Federal and State Regulation of Student Loan Servicers: A Legal Overview
Released: 2019-09-17T00:00:00

T he United States has created vast federal loan programs offering to millions of students alternatives to private educational loans . According to the U.S. Department of Education's (ED's) Office of Federal Student Aid (FSA), nearly 43 million borrowers owed money on federal student loans as of the second quarter of 2019, and the total amount of outstanding federal student loan debt currently exceeds $1.4 trillionâa figure that has nearly tripled since 2007. In recent years, a significant number of these borrowers have experienced difficulty repaying their student loans. Moreover, borrowers who lack financial experience may need guidance to navigate the student loan repayment process, which some borrowers find daunting or confusing. Student loan servicers âwith whom the United States has contracted to assist with the administration of its sizable student loan portfolio âare a key source of guidance and assistance for borrowers struggling to understand and repay their federal student loans. Under its contract with the federal government, a servicer may be responsible for (among other things)

communicating with borrowers regarding repayment; disclosing information about student loan terms to borrowers; applying payments to outstanding loan balances; processing applications for enrollment in repayment plans; processing applications for loan forgiveness or discharge; and processing requests for loan forbearance or deferment.

Some maintain that at least some of these federal student loan servicers have engaged in various forms of undesirable conduct, such as steering borrowers away from beneficial repayment options or providing inaccurate or incomplete information. Representatives from the servicing industry deny these accusations.

These allegations of servicer misconduct have drawn the attention of both federal and state policymakers. At least two congressional subcommittees have conducted hearings on student loan servicing within the past few months , and the House Committee on Financial Services conducted another hearing on the topic on September 10, 2019. Additionally, several state legislatures have enacted new laws to regulate student loan servicers within the past few years. A number of state attorneys general and individual borrowers have also tried to pursue civil litigation against servicers of federal student loans based on alleged violations of state statutory and common law.

The states' involvement has raised questions involving the appropriate interaction between federal and state law, as well as the respective roles of the federal and state governments with respect to regulating student loan servicers. Significantly, ED has taken the position that the existing regime of federal regulation of student loan servicers leaves no room for state regulation on the topic. While some courts have agreed with this position, others have concluded that current federal law permits the state to regulate servicers with whom the federal government contracts.

This report analyzes the regulation of servicers of federal student loans. After providing necessary background information regarding the federal student loan programs, the report describes federal law governing student loan servicers. The report then discusses how some states and borrowers have tried to enact or enforce state laws to regulate servicers of federal student loans. Then, the report analyzes the legal issues implicated by the interaction of federal and state servicing laws, including whether (and, if so, to what extent) federal servicing regulation preempts the states from creating or enforcing servicing laws of their own. The report concludes by identifying relevant legal considerations for Congress.

Background on the Federal Student Loan Programs

The federal government's roles with respect to the operation, supervision, and administration of federal student loan programs have evolved over time. Around the turn of the millennium, for instance, most (though not all) federal student loans were issued under the now-discontinued Federal Family Education Loan Program (FFELP), under which private lenders extended loans to borrowers that the federal government guaranteed against the risk of loss. Although the federal government set the terms and conditions of FFELP loans and subsidized the FFELP program, various entities other than the federal government also helped operate the FFELP. For example, private lenders (or third parties with which those lenders contracted) bore the responsibility of servicing FFELP loans.

Several recent developments, however, have shifted the federal government's role in the student loan system. In 2008, for instance, Congress enacted the Ensuring Continued Access to Student Loan Act (ECASLA), which authorized ED to purchase outstanding FFELP loans from private lenders. Thus, for the nearly 4 million loans that ED purchased from private lenders under ECASLA, "the federal government is now the 'lender.'" Then, in 2010, Congress enacted the Student Aid and Fiscal Responsibility Act (SAFRA), which, among other things, terminated the authority to make new FFELP loans. As a result of SAFRA, the United States now issues most new federal student loans through the Federal Direct Loan Program (FDLP), under which the government itselfârather than a private lenderâextends loans directly to students. These developments have thereby expanded the federal government's direct involvement in the student loan industry, which in turn has prompted the United States to rely increasingly on servicers to administer aspects of the federal student loan programs.

Federal Laws and Contractual Requirements Governing Student Loan Servicers

A variety of federal statutes and regulationsâas well as contractual provisionsâbear on the servicing of federal student loans.

Statutory Provisions

One such statute is Title IV of the Higher Education Act of 1965 (HEA), which (among other things) establishes programs to provide financial assistance to postsecondary students, including the FDLP. Title IV also governs loans issued under the now-discontinued FFELP that remain outstanding.

