Federal Guidance Escalates Struggle Between ED, States Over Loan Servicing Oversight

By Joelle Fredman, NASFAA Staff Reporter

The Department of Education (ED) reiterated that it has sole authority over federal loan servicers in a notice today, following several months of debate between attorneys general and loan servicers on whether states can regulate servicers operating in their borders.

In a notice in the Federal Register, which was officially published Monday, ED clarified that only the federal government can oversee federal student loan servicers, and that an uptick in states establishing regulatory requirements for servicers related to the Direct Loan program, the Federal Family Education Loan (FFEL) program, and disclosure requirements, will continue to "create additional conflicts with federal law." The notice represents ED's stance on the issue and may be used in current and future court cases, but does not represent new regulation.

"Congress created and expanded the Direct Loan Program with the goal of simplifying the delivery of student loans to borrowers, eliminating borrower confusion, avoiding unnecessary costs to taxpayers, and creating a more streamlined student loan program that could be managed more effectively at the federal level," ED wrote. "Recently, several states have enacted regulatory regimes or applied existing state consumer protection statutes that undermine these goals by imposing new regulatory requirements on the Department's Direct Loan servicers, including state licensure to service federal loans."

ED wrote that requiring federal loan servicers to comply with licensure requirements in 50 different states, on top of federal requirements, and establishing additional regulations on services that directly clash with federal law, such as conflicting deadlines to respond to borrowers, raises costs for taxpayers and impedes ED from offering students effective service. ED also ensured that it has its own set "oversight efforts" to manage loan servicers and protect borrowers, such as monitoring servicers' compliance with ED contracts and the FSA Feedback System.    

"The Secretary emphasizes that the Department continues to oversee loan servicer to ensure that borrowers receive exemplary customer service and are protected from substandard practices," ED wrote.

This notice, which news outlets such as POLITICO and Inside Higher Ed reported was coming, follows a string of ED announcements on changes involving federal loan servicers that prompted lawmakers to express their concerns and states to adopt their own protections for borrowers.  

In April, DeVos withdrew three Obama-era policy memos related to improving student loan servicing and changes to the way ED selects loan servicers. The previous administration sought to streamline the servicing process for borrowers by creating one online servicing portal with several servicers, as well as expand oversight through the FSA Feedback System, which allows borrowers to submit complaints, feedback, and flag suspicious activity.

Soon after, a group of 20 democratic attorneys general, the D.C. attorney general, and the executive director of the Office of Consumer Protection of Hawaii, sent a letter to DeVos with concerns about lowering standards for federal student loan servicers due to a history of lawsuits brought against servicers.

"Through its choice of student loan servicers and its creation of servicing standards, the Department plays a central role in determining whether or not borrowers will be able to successfully repay their federal student loan debt," they wrote. "The guidance revoked by the Department was expressly designed to protect borrowers and correct pervasive student loan servicing failures that harm student loan borrowers and their families. By revoking these critical protections, the Department has abdicated its responsibility to student loan borrowers."

The rollback of the memos also led states to adopt laws mirroring the Obama-era protections that guarded against abuse by federal loan servicers related to issues such as transparency and the extent to which a servicers can go to procure payment from a borrower.

California, for example, passed legislation that took effect last summer that would require that loan servicers operating in the state obtain a license from the commissioner of business oversight and pay a $300 application and fingerprinting fee, among other requirements. Connecticut's legislation includes a $1,000 non-refundable licensure fee and an $800 investigation fee.     

Just last week, Washington state passed legislation known as the "Student Loan Bill of Rights" to protect students from student loan servicers that misrepresent a student's loans to them or encourage a student to take a harmful action. It also established a student loan advocate to help students navigate the loan system or file complaints.

As states began asserting more power over loan servicers in response to the rollbacks and loan servicers found themselves subject to new sets of regulations, groups representing servicers, such as the Education Finance Council (EFC) and the National Council of Higher Education Resources (NCHER), requested that DeVos issue guidance on states' roles.

"Student loan servicers are already heavily regulated by the Department and the Consumer Financial Protection Bureau; new state-level regulations would replicate these requirements with no additional benefit for borrowers, and at burdensome cost to servicing entities," EFC President Debra Chromy wrote to DeVos in June. "EFC is requesting that the Department should make this assertion clear to both the public and to state entities that seek to impose their own conflicting regulations on federal student loan servicing contractors."

NCHER wrote to DeVos last summer urging her to issue guidance that federal law preempts state law, which included similar arguments to the notice released today, such as concerns that states' laws often conflict with federal regulations and that additional regulations to servicers will ultimately be costly for the taxpayer.

