Opinion ID: 2828218
Heading Depth: 4
Heading Rank: 2

Heading: Requirements for Imposing Collection Costs

Text: Bible has plausibly alleged a breach of the MPN by alleging that USA Funds assessed collection costs that were not authorized by the Higher Education Act and its regulations. This conclusion is supported by two independent grounds. The author of this opinion agrees with the Secretary of Edu16 No. 14-1806 cation and Bible that under the best interpretation of the statutes and regulations, the collection costs assessed here were prohibited. Cf. Perez v. Mortgage Bankers Ass’n, 575 U.S. —, 135 S. Ct. 1199, 1208 n.4 (2015) (“Even in cases where an agency’s interpretation receives Auer deference, however, it is the court that ultimately decides whether a given regulation means what the agency says.”). Second, this author and Judge Flaum agree that even if this were not the best interpretation of the statutes and accompanying regulations, it is at least a reasonable one, and we defer to that interpretation because it reflects the reasoned position of the Secretary of Education, who is tasked with administering the program. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984); Auer v. Robbins, 519 U.S. 452, 461 (1997).
Beginning with interpretation without deference to the agency, Bible acknowledges that guaranty agencies are required to impose collection costs on borrowers who have defaulted in certain circumstances. Both the HEA itself and the implementing regulations make this clear. See 20 U.S.C. § 1091a(b)(1) (“[A] borrower who has defaulted on a loan … shall be required to pay … reasonable collection costs.”); id. § 1078-6(a)(1)(D)(i)(II)(aa) (upon successful rehabilitation, a guaranty agency may, in order to defray collection costs, “charge to the borrower an amount not to exceed 18.5 percent of the outstanding principal and interest at the time of the loan sale”); 34 C.F.R. § 682.410(b)(2) (“[T]he guaranty agency shall charge a borrower an amount equal to reasonaNo. 14-1806 17 ble costs incurred by the agency in collecting a loan.”).4 Bible argues, however, that the regulations prohibit USA Funds from imposing collection costs in her circumstances: a firsttime defaulter who she promptly agreed to enter into a rehabilitation agreement within 60 days of receiving notice that USA Funds had paid her lender’s default claim, and who has complied with that agreement. She contends that imposing collection costs in these circumstances is “unreasonable” under 20 U.S.C. § 1091a(b)(1). Two key regulations define the phrase “reasonable collection costs” in § 1091a(b)(1). The first regulation, 34 C.F.R. § 682.405, requires guaranty agencies to create loan rehabilitation programs for all borrowers that have enforceable promissory notes. These programs are designed to give eligible borrowers an opportunity to rehabilitate defaulted loans so that, upon successful rehabilitation, the loans may be purchased by eligible lenders and removed from default status. 34 C.F.R. § 682.405(a).5 A loan is considered rehabilitated only after two requirements are met: (1) the borrower has timely made nine out of ten payments required under a monthly repayment agreement, and (2) the loan has been sold to an eligible lender. 34 C.F.R. § 682.405(a)(2)(i)–(ii). Subsection (b) of this regulation then establishes specific requirements for terms that 4 Again, this opinion cites and quotes the versions of the statutes and regulations applicable to Bible’s loan. For example, the 18.5% cap on collection costs has since been reduced to 16%. 5 Some loans, such as loans for which a judgment has already been obtained, are exempted from this provision. See 34 C.F.R. § 682.405(a)(1). None of these exemptions is relevant here. 18 No. 14-1806 must be included in the rehabilitation agreement. For example, the guaranty agency must provide the borrower with a written statement confirming the borrower’s “reasonable and affordable payment amount” and “inform[ing] the borrower of the amount of the collection costs to be added to the unpaid principal at the time of the sale.” 34 C.F.R. § 682.405(b)(1)(vi). The second regulation, 34 C.F.R. § 682.410, is even more specific. It establishes fiscal, administrative, and enforcement requirements that a guaranty agency must satisfy to participate in the FFELP. Paragraph (b)(2) addresses collection costs: Collection charges. Whether or not provided for in the borrower’s promissory note and sub- ject to any limitation on the amount of those costs in that note, the guaranty agency shall charge a borrower an amount equal to reason- able costs incurred by the agency in collecting a loan on which the agency has paid a default or bankruptcy claim. These costs may include, but are not limited to, all attorney’s fees, collection agency charges, and court costs. [Subject to certain exceptions not relevant here], the amount charged a borrower must equal the lesser of—
