After an unexpectedly slow start, the Trump administration’s deregulatory push finally gained momentum in late 2017.
In the field of student lending, this slowdown affected the Department of Education (DOE), the Consumer Financial Protection Bureau (CFPB), and the Department of Justice (DOJ). Unwilling to let this vacuum stand, various states invoked their own consumer protection laws and passed new regulations regarding some of the most visible participants in the student loan market: the DOE’s servicers of federal student loans, the middlemen between borrowers, and the market’s biggest lender. In response, the DOJ and DOE have sought to stymie these efforts by invoking an argument infrequently made in prior years: essentially, federal law—they now argue—preempts all such state regulatory action.
This article examines these events and summarizes likely arguments.
State of the Law
Federal Government’s Regulatory Framework for Post-Secondary Education
Passed to keep the door to higher education open to all students of ability regardless of socioeconomic background, the Higher Education Act of 1965 (HEA) commenced the federal government’s large-scale involvement in higher education. Among other initiatives and programs, this far-reaching statute established the Federal Family Education Loan Program (FFELP), a now-defunct system of loan guarantees meant to encourage lenders to loan money to students and their parents on favorable terms.
The HEA authorized the secretary of DOE to “prescribe such regulations as may be necessary to carry out the purposes” of the act and served as the legal anchor for numerous DOE regulations. The Health Care and Education Reconciliation Act of 2010 (HCERA) dismantled the FFELP. Although current loans remained unaffected, HCERA left the Federal Direct Loan Program, created in 1993, as the sole source of federal student loans. In addition, HCERA limited private participation in this program to servicers alone.
Once a student graduates, loan servicers act as the primary point of contact between borrowers and the federal government. Because of their prominent role, servicers have attracted the attention of state and federal officials. The DOE currently contracts with eight private servicers.
As of January 1, 2018, the DOE has three Title IV Additional Servicers (TIVAS): (1) Navient Corporation (Navient); (2) FedLoan Servicing, an affiliate of the Pennsylvania Higher Education Assistance Agency (PHEAA); and (3) Nelnet, Inc.
The DOE has an additional five for-profit servicers: (1) the Missouri Higher Education Loan Authority (MOHELA); (2) Granite State Management & Resources; (3) the Oklahoma Student Loan Authority (OSLA); (4) the Higher Education Servicing Corp. (HESC) and EdFinancial on behalf of the North Texas Higher Education Authority; and (5) CornerStone.
For decades, the federal government routinely defended these servicers against borrowers’ lawsuits with precisely the same argument. For example, on October 1, 1990, the DOE contended that its regulations governing the FFEL Program, then known as the Guaranteed Student Loan program, preempted state laws regarding the conduct of loan collection activities.
A second such instance took place 19 years later. In 2009, the DOJ, on behalf of the DOE, advanced a reading of the DOE’s operating statutes in Chae v. SLM Corporation, a case launched against Sallie Mae, a FFEL program loan servicer, in the U.S. District Court for the Central District of California. Specifically, the DOJ argued in its motion for summary judgment that the state consumer protection laws on which the plaintiffs relied conflicted with federal law and were thus preempted. Both the district court and the Ninth Circuit agreed.
Within its prescribed sphere, federal law reigns superior to any state law counterparts pursuant to the Supremacy Clause of the U.S. Constitution. The doctrine of “preemption,” the displacement of state law by federal law, constitutes a subset of the field of “federalism.” It dates back to Chief Justice John Marshall’s core “conviction” in McCullough v. Maryland: “[T]he States have no power, by taxation, or otherwise, to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by Congress, to carry into effect the powers vested in the national government.” It can take one of three forms: (1) express preemption; (2) conflict (implied) preemption; and (3) field (implied) preemption.
Regardless of the version, Congress’s purpose remains the ultimate touchstone in every preemption case. Federal courts, moreover, tend to favor a presumption against preemption.
Express preemption occurs whenever Congress or a federal agency enacts a law that directly revokes specified powers from the states. Customarily, the Supreme Court has narrowly and strictly construed these explicit provisions to preserve traditional areas of state regulation regarding health, safety, and welfare. As it has often repeated, to displace traditional state regulation, the federal statutory purpose must be “clear and manifest.” For this reason, when a statute’s express preemption clause is susceptible to more than one plausible reading, federal courts ordinarily decline to adopt the preemptive one.
