While the Department of Education (ED) has previously asserted its sole authority over federal student loan servicers, a circuit court recently contradicted that claim, arguing federal law does not preempt state consumer protection law in cases in which servicers made affirmative misrepresentations to borrowers regarding their repayment options.
ED in March 2018 posted a notice in the Federal Register stating 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 publication of the notice followed months of debate between ED and state attorneys general regarding whether states may regulate loan servicers that operate within their borders.
The announcement caused some fallout. In the following months, Seth Frotman, then the student loan ombudsman at the Consumer Financial Protection Bureau (CFPB), resigned, citing concerns with oversight of loan servicing and claiming bureau leadership blocked efforts to notify ED of the harm of asserting its authority to regulate servicers. Frotman subsequently launched a new organization—the Student Borrower Protection Center (SBPC)—to protect student loan borrowers.
Lawmakers on Capitol Hill, such as Sen. Elizabeth Warren (D-MA), have also pressed ED for answers. Warren in May wrote to Gen. Mark Brown, chief operating officer of ED’s Office of Federal Student Aid (FSA), and among other things asked whether ED would rescind the notice.
Leading up to ED’s notice last March, several states had passed laws mirroring Obama-era student loan protections the Trump administration rolled back. A number of lawsuits had also been brought against student loan servicers, claiming they violated state consumer protection laws.
The decision in one such lawsuit, Nelson v. Great Lakes Educational Loan Services, Inc., was overturned just a few weeks ago in the Seventh Circuit Court. In the lawsuit, plaintiff Nicole Nelson alleged Great Lakes violated the Illinois Consumer Fraud and Deceptive Business Practices Act by steering her into forbearance and deferment, rather than an income-driven repayment plan. While a district court previously dismissed the case and said the claims were preempted through a provision in the Higher Education Act that says federal loans are not subject to state disclosure laws, the circuit court reversed that decision.
“The district court’s ruling was overly broad,” U.S. Circuit Judge David F. Hamilton wrote. “When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information.”
While the circuit court’s decision is only binding to lower court decisions within that circuit, it calls into question whether ED’s assertion of authority may be challenged further. Great Lakes’ actions, Hamilton wrote, are “affirmative misrepresentations, not failures to disclose.”
“A borrower who reasonably relied on them to her detriment is not barred … from bringing state-law consumer protection and tort claims against the loan servicer,” he wrote.
ED spokeswoman Liz Hill told The Washington Post that ED is reviewing the decision and will continue to follow the case.
Dan Zibel, vice president of the National Student Legal Defense Network, said in a statement that the decision was “a victory for student loan borrowers and a powerful rebuke to the attempts by [Education Secretary] Betsy DeVos to shield student loan servicers from oversight.”
“Although Secretary DeVos has ignored rampant servicing misconduct and tried to bar the use of state consumer protection law against servicers, this ruling ensures that the courtroom doors will remain open to student loan borrowers and state attorneys general fighting on their behalf,” he said.
Publication Date: 8/1/2019