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New Jersey Attorney General Gurbir S. Grewal and the New Jersey Division of Consumer Affairs have filed a complaint against luxury used-car dealership 21st Century Auto Group, Inc. and its owner, Dmitry Zeldin, accusing the dealership of violations of state consumer protection laws.  According to the Office of the Attorney General, 21st Century fails to disclose to consumers that certain vehicles have incurred prior damage and also advertises vehicles after they are sold in a “bait and switch” operation.

The A.G.’s Office prosecuted 21st Century and Zeldin five years ago on allegations of the same practices.  In 2014, the parties entered into a settlement agreement, with the dealership agreeing to pay a penalty of $130,000 and make widespread changes to its business practices.  The agreement also prohibited the dealership from engaging in unfair or deceptive acts or practices in the future.  However, the Division of Consumer Affairs reported that it continued to receive complaints about 21st Century following the settlement agreement.

“Businesses can’t just sign a settlement agreement and then go right back to the same dishonest practices that got them into trouble in the first place,” Grewal said in a statement. “They must abide by the reforms set forth in the agreement, especially those requiring them to stop deceiving customers.”

The complaint features new allegations against 21st Century, including the assertion that the dealership sold “gray market cars” – vehicles that are intended for distribution outside of the United States and do not necessarily meet safety and emissions standards required under federal law.  The complaint alleges other violations, including:

  • conducting credit checks without a consumer’s knowledge or authorization;
  • failing to conspicuously post the total selling price of used motor vehicles;
  • submitting false financial information to a lending institution;
  • misrepresenting that certain used motor vehicles advertised and/or offered for sale were covered by a warranty;
  • failing to refund monies paid by consumers after they cancelled the sales transaction;
  • advertising used motor vehicles on the 21st Century Auto Group website at a price much lower than the price posted on the vehicle at the dealership location;
  • failing to disclose to a consumer prior to purchase that a used motor vehicle had sustained major flood damage; and
  • representing that, as part of a negotiated deal, they will make certain repairs to a used motor vehicle and then, after the sale is consummated, failing to do so.

The case is Gurbir S. Grewal, et al. v. 21st Century Auto Group, Inc., et al., pending in the Superior Court of New Jersey, Chancery Division, Union County.

 

In the fall of 2017, the New York Times documented the existence of laws in nineteen jurisdictions which allow for the revocation of government-issued professional licenses if a holder defaults on a student loan. Pleas for reform soon swamped states.

In Texas, whose next regular legislative session will begin on January 8, 2019, promises were issued from some of its most conservative legislators. “Next session the Legislature needs to address this issue head on and ensure that Texans who can’t pay student loans aren’t further crippled by government actions,” the conservative House Freedom Caucus, chaired by Rep. Matt Schaefer (R-Tex.) from Tyler, said in a statement released on April 4.

Meanwhile, in Tennessee, two modest reforms were passed (and one signed) in April. Approved by the Tennessee Senate and House on March 19 and April 2, respectively, and signed by the Governor on April 18, the first creates a medical hardship exemption for certain licensed professionals who are late or default on their student loan payments. The second, passed by both houses as of April 24, reduces the fee (from $350 to $180) to expunge the public record of defendants who had charges dismissed due to completing a pretrial diversion program.

Not surprisingly, considering its passage of a Student Loan Bill of Rights in November 2017 (over the governor’s veto), another state—Illinois—appears to have made the most concrete progress in recent days. In particular, a specific proposal, embodied in Senate Bill 2439, filed on January 30 by Sen. Scott M. Bennett (D-Ill.) of Champaign, gained traction in the spring of 2018. Sponsored by Democrats and Republicans, this bill would eliminate language from the Civil Administrative Code of Illinois requiring the Illinois Department of Professional Regulation to deny licenses or renewals to “any person who has defaulted on an educational loan” unless that person is performing satisfactorily under a repayment plan. Via further textual extirpation, it would abrogate IDPR’s power to suspend or revoke a license for failure to make satisfactory repayments on delinquent or defaulted loans. If enacted, it would stop regulatory directives and referrals between the IDPR, the Illinois Student Assistance Commission (“ISAC”), and other licensing agencies and boards with respect to student loan delinquencies and defaults.

