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Education Dept. rolls back state-law preemption on student loans
On August 9, the U.S. Department of Education published an interpretation, noting “that there is significant space for State laws and regulations relating to student loan servicing, to the extent that these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws.” The interpretation clarifies the Department’s position on the legality of state laws and regulations regarding certain aspects of federal student loan servicing, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. According to the interpretation, though federal law preempts state laws that conflict squarely on issues such as timelines, dispute resolution procedures, and collections, the Department believes that it does not preempt state laws regarding affirmative misrepresentations or other measures meant to address improper conduct that could occur in Federal Family Education Loan Program. The Department stated that “[s]tates may consider and adopt additional measures which protect borrowers and do not conflict with Federal law,” and that “such measures can be enforced by the States and the Department can and will work with State officials to root out all forms of fraud, falsehood, and improper conduct that may occur in the Federal student aid programs.” According to the Department, “[t]his action will help states enforce borrower bills of rights or other similar laws to address issues with servicing of federal student loans.” The new interpretation revokes and supersedes the interpretation published in March 2018, “Federal Preemption and State Regulation of the Department of Education’s Federal Student Loan Programs and Federal Student Loan Servicers” (covered by InfoBytes here). Comments are due 30 days after publication in the Federal Register.
State AGs filed amicus brief in support of federal student loan borrowers
On July 29, a coalition of attorneys general from 20 states and the District of Columbia filed an amicus brief in the U.S. Court of Appeals for the Second Circuit against Secretary of Education Miguel Cardona and the Department of Education in support of an appeal challenging the Department’s 2019 rule governing student loan relief for defrauded borrowers (“2019 Rule”). As summarized in the brief, Congress created a statutory entitlement to loan relief for borrowers who are defrauded by their school—a process known as “borrower defense”—to “ensure that victimized students are not unfairly saddled with federal student loans.” The amici brief argues that the 2019 Rule “reject[ed] longstanding agency practice and positions going back 25 years to the first borrower defense rule” and “makes it all but impossible for defrauded borrowers to successfully obtain loan relief.” The states argue that the Department’s 2019 Rule is thus arbitrary and capricious under the Administrative Procedure Act and request that the Second Circuit reverse the district court’s holding to the contrary.
As previously covered by InfoBytes, in July 2020, state attorneys general from 22 states and the District of Columbia filed a complaint in U.S. District Court for the Northern District of California against Secretary of Education Betsy DeVos and the Department of Education, also asking the court to vacate the Department’s 2019 final rule.
Groups ask Education Dept. to stop preempting states on student lending
On July 7, the Conference of State Bank Supervisors (CSBS) and the North American Collection Agency Regulatory Association (NACARA) sent a letter to Department of Education Secretary Miguel Cardona urging the Department to rescind recent policies “claiming preemption or otherwise impairing state regulation of federal student loan servicers and debt collectors.” The letter acknowledges steps taken by the Department to facilitate coordination and collaboration with state financial regulators but notes that additional action is required to accomplish a shared mission of protecting student borrowers. Among other things, the letter discusses several Department actions taken over the years, including the Department’s 2018 position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program is preempted by federal law. The letter urges the Department “to rescind the 2018 preemption notice and formally recognize that state oversight and regulation is fully applicable to federal student loan servicers and debt collectors, entirely appropriate, and not in conflict with the purpose of the [Higher Education Act].” The letter also discusses revised guidance issued in May concerning the handling of outside requests for Department records and data. As previously covered by InfoBytes, the revised guidance supersedes the Department’s 2017 guidance and creates a “streamlined and expedited process” for reviewing information requests made by any state or federal authority for information pertaining to companies engaged in student loan lending or collections. However, CSBS and NACARA emphasize that the Department should “recognize that state financial regulators are independently authorized to access records in possession of the federal student loan servicers and debt collectors subject to state regulation.” Additionally, the letter requests, among other things, that the Department take additional action deemed necessary to “fully return” to a policy of collaboration for protecting student loan borrowers, pointing out that timing is important as most federal student loan repayments resume in October.