Title IV contains several provisions that pertain to student loan servicing. The first such provision is 20 U.S.C. Â§ 1082, which applies to FFELP loans. 20 U.S.C. Â§ 1082(a)(1), for instance, empowers the Secretary of Education (Secretary) to "prescribe . . . regulations applicable to third party servicers," "including regulations concerning financial responsibility standards for, and the assessment of liabilities for program violations against, such servicers." Section 1082(a)(1) explicitly specifies, however, that "in no case shall damages be assessed against the United States for the actions or inactions of such servicers." Section 1082( l )(1) in turn requires the Secretary to promulgate regulations "prescrib[ing] standardized forms and procedures regarding .Â .Â . [student loan] servicing." In addition, Section 1082(p) requires certain officers, directors, employees, and consultants of student loan servicing agencies to submit reports to the Secretary disclosing potential financial conflicts of interest.

Another provision, 20 U.S.C. Â§ 1087f, applies to FDLP loans. Section 1087f(a)(1) directs the Secretary to award federal loan servicing contracts to eligible servicers "to the extent practicable." The Secretary may enter into servicing contracts only with "entities which the Secretary determines are qualified to provide such services" that possess "extensive and relevant experience and demonstrated effectiveness." Additionally, "[i]n awarding such contracts, the Secretary" must "ensure that such services . . . are provided at competitive prices."

Yet another provision that has been particularly critical to the current legal debate over student loan servicing regulations is 20 U.S.C. Â§ 1098g's express preemption provision, which states that "[l]oans made, insured, or guaranteed pursuant to a program authorized by Title IV of the [HEA] shall not be subject to any disclosure requirements of any State law." As explained below, courts have reached divergent conclusions regarding the significance of this statutory provision.

Regulations

Regulations Specifically Governing Loan Servicing

ED has promulgated several servicing-related regulations under its rulemaking authority under Title IV of the HEA. Nearly all of these regulations are codified in Part 682 of Title 34 of the Code of Federal Regulations, which governs FFELP loans rather than FDLP loans. 34 C.F.R. Â§Â 682.203(a), for instance, contemplates that an FFELP lender "may contract or otherwise delegate the performance of its functions under" governing federal law "to a servicing agency," but emphasizes that doing so "does not relieve the . . . lender . . . of its duty to comply with" all applicable statutes and regulations. 34 C.F.R. Â§ 682.208 in turn prescribes actions that a servicer must take when servicing an FFELP loan, including "responding to borrower inquiries, establishing the terms of repayment, and reporting a borrower's enrollment and loan status information." Similarly, 34 C.F.R. Â§ 682.416 establishes administrative responsibility and financial responsibility standards that third-party servicers of FFELP loans must satisfy. In addition, 34 C.F.R. Â§ 682.416(e) imposes auditing requirements on servicers of FFELP loans. Should a servicer violate any of the federal requirements that apply to it, Subpart G of Part 682 establishes a variety of procedures for addressing those violations, including administrative proceedings to limit, suspend, or terminate the servicer's eligibility to enter into servicing contracts.

It is unclear whetherâand, if so, to what extentâthese FFELP loan servicing regulations apply to servicers of FDLP loans. Section 1087e(a)(1) of the HEA provides that, with certain exceptions, FDLP loans "shall have the same terms, conditions, and benefits" as FFELP loans. At least one court has therefore concluded that Section 1087e(a)(1) embodies a general congressional preference that FDLP and FFELP loans be governed by the same legal standards. The few judicial opinions interpreting Section 1087e(a)(1) do not conclusively resolve, however, whether FFELP regulations governing third-party servicers qualify as "terms, conditions, and benefits" of FFELP loans that would apply equally to FDLP servicers. Furthermore, courts considering whether FFELP regulations apply to FDLP loans outside the loan-servicing context have reached divergent conclusions. Nor do the portions of the servicing contracts that FSA has posted on its website specify whether servicers of FDLP loans must follow the FFELP servicing regulations. It is possible, however, that ED may nonetheless demand or expect its FDLP servicers to comply with some or all of the FFELP servicing standards. Moreover, some servicers have implicitly suggested in litigation briefs that at least some of the FFELP servicing regulations apply to FDLP servicers.

General Regulatory Duties That ED Has Delegated to Servicers

In addition to regulations that directly concern loan servicing, ED has also promulgated regulations establishing various responsibilities that the Secretary must fulfill, which the Secretary has in turn delegated to servicers. 34 C.F.R. Â§ 685.221(e)(3), for instance, requires the Secretary to "notif[y] the borrower in writing of" the requirement to regularly submit income recertification information to remain eligible to participate in an income-driven repayment (IDR) plan, which this report details below. ED has delegated that notification responsibility to servicers with which it contracts.

