Rule2021-17021
Federal Preemption and Joint Federal-State Regulation and Oversight of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 12, 2021
Effective
August 12, 2021
Issuing agencies
Education Department
Abstract
The U.S. Department of Education (Department) issues this interpretation to revise and clarify its position on the legality of State laws and regulations that govern various aspects of the servicing of Federal student loans, such as preventing unfair or deceptive practices, correcting misapplied payments, or addressing refusals to communicate with borrowers. The Department concludes that these State laws are preempted only in limited and discrete respects, as further discussed in this interpretation. In addition, this interpretation will help facilitate close coordination between the Department and its State partners to further enhance both servicer accountability and borrower protections. This interpretation revokes and supersedes the interpretation published on March 12, 2018, "Federal Preemption and State Regulation of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers" (2018 interpretation).
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 153 (Thursday, August 12, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Rules and Regulations]
[Pages 44277-44282]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17021]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF EDUCATION
34 CFR Chapter VI
[Docket ID ED-2021-OS-0107]
Federal Preemption and Joint Federal-State Regulation and
Oversight of the Department of Education's Federal Student Loan
Programs and Federal Student Loan Servicers
AGENCY: Office of the Secretary, Department of Education.
ACTION: Interpretation.
-----------------------------------------------------------------------
SUMMARY: The U.S. Department of Education (Department) issues this
interpretation to revise and clarify its position on the legality of
State laws and regulations that govern various aspects of the servicing
of Federal student loans, such as preventing unfair or deceptive
practices, correcting misapplied payments, or addressing refusals to
communicate with borrowers. The Department concludes that these State
laws are preempted only in limited and discrete respects, as further
discussed in this interpretation. In addition, this interpretation will
help facilitate close coordination between the Department and its State
partners to further enhance both servicer accountability and borrower
protections. This interpretation revokes and supersedes the
interpretation published on March 12, 2018, ``Federal Preemption and
State Regulation of the Department of Education's Federal Student Loan
Programs and Federal Student Loan Servicers'' (2018 interpretation).
DATES: This interpretation is effective on August 12, 2021. We must
receive your comments on or before September 13, 2021.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments submitted by fax or by email or those submitted after
the comment period. To ensure that we do not receive duplicate copies,
please submit your comments only once. In addition, please include the
Docket ID at the top of your comments.
<bullet> Federal eRulemaking Portal: Go to <a href="http://www.regulations.gov">www.regulations.gov</a> to
submit your comments electronically. Information on using
<a href="http://Regulations.gov">Regulations.gov</a>, including instructions for accessing agency documents,
submitting comments, and viewing the docket, is available on the site
under FAQ.
<bullet> Postal Mail, Commercial Delivery, or Hand Delivery: If you
mail or deliver your comments about the interpretation, address them to
Beth Grebeldinger, U.S. Department of Education, Federal Student Aid,
830 First Street NE, Room 113F4, Washington, DC 20202.
Privacy Note: The Department's policy is to make all comments
received from members of the public available for public viewing in
their entirety on the Federal eRulemaking Portal at
<a href="http://www.regulations.gov">www.regulations.gov</a>. Therefore, commenters should be careful to include
in their comments only information that they wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: Beth Grebeldinger, U.S. Department of
Education, Federal Student Aid, 830 First Street NE, Room 113F4,
Washington, DC 20202. Telephone: 202-377-4018. Email:
<a href="/cdn-cgi/l/email-protection#733116071b5d34011211161f171a1d1416013316175d141c05"><span class="__cf_email__" data-cfemail="e5a780918dcba29784878089818c8b828097a58081cb828a93">[email protected]</span></a>.
If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.
SUPPLEMENTARY INFORMATION:
Invitation to comment: We are inviting comment on this
interpretation because we value the public's input and perspective on
these critical issues. We will consider public comment received and
determine whether it is appropriate to modify or supplement this
document.
Background: On March 12, 2018, the Department published in the
Federal Register the 2018 interpretation (83 FR 10619). The 2018
interpretation set forth the Department's position at the time on the
legality of several State laws regulating Federal student loan
servicers, which the Department found to be broadly preempted by
Federal law. In particular, the 2018 interpretation opined that State
regulation of the servicing of loans under the William D. Ford Federal
Direct Loan Program (Direct Loans) ``impedes uniquely Federal
interests.'' Id. at 10,620. The 2018 interpretation also opined that
State regulation of the servicing of loans under the Federal Family
Education Loan Program (FFEL Loans) ``is preempted to the extent that
it undermines uniform administration of the program.'' Id.
