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Student loan servicer seeks declaratory and injunctive relief to resolve dispute concerning preemption of state law
On April 4, a Pennsylvania-based student loan servicer (servicer) that services federal student loans on behalf of the U.S. Department of Education (Department) filed a complaint in the U.S. District Court for the District of Columbia against the Connecticut Department of Banking and its banking commissioner (together, the Connecticut Defendants), and the Department, seeking a judicial determination that the federal Privacy Act of 1974 (Privacy Act) preempts Connecticut law requiring the servicer to disclose certain records containing confidential information about its student loan borrowers to the state, along with data related to borrower complaints, or risk revocation of its state servicer’s license. In addition, the servicer seeks injunctive relief against the Connecticut Defendants to prevent the enforcement of state law in contravention of the Privacy Act and revocation of the servicer’s license.
In support of the injunctive relief sought, the servicer cites several irreparable harms, including (i) the potential termination of its federal loan servicing contract; (ii) the revocation of its license to service, which would adversely affect approximately 100,000 student borrowers in the state, and (iii) the potential impact on loan servicing arrangements that the servicer has with “dozens of private lenders doing business in Connecticut.”
As previously covered in InfoBytes, on March 12 Department Secretary Betsy DeVos published an Interpretation that asserted the position that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of loan under the Federal Family Education Loan Program “is preempted to the extent that it undermines uniform administration of the program.” However, last month—as discussed in InfoBytes—a bipartisan coalition of 30 state Attorneys General released a letter urging Congress to reject Section 493E(d) of the Higher Education Act reauthorization—H.R. 4508, known as the “PROSPER Act”—which would prohibit states from “overseeing, licensing, or addressing certain state law violations by companies that originate, service, or collect on student loans.” The states expressed a concern that, if enacted, the law would preempt state consumer protection laws for student borrowers and constitute “an all-out assault on states’ rights and basic principles of federalism.”
Bipartisan group of state Attorneys General denounce potential limitations on state oversight of student loan industry
On March 15, a bipartisan group of 30 state Attorneys General released a letter urging Congress to reject Section 493E(d) of the Higher Education Act reauthorization – H.R. 4508, known as the “PROSPER Act” – which would prohibit states from “overseeing, licensing, or addressing certain state law violations by companies that originate, service, or collect on student loans.” Led by the New York and Colorado Attorneys General, the letter characterizes Section 493E(d) as an “an all-out assault on states’ rights and basic principles of federalism.” According to the letter, if enacted, parts of the student loan industry would be immunized from state-level enforcement, placing a larger consumer protection role on the Department of Education for which the agency is not equipped to handle. The Attorneys General assert that the states have the legal capacity and track record to enforce against abuses in the student loan market; citing to a statistic which estimates $1.38 trillion in student loan debt, the letter highlights previous state enforcement actions and emphasizes the need for states and the federal government to work together to protect U.S. borrowers.
In addition to Section 493E(d) of the PROSPER Act, the Department of Education recently published an interpretation in the Federal Register which takes the position that state regulation of certain federal student loan programs is preempted by federal law, previously covered by InfoBytes here.
Department of Education: states do not have the authority to regulate student loan servicers
On March 12, the U.S. Department of Education published an Interpretation in the Federal Register, which takes the position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program (Direct Loans) and the Federal Family Education Loan Program (FFEL Program Loans) is preempted by Federal law. Specifically, the Department noted that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of FFEL Program Loans “is preempted to the extent that it undermines uniform administration of the program.” The Interpretation was issued in response to several states having recently enacted regulatory regimes, or sought to apply existing consumer protection statutes, imposing additional requirements on such student loan servicers. The Ranking Member of the House Committee on Education and the Workforce, Representative Bobby Scott, D-VA, issued a statement following the notice of publication on March 9, disagreeing with the Department’s Interpretation: “Congress has not given the Secretary the authority to preempt state consumer protection law for student borrowers. . . . I urge the Secretary to reverse this egregious overreach of Federal authority to rescind states’ ability to protect student borrowers and hold unscrupulous servicers accountable.”
Superior Court denies student loan servicer’s motion to dismiss Massachusetts Attorney General’s lawsuit
On February 28, a Suffolk County Superior Court denied a Pennsylvania-based student loan servicing agency’s (defendant) motion to dismiss a lawsuit filed by the Massachusetts Attorney General, which alleged the defendant overcharged borrowers and improperly processed claims for public service loan forgiveness. (See previous InfoBytes coverage here.) According to the court, the loan servicer’s argument that it is “an arm of the Commonwealth of Pennsylvania” and therefore entitled to sovereign immunity from lawsuits was not convincing; it noted that not only had the defendant failed to qualify as a state entity but it demonstrated “substantial financial and operational independence” from the state.