Field preemption, alternatively, requires examination not of a statute’s text, but rather its structure and purpose. It typically arises where a federal regulatory scheme occupies the legislative field. In some cases, courts have found field preemption when federal law is so pervasive and comprehensive as to compel the inference that Congress left no room for state-level regulation. In other cases, “an Act of Congress touches a field in which [the] federal interest is so dominant[,] that . . . the federal system will be assumed to preclude enforcement of state laws on the same subject.” With certain important exceptions, bankruptcy law constitutes one of the more prominent examples of this kind of preemption’s application.
Like field preemption, conflict preemption does not turn on any express statement of congressional intent. Instead, conflict preemption bars a state law’s enforcement when an actual clash between state and federal law inevitably occurs. It often arises where it is impossible for a private party to comply with both state and federal requirements or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. In some cases, field preemption may be treated as “a species of conflict preemption,” where state regulatory processes are preempted by conflict with federal law as well as by field preemption—and for the same general reasons.
Impending Battle Over Federal Preemption’s Reach
For years, as student loan debt crossed the $1.4 trillion mark and the number of borrowers passed 44 million, borrowers and their advocates criticized the federal government’s chosen servicers for purportedly not working on behalf of debtors’ best interests.
Capitulating to these concerns, various states began enacting laws that forced student-loan servicers to hold licenses to operate within their borders and to comply with certain consumer protection guidelines in 2015.
As these laws took effect, servicers responded with lawsuits and lobbyists. In particular, the National Council of Higher Education Resources (NCHER), a student loan industry trade group, urged the federal government to endorse the application of field and/or conflict preemption of state consumer laws purporting to regulate servicers’ conduct, in either court filings or official agency publications, as one more way of beating back these escalating efforts.
Federal Government’s Position
On March 12, 2018, the DOE formally posted a notice of interpretation (NI) 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 motivation behind this NI: the enactment by certain states of “regulatory regimes that impose new regulatory requirements on servicers of loans” or disclosure requirements on loan servicers with respect to loans made under the HEA. Such claims, the NI asserts, “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 NI added.
Months earlier, just as it had in Chae years prior, the DOJ had telegraphed its endorsement of this approach when it took the rare step of filing a Statement of Interest (SOI) in a Massachusetts case in defense of PHEAA, a Pennsylvania-based national servicer, pursuant to longstanding federal law.
In this document, the DOJ reasoned that the servicer’s practices are either required or authorized by federal statutes, federal regulations, or the servicer’s contract with the DOE; thus, the Massachusetts Attorney General’s state-law claims violated the Supremacy Clause.
More specifically, the DOJ argued for conflict preemption for three reasons: (1) PHEAA cannot comply with Massachusetts’ interpretation of the relevant statutes and the actual requirements of federal law; (2) Massachusetts’ claims “stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” as expressed in the HEA; and (3) Massachusetts’ requested relief would likely “require PHEAA to violate its contract with DOE.”
Although the Massachusetts state court denied PHEAA’s motion to dismiss on February 28, 2018, in an opinion released on March 1, 2018, it did not address the DOJ’s preemption argument. Instead, it sidestepped the issue by narrowly construing the SOI’s text.
According to the court, the DOE was “not actually argu[ing] that any of . . . [Massachusetts’] claims . . . [are] preempted by federal law, or that any of the alleged misconduct by PHEAA at issue here is affirmatively allowed by federal law.” Instead, the SOI amounted merely to an admonition that the state’s complaint could conflict with the DOE’s requirements. Given that “any relief against PHEAA could be structured . . . as not to interfere or otherwise conflict with the . . . [DOE’s] legal rights, and it is therefore not inevitable that the . . . [DOE] will have an interest in whatever judgment may be entered,” the court was disinclined to find preemption.
Servicers applauded the DOE’s position. Within weeks, many submitted comment letters requesting the tendering of similar statements in dozens of pending state court cases. As the NCHER had already argued in the summer of 2017, state regulations can only “add an unnecessary web of regulations which are both duplicative and potentially contradictory to existing federal regulations and policies.” Already “heavily regulated” by the DOE and CFPB, “new state-level regulations” pointlessly “replicate these requirements with no additional benefit for borrowers, and at burdensome cost to servicing entities.” “To do things for some borrowers in Illinois, a different thing for borrowers in California, something else different for folks in Maine—it is a federal program and it gets confusing,” NCHER’s president maintained.