would be charged for the cost of collec- tion under the formula in 34 C.F.R. [§] 30.60; or No. 14-1806 19
would be charged for the cost of collec- tion if the loan was held by the U.S. De- partment of Education. 34 C.F.R. § 682.410(b)(2). This paragraph makes clear that guaranty agencies must charge a borrower reasonable collection costs, and it establishes a cap on the maximum amount that can be charged by the guaranty agency. Paragraph (b)(2), however, does not specify the circumstances under which these costs may be assessed. That issue is addressed by other portions of § 682.410, which create procedural safeguards for student borrowers. First, some context. Guaranty agencies have two primary ways of pushing student-borrowers to repay their defaulted loans: (1) reporting the delinquent account to a consumer reporting agency (which lowers the borrower’s credit rating) and (2) assessing collection costs against the borrower. Because the Department of Education was concerned about recent graduates facing these adverse consequences without first being given an opportunity to cure their defaults, it created protections in § 682.410(b)(5)(ii). It provides that guaranty agencies must take certain actions before either reporting the default or assessing collection costs: The guaranty agency, after it pays a default claim on a loan but before it reports the default to a consumer reporting agency or assesses collection costs against a borrower, shall, within the timeframe specified in paragraph (b)(6)(ii) of this section, provide the borrower with— 20 No. 14-1806 (A) Written notice that meets the re- quirements of paragraph (b)(5)(vi) of this section regarding the proposed ac- tions; (B) An opportunity to inspect and copy agency records pertaining to the loan obligation; (C) An opportunity for an administra- tive review of the legal enforceability or past-due status of the loan obligation; and (D) An opportunity to enter into a re- payment agreement on terms satisfacto- ry to the agency. 34 C.F.R. § 682.410(b)(5)(ii) (emphasis added). This provision does not specify a particular timeframe for these actions, but it includes two cross-references that do. First, subparagraph (b)(6)(ii) requires the guaranty agency to send the written notice mentioned in (b)(5)(ii) within 45 days of the date it pays the lender’s default claim. Second, subparagraph (b)(5)(iv)(B) requires the agency to give the borrower at least 60 days from the date of the initial notice to request administrative review of the loan. Subparagraph (b)(5)(ii) effectively creates a safe harbor for borrowers who find themselves in default for the first time. When a borrower is first notified that a guaranty agency has paid a default claim on her loan, she has a 60-day window to request administrative review of the debt or to enter into a repayment agreement with the agency. If she does not take either action, the guaranty agency can then No. 14-1806 21 take collection actions against her, report her default to a consumer reporting agency, and assess collection costs against her in the amount specified by § 682.410(b)(2). To be sure, subparagraph (b)(5)(iv)(B) mentions the opportunity to request administrative review of the loan obligation, not the opportunity to enter into a repayment agreement with the agency. But that is not a problem for Bible. Her point is that subparagraph (b)(5)(ii) requires the guaranty agency to provide the borrower with all four things before reporting the debt to a consumer reporting agency or assessing collection costs, and one of those things (administrative review) triggers a waiting period of at least 60 days. The regulations do not force the borrower to choose between requesting administrative review and entering into a repayment program. The borrower has a right to request administrative review and then to decide whether to enter into a repayment agreement. Accordingly, the borrower has at least 60 days to enter into an alternative repayment agreement. That Bible did not request administrative review of her loan obligation in this case is beside the point; she had at least 60 days to do so, and before that time ran out, she entered into the rehabilitation agreement. This understanding is confirmed by § 682.410(b)(6)(ii), which requires the guaranty agency to inform the borrower “that if he or she does not make repayment arrangements acceptable to the agency, the agency will promptly initiate procedures to collect the debt,” such as garnishing her wages, filing a civil suit, or taking her income tax refunds. 