosecuted exclusively by one of the following:
   1. The Attorney General.
   2. A district attorney.
   3. A county counsel authorized by agreement with the district attorney in actions that involve a violation of a county ordinance, or county counsels of any California county containing a city with a population of at least 750,000 people.
   4. A city attorney of a city having a population in excess of 750,000.
   5. Any city attorney in a city and county.
   6. With the consent of the district attorney, a city prosecutor in any city having a full-time city prosecutor. (Business and Professions Code Section 17204.)

FISCAL EFFECT: As currently in print this bill is keyed fiscal.

COMMENTS: Student loan borrowers in California carry the largest total student debt burden in the country, and reports of widespread servicing breakdowns—particularly in the administration of Public Service Loan Forgiveness—have led to calls for enhanced accountability. Although the state Attorney General has successfully used the UCL and Rosenthal Act to pursue relief against private servicers, some companies continue to assert that they are beyond the reach of these laws due to their federal or out-of-state status. This bill responds to that argument by codifying the Legislature’s intent to bring student loan servicing activity within the protections afforded to other forms of consumer debt. This Attorney General-sponsored measure clarifies that student loan servicing is subject to two of California’s principal consumer protection statutes: the Unfair Competition Law (UCL) and the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act). Specifically, the bill defines student loan servicers as “persons” under the UCL and affirms that student loans are “debts” arising from “consumer credit transactions” under the Rosenthal Act. According to the author, these clarifications are needed to resolve litigation-driven ambiguity over whether these statutes apply to federal student loan servicers and to entities acting as public instrumentalities of other states.

As explained by the author:

In 2022, the Attorney General was able to return $11.5 million to California student loan borrowers, victims of widespread misconduct by the massive student loan servicer Navient, and to cancel $261 million in student debt. AB 866 makes clear that all student loan servicers, regardless of their affiliation with other states, cannot engage in misconduct to defraud Californians struggling under ballooning student loan debt. AB 866 will make sure that all student loan borrowers, regardless of who services their loans, are protected by California’s robust consumer protection laws and that the Attorney General, along with other public prosecutors, can enforce those laws against those servicers.

Student loan debt. Americans now owe $1.74 trillion in student loan debt, making it the second largest category of consumer debt in the United States, second only to mortgages. (Student Loan Debt Statistics (LendingTree), available at https://www.lendingtree.com/student/student-loan-debt-statistics/ (as of Mar. 31, 2025).) Approximately $148.6 billion of that student loan debt belongs to California residents, who collectively hold the largest total student loan burden in the nation. (Student Loan Debt by State (Education Data Initiative), available at https://educationdata.org/student-loan-debt-by-state (as of Mar. 31, 2025).) Nearly 40% of California State University graduates in 2021–22 graduated with debt, with average balances ranging from $15,200 to $24,000; and in the context of indebtedness and default disproportionately impacting low-income and underrepresented students. (The Institute for College Access & Success, CSU At All Costs, The Inequitable Burdens of Affording a College Degree, September 2023, p. 6.) Servicing breakdowns by major federal contractors such as MOHELA—currently the sole servicer of the Public Service Loan Forgiveness (PSLF) program—have compounded the burden on borrowers, leading to massive delays, erroneous denials, and misapplied payments, affecting thousands of Californians. Investigations by the U.S. Department of Education and independent consumer protection groups have documented servicing errors impacting hundreds of thousands of borrower accounts. Errors have included inaccurate billing, failure to process PSLF forms, and prolonged call center inaccessibility. These breakdowns have denied or delayed loan forgiveness for eligible borrowers and contributed to financial distress, including unnecessary interest accrual and forbearance misuse. (The MOHELA Papers: Systemic Servicing Failures and Borrower Harm in the Public Service Loan Forgiveness Program (Student Borrower Protection Center & American Federation of Teachers, Jan. 2024) p. 4 et seq., available at https://protectborrowers.org/mohela-report (as of Mar. 31, 2025); U.S. Department of Education, Press Release: Department Withholds $7.2M in Payment to MOHELA, Oct. 31, 2023, available at https://www.ed.gov/news/press-releases/mohela-penalty (as of Mar. 31, 2025).)

Legislative & litigation background. California has taken an active role in regulating the student loan servicing industry through the Student Loan Servicing Act (Financial Code Section 28100 et seq.), the Unfair Competition Law (Business and Professions Code Section 17200 et seq.), and the Rosenthal Fair Debt Collection Practices Act (Civil Code Section 1788 et seq.). While California has used existing state tools to challenge unlawful servicing practices—including the UCL and the Rosenthal Act—uncertainty remains about the application of these statutes to federal student loan servicers, particularly when those servicers operate as agencies or instrumentalities of another state. This ambiguity has allowed certain servicers to assert that they are exempt from California oversight, including in litigation contexts where federal preemption is raised as a defense. For example, in People v. Navient Corp. (San Francisco Sup. Ct., Case No. CGC-18-567732), the California Attorney General alleged widespread servicing abuses, including steering borrowers into costly forbearances instead of income-driven repayment plans; misrepresenting eligibility for Public Service Loan Forgiveness; and misapplying payments. Navient argued that these claims were preempted by the Higher Education Act of 1965 (20 U.S.C. Section 1001 et seq.), but the court rejected that defense and allowed the case to proceed. The matter was ultimately resolved as part of a $1.85 billion multistate settlement in 2022, with more than $261 million in relief secured for California borrowers. However, despite such enforcement efforts, servicers continue to assert that federal law exempts them from compliance with California’s consumer protection statutes.