Attorneys general from thirty-one states have signed a letter urging Congress to scrap a proposed federal breach notification law that was introduced by Rep. Blaine Lukemeyer (R-Mo.) and Rep. Carolyn Maloney (D-N.Y.) in an effort to create a national data breach notification and security standard.  The proposed law, known as the Data Acquisition and Technology Accountability and Security Act (the “Draft Bill”), if passed, would require covered entities to, among other things:

  1. Conduct preliminary investigations of data breaches – If a covered entity believes that a breach of data security containing personal information occurred, the covered entity would be required to conduct an immediate investigation (“Preliminary Investigation”) to determine, among other thing, if personal information has or is likely to have been acquired without authorization.
  2. Notify agencies in the event of reasonable risk – If, after conducting the Preliminary Investigation, a covered entity determines that there is a reasonable risk that the data breach resulted in or will result in identity theft, fraud, or economic loss to consumers, the covered entity would be required to notify certain governmental entities, such as the Secret Service, the Federal Bureau of Investigation, and other agencies, if the data breach involved personal information relating to 5,000 or more consumers.
  3. Notify consumers in the event of harm – If, after conducting the Preliminary Investigation, a covered entity determines that there is a reasonable risk that a data breach resulted in identity theft, fraud, or economic loss to consumers, the covered entity would be required to notify all impacted consumers.

With respect to state enforcement rights, the Draft Bill indicates that state attorneys general may bring civil actions against covered entities for certain violations of the Draft Bill, provided that: (1) the covered entity is not a financial institution, and (2) the attorney general provides prior written notice of any action to the FTC and provides the FTC with a copy of its complaint, except in certain circumstances where such notice may not be feasible.  Additionally, the Draft Bill indicates that the FTC shall have the right to intervene in all state actions and that no state attorney general can bring an action against a covered entity if the FTC has already done so.

Lastly, and likely most controversially, Section 6 of the Draft Bill indicates that the act would “preempt any law, rule, regulation, requirement, standard, or other provision having the force and effect of any law of any state … with respect to securing information from unauthorized access or acquisition, including notification of unauthorized access or acquisition of data … .”

So, what is the big deal?  Having a national data breach notification law is a good thing, right?  Well, no … not according to the thirty-two attorneys general who signed the letter to Congress released on March 19.  As explained by these attorneys general, there are several issues of concern with the draft bill, including that it:

  1. “[T]otally preempts all state data breach and data security laws that require notice to consumer and state attorneys general of data breaches,” which would include the states’ consumer data breach notification laws that, as of March 28, 2018, have been enacted by all fifty states.
  2. “Allows entities suffering breaches to determine whether to notify consumers of a breach based on their own judgment of whether there is ‘a reasonable risk’ that the breach of data security has resulted in identity theft, fraud, or economic loss to any consumers.”  This, as they noted, is insufficient and too late, and will result in less transparency to consumers as fewer notifications to consumers will be sent.  It also permits entities that have suffered a data breach to notify consumers after the harm to them has occurred, which limits consumers’ opportunity to take proactive steps to protect themselves from identity theft before it happens.
  3. Fails to acknowledge the fact that data breaches come in all sizes by only addressing large, national breaches affecting 5,000 or more consumers, and prevents attorneys general from learning of or addressing breaches that are smaller in scale but nonetheless victimize residents in their states.
  4. Places consumer reporting agencies and financial institutions out of states’ enforcement reach, which would prevent State attorneys general from pursuing these companies after a security incident.

Considering themselves to be the “chief consumer protection officials” in their respective states, the attorneys general note that there is a place for both state and federal agencies to protect consumers’ personal information, and therefore, recommend that the Draft Bill not preempt state data security and breach notification laws.

On June 9, 2017, under the leadership of its former director, the Consumer Financial Protection Bureau issued a modified civil investigative demand, or “CID,” containing the following Notification of Purpose: 

The purpose of this investigation is to determine whether a [sic] student-loan servicers or other persons, in connection with servicing of student loans, including processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting, have engaged in unfair, deceptive or abusive acts or practices in violation of §§ 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536; or have engaged in conduct that violates the Fair Credit Reporting Act, 15 U.SC. §§ 1681, et seq., and its implementing Regulation V, 12 C.F.R. Part 1022. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest. 