Servicer Contracts with the Federal Government

Pursuant its authority to enter into servicing contracts, ED has contracted with multiple entities to service federal student loans. These contracts govern many details of those servicers' operations, including financial reporting, transaction management, internal controls, accounting, and security. The servicing contracts also contain several mechanisms that ED may invoke against servicers that violate applicable federal requirements, including (1) ordering the noncompliant servicer "to return any fees that [it] billed to [ED] from the time of noncompliance" or (2) "reallocating new loan volume to other servicers or transferring all or part of the noncompliant servicer's current loan volume to another servicer until the noncompliant servicer comes back into compliance." Interested parties disagree, however, whether ED uses these contractual provisions with sufficient frequency and diligence to effectively punish and deter servicer misconduct.

Role of the Consumer Financial Protection Bureau

In addition to ED's own oversight of its servicing relationships, the Consumer Financial Protection Bureau (CFPB) is another federal agency that possesses certain authorities as to federal student loan servicers. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB may exercise supervisory authority over certain nonbank "larger participants" in consumer financial product or service markets that it chooses to define by rule. In 2013, the CFPB exercised this authority to define larger participants in the student loan servicing market. Pursuant to the rule, the CFPB has supervisory authority over student loan servicers servicing more than 1 million accounts. The purposes of CFPB supervision include assessing compliance with consumer financial protection laws and detecting risks to consumers and consumer financial markets. By statute, the CFPB may conduct examinations as well as request information from supervised entities. In addition to its supervisory authority, the CFPB may bring enforcement actions against student loan servicers. In January 2017, for instance, the CFPB sued one of the largest federal student loan servicers, Navient Corporation. As of the date of this report, the case currently remains pending.

Notably, questions have arisen regarding the relationship between the CFPB and ED. In the early 2010s, the two agencies entered into Memoranda of Understanding (MOUs) (1) providing for interagency sharing of information pertaining to, among other things, complaints about student loan servicers and (2) coordinating supervisory and oversight activities pertaining to student loans. However, ED terminated these MOUs in 2017. Among its reasons for terminating the MOUs, ED asserted that the CFPB had "unilaterally expand[ed] its oversight role to include the Department's contracted federal loan servicers" in derogation of ED's claimed "full oversight responsibility for federal student loans." The CFPB further represented to Congress in April 2019 that "student loan servicers have declined to produce information requested by the [CFPB] for supervisory examinations related to" FDLP and FFELP loans since 2017.

Allegations of Servicer Misconduct

As described below, some claim that the aforementioned federal requirements and oversight mechanisms have not deterred federal student loan servicers from engaging in misconduct.

Forbearance Steering

Some, for instance, have accused federal student loan servicers of steering borrowers toward forbearance when participating in an IDR plan would be more beneficial for the borrower. Forbearance is a way for a borrower who encounters short-term financial hardship to obtain temporary relief from his obligation to repay a federal student loan. Forbearance allows the borrower to either

temporarily cease making student loan payments; temporarily make smaller student loan payments; or extend the deadline by which the borrower must make payments.

Interest, however, typically continues to accrue on the loan during the forbearance period, which is then capitalizedâthat is, added to the loan principal âwhen the forbearance period concludes. Thus, for borrowers experiencing long -term financial hardship, this interest accrual and capitalization may render forbearance less advantageous than participation in an IDR plan, the latter of which allows borrowers to make reduced monthly payments based on their income and offers them the prospect of obtaining loan forgiveness after making such payments over a specified period of years.

Some allege that certain servicers have systematically encouraged borrowers to enter into forbearance rather than participate in IDR plans that would be more advantageous for the borrower. According to critics, servicers have a financial incentive to steer borrowers into forbearance because enrolling a borrower in an IDR plan requires the servicer to expend more resources than steering the borrower toward forbearance. Representatives from the servicing industry, however, deny that servicers engage in forbearance steering and assert that servicers in fact earn less money when borrowers enter forbearance.

Income Recertification

Some have also accused servicers of failing to provide critical information to student loan borrowers regarding the income recertification process a borrower must complete to remain in an IDR plan. Because, as noted above, a borrower's monthly payments under an IDR plan depend on the borrower's income, borrowers enrolled in IDR plans must recertify their income and family size each year. A borrower who does not comply with this annual recertification requirement may experience an increase in both his monthly loan payments and his total loan balance. Critics have accused some servicers of failing to "advise borrowers of the negative consequences of failing to submit timely, complete, and correct recertifications to renew borrowers' IDR plans."

Loan Forgiveness Eligibility

Some borrowers also allege that federal student loan servicers misinformed them about their eligibility for loan forgiveness under federal law. Subject to various conditions, the Public Service Loan Forgiveness (PSLF) program affords loan forgiveness to borrowers who make 10 years of monthly loan payments while employed in a public service job. Critically, however, only loans issued under the FDLP qualify for the PSLF program. Some borrowers claim that they relied to their detriment on their servicers' representations that they qualified for forgiveness under the PSLF program, only to later learn that they were in fact ineligible because their student loans were non-FDLP loans, such as FFELP loans.