Furthermore, the court also rejected the defendant’s arguments that the action was not permitted because the Department of Education is an indispensable party to the suit and that the Massachusetts Attorney General’s claims “are preempted ‘to the extent’ that they ‘conflict with the requirements of federal law.’” The judge opined that the Department of Education is not an indispensable party even though some of the injunctive relief sought may conflict with the Department of Education’s rights under its loan servicing contract or regulatory requirements.
Coalition of state attorneys general urge Department of Education to reject accreditor’s application
On February 20, Massachusetts Attorney General Maura Healey, along with 20 other state attorneys general and the Executive Director of the Hawaii Office of Consumer Protection, issued a letter to U.S. Department of Education (DOE) Secretary Betsy DeVos in opposition to an application submitted by the Accrediting Council for Independent Colleges and Schools (ACICS) to regain its status as a nationally recognized accreditor. According to Healey’s letter, which was submitted in response to the DOE’s January request for comments concerning ACICS’ application, “ACICS’ systemic accreditation failures and refusal to fulfill its obligations to students and taxpayers have enabled predatory schools to ruin the lives of hundreds of thousands of students. . . . Given the gravity of these failures, the Department should not grant any application for recognition made by ACICS without verifying that ACICS has corrected every deficiency and complied with all Departmental requirements effectively and consistently.” As previously covered in InfoBytes, this is not the first time that state attorneys general have reached out to the DOE concerning ACICS’ actions. The DOE upheld the decision to terminate ACICS’ recognition in December 2016.
Department of Education releases RFI on undue hardship threshold
On February 21, the Department of Education published a Request for Information (RFI) seeking feedback on whether there is a need to clarify the threshold for “undue hardship” when evaluating bankruptcy cases in which borrowers seek to discharge student loans. According to the RFI, current U.S. Bankruptcy Code states that student loans can be discharged in bankruptcy claims only if “excepting the debt from discharge would impose an ‘undue hardship’ on the borrower and the borrower’s dependents.” However, according to the RFI, the term “Undue hardship” has never been defined by Congress in the Bankruptcy Code, nor has the Department been delegated the authority to do so. Instead, the context for proving a hardship claim falls under one of two tests summarized in the department’s 2015 Dear Colleague Letter (2015 Letter). The RFI requests comments on the following: (i) what factors should be considered when evaluating undue hardship claims; (ii) the weight to be given to any such factors; (iii) whether the use of two tests result in any “inequities among borrowers”; (iv) under what circumstances should loan holders “concede an undue hardship claim by the borrower”; and (v) whether and how changes should be made to the 2015 Letter. Comments on the RFI are due May 22.
State AGs Sue Department of Education for Withholding Promised Student Loan Debt Relief
On December 14, state attorneys general from California, Massachusetts, Illinois, and New York, filed lawsuits (see here and here) against the U.S. Department of Education (Department) in federal courts in California and Washington, D.C., accusing the Department of withholding student loan debt relief to tens of thousands of borrowers determined to have been defrauded by a now-defunct chain of for-profit colleges. According to the complaints, the Department promised borrowers expedited discharges of their federal student loans, reimbursements of previously paid amounts, and, according to the California complaint, “streamlined review procedures” to quickly process relief. However, the attorneys general made a variety of claims, including asserting that the Department has (i) since January 20, 2017, delayed approval of all pending borrower-defense claims; (ii) pursued unlawful debt-collection actions against borrowers, such as seizing students’ tax refunds and garnishing their wages in violation of the Administrative Procedure Act; and (iii) failed to justify the “disparate and unequal treatment of similarly situated claimants.” In addition to a request that the court vacate denials of covered borrower-defense claims, the attorneys general seek, among other things, that the Department (i) resume discharging the loans of affected borrowers; (ii) cease the alleged unlawful collections; and (iii) according to the Massachusetts, Illinois, and New York lawsuit, provide ancillary relief “including refunding amounts already seized from . . . borrowers pursuant to the unlawful certification for offset or administrative wage garnishment.”
The lawsuits follow other challenges and proposals of state attorneys general to the Department related to its oversight of federal student loans (see previous InfoBytes coverage here, here, and here).
FTC, Department of Education Announce Education Technology Workshop to Explore Privacy Issues
On October 4, the FTC and the Department of Education issued a notice announcing a joint Ed Tech (education technology) workshop to examine the challenges concerning privacy implications as more schools are using school-issued personal computing devices. The workshop will discuss issues surrounding the FTC’s Children’s Online Privacy Protection Act Rule (COPPA) as it applies to schools and how it intersects with the Department of Education’s Family Educational Rights and Privacy Act, which is designed to protect the privacy of students’ education records. The workshop, which is open to the public, will be held in Washington, D.C., on December 1.