34 C.F.R. § 682.410(b)(6)(ii). What would be the point of warning the borrower that declining to make repayment arrangements would trigger costly debt collection activities if 22 No. 14-1806 the guaranty agency could initiate these procedures and assess those costs regardless of whether she agrees to repay? That the regulations create this sort of safe harbor is not surprising. Under USA Funds’ interpretation of the regulations, a guaranty agency could assess collection costs against a borrower even though it was never forced to “initiate procedures to collect the debt.” This would allow the guaranty agency to charge for costly actions that it might never need to take, such as wage garnishment or filing a civil suit. This case illustrates the point. USA Funds assessed over $4,500 in collection costs even though it merely sent one letter, sent and received one fax, spoke to Bible and her attorney on the phone several times, and cashed Bible’s monthly checks. The safe harbor of subparagraph (b)(5)(ii) also creates an incentive for first-time defaulters to rehabilitate their loans by voluntary repayment. If first-time defaulters knew that they would face collection costs regardless of whether they agree to repay, they would have less incentive to enter into the repayment program voluntarily. These regulations are designed to reward cooperation. This concept of providing a borrower with notice and an opportunity to resolve the default before being subject to adverse consequences, such as credit reporting or collection costs, is not new. When the Department first incorporated this concept into the FFELP regulations in 1992, it was actually borrowing from a requirement that had been imposed on guaranty agencies back in 1986 under the federal tax refund offset program. Under that program, guaranty agencies were required to provide borrowers with notice of the proposed offset and an opportunity to avoid that offset by entering into a satisfactory repayment agreement. See Letter from No. 14-1806 23 Lynn B. Mahaffie, Dep’t of Education, Dear Colleague Letter Gen-15-14, at 2–3 (July 10, 2015). The disputed regulations here are based on that same model: the defaulted borrower must be given an opportunity to avoid the adverse consequences by promptly agreeing to repay the debt voluntarily. The intent to create this safe harbor is further shown by a related statutory provision dealing with credit reporting. Under the HEA, Congress expressly provided that before reporting the default to a consumer reporting agency, the guaranty agency must provide the borrower with notice that the loan will be reported as in default “unless the borrower enters into repayment.” 20 U.S.C. § 1080a(c)(4) (emphasis added). “[I]f the borrower has not entered into repayment within a reasonable period of time,” then the guaranty agency must report the default. Id. The clear implication of § 1080a(c)(4) is that if the borrower timely enters into repayment, then the guaranty agency may not report the loan as in default. The Secretary of Education issued the disputed regulation here, 34 C.F.R. § 682.410(b)(5), to implement this statutory requirement found in § 1080a(c)(4). See Letter from Lynn B. Mahaffie, Dep’t of Education, Dear Colleague Letter Gen15-14, at 2 (July 10, 2015), citing 57 Fed. Reg. 60280, 60355–56 (Dec. 18, 1992). Subparagraph (b)(5)(ii) discusses credit reporting and the assessment of collection costs in the exact same way: “but before it reports the default to a consumer reporting agency or assesses collection costs against a borrower … .” USA Funds has given us no persuasive reason to treat one of the stated adverse consequences of default (a bad credit report) differently from the other (collection 24 No. 14-1806 costs). Yet that is precisely what its interpretation of the statutory framework and related regulations would do. This conclusion is based on the text of the applicable statutory provisions, regulations, and the MPN itself. USA Funds does not squarely address the textual basis of Bible’s claim but responds with three arguments. First, it argues that § 682.410(b)(2) allows it to impose