The recipient of this CID was Heartland Campus Solutions ECSI, a division of Heartland Campus Solutions and a large servicer of student loans. Within twenty-one days, Heartland filed a petition to set aside or modify this request in the United States District Court for the Western District of Pennsylvania. The District Court rejected the petition. 

Background 

Statutory Framework  

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)—the Consumer Financial Protection Act (“CFPA”)—established the CFPB to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to implement and . . . enforce Federal consumer financial law.” One of the CFPB’s “primary functions” is to “supervis[e] covered persons for compliance with Federal consumer financial law, and tak[e] appropriate enforcement action to address violations of Federal consumer financial law[.]” For years, the CFPB has investigated for-profit colleges for allegedly deceptive practices in connection with their student-lending activities. 

Pursuant to its investigative authority, the CFPB may issue CIDs so as to investigate and collect information “before the institution of any proceeding.” These demands may require the production of documents and oral testimony from “any person” that it believes may be in possession of “any documentary material or tangible things, or may have any information, relevant to a violation” of the sundry laws over which it enjoys jurisdiction. Statutorily, each CID must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” As CIDs are not self-enforcing, a recipient’s refusal compels the CFPB to file a petition in federal court to secure compliance.  

D.C. Circuit’s Test 

In Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools, 854 F.3d 683 (D.C. Cir. 2017) (“ACICS”), the D.C. Circuit formulated the test now used for analyzing the enforceability of a CID. In that case, the CID’s Notification of Purpose declared:  

The purpose of this investigation is to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536, or any other Federal consumer financial protection law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest. 

Affirming the district court’s decision that this CID was unenforceable – “other than noting that an agency may define the scope of its investigation in general terms, the Bureau wholly fails to address the perfunctory nature of its Notification of Purpose” – the D.C. Circuit summarized its guiding principles. “[R]eal limits on any agency’s subpoena power” exist, it warned, and “the deference courts afford agencies does not ‘eviscerate the independent role which the federal courts play in subpoena enforcement proceeding.’” Instead, “[t]he statutory power to enforce CIDs in the district courts . . . [implicitly] entrusts courts with the authority and duty not to rubber-stamp the . . . [CFPB’s] CIDs, but to adjudge their legitimacy.” Simply put, “[a]gencies are also not afforded ‘unfettered authority to cast about for potential wrongdoing.’” Therefore, “[b]ecause the validity of a CID is measured by the purposes stated in the notification of purpose,” courts must carefully assess “the adequacy of the notification of purpose,” a critically “important statutory requirement.” In general, no court should “enforce a CID when the investigation’s subject matter is outside the agency’s jurisdiction” or honor a demand “where there is too much indefiniteness or breadth in the items requested.” 

Guided by these precepts, ACICS gave content to CIDs’ minimal “adequacy” requirement. “A notification of purpose may use broad terms to articulate an investigation’s purpose.” However, to satisfy the statute, that notice must still provide a recipient “with sufficient notice as to the nature of the conduct and the alleged violation under investigation.” 

The D.C. Circuit applied this standard—and found the CFPB’s CID to be inadequate. While the Notification of Purpose defined “the relevant conduct as ‘unlawful acts and practices in connection with accrediting for-profit colleges,’” it “never explain[ed] what the broad and non-specific term ‘unlawful acts and practices’ means in this investigation.” Reasonably read, the CFPB’s explanation of its investigative purpose provided “no description whatsoever of the conduct the CFPB is interested in investigating” or “sa[id] nothing” at all about any potential link between the relevant conduct and the alleged violation. The D.C. Circuit concluded, “[W]ere we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.” 

Case at Hand

Application of ACICS’ Standard 

Heartland “relie[d] almost exclusively” upon the test fashioned and utilized in ACICS. Although the District Court agreed that ACICS sets forth the correct legal test for analyzing the enforceability of a CID, it rejected Heartland’s central argument: that the CID issued to it by the CFPB was just as vague because it “merely categorize[s] all aspects of a student loan servicing operation.” 

