Earlier this month, the United States District Court for the Western District of Texas denied a student loan servicer’s motion for judgment on the pleadings, finding that it was not entitled to absolute immunity under the Eleventh Amendment of the United States Constitution for alleged violations of the Fair Credit Reporting Act.

In May 2018, Kanita Perkins allegedly discovered that several student loans from Missouri Higher Education Loan Authority (“MOHELA”) had been taken out in her name without her authorization. Perkins filed an identity theft report with the Federal Trade Commission explaining the inaccuracies on her credit reports involving the student loans. In September 2018, Perkins verbally disputed the loans to MOHELA and asked that her obligations under the fraudulent loans be discharged. Her obligations were not discharged and she began receiving debt collection notices. In April 2019, MOHELA acknowledged that Perkins was the victim of identity theft and discharged her obligations under the loans.

Perkins brought suit against MOHELA for purported violations of the FCRA. In response, MOHELA filed a motion for judgment on the pleadings arguing that, as an arm of the State of Missouri, it was immune from suit under the Eleventh Amendment.

Rejecting MOHELA’s argument, the Court relied on six factors set forth in Clark v. Tarrant Cty., 798 F.2d 736, 744-45 (5th Cir. 1986):

  1. whether the state statutes and case law view the entity as an arm of the state;
  2. the source of the entity’s funding;
  3. the entity’s degree of local autonomy;
  4. whether the entity is concerned primarily with local, as opposed to statewide problems;
  5. whether the entity has the authority to sue and be sued in its own name; and
  6. whether the entity has the right to hold and use property.

The Court held that, while one given factor is not dispositive, and even though five out of six factors favored the determination that MOHELA was an arm of the State, the most important factor cut against MOHELA’s argument.

Factors one and four supported MOHELA’s argument as it was created by Missouri statutes and was concerned with statewide higher education funding. Factors five and six also supported MOHELA as it had the right to hold property and the right to sue and be sued. The Court explained factor three was of mixed support, as MOHELA was given a great deal of autonomy by statute, but its board was made up entirely of the Governor’s appointees and state officials.

In finding MOHELA was not an arm of the State of Missouri, the Court held that factor two was the most important factor, which did not favor MOHELA. Relying on Fifth Circuit caselaw, the Court explained that an entity is considered an arm of the state if the state is the source of the entity’s funds, or if the state’s treasury would be liable for a potential judgment against the entity. The Court found that MOHELA was not funded by the State of Missouri and that MOHELA had admitted there was not a statute that required the State of Missouri to cover a judgment against it. Accordingly, the Court denied MOHELA’s motion as it was not entitled to immunity under the Eleventh Amendment.

The decision in Perkins comes at a time of great uncertainty for student loan servicers and borrowers alike. In the midst of changes brought on by the coronavirus (COVID-19), servicers of student loans should ensure new policies governing student loans are implemented and employees are trained to comply with these new guidelines.