Federal courts have had the opportunity to consider the
Department's position on preemption in several recent decisions. Those
courts consistently declined to give any deference to the 2018
interpretation, finding it deserving of ``little weight.'' Nelson v.
Great Lakes Educ. Loan Services, Inc., 928 F.3d 639, 651 n.2 (7th Cir.
2019); see also Lawson-Ross v. Great Lakes Higher Educ. Corp., 955 F.3d
908, 921 n.13 (11th Cir. 2020) (same); New York v. Pennsylvania Higher
Educ. Assistance Agency, 19 Civ. 9155, 2020 WL 2097640 at *16 n.14
(S.D.N.Y. May 1, 2020) (same); Student Loan Servicing Alliance v. DC,
351 F. Supp. 3d 26, 48-51 (D.D.C. 2018). Their analyses reveal the
flaws in the 2018 interpretation's insubstantial justifications for its
broad claims to preempt State laws on student loan servicing.
The court in Student Loan Servicing Alliance analyzed the 2018
interpretation in some detail, and its analysis has been largely
followed by the other courts that have considered these preemption
issues. The court found that the 2018 interpretation constitutes
informal guidance, having not undergone any formal review process
prescribed by statute. See 351 F. Supp. 3d at 48-49. Thus, under Wyeth
v. Lavine, 555 U.S. 555 (2009), the 2018 interpretation would be
entitled only to Skidmore deference, which turns on its ``thoroughness,
consistency, and persuasiveness.'' Wyeth, 555 U.S. at 577. The court
went on to find that the views expressed in the 2018 interpretation
warrant no deference because they are conclusory
[[Page 44278]]
and devoid of analysis, offering nothing more than ``a retroactive, ex-
post rationalization for DOED's policy changes.'' Student Loan
Servicing Alliance, 351 F. Supp. 3d at 50. Moreover, those views
produce a ``dramatic inconsistency'' from explicit statements that the
Department had made in prior judicial proceedings, and such a ``stark,
unexplained change'' in the Department's approach to preemption again
precluded any deference. Id. Finally, the 2018 interpretation was found
to be neither thorough nor persuasive because it did not even specify
the regulations that it claimed to be interpreting. See id. at 51.
The Department has reconsidered the issues of preemption and the
place of the States in regulating Federal student loan servicers and
revokes the 2018 interpretation as substantially overbroad and legally
unsupported. Preemption issues are necessarily contextual and fact-
specific, and the law does not support the sweeping claims made in the
2018 interpretation that Federal law broadly preempts State authority
over Federal student loan servicing under principles of field
preemption, express preemption, or conflict preemption. The Department
views the States as important partners in ensuring the protection of
student loan borrowers and the proper servicing of Federal student
loans. The Department believes that the States have an important role
to play in this area and it is appropriate to pursue an approach marked
by a spirit of cooperative federalism that provides for concurrent
action according to a concerted joint strategy intentionally
established among Federal and State officials. Accordingly, as
discussed further below, the Department believes 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. We will analyze and determine preemption
issues consistent with this overarching principle but based on the
specific, individualized facts and circumstances of a given situation.
A. General Preemption Principles
As a preliminary matter, the Department recognizes that the Supreme
Court has established the fundamental principles of Federal preemption
doctrine over more than two centuries. Throughout the history of our
country, the Court has repeatedly emphasized that claims of preemption
of State law are narrowly construed and are to be resisted `` `unless
that [is] the clear and manifest purpose of Congress.' '' Cipollone v.
Liggett Group, Inc., 505 U.S. 504, 516 (1992) (quoting Rice v. Santa Fe
Elevator Corp., 331 U.S. 218, 230 (1947)). And where, as here, Congress
legislates in a field traditionally occupied by the States, the
presumption against preemption ``applies with particular force.''
Altria Group, Inc. v. Good, 555 U.S. 70, 77 (2008); see, e.g., Pacific
Gas & Elec. Co. v. State Energy Resources Conservation & Dev't Comm'n,
461 U.S. 190 (1983) (Federal licensing of safety designs for nuclear
power plants did not preempt State action suspending construction of
such plants on economic grounds); Huron Portland Cement Co. v. Detroit,
362 U.S. 440 (1960) (city may enforce its local anti-pollution
ordinance even against Federally licensed steamship).