State Laws Regulating Servicers of Federal Student Loans

Significantly, the HEA does not provide litigants with a private right of actionâthat is, the HEA does not authorize borrowers to directly pursue civil litigation against servicers of federal student loans. Instead, only the Secretary may enforce the HEA. States, however, have developed their own laws empowering entities other than the federal governmentâsuch as state officials or individual borrowersâto pursue legal action against servicers. These state laws fall into two broad categories: (1) statutes that specifically target servicers for regulation and (2) statutes and common law causes of action that apply more generally to a broad range of entities, including servicers of federal student loans.

State Laws Governing Student Loan Servicers Specifically

First, several states have recently enacted legislation that specifically imposes legal requirements on federal student loan servicers beyond what federal law requires. Because the specifics of each statute vary from state to state, the following subsections of this report survey the most significant similarities and differences between the various state servicing laws.

Some state servicing statutes, for instance, prohibit student loan servicers from operating within the state's boundaries unless they maintain an active servicing license issued by the state. A servicer that operates in one of these states without a license is subject to monetary penalties. These statutes also typically provide that the state may revoke a servicer's licenseâand thereby preclude the servicer from servicing loans within the stateâif the servicer engages in specified acts of misconduct. For example, the District of Columbia's servicer licensing statute states that the Commissioner of the District of Columbia Department of Insurance, Securities, and Banking "may revoke" a student loan servicing license "if, after notice and a hearing, the Commissioner finds that the licensee has" "[d]emonstrated incompetency or untrustworthiness to act as a licensee" or "[c]ommitted any fraudulent acts, engaged in any dishonest activities, or made any misrepresentation in any business transaction." Notably, some of these state licensing statutes contain provisions that appear intended to mitigate potential interference with the federal government and the servicers with which it contracts. For example, New York's servicing statute, which becomes effective on October 9, 2019, will provide that entities hired by ED to service federal student loans will automatically be deemed licensed to service those loans, without the need to submit a license application and otherwise meet the prerequisites for licensure. However, the New York statute will still require federal student loan servicers to comply with many of the statute's other requirements. Several other states, including Colorado and Maine, have likewise enacted similar laws allowing for automatic licensure for federal student loan servicers.

Some state statutes designate a student loan ombudsperson to conduct oversight of servicers' operations, review and attempt to resolve borrowers' complaints about student loan servicers, and otherwise assist and educate borrowers with the loan servicing process. Some of these statutes contemplate that if the ombudsperson discovers that a servicer is engaging in unlawful conduct, he may refer that servicer to the responsible state agency for civil enforcement proceedings or even criminal prosecution.

In response to allegations that some federal student loan servicers have steered borrowers toward forbearance instead of an IDR program, some states have also enacted laws requiring servicers to evaluate the borrower's eligibility for IDR plans before placing the borrower in forbearance. Relatedly, at least one state prohibits servicers "from implementing any compensation plan that has the intended or actual effect of incentivizing a repayment specialist to violate" applicable servicing regulations "or any other measure that encourages undue haste or lack of quality."

Similarly, in response to allegations that servicers have failed to provide borrowers with key information about income recertification, at least one state requires servicers to "disclose the date that a borrower's [IDR] plan certification will expire and the consequences to the borrower for failing to recertify by the date, including the new repayment amount."

A few state statutes also attempt to address concerns that some servicers have misinformed borrowers regarding their eligibility for loan forgiveness programs, such as the PSLF. The State of Washington, for instance, makes it unlawful to "[m]isrepresent or omit any material information" about "the availability of loan discharge or forgiveness options."

A number of states have also enacted statutory provisions to regulate various other aspects of servicers' operations. For instance, some state statutes purport to require servicers to acknowledge and respond to borrower complaints and requests within a specified time frame. Several statutes also impose recordkeeping or annual reporting requirements upon servicers. Additionally, some laws require servicers to inform the borrower if the identity or address of the party to whom the borrower must send payments or communications changes.

There are a host of different remedies for violating state servicing laws. Some states, for instance, have authorized borrowers to pursue a private cause of action against a servicer who violates the state's servicing laws. A Maine statute that becomes effective January 1, 2020, for example, will authorize borrowers to recover compensatory, treble, and punitive damagesâas well as costs and attorney's feesâfrom servicers who violate the statute's prohibitions. As an alternative to enforcement by private litigants, some state statutes authorize the government to (1) levy fines or penalties against servicers who commit specified acts or omissions or (2) sue servicers who violate the state's servicing laws. Some state servicing statutes explicitly contemplate enforcement by both individual borrowers and the state government alike.