In October, a bipartisan group of attorneys general, a majority of whom signed on to the previous letter as well, wrote to Devos urging her to "to reject an ongoing campaign by student loan servicers and debt collectors to secure immunity for themselves from state-level oversight and enforcement."

"State enforcement agencies have long been at the frontlines in protecting their citizens from fraud, deceptive conduct; and unfair business practices, including by financial service companies, debt collectors, and others. Indeed, such actions reflect fundamental states' rights and fall squarely within the historic police powers reserved to the states," they wrote. "The Department should reject the Industry Requests in full and resume the long tradition of federal-state cooperation in protecting students and borrowers from unfair and deceptive practices."

Earlier this year, however, the Justice Department shed on light on where it stands on federal preemption over servicers when it sided with federal loan servicer, the Pennsylvania Higher Education Assistance Agency (PHEAA), which manages Public Service Loan Forgiveness (PSLF) borrower accounts, after a Massachusetts attorney general accused it of causing borrowers to lose their benefits. The department filed papers on behalf of PHEAA arguing that it could not be sued by the Massachusetts attorney general because federal law preempts state claims. ED cited this filing in today's notice to reiterate its stance on states and loan servicers

"Massachusetts' claims are preempted because the state sought to proscribe conduct federal law requires and to require conduct federal law prohibits," ED wrote.

Last week, however, a state court judge challenged that outcome and denied PHEAA's motion to dismiss the lawsuit,  ruling that the attorney general could sue the agency because she was not also suing ED. The judge said that the Department of Justice did not clearly assert whether the claims were preempted by law.

As reports that the notice was coming out began to circulate over the past few weeks, Democratic lawmakers and state banking regulators expressed their concerns about how ED's stance on regulating loan servicers would affect students.

"It is bad enough that the Department of Education does not accept its own responsibility to protect students from companies that prey on their ambition, but it is unconscionable for the administration to also prevent states from taking action," Rep. Mark Takano (D-CA), a member of the House education committee, wrote in statement last month. "From rolling back important consumer protections — like the Borrowers Defense to Repayment rule and the Gainful Employment rule — to now reportedly blocking state regulations, the administration has clearly articulated its intention to prioritize corporate profits over students."

House Democratic Caucus Chairman Rep. Joe Crowley (D-NY) said last month that the Trump administration is "weakening protections" for the millions of students who have been subject to abuse and fraud.

"The Trump administration and Secretary Devos must stop these attacks on our students and give states the ability to protect their residents against fraud and abuse," he said in a statement.

Rep. Bobby Scott (D-VA), ranking member of the House Committee on Education and the Workforce, said today that "Congress has not given the Secretary the authority to preempt state consumer protection law for student borrowers."

"States are well within their rights to enact and enforce consumer protection laws...I urge the Secretary to reverse this egregious overreach of Federal authority to rescind states' ability to protect student borrowers and hold unscrupulous servicers accountable," he wrote.

The Conference of State Bank Supervisors (CSBS), which represents bank regulators from every state, wrote to DeVos earlier this month to oppose ED's stance on states and loan servicers, arguing that "this effort at preemption by regulatory fiat runs counter to the Congressionally mandated state-federal balance in financial regulation and exceeds the Department's authority."

"Responsibility for regulating and supervising debt collectors – like other nonbank financial services — has historically resided at the state level….Congress has deliberately preserved this cooperative state-federal regulatory framework for nonbank financial services activities for the benefit of consumers and providers of financial services alike," CSBS President John Ryan wrote. "Consumers benefit because the proximity of the state regulatory framework has proven to be more accountable to local concerns and enables the public to conduct their own assessment as to whether the degree of consumer protections afforded by a State accords with their personal preferences."

The National Student Legal Defense Network (NSLDN) said Friday that ED's interpretation won't stand in court, where this issue will ultimately be decided on.    

 "To be clear, Secretary DeVos' pronouncement is worth very little in terms of legal weight," said NSLDN President Aaron Ament. "We are not aware of a single court that has ever held that the regulation of loan servicers is 'governed exclusively by Federal law,' as the Department of Education now maintains. In contrast, the Department itself has repeatedly and recently noted the important role that state consumer protection laws play in policing the conduct of loan servicers. We look forward to the judicial branch resolving this attempted overreach."

The Student Loan Servicing Alliance (SLSA), on the other hand, said that ED's guidance "is not just good law, it is good policy."

"Clear, uniform student loan servicing guidance from the federal government will help borrowers avoid the frustrations of an inconsistent patchwork of policies from individual states," the group wrote Friday. "It is critical that we set aside political student loan rhetoric and focus on creating effective solutions for the biggest issues facing borrowers, like simplifying complex repayment programs and improving college completion rates."

 

Publication Date: 3/9/2018


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