Response by State-Level Actors and Consumer Advocates
Consumer advocates and state officials have challenged these preemption arguments. With about a dozen states having recently passed or considering legislation to more strictly oversee and license federal loan servicers, two groups announced their outright opposition to any such assertion of federal preeminence. On March 2, 2018, the Conference of State Bank Supervisors, which represents regulators in all 50 states, pointed out that, “Congress has deliberately preserved this cooperative state-federal regulatory framework for nonbank financial services activities for the benefit of consumers and providers of financial services alike.” Usually, “[p]reemption of state licensing or regulation is a policy response that Congress has carefully considered and chosen to do in certain circumstances through specific legislation.” It thus saw as improper DOE’s attempt to compel preemption “through a mere interpretive notice,” a decision more rightly “rest[ing] with Congress and not with a federal agency.”
Meanwhile, in equally blunt terms, the attorneys general (AGs) of more than two-dozen states rebuked this campaign, both before and after the NI’s publication. On October 23, 2017, 25 AGs wrote, “These requests defy the well-established role of states in protecting their residents from fraudulent and abusive practices. . . . The department cannot sweep away state laws that apply to student loan servicers and debt collectors.” As one signatory, Virginia’s Attorney General Mark Herring, explained, “We cannot allow student-loan servicers to sidestep state law and oversight and deny students and borrowers these vital protections from student loan abuses.” Within days of the NI’s release, 30 AGs reiterated these contentions.
Debating the Potential Ramifications of the Federal Government’s New Posture
The legal issues regarding the renewed emphasis on federal preemption by the DOE and DOJ remain largely unresolved; however, states will probably contest any such finding with three primary arguments.
First, they are likely to argue that consumer financial protection in the United States has always been a patchwork of state and federal law, so conflict or field preemption should not apply.
Second, they are likely to claim that the anti-preemptive provision of the Dodd-Frank Consumer Financial Protection Act of 2010 allows them to circumvent this danger.
Third, they may point to case law suggesting that informal position statements akin to the NI are entitled to less deference.
The DOE and DOJ likely will counter these arguments in several ways.
First, as the DOJ noted in its SOI in Massachusetts, Congress created the Direct Loan Program to simplify the delivery of student loans to borrowers and eliminate borrower confusion, provide borrowers with a variety of repayment plans, replace FFEL, minimize unnecessary cost to taxpayers and borrowers, and create a more streamlined program that can be managed more effectively at the federal level. The same can be said about the original FFEL program.
State regulation could lead to the emergence of different plans for loan forgiveness for borrowers in every state, resulting in borrowers being treated differently depending on the state in which they live, to the detriment of uniformity and efficiency. At the same time, given that more borrowers may be forgiven after fewer payments, one more objective—that of conserving taxpayer funds—may be imperiled by overly aggressive state regulation. The same hit to the U.S. Treasury would come from servicers’ requests for increased payments from the federal government to compensate for the added administrative complexity created by the need to comply with dozens of jurisdictions’ new mandates. All these harms would arguably undermine the ability of the DOE to fulfill the HEA’s obvious and dominant goals—a fact that favors preemption.
Second, the DOE could point to actual conflicts between federal and state laws and regulations with respect to servicing of loans made by private lenders and guaranteed by the federal government through the FFEL program. Depending on the state regulation, examples may include deadlines for borrower communications and requirements around the resolution of disputes raised by borrowers.
Third, and perhaps most significantly, the HEA actually contains an express preemption provision. Per this section, “[l]oans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 . . . shall not be subject to any disclosure requirements of any [s]tate law.” The DOE has concluded that this section “encompass[es all] informal or non-written communications to borrowers as well as reporting to third parties such as credit reporting bureaus.” A court may reasonably concur.
Recent events indicate that the DOE and state AGs are preparing to clash over the question of whether federal preemption bars (in whole or in part) regulation by the states of federal student loan servicers. It remains to be seen how courts will resolve this coming conflict.