Whereas the aforementioned provisions impose servicing requirements that go beyond federal law, some state statutes also incorporate existing federal servicing standards by reference and thereby provide state law remedies for alleged violations of federal requirements. A Connecticut statute, for instance, provides that in addition to complying with all requirements imposed by Connecticut law, a student loan servicer must also "comply with all applicable federal laws and regulations relating to student loan servicing." "[A] violation of any such federal law or regulation shall be deemed a violation of" Connecticut law "and a basis upon which the [Connecticut Banking Commissioner] may take enforcement action" against a noncompliant servicer.

State Laws of General Applicability

In addition to these statutes that specifically purport to regulate student loan servicers, servicers may also be bound by a state's laws of general applicability. For example, many states have enacted consumer protection statutes that purport to apply to various entities and prohibit an array of activities that state legislatures have deemed deceptive or unfair to consumers. As explained below, some borrowers and states have invoked these consumer protection statutes in civil lawsuits against servicers challenging various forms of alleged misconduct. Additionally, state courts typically recognize common law causes of action for acts like fraud, negligent or fraudulent misrepresentation, breach of fiduciary duty, negligence, unjust enrichment, tortious interference, and breach of contract. Some borrowers have likewise invoked (or tried to invoke) these common law doctrines against servicers allegedly engaged in misconduct.

Preemption and the Interaction of Federal and State Servicing Laws

With both federal and state laws coexisting in the realm of federal student loan servicing regulations, questions of federal preemptionâthat is, questions regarding whether federal law in a given area displaces or overrides state laws in that areaâhave arisen.

Federal Preemption

Under case law interpreting the Constitution's Supremacy Clause, federal law can preempt conflicting state law in two central ways. First, statutory language that express ly addresses the scope of a law's preemptive effect, such as the express preemption clause in 20 U.S.C. Â§Â 1098g, may be the basis to conclude that Congress intended federal law to supersede certain state laws. Second, even if a statute is silent as to Congress's preemptive intent, implied preemption principles can also displace state law. A statute can implicitly preempt state law where (1) the scheme of federal regulation is so pervasive, or the federal interest is so dominant, that it can be presumed that Congress intended to supplant all state laws in a particular area (also known as "field preemption"); or (2) the state law conflicts with federal law by either making it impossible to simultaneously comply with both laws or by frustrating the purposes and objectives of the federal law (also known as "conflict preemption"). For each type of preemption, congressional intent is the touchstone of courts' analyses. Influencing the preemption analysis, courts have, at times, employed a "presumption against preemption," meaning that they begin with an assumption that Congress did not intend to displace state law, particularly in areas falling within the traditional police powers of the states.

ED's Interpretation

Invoking several of these principles of federal preemption, in March 2018 ED announced its own position on the issueâthat is, that federal law preempts a wide range of state laws that regulate federal student loan servicers. Significantly, ED did not promulgate this interpretation through notice-and-comment rulemaking; it instead published its interpretation in the Federal Register as an informal guidance document. Among other things, the ED interpretation claims that federal law displaces

state laws that "impose regulatory requirements on servicing," such as laws that "impose deadlines on servicers for responding to borrower inquiries" or "require specific procedures to resolve borrower disputes"; state regulations "requiring licensure of servicers" of certain federal student loans; and state requirements concerning what servicers must disclose to borrowers.

ED appears to ground its interpretation in several preemption theories, including conflict preemption (i.e., that state servicing laws allegedly impede Congress's objective of establishing uniform federal loan servicing standards) and field preemption (i.e., that existing federal regulation is comprehensive and adequate, leaving no role for additional state regulation). ED also relies on express preemption principles, arguing that 20 U.S.C. Â§ 1098g's preemption provisionâstating that "[l]oans made, insured, or guaranteed pursuant to a program authorized by Title IV of the [HEA] shall not be subject to any disclosure requirements of any State law"âbroadly bars states from imposing disclosure requirements. ED "interprets the term 'disclosure requirements' under section 1098g . . . to encompass" not only written disclosures, but also "informal or non-written communications to borrowers." In addition to issuing this interpretation, ED has also submitted filings in several cases , asking courts to dismiss lawsuits against student loan servicers on preemption grounds or otherwise narrow or invalidate state regulations.

Recent Litigation

ED's interpretation and its litigation position have fueled the debate between states and plaintiff borrowers on one sideâwho claim that state servicing statutes may harmoniously exist alongside federal laws and policiesâand ED and federal student loan servicers on the other, who claim that those state regulations irreconcilably conflict with supreme federal law. Federal courts addressing these disputes, as discussed below, have analyzed the applicability of field preemption, conflict preemption, and express preemption to state student loan servicing laws and state law claims against federal student loan servicers. In doing so, the courts have afforded varying levels of weight to ED's interpretation in conducting their preemption analyses.