collection costs, and the regulations do not explicitly prohibit the imposition of collection costs against a borrower who has defaulted but promptly entered into a repayment agreement. This argument is not persuasive. Paragraph (b)(2) merely establishes the background rule that the guaranty agency must assess “reasonable collection costs” against the borrower and establishes the cap on the maximum amount of costs that can be charged. It does not say anything about the circumstances under which these costs can be imposed. As explained, other parts of the regulation such as subparagraph (b)(5)(ii) impose more specific requirements about the circumstances in which collection costs may be assessed. Second, USA Funds contends that Bible’s interpretation of § 682.410(b)(5)(ii)(D) ignores the fact that the repayment agreement must be “on terms satisfactory to the agency.” It appears to argue that under this language the guaranty agency retains the discretion to assess collection costs whenever it wants. But this interpretation is inconsistent with the introductory paragraph of the regulation, which makes clear that the agency must provide the borrower an opportunity to enter into a repayment agreement before collection costs are assessed. Guaranty agencies do not have unfettered disNo. 14-1806 25 cretion to impose whatever collection costs they want, whenever they want, as the argument suggests.6 Contrary to USA Funds’ arguments, Bible’s interpretation still gives meaning to the phrase “on terms satisfactory to the agency.” Under her theory, USA Funds retained the discretion to set the terms of the repayment agreement. After all, it transmitted the form document to Bible that became the rehabilitation agreement. It could have insisted on higher monthly payments, for example. USA Funds had the power to set the initial terms of its offer and to reject any proposed counteroffer. It did not have the power, though, to impose collection costs in contravention of § 682.410(b)(5)(ii). Third, USA Funds points to another provision in the MPN: “If I default, the guarantor may purchase my loans and capitalize all then-outstanding interest into a new principal balance, and collection fees will become immediately due and payable.” This provision, however, does not displace the guaranty agency’s obligations under 34 C.F.R. § 682.410. The collection fees become “immediately due and payable” only after the guaranty agency has first provided the borrower with (1) written notice that meets the require- 6A “rehabilitation” agreement is one type of authorized “repayment agreement.” See 34 C.F.R. § 682.405(a)(2) (a loan is “rehabilitated” after the borrower has voluntarily “made and the guaranty agency has received nine of the ten payments required under a monthly repayment agreement”) (emphasis added); see also 20 U.S.C. § 1078-6(a)(4) (provision authorizing loan rehabilitation refers to borrower making “scheduled repayments”); accord, Letter from Lynn B. Mahaffie, Dep’t of Education, Dear Colleague Letter Gen-15-14, at 5 (July 10, 2015) (“Thus, a rehabilitation agreement is simply a specific form of a satisfactory repayment agreement.”). 26 No. 14-1806 ments spelled out in subparagraph (b)(5)(vi), (2) an opportunity to inspect and copy agency records pertaining to the loan obligation, (3) an opportunity for administrative review of the enforceability or past-due status of the loan obligation, and (4) an opportunity to enter into a repayment agreement. See 34 C.F.R. § 682.410(b)(5)(ii)(A)–(D). Interpreting the provision as USA Funds suggests would contradict § 682.410(b)(5)(ii). Recall, moreover, that USA Funds had told Bible that she owed zero collection costs when she first defaulted. It was not until after she signed the rehabilitation agreement that she finally learned about the costs. ii. Deference to the Secretary of Education’s Interpretation Even if the preceding analysis does not provide the best interpretation of the statutory framework and accompanying regulations, the author and Judge Flaum agree the same re- sult would still be correct based on the deference we owe to the Secretary of Education, who is tasked with administering the FFELP and issuing the implementing regulations. Because the HEA does not define “reasonable collection costs,” Congress “explicitly left a gap for the agency to fill,” Chevron, U.S.A., Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837, 843 (1984), and delegated to the Secretary of Education authority to “prescribe such regulations as may be necessary to carry out the [Act’s] purposes.” 