Instead, the District Court saw two pivotal distinctions between the two notices. First, “the CFPB has broad statutory authority to investigate student lending practices,” unlike the its questionable prerogative to investigate college accreditation in ACICS. Second, the CID issued to Heartland lacked any “catch-all” provision for “any other” consumer financial law violations, again distinguishing it from the capacious and virtually unlimited CID in ACICS. Indeed, the CID in Heartland referred to two violations—engaging in Unfair, Deceptive or Abusive Acts or Practices (“UDAAP”) and violation of the Fair Credit Reporting Act (“FCRA”)—that the CFBP is statutorily obliged to enforce. 

As to Heartland’s alternative argument—that the CID was improper because it covered all the operations of a student loan servicer’s business—the District Court deemed it a “red herring.” Heartland itself, it noted, had acknowledged the CFPB’s broad authority to investigate violations of consumer financial laws. Per Dodd-Frank, as long as oversight of each operation lies within the CFPB’s purview, a CID may reasonably cover a company’s every endeavor. As the District Court observed, Heartland had cited “no authority . . . holding that the CFPB is barred from investigating the totality of a company’s business operations, rather than a mere subset of its operations, when it has a legitimate reason to believe that violations have occurred.” For its part, the District Court could find not a shred of legal support for this assertion. 

Accordingly, as Heartland had “not argue[d] that the information requested in . . .  [the] CID is unreasonably broad or burdensome, only that the Notification of Purpose is inadequate,” the District Court deemed “the Notification of Purpose set out in the June 9 CID . . . [to be] sufficient to provide Respondent with fair notice of the CFPB’s investigation” under the ACICS standard. 

Two Take-Aways: Two Ways to Defeat CIDs and CFPB’s Unchanged Character   

Heartland holds several lessons for lenders, servicers, and their counsel. First, these opinions, if only because of the scarcity of any others, will likely set the rules for the cases to follow. Under ACICS and Heartland, firms and individuals receiving CIDs can object to them on two bases: (1) that the CID is beyond the scope of the CFPB’s authority to investigate, and (2) that the CID is not specific enough to put the recipient on notice of the alleged illegal conduct. Whether or not the CFPB responds with more thorough descriptions, both ACICS and Heartland point to two promising avenues for beating back an unduly capacious CID. 

Second, the Heartland case suggests a nuanced approach to the CFPB, even under its more pro-business director. Apparently, the CFPB is still willing to continue with its investigations and enforcement activity in the student–financing field. In addition, it appears prepared to pursue ongoing enforcement investigations and to sue to enforce CIDs where the activities implicated fall readily within its jurisdiction. 

How other courts make use of ACICS and Heartland in the years ahead is a story worth following.

While Washington debates various reforms to the federal government’s student loan framework, and other states adopt borrowers’ bills of rights to the consternation of the United States Department of Education, other proposals for dealing with the student debt crisis have cropped up in legislatures across the country. In recent weeks, two such efforts made headlines. 

Iowa 

In Iowa, graduates from the state’s three public universities—the University of Iowa, Iowa State University, and the University of Northern Iowa—left school with average student loan debt that ranged from $24,325 to $28,617 in 2017. Sixty-eight percent of Iowa college graduates in 2013-14 had an average student debt load of $29,732; for the class of 2015-16, the overall average stood at $29,801, the 19th highest in the nation. In 2015-16, the default rate surpassed 12.5%. On March 7, in an attempt to alleviate this problem, Iowa’s Senate resoundingly passed a three-part bill, setting it up for consideration by the Iowa House of Representatives. If passed by the latter and signed by the governor, this legislation would (1) require all students at Iowa’s three universities to take a financial literacy course; (2) compel regents to provide information to graduates about employment rates, likely starting pay, and the typical graduate’s average debt in their field of study; and (3) mandate that these same regents provide students with information on how to graduate in less than four years, particularly those students who arrive on campus with college credits. 

“I hear from a lot of parents about their concerns about their children’s student loan debt,” Iowa Senate Majority Leader Jack Whitver said. “They are looking to the Legislature for solutions … .” As to the bill’s first provision, Rachel Boon, the chief academic officer for Iowa State’s regent, opined: “Helping students find ways to better manage their living expenses can also help them keep down their debt loads.” In defense of the bill’s second provision, Whitver added, “We’re just trying to get parents and kids information so that they know if they choose a certain major, what the job options are and what they can expect to make.” As to the third, he continued, “We’re not saying they have to have every major graduated in three years but there’s a lot of majors they could do.” 