Field Preemption

Courts have somewhat readily concluded that the HEA does not occupy the field of federal student loan servicing regulation. As an initial matter, several federal appellate courts over the past 25 yearsâin analyzing different legal contexts in the realm of higher educationâhave held that the HEA does not have field preemptive effect more generally. For example, in one such case involving state law negligence claims against national school accrediting agencies (which ED approves pursuant to the HEA), the Ninth Circuit concluded that Congress, in enacting the HEA, "expected state law to operate in much of the field in which it was legislating." Although courts have recognized that the HEA is comprehensive, they have also noted that a regulatory regime's comprehensiveness on its own does not necessarily result in field preemption. Moreover, courts have observed that scattered throughout the HEA are several express preemption provisions, which explicitly foreclose certain state lawsâsuch as state usury, garnishment, and, with respect to Section 1098g, disclosure laws. Such explicit preemption provisions, courts have reasoned, would not be necessary if Congress had intended to simply supplant all state laws.

When it comes to student loan servicing specifically, courts have uniformly rejected the argument that in the HEA Congress intended for federal regulation of federal student loan servicers to be an exclusive field. The HEA provides ED with the authority to contract with student loan servicers and to "establish minimum standards" governing those servicers' management and accountability. The district court in Student Loan Servicing Alliance v. District of Columbia , for example, concluded that this language merely sets a federal regulatory "floor," without foreclosing supplemental regulation from the states. The servicers in Student Loan Servicing Alliance further raised the argument that the federal government has a dominant interest in regulating federal student loan servicing that would merit field preemptionâparticularly because, with the discontinuation of the FFELP, the federal government now makes over 90% of new student loans through the FDLP. The servicers argued, accordingly, that the federal government has a unique interest in protecting its rights under its servicing contracts for these loans. However, in weighing the federal interests against the "compelling" interest of states in protecting their consumers, the Student Loan Servicing Alliance court concluded that the federal interest was not dominant enough to preclude state regulation.

Conflict Preemption

Although field preemption arguments have not thus far posed a hurdle to state student loan servicing regulation, the federal district court in Student Loan Servicing Alliance recently invalidated significant portions of the District of Columbia's student loan servicing law under conflict preemption principles. In its student loan servicing law passed in 2016, the District of Columbia (DC) required student loan servicers to obtain a license from DC and adhere to other substantive regulations and standards of conduct. While one of the primary points raised in ED's Interpretation, as discussed above, was that this type of state licensing scheme conflicted with federal law, the court determined that it did not have to give ED's Interpretation any deference. Rather, the court concluded that the ED Interpretation consisted of informal agency guidance that was insufficiently "thorough, consistent, and persuasive."

Yet, in performing its own independent analysis, the district court still held that DC's licensing scheme posed an obstacle to the federal law's underlying purpose by undermining ED's authorityâprovided for in the HEAâto select servicers for federal student loans. The court relied on a line of prior federal cases arising in different legal contexts that preempted state laws' impeding the federal government's ability to contract. The court reasoned that the DC law did so by effectively "second-guess ing " the federal government's decisions to contract with a given loan servicer. The court's reasoning applied to FDLP loans and government-owned FFELP loans (e.g., those that ED purchased under ECASLA) , for which ED makes servicer contracting decisions under the HEA. The court held, however, that federal law did not preempt state regulations of servicers of outstanding commercial FFELP loans, where private lenders own and decide whether to contract with student loan servicers and the federal government acts merely as a reinsurer or a guarantor.

Beyond the Student Loan Servicing Alliance case and its preemption of DC's licensing requirement for federal student loan servicers, however, courts have generally declined to find conflict preemption in suits brought against servicers for misrepresentations under state laws of general applicability. The main argument that federal student loan servicers have raised in this context is that plaintiffs' ability to sue under state law poses an obstacle to the HEA's objective of providing uniformity in federal student loan servicing regulation, subjecting servicers instead to actions under the laws of 50 different states and DC. However, uniformity is not a stated goal of the HEA. While certain cases have concluded that uniformity is one of the statute's purposes (albeit in arguably distinguishable contexts), other courts have declined to reach that result. Courts have also reasoned that even if uniformity were an objective of the HEA, it does not follow that enforcing state laws prohibiting deceptive conduct would serve as an obstacle to uniformity in the HEA's standards because "uniformity in setting . . . standard parameters for the federal student loan programs is not harmed by prohibiting unfair or deceptive conduct in operating those programs. Moreover, as several courts have noted, a broad reading of servicers' uniformity argument would in effect be akin to a finding of HEA field preemption, which courts have consistently declined to recognize.

