In the student loan market, servicers play a critical role. These entities maintain account records regarding borrowers, send periodic statements advising borrowers about amounts due and outstanding balances, receive payments from borrowers, allocate those payments among various loans and loan holders, answer borrowers’ questions, report to creditors and investors, and strive to prevent default by delinquent borrowers via so-called “diversion aversion assistance.”
For each loan it backs, the Department of Education selects a servicer, to be changed only upon the occurrence of certain specified conditions. Currently, the DOE contracts with eight private servicers.
As the conduits between borrowers and lenders, servicers often are the most visible targets for overburdened borrowers and zealous regulators. Bills come under their letterheads and collection calls originate in their offices. As such, in recent years, servicers have increasingly become the subject of lawsuits based on state consumer protection laws as well as regulatory action by state actors.
On March 12, in order to address the concerns of servicers, lenders, borrowers, and state regulators, the DOE posted a formal notice contending that, under its interpretation of federal statutory and regulatory law, the DOE alone possesses the power to regulate student loan servicers.
The DOE acknowledged the notice was motivated by the fact that several states recently had “enacted regulatory regimes that impose new regulatory requirements on servicers of loans” under the DOE’s Direct Loan Program. Other states had imposed disclosure requirements on loan servicers for loans made under the Higher Education Act of 1965 (“HEA”), and some states had adopted regulations addressing servicing for the Federal Family Education Loan (“FFEL”) Program.
In the DOE’s view, such regulations – and claims based thereon – “are preempted because . . . state[s have] sought to proscribe conduct Federal law requires and to require conduct Federal law prohibits.” “This is not a new position,” the DOE argues in the notice.
This position echoes the DOE’s interpretation of regulations governing the FEFL Program, issued on October 1, 1990, as well as its stated position in Chae v. SLM Corporation, 593 F.3d 936 (9th Cir. 2010). (SLM Corporation, more commonly known as Sallie Mae, spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation on April 30, 2014. Navient is the largest servicer of federal student loans and acts as a collector on behalf of the DOE.)
In Chae, the Ninth Circuit reaffirmed its earlier conclusion that “field preemption does not apply to the HEA.” In other words, federal education policy regarding private lending to students was deemed not so extensive as to occupy the entire regulatory field.
The Ninth Circuit also concluded, however, that (1) the HEA expressly preempted the plaintiffs’ allegations that a student loan servicer made fraudulent misrepresentations in its billing statements and coupon books, and (2) conflict preemption prohibited the plaintiffs from bringing their remaining business, contract, and consumer-protection law claims because, if successful, they would create an obstacle to the achievement of congressional purpose.
Apparently, “[t]he statutory design, its detailed provisions for the FFELP’s operation, and its focus on the relationship between borrowers and lenders persuade[d]” the appellate panel in Chae “that Congress intended to subject FFELP participants to uniform federal law and regulations,” a conclusion from which conflict preemption naturally followed.
With such precedents in mind, the DOE is now seemingly preparing to take on the more activist states on behalf of the servicers that it fought during the Obama Administration.