Maine 

Further north, Maine confronted the same problem. Sixty-eight percent of post-secondary education students graduated with student loan debt, and the average debt sat at $30,908 for borrowers who entered repayment in 2014. For 2015, the state’s default rate stood at 11%, fractionally less than the national average of 11.5%. At the same time, Maine faces an impending “demographic winter” as more of its workforce approaches retirement-age. “Our businesses need young people here to fill the jobs that will be coming available when people retire,” Governor Paul LePage warned members of the Legislature’s Appropriations and Financial Affairs Committee. “We need young people to settle here and have families. We need them to buy houses from those who retire and downsize, to keep our communities going. The longer we can have a young person here after graduation, the more likely they will make a long-term commitment to the state.” 

In response to these problems, on March 27, the legislature’s Taxation Committee commenced its consideration of a proposal, backed by LePage, intended to attract young people to the nation’s state with the oldest population by affording some student loan debt relief. In particular, the bill would create uniform rules for qualifying for the existing Educational Opportunity Tax Credit, denounced by critics as too complicated and underused by Maine employers. At present, the eligibility for this particular credit varies widely depending on an individual’s graduation year. In contrast, the expanded credit would apply to all eligible graduates with a degree from any accredited college or university after 2007 and would range from $1,000 for individuals with an associate degree to $3,000 for those with a graduate degree.  

In addition to this bill, LePage has urged lawmakers to approve $50 million in bonds to provide zero-interest student loans to Mainers attending school in-state while allowing others to refinance if they stay in Maine after college. As currently envisioned, this second bill would allow students with existing debt to consolidate loans or refinance to a lower interest rate if they agree to reside and work in Maine for at least five years. This bill represents LePage’s second such attempt: a similar bill, albeit one funded to the tune of $100 million in bonds, stalled last year largely because of Republican opposition. 

Bond measures must receive two-thirds support in Maine’s House of Representatives and Senate before they can be placed on the statewide ballot for voter consideration.

As of March 23, at least 19 states hold or revoke the state-issued licenses of teachers and/or other professionals if the borrower is in default on their student loans. These jurisdictions span the country, both ideologically and geographically:

Some of these provisions have been in place for 20 years or longer. Many, if not all, date to an era before the federal government assumed its preeminent role in the student lending market.

The federal government originally encouraged the emergence and proliferation of these laws. In 1990, a U.S. Department of Education handbook urged states to enact legislation that would “[d]eny professional licenses to defaulters until they take steps to repayment.” This advice was followed by twenty-two states. Typically, these laws apply to any profession that requires a worker to have a license, certificate, registration, or approval to legally work in the state. Accordingly, depending on the jurisdiction, they can affect health professionals, veterinarians, attorneys, engineers, psychologists, teachers, and even barbers.

For all their similarities, these laws have different effects across these diverse states for three reasons. First, the average default rate is a study in contrasts, with a low of 6.4% in North Dakota and a high of 15.1% in Mississippi. Second, the average debt for members of the Class of 2014 likewise varies considerably, reaching as high as $31,579 in Minnesota and dipping as low as $21,382 in California. Third, variations in coverage and enforcement abound, as the following examples show:

