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Student loan servicers seek to clarify federal preemption of state student loan servicing regulations in suit to enjoin Washington, D.C. law

The Student Loan Servicing Alliance, a trade group representing student loan servicers, has sued the District of Columbia to enjoin the operation of Law 21-214, the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.  The Act, which became effective February 18, 2017, established a student loan ombudsman within the D.C. Department of Insurance, Securities, and Banking with the authority to create rules for student loan servicers. The DISB issued initial emergency regulations on September 8, 2017 and revised regulations on December 26, 2017. The DISB also issued an initial borrower “bill of rights” on October 11, 2017 and revisions earlier this year.

The D.C. regulations and bill of rights impose significant restrictions upon servicers, including requirements that servicers be licensed, pay application and annual fees (including a now-revised annual assessment fee of $.50 per borrower), file a surety bond, and comply with recordkeeping requirements.  The bill of rights purports to dictate further requirements for handling complaints, applying payments, disclosing fees, providing access to default aversion services, and notifying borrowers of payment application methodologies when handling multiple loans.

SLSA seeks a declaratory judgment that the application of the Act and its regulations to federal student loan servicers is precluded by both field and conflict preemption.  In particular, SLSA notes that Federal Direct Loan and the Federal Family Education Loan Programs were created with the intent of providing uniform servicing standards and the Higher Education Act, 20 U.S.C. § 1098g, expressly states that federal loans “shall not be subject to any disclosure requirements of any State law.”

As further evidence of preemption, SLSA emphasizes that the HEA does not contemplate the assessment of state fees and will not permit a myriad system of state licensing and regulatory regimes that would inevitably result in severe cost increases to the federal government.  The Department of Education compensates servicers on a per-borrower basis depending on loan performance, with a maximum compensation of $34.20 per year.  If state licensing is not preempted and states are allowed to assess servicer fees with impunity, the resulting system will siphon ED compensation and require potentially exorbitant increases in ED compensation to servicers in order for those servicers to recoup the money lost to state fees.

SLSA’s suit comes on the heels of ED’s recent interpretation of the HEA, which stresses that the preemption of state regulation of federal student loan servicers expressly prohibits licensing schemes like that in the District of Columbia.   SLSA also relies upon the recent Statement of Interest, filed by the Department of Justice in litigation brought by the Commonwealth of Massachusetts against the Pennsylvania Higher Education Assistance Agency.  The DOJ likewise stresses that the Commonwealth’s efforts to oversee the handling of borrower benefits and payment application for federal student loans are preempted by the HEA.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 88
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About this Author

Brian Slagle, Philadelphia lawyer, Ballard Spahr law firm
Associate

Brian J. Slagle is an associate in the Business and Finance Department and a member of the Consumer Financial Services Group. His practice focuses on providing regulatory advice to clients on state and federal consumer finance laws. He regularly assists clients with a range of compliance and transactional issues relating to licensing, the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Electronic Funds Transfer Act (EFTA), Electronic Signatures in Global and National Commerce Act (ESIGN), the Telephone Consumer Protection Act (TCPA), the Fair Credit...

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