AB 866 seeks to resolve this uncertainty by codifying that student loan servicing activity—regardless of loan type or servicer status—is subject to the same legal standards that apply to other forms of consumer debt collection and financial services, thereby ensuring that both public prosecutors and private litigants can pursue remedies when borrowers are harmed.

The Rosenthal Fair Debt Collection Practices Act (Civil Code Section1788 et seq.) is California’s principal consumer protection statute governing the conduct of debt collectors and creditors engaged in the collection of consumer debts. Modeled after the federal Fair Debt Collection Practices Act (15 U.S.C. Section 1692 et seq.), the Rosenthal Act prohibits a wide range of abusive, unfair, or deceptive practices in the collection of consumer debts and provides for actual and statutory damages, injunctive relief, and attorneys’ fees (Civil Code Section 1788.30). The Act applies not only to third-party debt collectors but also to original creditors collecting their own debts, making it more broad than its federal counterpart.

The Unfair Competition Law (Business and Professions Code Section 17200 et seq.) is California’s broad consumer protection statute, prohibiting any unlawful, unfair, or fraudulent business act or practice. It allows for public and private enforcement actions and provides remedies in the form of injunctive relief and restitution (Business and Professions Code Section 17203), though it does not authorize compensatory damages. The UCL is often used to enforce violations of other statutes by incorporating them under its “unlawful” prong. Remedies under the UCL include injunctive relief, restitution, and civil penalties (for public enforcement). Since the approval of Proposition 64 by voters in 2004, the list of attorneys authorized to seek civil penalties is essentially limited to the Attorney General; district attorneys; city attorneys of cities having populations in excess of 750,000 people; city attorneys of consolidated cities and counties (i.e., the City Attorney of San Francisco); full-time city prosecutors (with the consent of the district attorney); and county counsels of any California county containing a city with a population of at least 750,000 people.

This bill clarifies that student loan servicers are “persons” under the UCL, and that student loans are “debts” arising from “consumer credit transactions” under the Rosenthal Act, thereby codifying existing enforcement practice and removing any doubt about the Legislature’s intent to subject student loan servicing activity to California’s core consumer protection laws. AB 866 clarifies that student loans constitute “debts” arising from “consumer credit transactions” for purposes of the Rosenthal Act, thereby ensuring that student loan borrowers are fully protected by these provisions. This clarification is significant because some servicers have historically argued that student loans fall outside the Act’s scope. Student loan servicers often frame their conduct as “servicing,” not collecting, and courts have been divided on whether the Rosenthal Act applies to loan servicers acting on behalf of the original creditor. Codifying student loans as “debts” and servicing as arising from “consumer credit transactions” (Financial Code Section 28180.5 (b)–(c)) eliminates that ambiguity and solidifies the availability of private remedies. By closing this interpretive gap, AB 866 provides borrowers with a clear legal basis to challenge abusive collection and servicing practices under state law.

AB 866 also reinforces that student loan servicers are “persons” subject to the UCL, thereby eliminating any ambiguity about the statute’s applicability to the student loan industry. This is particularly important given the increasing volume of borrower complaints about misapplied payments, misinformation, and servicing delays.

This bill takes on heightened importance given the federal uncertainty surrounding student loan oversight. In recent years, federal administrative priorities have shifted—at times reducing support for aggressive enforcement against abusive servicing practices or predatory for-profit colleges. Legal challenges to the structure and authority of the Consumer Financial Protection Bureau itself, including pending litigation seeking to limit or eliminate the Bureau’s rulemaking and enforcement powers, have further heightened concern among borrower advocates. And the Supreme Court’s ruling in Nebraska v. Biden (Biden v. Nebraska (2023) 600 U.S. ___ [143 S.Ct. 2355]), which limited the Biden administration’s ability to cancel student debt, along with the current dismantling of the U.S. Department of Education’s ability to oversee student debt servicers by the Trump administration, underscore the urgent need for this measure. AB 866 serves as a critical state-level backstop—ensuring that California borrowers remain protected even if federal regulatory support is diminished.

Enforcement. This bill does not add any enforcement mechanisms, but by expressly confirming that student loan servicers are “persons” subject to the UCL, and that student loan debt qualifies as “debt” under the Rosenthal Act, AB 866 enhances both public and private enforcement under both of those acts.