  • Iowa, for instance, allows for the revocation of any state-issued license, including a driver’s license. In 2012, more than 900 driver’s licenses had been temporarily suspended in the Hawkeye State for failure to pay student loans. Yet, state officials denied that the law has been recently used. Indeed, the Iowa College Student Aid Commission, which once collected federal loans in the state, retreated from encouraging revocation after transferring its student loan portfolio to a private servicer. Still, efforts to date to formally abolish this statute have failed.
  • For its part, Kentucky does not track how many default notices it sends to licensing agencies. However, a review of the records of licensing boards throughout the Bluegrass State revealed that the licenses of 308 nurses and 223 teachers were revoked in recent years for student loan default.
  • In one state with an acute nursing shortage—Louisiana—the statewide nursing board notified 87 nurses that their defaulted student loans would bar renewal of their licenses in 2017. This was an increase of around 11.54% from 2016, and approximately 50% of these nurses were first-time defaulters. While 84 nurses eventually paid off their loans, the three that could not no longer work in the medical field.
  • Tennessee has proven particularly aggressive: from 2002 to 2017, officials from the Tennessee Student Assistance Corporation (“TSAC”), the state-run entity responsible for enforcing the law, reported more than 5,400 people to the state’s professional licensing agencies. In one month alone, 42 Tennessee nurses lost their licenses as a result of these state regulations. “It’s an attention getter,” TSAC’s chief aid and compliance officer stated, in discussing the effort. “[Borrowers] made a promise to the federal government that they would repay these funds. This is the last resort to get them back into payment.”
  • Per a 2015 law, South Dakota suspends driver’s, hunting, and fishing licenses, as well as camping and park permits. Through October 2017, Jeff Holden, commissioner of the South Dakota Bureau of Administration, sent over 21,162 accounts to South Dakota Game, Fish and Parks, the agency in charge of the state’s parks, fisheries, and wildlife, for this very purpose. The agency estimated that 3,000 to 4,000 people on the Obligation Recovery Center’s bad debt list held hunting or fishing licenses in 2016 alone. From October 1 through November 18, 2017, 1,550 more had their licenses blocked or nullified.

In light of the student loan crisis, and as their role as lenders has receded, some states are revisiting these statutes. In fact, until 2014, the laws of at least 22 states contained default-triggered revocation provisions. However, Montana repealed its provision in 2015; Oklahoma and New Jersey did the same in 2016; and multiple bills were introduced in both houses of Tennessee’s legislature to do so in 2017-18. Meanwhile, many states in which the laws remain on the books rarely enforce them. This is the case in Alaska, Hawaii, Massachusetts, and Washington (with Hawaii’s state licensing board never having enforced the revocation law). Finally, New Mexico’s statute is scheduled to sunset on July 1, 2020.

Like a bevy of other jurisdictions, the District of Columbia has established a “borrower’s bill of rights” which creates minimum standards for timely processing, correction of errors, and communication for servicers of federal student loans. 

In response to this state-level action, the U.S. Department of Education recently argued that all such regulations are wholly preempted by its own regulatory efforts and the Higher Education Act of 1965 (“HEA”).  

On March 20, the Student Loan Servicing Alliance (“SLSA”), a trade group representing companies who collect education debt payments, invoked federal preemption in a lawsuit seeking invalidation of D.C.’s borrower’s bill of rights. In particular, the complaint by SLSA argues that the bill violates a provision of the HEA that says loans authorized by the federal government are not subject to any disclosure requirements under state law. 

“This lawsuit is about preserving uniform federal guidelines to ensure borrowers know what to expect from their servicer regardless of where they live,” the SLSA’s spokesman contended. 

In general, the SLSA and individual servicers argue that state laws purporting to regulate student lending interject more complexity and confusion into an already complicated federal statutory and regulatory structure for student lending. “It makes perfect sense that the federal government — not individual states — should control who services these assets and how they do it,” asserted the servicers’ attorney. “It helps consumers avoid confusion to have one set of rules as opposed to 50.” 

Borrower advocacy groups and some states, on the other hand, argue that state-level action is needed to supplement the regulatory efforts of the DOE and the Consumer Financial Protection Bureau. In particular, states point to their historic role in regulating the field of consumer protection. 

This issue arose most recently at congressional hearings on March 20 at which DOE Secretary Elisabeth (“Betsy”) DeVos testified.

In early March, the Department of Education, led by Secretary Elisabeth Dee DeVos, began informing some former students at campuses once owned by the now-defunct Corinthian Colleges, Inc. that it will forgive only fifty percent or less of their federal student loans. In fact, DeVos had announced her intent to adopt such a plan, a decided departure from the approach taken by the Obama Administration’s DOE in its final years, in December 2017. While “[n]o fraud is acceptable, and students deserve relief if the school they attended acted dishonestly,” DeVos then argued that taxpayers should nonetheless not be “forced to shoulder massive costs that may be unjustified.” Seemingly, as Corinthian alums’ recent letters suggest, the DOE has now reduced this sentiment to a formula. No official policy and definite method, however, has yet been publicly released by the DOE.