Department of Education discharges roughly $500 million in student loan debt
On June 16, the Department of Education announced the approval of 18,000 borrower defense to repayment claims for individuals who attended a now-defunct for-profit educational institution, providing borrowers with 100 percent loan discharges and providing approximately $500 million in relief. The educational institution has been subject to several investigations and settlements related to its private student loan origination practices, including allegations brought by the CFPB claiming the educational institution forced borrowers into “high-interest, high-fee” private student loans knowing that borrowers could not afford them. (See InfoBytes coverage on matters related to the educational institution here and here.) According to the Department’s announcement, the approvals cover two categories of borrower claims related to employment prospects and the ability to transfer credits, and mark “the first approval of a new category of borrower defense claims by the Department since January 2017.” Among other things, the Department found that borrowers’ “job prospects were not improved by attending” the educational institution and that credits from the educational institution rarely transferred.
Cordray streamlines process for student loan information requests
On May 28, Richard Cordray, Chief Operating Officer of Federal Student Aid (FSA) at the Department of Education, issued a memorandum to FSA vendors revising guidance related to handling outside requests for Department records and data. In 2017, the Department instructed loan servicers working for FSA to avoid responding directly to inquiries from third parties, including state and federal regulators, and required state attorneys general and regulators to submit requests for information directly to the Department. However, according to a blog post announcing the revised guidance, Cordray noted that FSA usually rejected the requests, thus forcing states to file lawsuits against FSA and student loan servicers in order to obtain the information. Cordray further emphasized that states and regulators need access to company policies and procedures, handbooks, consumer complaints, and other information should they think a student loan servicing company might be violating a law or regulation. The revised guidance supersedes the Department’s 2017 guidance and creates a “streamlined and expedited process” for reviewing information requests made by any state or federal authority for information pertaining to companies engaged in student loan lending or collections. Instructions are provided for vendors that receive information requests seeking to obtain Department records or data.
District Court rules FCRA waives sovereign immunity
On May 13, the U.S. District Court for the Eastern District of Michigan denied a motion to dismiss filed by the Department of Education (Department), ruling that the FCRA “unequivocally waives sovereign immunity” concerning the allegations at issue in the case. In the lawsuit, the plaintiff alleges, among other things, that the Department violated Section 1681s-2(b) of the FCRA by “negligently and willfully” failing to conduct a proper investigation of her dispute and by failing to remove an erroneous notation of “account in dispute” from a tradeline reported on her credit files. The Department moved to dismiss, arguing, among other things, that it could not be sued for damages under the FCRA “because Congress has not waived sovereign immunity with respect to that statute.”
The court, disagreed, pointing out that while the question of whether sovereign immunity is waived under the FCRA “has generated a circuit split,” the “authority finding that the FCRA waives sovereign immunity is more persuasive than the authority supporting the contrary view.” After examining the statute, the court noted that the FCRA defines a “person” to include a “government or governmental subdivision or agency,” and pointed out that the term “person” appears in other FCRA provisions cited within the plaintiff’s lawsuit. As an example, the court referenced Section 1681n(a), which states: “Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer.” The court also determined that the waiver of sovereign immunity “is sufficiently explicit” in Section 1681u of the FCRA.
Department of Education streamlines borrower defense relief process
On March 18, the Department of Education announced a new, streamlined approach for ensuring federal borrowers who attended institutions that engaged in certain misconduct are able to receive full discharges of their William D. Ford Direct Loan Program loans. The new approach—which rescinds a methodology announced in December 2019 that relied “on publicly available earnings data and a scientifically robust statistical methodology to determine harm”—will immediately create a path for borrowers with approved borrower defense claims to date to receive full loan discharges, including borrowers who already had their claims approved and received only partial relief. In addition, the Department said full relief under the new approach will also include requests to credit bureaus to remove any negative ratings tied to the loans, and reinstatement of a borrower’s federal student aid eligibility, where applicable.