The Rosenthal Act contains an express private right of action. Under Civil Code Section 1788.30, any debtor who suffers a violation of the Act may bring a civil action for actual damages, statutory damages up to $1,000, and attorneys’ fees and costs. (Civil Code Section 1788.30.) Moreover, violations of the federal Fair Debt Collection Practices Act (15 U.S.C. Section 1692 et seq.) are automatically deemed violations of the Rosenthal Act under Civil Code Section 1788.17, incorporating federal standards into state law. Unlike the UCL, the Rosenthal Act does not contain an express public enforcement provision. However, the Attorney General may bring a public enforcement action under the UCL using a Rosenthal Act violation as the predicate “unlawful act.”

California’s Unfair Competition Law provides an expansive cause of action for any unlawful, unfair, or fraudulent business act or practice. Courts have long held that UCL claims may be predicated on violations of other laws, including the Rosenthal Act and industry-specific regulations (see Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal.4th 163, 180; Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949).

The Attorney General (and local public prosecutors) are authorized to pursue enforcement actions against those servicers for unlawful, unfair, or fraudulent practices. (Business and Professions Code Sections 17204, 17206, 17207.) UCL enforcement actions by public prosecutors do not require proof of intent or actual injury — only that a practice falls within one of the statute’s three prongs. This low threshold makes the UCL a powerful tool for regulators to seek civil penalties, restitution, and injunctive relief. The UCL authorizes injunctive relief and restitution for private plaintiffs (Section 17203), although it does not permit compensatory damages or penalties. Standing is limited to those who suffer an economic injury in fact and lost money or property as a result of the unfair practice (Section 17204; Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 320–21). In the context of student loan servicing, borrowers misled about repayment options, forgiveness eligibility, or account status may seek equitable relief, including court orders requiring servicers to correct records, process applications, or cease deceptive practices.

Preemption Questions. This bill does not currently have any formal opposition, though AB 866 may raise questions of federal preemption under the Higher Education Act of 1965 (HEA) (20 U.S.C. Section 1070 et seq.), particularly with respect to its application to federal student loan servicers. While the HEA does not contain a general express preemption clause, it does expressly preempt state laws that impose disclosure requirements inconsistent with federal requirements (20 U.S.C. Section 1098g). Servicers have invoked this provision—and implied conflict preemption—to argue that state consumer protection laws such as the Rosenthal Act and the UCL are preempted when applied to their handling of federal loans. Courts have been divided. In Chae v. SLM Corp. (9th Cir. 2009) 593 F.3d 936, the Ninth Circuit held that certain UCL and false advertising claims based on loan billing practices were preempted because they conflicted with federal disclosure mandates. As discussed above, in June 2018, the California Attorney General filed suit against Navient Corporation in San Francisco Superior Court, alleging widespread unlawful student loan servicing practices in violation of California’s Unfair Competition Law and the Rosenthal Act. Navient filed a demurrer, arguing, among other things, that the Attorney General’s claims were preempted by the HEA, specifically under Section 1098g, which preempts state laws imposing additional disclosure requirements on federal student loans. The court denied the demurrer, holding that the claims were sufficiently pleaded as based on affirmative misconduct and unfair practices, not disclosure obligations, and were therefore not preempted. In January 2022, California joined a $1.85 billion multistate settlement with Navient that included consumer relief and injunctive terms to deter further misconduct.

Consistent with this litigation history, to the extent AB 866 regulates servicing conduct—such as misapplied payments, deceptive communication, or failure to respond to borrower inquiries—and not the terms of the loan or federally mandated disclosures, it is more likely to withstand preemption challenges. Should this bill pass this Committee, it will be heard by the Committee on Banking and Finance, which is best equipped to fully analyze preemption concerns raised by federal banking laws.

ARGUMENTS IN SUPPORT: Attorney General Rob Bonta, the bill’s sponsor, explains how AB 866 will protect California’s students by ensuring that federal student loan borrowers—as well as borrowers whose student loans are serviced by agencies or instrumentalities of other states—are bound by California’s robust consumer protection laws:

AB 866 protects student borrowers from such misconduct by removing any uncertainty regarding the Attorney General’s ability to use California’s Unfair Competition Law and the Rosenthal Fair Debt Collection Practices Act against servicers of federal student loans – as well as servicers established as agencies or instrumentalities of a state – in the same way that the Attorney General is currently able to bring actions against for-profit and nonprofit entities that service private student loans. Such clarification is necessary to ensure that servicers are held accountable for servicing failures that can cause significant financial distress and result in long-term consequences for California student borrowers, including borrowers losing eligibility for mortgages and homeownership, foregoing saving for retirement, and evening putting some borrowers at risk of homelessness. With one in ten California residents holding student loans, Californians are uniquely impacted by the actions of loan servicers. The Attorney General is committed to ensuring that all of those residents enjoy equal protection under our state’s consumer protection laws and that student loan servicers are held accountable for servicing errors that harm California’s student borrowers. AB 866 is a critical step toward that goal.

REGISTERED SUPPORT / OPPOSITION:

Support

California Department of Justice

Opposition

None on file

Analysis Prepared by: Shiran Zohar / JUD. / (916) 319-2334