20 U.S.C. § 1082(a)(1). The Secretary exercised that expressly delegated authority by issuing 34 C.F.R. § 682.410, “which establishes the basic rules for the assessment of collection costs against borrowers who have defaulted on their student loans.” See Black v. Educational Credit Mgmt. Corp., 459 F.3d 796, 800 (7th Cir. 2006). The Secretary’s reasonable interpretation of the No. 14-1806 27 Act is entitled to substantial deference. See Chevron, 467 U.S. at 843–44. And the agency’s interpretation of its own regulations is “controlling” unless it is (1) plainly erroneous or inconsistent with the regulation, (2) does not reflect the agency’s fair and considered judgment on the matter in question, or (3) represents a post hoc rationalization advanced by the agency seeking to defend past agency action against attack. Christopher v. SmithKline Beecham Corp., 567 U.S. —, 132 S. Ct. 2156, 2166 (2012), citing Auer v. Robbins, 519 U.S. 452, 461–62 (1997) (some citations omitted). The Secretary’s interpretation of “reasonable collection costs” in 20 U.S.C. § 1091a(b)(1) is reasonable. The Secretary interprets “reasonable” to mean that similar costs must be assessed against borrowers who are at similar stages of delinquency. Under the Secretary’s view, a borrower who promptly enters into a voluntary repayment agreement and complies with that agreement, thereby obviating the need for the guarantor to initiate costly debt collection procedures, is not similarly situated to someone who does not, thereby forcing the guarantor to undertake costly debt collection procedures. Even if we thought the interpretation urged by USA Funds were better in the abstract, “a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.” Chevron, 467 U.S. at 844 (footnote omitted); see also Michigan v. EPA, 576 U.S. —, 135 S. Ct. 2699, 2707 (2015) (“Chevron directs courts to accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers.”); Chemical Mfrs. Ass’n v. Natural Resources Defense Council, Inc., 470 U.S. 116, 125 (1985) (“This view of the agen28 No. 14-1806 cy charged with administering the statute is entitled to considerable deference; and to sustain it, we need not find that it is the only permissible construction that EPA might have adopted but only that EPA’s understanding of this very ‘complex statute’ is a sufficiently rational one to preclude a court from substituting its judgment for that of EPA.”). USA Funds has not shown that the Secretary’s interpretation is unworthy of deference. The Secretary’s decision to interpret 34 C.F.R. § 682.410(b)(5)(ii) as creating a safe harbor for borrowers in Bible’s position is not plainly erroneous or inconsistent with the regulation. It reflects the agency’s fair and considered judgment on the question. And it does not represent a post hoc rationalization by the agency seeking to defend past agency action against attack. There is no indication from the record that the Secretary has ever taken a contrary position since the regulation was first adopted in 1992. And as explained above, when the Department of Education first issued this regulation, it was merely borrowing from a requirement that had previously been imposed on guaranty agencies under the federal tax refund offset program. See Letter from Lynn B. Mahaffie, Dep’t of Education, Dear Colleague Letter Gen-15-14, at 2–3 (July 10, 2015) (explaining history of the “notice and opportunity to resolve” concept). In addition, the Secretary took this same position in a legal brief filed in an earlier case in this circuit, Educational Credit Mgmt. Corp. v. Barnes, 318 B.R. 482 (S.D. Ind. 2004), aff’d sub nom. Black v. Educational Credit Mgmt. Corp., 459 F.3d 796 (7th Cir. 2006), interpreting § 682.410(b)(5) in the same manner it does here. Both its reasoning and its conclusion No. 14-1806 29 have remained exactly the same.7 Cf. Christopher, 132 S. Ct. at 2165–68 (no Auer deference where agency’s interpretation would have imposed “massive liability” for conduct that occurred before the announcement of the interpretation, agency’s announcement was preceded by long period of acquiescence to industry practice, and agency materially changed its reasoning during course of litigation). To summarize, Bible has alleged sufficiently that USA Funds breached its contract with her by assessing over $4,500 in collections costs after she timely entered into and complied with a monthly repayment agreement, in violation of the applicable regulations that were incorporated into the parties’ contract.