Corinthian’s Representative Rise

Founded in February 1995, Corinthian was a large for-profit post-secondary education company whose subsidiaries offered career-oriented diploma and degree programs in health care, business, criminal justice, transportation technology and maintenance, construction trades, and information technology. Originally, Corinthian’s five founders, alumni of National Education Centers, Inc. (“NECI”), itself a for-profit operator of vocational schools based in Irvine, California, planned to acquire fundamentally sound but underperforming (relative to their seeming potential) schools. Following this plan, this quintet’s new company purchased sixteen colleges from NECI in 1995 and eighteen from Phillips Colleges, Inc. in 1996. In that year, it also legally took the name Corinthian, under which it would henceforth operate. From 1997 through 2010, Corinthian grew via such acquisitions and organically from the opening of new branch campuses; the remodeling, expanding or relocating of existing campuses; and the adoption of new curricula by existing colleges. At its height, Corinthian owned ninety-one campuses that operated under such brand names as WyoTech, Heald College, and Everest College.

Corinthian was no outlier in the post-secondary education market. From 2005 to 2010, enrollment in the for-profit college sector doubled to more than two million students. The vast majority of these institutions’ revenue came – and much of it (90%) still does – from students overly reliant on federal and private loans and relatively sparse grants. As the Brookings Institute concluded in January 2018, based on DOE data released in October 2017, over half (52%) of student loan borrowers who attended a for-profit college in 2003 defaulted on their student loans after twelve years, compared with 26% of borrowers at two-year community colleges. Troublingly, nearly three-fourths (72%) of the programs offered at for-profit colleges produce graduates who earn less than high school dropouts.

Corinthian’s Swift Fall

Corinthian’s legal woes began at the state level. In July 2007, California’s Attorney General threatened to file suit against Corinthian, and a settlement resulted. In 2008, a purported class action suit was filed against Corinthian and a wholly-owned subsidiary in Santa Clara Superior Court on behalf of graduates of the medical assistant vocational programs run by Bryman College, which had become Everest College in April 2007. The lawsuit alleged that Bryman made untrue or misleading statements to students related to employment success in order to induce them to enroll and stay enrolled in their medical training program. In October 2013, California’s A.G., future Senator Kamala D. Harris, finally sued the beleaguered company.

Federal attention inevitably followed. On October 17, 2007, DOE investigators seized records at Florida campuses of for-profit colleges, including Corinthian’s former National School of Technology in Fort Lauderdale and Florida Career College (a division of Anthem Education Group) in Lauderdale Lakes and Pembroke Pines. In June 2013, Corinthian disclosed that it was under investigation by the Securities and Exchange Commission. Another investigation, this one by the Consumer Financial Protection Bureau, commenced in November 2013 and culminated in the filing of a federal lawsuit in September 2014.

Subject to this flurry of enforcement actions, Corinthian executed a controlled shutdown of twelve of its U.S. schools and a sale of eighty-five other schools pursuant to a deal with the DOE struck on July 3, 2014. In February 2015, Corinthian finalized a sale of most of its locations to Zenith Education Group. In April 2015, the DOE finally fined Corinthian in the amount of $30 million, having found twelve Corinthian campuses to have misled students and loan agencies about its graduates’ actual prospects for post-school employment. Within two weeks, Corinthian and twenty-four of its subsidiaries filed a Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. Upon filing, Corinthian closed its remaining thirty locations across the country, including two satellite campuses. The hits, however, kept coming. In November 2015, the DOE, in conjunction with California’s A.G., published additional findings of misrepresentation at twenty Everest and WyoTech campuses in California and Florida.

Obama Administration’s Loan Forgiveness Program for Corinthian Graduates

As part of this crackdown, the Obama Administration forgave tens of thousands of loans, totaling more than $550 million, held by students purportedly deceived by Corinthian. Eligibility for such relief was afforded to those who had attended a Corinthian school that closed on April 27, 2015, or attended a Corinthian school that engaged in fraud or other actions that violated applicable state law, regardless of whether that school closed. In other words, the Obama Administration steadily but consistently wiped away all debts traceable to any loan taken out by Corinthian’s enraged alumni. For now, these folks would enjoy “a clear path to loan forgiveness” thanks to the results of an investigation done in conjunction with multiple state attorneys that showed the company misrepresented job placement rates to enrolled and prospective students.

