California Student Loan Servicing Bond: A Comprehensive Guide
March 15, 2021
This guide provides information for insurance agents to help student loan servicers obtain California Student Loan Servicing Bonds
At a Glance:
- Average Cost: Between 1.5% to 7.5% of the bond amount per year based on the student loan servicer’s credit
- Bond Amount: Based on dollar amount of loans serviced:
Table 1.1
| Dollar Amount of Loans Serviced | Bond Amount |
|---|---|
| 0 to $50 million | $25,000 |
| Over $50 million to $100 million | $50,000 |
| Over $100 million to $250 million | $75,000 |
| Over $250 million | $100,000 |
- Who Needs It: All individuals and business entities seeking to obtain a Student Loan Servicing License in the State of California
- Purpose: To ensure the public will receive compensation for any damages should the student loan servicer fail to comply with registration law
- Who Regulates Student Loan Servicers in California: The California Department of Financial Protection and Innovation
Background
California Assembly Bill 2251 requires student loan servicers operating in the state to obtain a license with the Department of Protection and Innovation. The California legislature enacted the licensing laws and regulations to ensure that student loan servicers engage in ethical business practices. In order to provide financial security for the enforcement of the licensing law, student loan servicers must purchase and maintain a student loan servicing surety bond (limits outlined in Table 1.1) to be eligible for licensure.
What is the Purpose of the California Student Loan Servicing Bond?
California requires student loan servicers to purchase a surety bond as part of the application process to obtain a student loan servicing license. The bond ensures that the public will receive compensation for financial harm if the student loan servicer fails to comply with the licensing regulations. In short, the bond is a type of insurance that protects the public if the student loan servicer breaks licensing laws.
How Can an Insurance Agent Obtain a California Student Loan Servicing Surety Bond?
BondExchange makes obtaining a California Student Loan Servicing Bond easy. Simply login to your account and use our keyword search to find the “loan” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone (800) 438-1162, email or chat from 7:30 AM to 7:00 PM EST to assist you.
At BondExchange, our 40 years of experience, leading technology, and access to markets ensures that we have the knowledge and resources to provide your clients with fast and friendly service whether obtaining quotes or issuing bonds.
Is a Credit Check Required for the California Credit Service Organization Bond?
Surety companies will run a credit check on the owners of the student loan servicing organization to determine eligibility and pricing for the California Student Loan Servicing bond. Owners with excellent credit and work experience can expect to receive the best rates. Owners with poor credit may be declined by some surety companies or pay higher rates. The credit check is a “soft hit”, meaning that the credit check will not affect the owner’s credit.
How Much Does the California Student Loan Servicing Bond Cost?
The California Student Loan Servicing surety bond can cost anywhere between 1.5% to 7.5% of the bond amount per year. Insurance companies determine the rate based on a number of factors including your customer’s credit score and experience. The chart below offers a quick reference for the approximate bond cost on the $50,000 bond requirement.
$50,000 Student Loan Servicing Bond Cost
Table 1.2
| Credit Score | Bond Cost (1 year) |
|---|---|
| 800+ | $1,000 |
| 625 – 799 | $15,000 |
| 575 – 624 | $3,666 |
| 550 – 574 | $5,000 |
| 500 – 549 | $7,500 |
*The credit score ranges do not include other factors that may result in a change to the annual premium offered to your customers, including but not limited to, years of experience and underlying credit factors contained within the business owner’s credit report.
How Does California Define “Student Loan Servicer”?
To paraphrase California Assembly Bill 2251, a student loan servicer is any licensed business entity who performs the following services:
- Receives payments from a qualified education loan borrower and credits these payments to their account
- Maintains records of the borrowers loan payments and communicates with the borrower on behalf of the lender
- Helps the borrower avoid defaulting on their loan
How Do Student Loan Servicers Apply for a License in California?
Student loan servicers in California must navigate several steps to secure their student loan servicing licence. Below are the general guidelines, but applicants should refer to the NMLS’s application guidelines for details on the process.
Step 1 – Meet the Net Worth Requirements
Applicants for the California Student Loan Servicing License must first amass a company net worth (assets – liabilities) of at least $250,000. Applicants must submit an audited financial statement, prepared by a CPA, verifying their net worth when submitting their license application.
Step 2 – Purchase a Surety Bond
Student loan servicers must purchase a surety bond (limits outlined in Table 1.1) to be eligible for licensure
Step 3 – Request a NMLS Account
The California Student Loan Servicing License application is submitted electronically through the Nationwide Multistate Licensing System (NMLS). To submit a license application, applicants must first request to obtain an NMLS account.
Step 4 – Complete the Application
All California Student Loan Servicing License applications can be completed online through the NMLS. Applicants must complete entire the application, and submit the following items:
-
- Audited financial statements verifying the company’s net worth
- Certificate of Good Standing
- The company’s staffing and internal policies
- Copies of the following documents:
- Notice of transfer of servicer
- Notice of end of deferment period approaching
- Information on income driven repayment and loan forgiveness options (annual)
- Notice of default with information on income driven repayment plans, and toll-free telephone number to contact a representative
- Acknowledgment of receipt of borrower inquiry or complaint
- Notice of resolved complaint, with name and contact of rep who was responsible
- Billing statement, either paper or electronic
- Notice of loan balance transfer to debt collections agency
- A chart detailing the company’s ownership structure
- Appointment Of Commissioner As Agent For Service Of Process Form
Student loan servicers must pay the following fees when submitting their license application:
-
- $400 application fee
- $15 credit report fee (per control person)
How Do Student Loan Servicers Renew Their License in California?
Student loan servicers can renew their license online through the NMLS. License holders need to simply login to their account to access their renewal application.
What Are the Insurance Requirements for the California Student Loan Servicing License?
The State of California does not require student loan servicers to obtain any form of liability insurance as a prerequisite to obtaining a Student Loan Servicing License. Loan servicers must purchase and maintain a student loan servicing surety bond.
How Do California Student Loan Servicers File Their Bond?
Student loan servicers should submit the completed bond form, including the power of attorney, electronically through the NMLS. The student loan servicing surety bond requires signatures from both the surety company that issues the bond and a representative form the student loan servicing business. The surety company should include the following information on the bond form:
- Legal name and NMLS # of entity/individual(s) buying the bond
- Surety company’s name
- Bond amount
- Date the bond is signed
What Can Student Loan Servicers Do to Avoid Claims Against the California Student Loan Servicing Bond?
To avoid claims on the Student Loan Servicer Bond, student loan servicers must follow all license regulations in the state, including some of the most important issues below that tend to cause claims:
- Perform all written agreements pertaining to qualified education loans, correctly and accurately accounting for all funds received in connection with qualified education loans
- Do not engage in any acts of fraud
What Other Insurance Products Can Agents Offer Student Loan Servicers in California?
California does not require student loan servicers to obtain any form of liability insurance. However, most reputable businesses will seek to obtain this insurance anyway. Bonds are our only business at BondExchange, so we do not issue liability insurance, but our agents often utilize brokers for this specific line of business. A list of brokers in this space can be found here.
How Can Insurance Agents Prospect for California Student Loan Servicer Customers?
The NMLS conveniently provides a public database to search for active student loan servicers in California. The database can be accessed here. Contact BondExchange for additional marketing resources. Agents can also leverage our print-mail relationships for discounted mailing services.