In 2015, Connecticut became the first State to enact a law
requiring licensure and oversight of student loan servicers operating
in the State. In its wake, a growing number of States have followed
suit by enacting their own laws or adopting their own regulations.
These laws or regulations provide for licensure and oversight of
student loan servicers. They also typically confer or confirm
protections for citizens against prohibited acts such as engaging in
unfair, deceptive, or fraudulent acts or practices; misapplying
payments; reporting inaccurate information to credit bureaus; or
refusing to communicate with an authorized representative of the
student loan borrower.
The States that have created these regulatory regimes assert that
they are acting under their general police powers for the purpose of
protecting their citizens. That is a zone in which preemption is at its
weakest, and the Supreme Court has emphasized the need to begin ``with
the assumption that the historic police powers of the States are not to
be superseded by Federal Act unless that is the clear and manifest
purpose of Congress.'' Cipollone, 505 U.S. at 516. Particularly ``in a
field which the States have traditionally occupied,'' claims of
preemption face a high hurdle that has been erected to preserve the
traditional balance of powers under our system of federalism. Wyeth,
555 U.S. at 565. One such area is education, long regarded as a subject
for the exercise of predominantly State powers. Another is consumer
protection, which has traditionally been regulated by the States, with
more limited and occasional Federal involvement. See, e.g., California
v. ARC Am. Corp., 490 U.S. 93, 101 (1989); Florida Lime & Avocado
Growers, Inc. v. Paul, 373 U.S. 132, 146 (1963).
B. Field Preemption
The 2018 interpretation opined that ``the statutory and regulatory
provisions and contracts governing the Direct Loan Program preclude
State regulation, either of borrowers or servicers.'' 83 FR 10621. It
further stated that ``the HEA and Department regulations governing the
FFEL Program preempt State servicing laws that conflict with, or impede
the uniform administration of, the program.'' Id.
This broad assertion of power--that Federal law preempts the entire
field of law relating to Federal student loan servicing--has largely
been rejected by the courts. That is particularly the case where
Congress has considered the matter and expressly preempted specific but
limited areas of State law, as discussed below. Indeed, ``no circuit
court that has considered the issue has found field preemption'' to
apply in the context of the HEA. Lawson-Ross, 955 F.3d at 923; see also
Nelson, 928 F.3d at 652 (``Courts have consistently held that field
preemption does not apply to the HEA, and we do as well.''); Chae v.
SLM Corp., 593 F.3d 936, 941-42 (9th Cir. 2010) (same); Cliff v. Payco
Gen. Am. Credits, Inc., 363 F.3d 1113, 1125-26 (11th Cir. 2004) (same);
Armstrong v. Accrediting Council for Continuing Educ. & Training, Inc.,
168 F.3d 1362, 1369 (D.C. Cir. 1999) (same).
At no time prior to the issuance of the 2018 interpretation did the
Department take the view that field preemption applied to the servicing
and collection of Federal student loans, and the courts have held that
the Department did not provide persuasive reasons for its new position.
After reexamining the issue, the Department rejects the analysis
included in the 2018 interpretation and concludes that field preemption
does not apply to the servicing and collection of Federal student
loans.
C. Express Preemption
The 2018 interpretation further asserted broad preclusion of State
student loan servicing laws on the ground that any State efforts to
require Federal student loan servicers to reveal facts or information
not required by Federal law are expressly preempted under the HEA. See
83 FR 10621. By painting with such a broad brush, the 2018
interpretation failed to consider more carefully the specific terms of
applicable Federal laws and how they apply to State regulatory efforts.
In fact, the HEA does contain some specific provisions that
explicitly preempt certain areas of State law, but those provisions are
limited and selective. They include restrictions on
[[Page 44279]]
such matters as the application of State usury laws, see 20 U.S.C.
1078(d), of State statutes of limitation, see 20 U.S.C. 1091a(a)(2), of
the State-law defense of infancy, see 20 U.S.C. 1091a(b)(2), of State
wage garnishment laws, see 20 U.S.C. 1095a(a), of State laws on certain
costs and charges, see 20 U.S.C. 1091a(b), and of State disclosure
requirements, see 20 U.S.C. 1098g. These provisions, granular as they
are, reinforce the point that Congress consciously opted to displace
State authority only in these limited particulars and did not intend or
provide for broad field preemption of State laws governing student loan
servicing. See, e.g., Nelson, 928 F.3d at 650 (``The number of those
provisions and their specificity show that Congress considered
preemption issues and made its decisions. Courts should enforce those
provisions, but we should not add to them on the theory that more
sweeping preemption seems like a better policy.'') They also undermine
any broad finding of express preemption, which requires courts to
``identify the domain expressly preempted by that language.''
