Key Points
- New York City proposed a rule on October 20, 2026, that would require businesses to disclose AI customer service bots, offer an easy path to a human, and stop “doom loops” that leave problems unresolved.
- California’s AB 1609 will require businesses with more than $500 million in revenue to try to connect customers with a human within 15 minutes, starting January 1, 2027.
- Maine and Utah already require chatbot disclosure in some cases. No state bans AI customer service outright, so the new rules target how companies use it.
New York City’s Department of Consumer and Worker Protection (DCWP) proposed a first-in-the-nation rule on AI customer service on October 20, 2026. The rule would make it a deceptive trade practice to advertise customer service while answering only with irrelevant or wrong information. That is a familiar problem for borrowers who have dealt with servicer errors like MOHELA’s false past-due notices.
Businesses would also have to disclose when a customer is talking to an automated system, including phone menus, and give an easy way to reach a person. Violations could bring restitution and civil penalties starting at $525.
The proposal builds on a legal brief from Columbia Law School’s Center for Law and the Economy and Protect Borrowers arguing that companies are liable for their chatbots the same way they’re liable for human agents. Regulators have held servicers accountable for call center conduct before, including when the CFPB banned Navient from federal loan servicing in a $120 million settlement.
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Why It Matters
Chatbots are now the front door to many banks, insurers, and student loan servicers. The CFPB estimated in a 2023 report on bank chatbots that 37% of Americans interacted with one in 2022, and all 10 of the largest U.S. commercial banks use them. That report warned that customers get stuck in loops and struggle to reach a human, a trap that compounds common student loan servicer errors instead of fixing them.
The bots also struggle most with money problems. Gartner research cited by NYC found chatbots resolve just 17% of billing disputes, compared with 58% of returns or cancellations. Billing problems are exactly where borrowers need help, as the 2025 wave of incorrect SAVE forbearance notices showed.
How AI Chatbots Are Hurting Consumers
The cost goes beyond wasted time. A Harvard Journal of Law & Technology article by the brief’s authors, former FTC chief technologist Stephanie T. Nguyen and former D.C. consumer protection official Adam Teitelbaum, describes a borrower whose $500 payment was never credited by MOHELA, one of the federal student loan servicers. The servicer sent a delinquency notice, the chatbot couldn’t understand the issue, and hours on hold produced no fix.
Another borrower in the article relied on a wrong recertification deadline from the StudentAid.gov chatbot and missed the real one. That borrower now faces a $1,100 monthly payment increase and a possible loss of Public Service Loan Forgiveness eligibility. Missing an income-driven repayment recertification can reset a payment far above what a borrower can afford.
“Chatbots can create the illusion of help while trapping consumers in endless doom loops of wrong answers and unresolved problems,” Nguyen said in a statement on the NYC proposal. That risk grows as 7 million SAVE borrowers head back into repayment and need answers from their servicers.
What States Are Doing
No state has banned AI customer service. States are instead writing rules on disclosure and human access, a gap that matters more as the CFPB seeks to lay off half its staff, with supervision and enforcement facing the biggest cuts.
| Jurisdiction | Status | Bot Disclosure | Path To A Human | Penalties |
|---|---|---|---|---|
| New York City | Proposed | Required | Easy way to reach a person | Restitution, fines from $525 |
| California (AB 1609) | Starts Jan. 1, 2027 | Required if a bot could pass as human | Try within 15 minutes or book a time | Up to $5,000, then $10,000 |
| Maine (LD 1727) | In Effect | Required if consumers could be misled | Not required | Unfair Trade Practices Act |
| Utah (SB 226) | In Effect | When asked, or in high-risk financial chats | Not required | State consumer protection law |
California went furthest. Gov. Gavin Newsom signed AB 1609 on September 28, 2026, and it takes effect January 1, 2027, for businesses with more than $500 million in annual revenue. Covered companies must make a good-faith effort to connect customers with a person within 15 minutes or schedule a callback within one business day, and phone holds are capped at 15 minutes at a time and one hour in total, according to Weiner Brodsky Kider. Only public prosecutors can enforce it, so consumers can’t sue a bank, insurer, or student loan servicer under this law alone.
Maine’s LD 1727, signed in June 2025, bars companies from using chatbots in ways that could make consumers think they’re talking to a real person. Utah’s SB 226 (PDF File) requires disclosure when a consumer clearly asks, and requires financial professionals and other regulated occupations to disclose AI in high-risk interactions like collecting financial data. Neither law guarantees a path to a human, which still leaves borrowers waiting on hold to fix problems like an IDR recertification stuck in processing.
DCWP Commissioner Sam Levine framed the city’s move as filling a federal gap. “We are not waiting for Washington to come to the rescue of working people,” he said. The city is acting as the Trump administration works to cut CFPB funding.
The Pushback
Georgetown law professor Adam Levitin argued on Credit Slips that NYC’s rule could backfire. Call center workers often follow scripts with limited authority, and he expects the cost of human staffing to show up in higher prices for every customer. Borrowers know the scripted-agent problem well, from servicers denying SAVE applications that borrowers had submitted.
How To Get Past A Chatbot
Borrowers stuck in a doom loop today have a few tools, even before these rules take effect. Start by confirming which company services your federal loans, since each one handles escalations differently.
- Ask for an “agent” or “representative” by name. California’s law will require companies to accept common requests like these.
- Screenshot or save every chatbot answer with the date, especially deadlines and payment amounts.
- Put disputes in writing through the servicer’s secure message center or mail, and keep copies.
- File a complaint with the CFPB or your state attorney general if the company won’t fix the problem.
How This Connects
Servicer mistakes have driven our coverage all year, from IDR recertification confusion to the 86,000 public servants stuck in the PSLF buyback queue. A chatbot that gives a wrong deadline turns those errors into lost payments and lost forgiveness credit.
What’s Next
NYC’s rule now enters a 30-day public comment period with a public hearing before DCWP can finalize it. California’s law takes effect January 1, 2027, and Protect Borrowers is urging other states and cities to copy NYC. Borrowers should keep records of every servicer contact, including proof of each recertification, until stronger rules arrive.
Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.