Courts have also considered whether the Supreme Court's holding in Boyle v. United Technologies Corp . prevents the states from regulating activities that servicers perform under contracts with the federal government. Boyle held that plaintiffs could not pursue state law claims against federal contractors when allowing such claims to proceed would either create "a 'significant conflict'" with "an identifiable 'federal policy or interest'" or "'frustrate specific objectives' of federal legislation." In the 2019 case of Nelson v. Great Lakes Educational Loan Services, Inc. , for example, the Seventh Circuit determinedâalbeit with little elaborationâthat allowing a borrower to pursue state law misrepresentation claims against a servicer would not impermissibly conflict with federal interests or objectives.

Express Preemption

Express preemption arguments in recent federal student loan servicing cases have centered on the preemption clause in Section 1098g of the HEA. Specifically, courts have grappled with whether the preemptive language in Section 1098gâwhich prohibits states from imposing "disclosure requirements" regarding federal student loansâprecludes suits against servicers brought under state law for misrepresentations or misleading communications made to federal student loan borrowers.

Allegations in this category of lawsuits primarily include forbearance steering and misstatements regarding loan forgiveness eligibility, with the allegedly false or misleading statements in many cases being made over the telephone by the servicers' call center representatives. Specifically, some plaintiffs claim that they were "steered" toward placing their loans into forbearance rather than being informed of other options or enrolled in an IDR plan that may have been more beneficial in the long termâalleging that forbearance was simply a faster and less burdensome process for the servicer. Other plaintiffs recount, for example, being assured that they were on track to benefit from the PSLF program when that was not the case, thereby preventing them from taking remedial measures. Plaintiffs in these lawsuitsâwhich have included both federal student loan borrowers and state attorneys generalâhave brought state law tort claims or claims under state consumer protection statutes of general applicability. The main question at issue has been whether enforcing the state's law would require the servicers in these cases to make additional or different "disclosures" under Section 1098g.

Most federal courts considering this question in cases based on these types of allegations have held that Section 1098g does not preempt state law. These courts have allowed the students' lawsuits to proceed, viewing their claims as involving affirmative misrepresentations or otherwise deceptive conduct, which the courts distinguished from the mere failure to provide "disclosures" under Section 1098g. For example, in Pennsylvania v. Navient Corp. , a federal district court in Pennsylvania ruled that the HEA did not preempt the plaintiff's state law claims regarding forbearance steering. The court reasoned that the defendant's argument went "too far" by framing the plaintiff's claim as one for lack of disclosure, rather than a claim concerning unfair and deceptive conduct subject to the state consumer protection statute.

A federal district court in Florida in Lawson-Ross v. Great Lakes Higher Education Corp. , however, reached a different conclusion as to express preemption in 2018. The Lawson-Ross plaintiffs alleged that the defendant servicer falsely assured them that they were on track to benefit from PSLF (when they were not in fact eligible for the program), in violation of a Florida consumer protection statute and several state common law duties. The court concluded, however, that federal regulations already prescribe the information that must be provided to federal student loan borrowers, so that the plaintiffs' state law claims would essentially impose additional disclosure requirements on the servicer. Even though the plaintiffs argued that they alleged that the servicer had made an affirmative misrepresentation , the court construed the plaintiffs' claim as one for the servicer's failure to disclose accurate information regarding plaintiffs' eligibility, which it held to be impermissible under Section 1098g. In reaching its conclusion, the Lawson-Ross court afforded Skidmore deference to ED's interpretation after concluding that ED's views on the preemptive effect of federal law were "well-reasoned and sensible."

The Lawson-Ross court, and servicers arguing for preemption in similar cases, also relied for support on a 2010 case from the Ninth Circuit called Chae v. SLM Corp oration . In Chae , students sued a federal student loan servicer challenging certain methods it used to calculate interest, late fees, and repayment dates, claiming that these servicing practices rendered their billing statements, coupon books, and loan applications misleading in violation of a state consumer protection law. The court reasoned that Section 1098g preempted the action, stating that "[a]t bottom, the plaintiffs' misrepresentation claims are improper-disclosure claims" and that "[i]n this context, the state-law prohibition on misrepresenting a business practice 'is merely the converse' of a state-law requirement that alternative disclosures be made." While the Lawson-Ross court extended Chae 's logic to servicers' oral misrepresentations about PSLF eligibility, other courts have distinguished Chae , noting, for example, that Chae involved allegations concerning the misleading nature of written account statements and coupon books (i.e., "highly prescribed standardized forms"), rather than the "affirmative misconduct" and types of misleading communications involved in forbearance steering or PSLF allegations.

The landscape of decisions concerning Section 1098g's preemptive scope is subject to change as further appellate courts begin to address the issue. Notably, appeals in t he Pennsylvania and Lawson-Ross cases are pending. Moreover, the Nelson case, decided by the Seventh Circuit, may be appealed to the U.S. Supreme Court.