As previously covered in InfoBytes, the FTC made modifications to COPPA’s safe harbor program this past July that now require all participants to conduct a comprehensive annual internal assessment of any third-party or service provider that collects personal information from children on their websites or through online services, in addition to issuing updates in June regarding resources companies can use to ensure COPPA compliance.
AG Coalition Urges Department of Education to Reconsider Termination of MOUs With CFPB
On September 26, Pennsylvania Attorney General Josh Shapiro, along with 18 other state attorneys general (state AGs) and the Executive Director of the Hawaii Office of Consumer Protection, issued a letter to U.S. Department of Education (Department) Secretary Betsy DeVos in reaction to the Department’s August 31 letter to the CFPB, which terminated two Memoranda of Understanding (MOUs) that previously permitted the sharing of information in connection with the oversight of federal student loans. (See previous InfoBytes coverage regarding the MOUs here.) The letter to Secretary DeVos urges the Department to reconsider the termination of the MOUs and offers support for the work the CFPB has done—often in partnership with the Department and state AGs—to protect the millions of students and families that are repaying student loans. The State AGs contend the Department “falsely asserted it has exclusive jurisdiction over companies that service federal student loans when, in fact, student loan servicers are under the jurisdiction of the CFPB, [FTC], [DOJ], [state AGs] and other law enforcement agencies.” The state AGs further claim that the termination of the MOUs removes “critical protections” that were in place to “streamline the supervision of student loan servicers” and assist borrowers trying to resolve complaints related to their student loans. The letter cites several actions initiated by state AGs against the Department for allegedly abandoning its responsibility to protect student loan borrowers over the past seven months, including the Department’s decision to delay the Borrower Defense Rule and roll back the Borrower Defense and Gainful Employment Rules.
Department of Education Terminates Student Loan Sharing Agreements with CFPB, Announces Expanded Focus on Enforcement and Consumer Protection
On August 31, the U.S. Department of Education submitted a letter notifying the CFPB that it intends to terminate two Memoranda of Understanding (MOUs) between the agencies regarding the sharing of information in connection with the oversight of federal student loans. The MOUs that will terminate on September 30, 2017, are the “Memorandum of Understanding Between the Bureau of Consumer Financial Protection and the U.S. Department of Education Concerning the Sharing of Information” (Sharing MOU), dated October 19, 2011, and the “Memorandum of Understanding Concerning Supervisory and Oversight Cooperation and Related Information Sharing Between the U.S. Department of Education and the Consumer Financial Protection Bureau,” dated January 9, 2014.
The letter rebukes the CFPB for overreaching and undermining the Education Department’s mission to serve students and borrowers, and states that it “takes exception to the CFPB unilaterally expanding its oversight role to include the Department's contracted federal student loan servicers.” The letter also accuses the CFPB of failing to share all complaints related to Title IV federal student loans within 10 days of receipt as required by the MOUs, and that the Bureau’s intervention in these cases “adds confusion to borrowers and servicers who now hear conflicting guidance related to Title IV student loan services for which the Department is responsible.”
In a press release issued by the House Committee on Education and the Workforce on September 1, Representative Virginia Foxx (R-N.C.) praised the Department’s decision stating, “[t]he Department of Education has made it clear that its partnership with the CFPB is doing more harm than good when it comes to how it can best serve students and borrowers.” However, advocacy groups such as Americans for Financial Reform and the National Consumer Law Center (NCLC) criticized the Department’s decision, with the NCLC calling it “outrageous and deeply troubling” and refuting the Department’s claims that the CFPB “’unilaterally’ expanded its oversight role over servicers and collectors of federal student loans.” Instead it argued that the Department’s “failures are what led Congress to give the CFPB authority to help students.”
On the same day, the Education Department issued a press release announcing “a stronger approach to how Federal Student Aid (FSA) enforces compliance by institutions participating in the Federal student aid programs by creating stronger consumer protections for students, parents and borrowers against ‘bad actors.’” The strategy will focus on illegitimate debt relief organizations and schools that defraud students, and FSA will engage in “comprehensive communications and executive outreach to ensure parties and their leadership understand their responsibilities, the consequences of non-compliance and appropriate remedies.” The CFPB was notably absent, however, from the release’s reference to FSA’s continued stakeholder coordination, which listed the FTC and the DOJ.
On September 7, the CFPB responded to the CFPB’s letter to request time to “engage in a constructive conversation” with the Department to determine a path for continued collaboration to best serve the needs of student loan borrowers. Director Richard Cordray noted that because the Department has access to the CFPB’s Government Portal as part of the agencies’ arrangement, the Department is able to view borrower complaints in “near real-time.” According to Director Cordray, the Department has accessed the portal 80 times over the past three months. Several examples of the Bureau’s supervisory examinations are also provided to highlight the CFPB’s position that its actions have not been “inconsistent with the Department’s directives or [in conflict with the] shared goal of protecting student loan borrowers.”