New Lawsuit Aligns With ED Guidance on States Regulating Federal Loan Servicers

By Joelle Fredman, NASFAA Staff Reporter

Earlier this year, the Department of Education (ED) issued a notice—following months of debate regarding whether states could regulate federal student loan servicers operating within their borders—reiterating that ED has sole authority over federal loan servicers. Last week, a district court judge issued an opinion that aligns with this guidance, ruling in favor of a student loan servicing advocacy group that argued that new D.C. laws regulating servicers were preempted by federal law.

The group, the Student Loan Servicing Alliance (SLSA), argued over the summer that a series of D.C. laws requiring that federal loan servicers working in the district obtain a license to operate, which includes application fees and other charges, “would cause significant harm to the federal student loan program, its borrowers, and the student loan servicers that manage the program on behalf of the federal government.”

The group wrote that “SLSA’s members have and continue to expend time and money in preparation to comply with the [district’s] regulations,” despite the fact that the federal government has “unilateral authority” over how much loan servicers are paid, who they service, and where they operate.

The group asked the court to “move swiftly to prevent the District of Columbia from imposing its own directly conflicting, burdensome, and expensive laws and regulations in this federally preempted area.” SLSA warned that the D.C. laws could drive out servicers, yet without the servicers, “there would be a vacuum in the student loan industry to the detriment of the District of Columbia borrowers.”

The D.C. district court judge who heard the case, Paul Friedman, wrote in his opinion that D.C. is unable to regulate federal servicers servicing Direct Loans and federally-owned Federal Family Education Loan Program (FFELP) loans. He found that the district’s laws presented conflict issues with congressional intentions, and that D.C. “may not second-guess [the Department of Education’s] contracting decisions.”

However, he also ruled that D.C. could regulate commercially-held FFELP loans, arguing that D.C.’s licensing requirements for privately-owned loans do not conflict with the Higher Education Act (HEA), yet rather “adds qualifications that are additional to, and in no way displace those created by the federal government.”

This case—which Friedman wrote applies “inferentially” to other states—is the latest development in the ongoing debate around whether states can regulate federal loan servicers.

As more and more states began adopting laws to govern servicers, groups representing servicers, such as the Education Finance Council (EFC) and the National Council of Higher Education Resources (NCHER), requested that Education Secretary Betsy DeVos issue guidance on states' roles.  

In a Federal Register notice last March, 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, raises costs for taxpayers and impedes ED from offering students effective service.

Friedman noted in his opinion that, despite siding with SLSA that the D.C. laws conflicted with federal regulations, he gave “no deference” to the notice and believed it lacked “requisite thoroughness and persuasiveness because it fails to specify the regulations that it is referring to.”

In addition to ED’s notice, the Justice Department earlier this year 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.

This issue, however, has continued both inside and aside the courts. For example, last week, The Associated Press (AP) reported that a 2017 audit it obtained showed that federal loan servicer Navient “may have driven tens of thousands of borrowers struggling with their debts into higher-cost repayment plans.” Yet, AP reported, this information was kept from plaintiffs in five states that have brought suits against the servicer based on the argument that only ED “has jurisdiction over student loan servicing issues.” AP quoted ED spokeswoman Liz Hill, who said that “FSA performed the review as part of its own contract oversight, not for the benefit of other agencies.”

Additionally, Seth Frotman, the former student loan ombudsman for the Consumer Financial Protection Bureau (CFPB), announced yesterday the launch of a new non-profit organization, the Student Borrower Protection Center, which will focus on helping student borrowers by partnering with state officials. According the website, one goal of the organization is to help state lawmakers and attorneys general strengthen their oversight of student loan servicers. Stay tuned for more on this effort in Today’s News.  


Publication Date: 11/29/2018

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