Considerations for Congress

Legal debates over the preemptive effect of federal lawâboth within the student loan servicing context and withoutâimplicate a variety of considerations. On the one hand, replacing state law with a single uniform national standard can sometimes be advantageous. When each state remains free to enact its own laws on a given topic, the requirements of those laws may differâperhaps irreconcilablyâfrom jurisdiction to jurisdiction. Preempting those state laws can thereby release regulated parties from the "administrative and financial burden[s]" of learning and complying with the "laws of 50 States." Moreover, freeing federal contractors from the burden of complying with state laws could mitigate the risk of state intrusions upon federal prerogatives. On the other hand, however, when federal law does not go far enough in policing a particular industry, preemption can prevent the states from filling those regulatory gaps with their own laws. Preempting state law may also deprive the states of opportunities to experiment with novel methods of regulating particular industries and behaviors, which might ultimately prove more effective than methods devised by the federal government.

Depending on how Congress weighs these competing considerations, it may enact legislation clarifying or modifying the preemptive effect of federal law in the student loan servicing context. For example, a section of the PROSPER Act introduced in the 115th Congress, if enacted, would have provided that the servicing of student loans under Title IV of the HEA would "not be subject to any law or other requirement of any State or political subdivision of a State with respect to"

"disclosure requirements"; "requirements or restrictions on the content, time, quantity, or frequency of communications with borrowers, endorsers, or references with respect to such loans"; or "any other requirement relating to the servicing . . . of a loan made" under Title IV of the HEA.

Alternatively, if Congress instead intends to limit the preemptive scope of federal law, it could enact a savings clause specifying that federal law does not preempt any state law that imposes more restrictive requirements on federal student loan servicers than federal statutes and regulations. For instance, one section of the Student Loan Borrower Bill of Rights (S. 1354, 116th Cong.)âwhich, among other things, proposes to subject servicers to more expansive federal regulationâexplicitly would not "preempt any provision of State law regarding postsecondary education loans where the State law provides stronger consumer protections."

If Congress ultimately decides to displace state servicing laws, it may consider preempting state law either narrowly or broadly. For instance, a federal statute that displaces state servicing regulations could expressly preempt all state laws that implicate the servicing of federal student loans in any fashion, or it could preempt only specified categories of state statutes (such as servicer licensing requirements) and thereby preserve some regulatory role for the states.

Instead of expressly specifying the preemptive effect and scope of federal laws pertaining to federal student loan servicing, Congress could implicitly preempt state laws by changing the substantive standards governing servicers. Several Members of the 116th Congress have introduced legislation that, if enacted, would clarify or broaden servicers' duties and responsibilities under federal law or subject servicers to increased levels of federal oversight. Depending on their content and scope, new federal laws governing the conduct, obligations, and oversight of federal loan servicers could raise legal questions regarding (1) how those federal standards interact with state servicing laws and (2) the respective roles of federal and state law in regulating federal student loan servicers. The preemptive effect that courts will provide to a given federal law largely depends on the specific statutory text that Congress enacts.

One other substantive change that could affect the preemptive scope of federal law is altering how the HEA is enforced. As discussed, the HEA does not presently create a private right of action; instead, the HEA contemplates that ED alone will enforce the statute's mandates. As noted above, however, some observers claim that ED has not diligently policed the servicers with whom it contracts. If Congress agrees with that assessment, it could expressly empower other entitiesâsuch as states, individual borrowers, or other federal agencies like the CFPBâto wield a greater level of enforcement authority over federal student loan servicers. For instance, granting borrowers or states a private right of action under federal law against contractors that violate federal servicing standards could provide an additional means to deter, correct, and punish alleged servicer misconduct. That said, subjecting servicers to litigation and regulation by multiple entities could increase federal contractors' costs. Rendering servicers answerable to multiple stakeholdersâbe they federal agencies, states, or individual borrowersâmight also undermine the uniformity that some have argued is a central goal of federal student loan servicer regulation, which could in turn undercut arguments that preemption is necessary to preserve the federal government's predominant role in regulating its contractors.

Several bills pending in the 116th Congress propose to subject servicers to increased litigation or regulation by entities other than ED. Section 3 o f the Student Loan Borrower Bill of Rights, for example, would allow individuals to sue federal student loan servicers under the Truth in Lending Act's private right of action provision. By contrast, the CFPB Student Loan Integrity and Transparency Act of 2019 (H.R. 2833, 116th Cong.) would (among other things) (1) require federal student loan servicers to provide the CFPB with any information requested by specified CFPB officials and (2) reinstate the aforementioned MOUs between ED and the CFPB that ED terminated in 2017.

Unless and until Congress specifies the intended preemptive effect of federal servicing laws, however, legal questions regarding preemption in the loan servicing context will be left to the courts to resolve. Depending on their content, the courts' rulings may affect the uniformity of servicing regulations across jurisdictions and the degree and type of oversight to which federal student loan servicers are subject.