“When Americans invest their time, money and effort to gain new skills, they have a right to expect they’ll get an education that leads to a better life for them and their families. Corinthian was more worried about profits than about students’ lives,” John B. King Jr., DOE Secretary under Obama, explained in defense of this generous approach. “Through these important partnerships with states’ attorneys general, we are pleased to offer relief to Corinthian students who were defrauded. And we will continue to take action to protect students and taxpayers from unscrupulous companies trying to profit off of students who simply want to better their lives.”

This move came only two days after a San Francisco judge ordered Corinthian to pay restitution of $820 million for students and civil penalties of more than $350 million for its illegal advertising practices.

DeVos’ Proposal for Partial Relief

The DOE’s new formula apparently determines the propriety of relief for any Corinthian student by comparing the average earnings of students enrolled in that defunct entity’s program to the average earnings of students who graduated from similar programs at other schools. Seemingly, this program aims to provide students whose earnings are at 50% or more of their peers who attended a gainful employment passing program with only proportionally tiered relief so as to compensate for the difference and make them whole. The DOE has yet to provide data on how many students have received partial relief announcements based on its new formulation.

Troutman Sanders LLP will continue to monitor developments in this area.

On March 15, Governor Jay Inslee of Washington signed the Washington Student Education Loan Bill of Rights. This law had been in the works since 2017 when a report, released by Attorney General Bob Ferguson in December, documented significant disparities across gender, income, age, and race in student loan borrowing and highlighted a handful of the hundreds of complaints the office received from student loan borrowers about their student loan servicers. Providing strong protections for Washington’s more than 730,000 student loan borrowers, whose debt now totals $22.9 billion, the law changes Washington’s regulatory schematic for lenders and servicers operating in the student loan marketplace in the following ways:

  • It creates the position of “Advocate” within the Washington Student Achievement Council to assist student education loan borrowers with student loans, akin to the position off “ombudsman” under proposed and enacted servicing bills in other states. The Advocate is expected to receive and review borrower complaints and refer servicing-related complaints to the state’s Department of Financial Institutions (“DFI”) or the Office of the Attorney General, depending on which entity enjoys appropriate jurisdiction. Other duties include compiling information on borrower complaints, providing information to stakeholders, and analyzing laws and rules.
  • It requires servicers to obtain a license from the DFI. It does encode various exemptions from this requirement for certain types of entities and programs, such as trade, technical, vocational, or apprentice programs; postsecondary schools that service their own student loans; persons servicing five or fewer student loans; and federal, state, and local government entities servicing loans that they originated.
  • Per this law, all student loan servicers, except those entirely exempt from the statute, are made newly subject to sundry statutory duties. For example, servicers must offer, free of charge, information about repayment options and contact information for the Advocate, provide borrowers with information about fees assessed and amounts received and credited, maintain written and electronic loan records, respond to borrower requests for certain information within fifteen days, notify a borrower when acquiring or transferring servicing rights, and convey disclosures relating to the possible effects of refinancing student loans to all borrowers.
  • It imposes several requirements on third-parties providing student education and loan modification services. For example, it bars such persons from charging or receiving money until their services have been performed and charging fees in excess of what is customary, and it requires them to immediately inform a borrower in writing if a modification, refinancing, consolidation, or other such change is impossible.
  • It compels institutions of higher education to send borrower notices regarding financial aid.
  • It calls for the establishment, by rule, of fees sufficient to cover the costs of administering the program that it itself creates.
  • Lastly, the statute provides for a complete exemption for “any person doing business under, and as permitted by, any law of this state or of the United States relating to banks, savings banks, trust companies, savings and loan or building and loan associations, or credit unions.” This exception, however, does not expressly cover state banks chartered in other states.

In many ways, this law builds upon Washington’s Student Loan Transparency Act. Set to go into effect in July 2018, this law requires higher education institutions to provide detailed notices about loan balances and estimated monthly payments every time a school offers a financial aid package to a student. Crucially, the Student Loan Transparency Act was itself modeled after legislation in Indiana, Wisconsin, and Nebraska. Indeed, bills similar to the Washington Student Education Loan Bill of Rights have been recently introduced in state legislatures around the country.

Troutman Sanders LLP will continue to monitor these state law developments.

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.