States urge Department of Education to protect student loan borrowers
On March 9, NYDFS sent a letter on behalf of a multi-state coalition of financial regulators inviting recently confirmed Department of Education Secretary Dr. Miguel Cardona to partner with the states to ensure protections for student loan borrowers. Specifically, the letter urges Secretary Cardona to reverse two policies instituted by former Secretary Betsy DeVos that the coalition claims “undermine state supervision of private companies that service federal student loans.” The first is a 2018 interpretation (covered by InfoBytes here), which takes the position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program is preempted by federal law. The coalition argues that the Department’s 2018 preemption interpretation has made “state-level oversight of student loan servicers more burdensome.” As such, the coalition urges Secretary Cardona to promulgate a regulation rejecting federal preemption of state consumer protection laws to ensure borrowers can “benefit from state oversight of student loan servicers.” The letter also discusses former Secretary DeVos’s attempt to use the Privacy Act of 1974 “as a shield from necessary state oversight”—an action the coalition claims leaves states “with no choice but litigation” to obtain documents needed for industry oversight.
CFPB releases education ombudsman’s annual report
On October 28, the CFPB Private Education Loan Ombudsman published its annual report on consumer complaints submitted between September 1, 2019 and August 31, 2020. The report is based on approximately 7,000 complaints received by the Bureau relating to federal and private student loans. Of these complaints, roughly 1,700 were related to debt collection, while approximately 500 mentioned Covid-19. The Bureau’s press release notes that the continued decrease in both federal and private student loan complaints may be attributed to factors such as “borrower education and outreach by federal and state agencies and regulators; borrower education and outreach by consumer advocates; and continued maturation of some industry participants’ compliance management systems, complaint monitoring systems, and their internal consumer advocate and ombudsman offices.” Topics discussed within the report include (i) an analysis of socio-economic and racial gaps in the student loan market; (ii) supervisory examinations and prioritized assessments of federal student loan servicers; (iii) enforcement actions taken against student loan debt relief companies and a student loan trust; (iv) borrower education and outreach; and (v) the impact of Covid-19 on student loan borrowers, including CARES Act relief for federally held federal student loans. The report also discusses a Memorandum of Understanding reached with the Department of Education at the beginning of the year, which clarifies the roles and responsibilities for each agency and permits the sharing of student loan complaint data and other information and recommendations (covered by InfoBytes here).
The report provides several recommendations, including that policymakers—when addressing near-term and long-term repayment issues—“may wish to consider simplifying the various loan repayment plans and the various forgiveness, discharge, and cancellation programs,” as well as examine ways to (i) enhance data sharing between federal agencies; (ii) enroll debtors who file for bankruptcy in income driven repayment plans; (iii) revisit the undue hardship bankruptcy test; (iv) assess socio-economic and racial gaps in student loan debt load and degree attainment; and (v) pursue student loan debt relief scams.
Pennsylvania settles with third-party financing company, resulting in $200k in debt cancellation
On August 4, the Pennsylvania attorney general announced it had entered into an Assurance of Voluntary Compliance with a third-party financing company, which permanently shuts down the company’s operations in the state and requires the company to cancel nearly $200,000 in debt for its former customers. According to the AG, the company entered into agreements with various debt relief companies to provide third-party financing to student loan borrowers so they could be enrolled in certain federal student loan repayment programs offered by the Department of Education. However, the company allegedly violated provisions of the Pennsylvania Consumer Protection Law and TILA related to closed end credit transaction by, among other things, (i) misrepresenting that the finance plan was a revolving credit plan, when it was actually a closed end transaction; (ii) misrepresenting that it retained a security interest as a result of its financing agreements when in in fact it did not; (iii) financing consumers’ student loan debt relief services when it knew, or should have known, that consumers were not receiving the services as advertised; and (iv) failing to provide Regulation Z-required disclosures for closed end credit transactions, including the amount financed, finance charges, total of payments, and the number and amount of payments necessary to repay the total payments. In addition, the AG claimed that the company charged consumers unacceptably high interest rates. Under the terms of the settlement, the company is banned from financing or assisting others in financing student loan debt relief services and from collecting debt from Pennsylvania borrowers. The company must also request that credit reporting agencies delete the reported debts from consumers’ credit reporting files. Monetary relief in the amount of $930,000 is suspended unless a court determines the company has violated the terms of the settlement.