Medtronic, Inc. v. Lohr, 518 U.S. 470, 484 (1996). In the HEA, Congress
identified a series of pinpoints rather than casting a wide blanket
over the entire area, and its actions must be respected in determining
the scope of preemption of State law. See id. at 485 (intent of
Congress is the ``ultimate touchstone'' of preemption analysis).
The 2018 interpretation put special emphasis on the HEA provision
addressing State ``disclosure requirements.'' See 83 FR 10621. It
observed that this provision specified ``what information must be
provided in the context of the Federal loan programs,'' and expanded
upon the provision by stating that it also nullified any State
``prohibitions on misrepresentation or the omission of material
information.'' Id. But the courts have generally rejected this
approach. First, this provision of the HEA covers information conveyed
to the borrower before the disbursement of loan proceeds, before
repayment of the loans begins, and during repayment of loans. The
information disclosed is ``intended to ensure that consumer-borrowers
have accurate, relevant information and can make their own informed
choices about their financial affairs.'' Nelson, 928 F.3d at 647.
Notably, the HEA provision on disclosure requirements does not cover
affirmative misrepresentations, which are not about conveying either
more or less information, but instead are simply about conveying
accurate information so as not to mislead or defraud the borrower. The
courts found this distinction to be deeply grounded in basic principles
of the common law of torts, which sharply distinguish failure-to-
disclose claims from claims for affirmative misrepresentation. See,
e.g., Lawson-Ross, 955 F.3d at 917-19; Nelson, 928 F.3d at 647-49.
Second, the 2018 interpretation purported to rely on the Ninth
Circuit's decision in the Chae case, which concerned the failure to
disclose information in the specific ways required in Federal law, such
as in billing statements. But the findings in Chae do not preclude
State regulation of affirmative misrepresentation about information
that the servicer was not required to disclose. Nor can such conduct
plausibly be reframed as a mere ``failure to disclose'' correct
information. Pennsylvania v. Navient Corp., 967 F.3d 273, 289-90 (3d
Cir. 2020). The Chae court drew this same distinction, holding that the
``use of fraudulent and deceptive practices apart from the billing
statements'' are not preempted by Federal law. See Chae, 593 F.3d at
943; see also Lawson-Ross, 955 F.3d at 919 (discussing Chae); Nelson,
928 F.3d at 649-50 (same).
For these reasons, the Department finds that, except in the limited
and specific instances set forth in the HEA itself, State measures to
engage in oversight of Federal student loan servicers are not expressly
preempted by the HEA. Accordingly, in reconsidering the issue of
express preemption the Department does not find the conclusions reached
in the 2018 interpretation to be persuasive. Likewise, the courts have
not been persuaded when these issues have been presented to them. See,
e.g., Student Loan Servicing Alliance, 351 F. Supp. 3d at 51-55;
Lawson-Ross, 955 F.3d at 916-20; Nelson, 928 F.3d at 647-50.
D. Conflict Preemption
When, as here, both the Federal government and the States have
legitimate interests in the same areas of governance, courts typically
implement constitutional principles of federalism by seeking to balance
and respect those mutual interests as much as possible. Where the two
exercises of authority collide in irremediable conflict, then State law
must yield to the superior force of the Supremacy Clause. But courts
traditionally have understood their duty to harmonize Federal and State
power to the greatest extent they can do so. Therefore, implied
conflict preemption only nullifies State action if ``it is impossible
for a private party to comply with both state and federal law'' or if
State law `` `stands as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.' '' Crosby v. National
Foreign Trade Council, 530 U.S. 363, 373 (2000) (quoting Hines v.
Davidowitz, 312 U.S. 52, 67 (1941)).
Although the 2018 interpretation laid out some generalized grounds
on which Federal and State regulations of student loan servicers could
be found to clash, the courts have rejected these arguments. They have
noted the Supreme Court's overarching point that where the enacted
legislation explicitly addressed the issue of preemption, as is true of
the HEA, ``there is no need to infer congressional intent to preempt
State laws from the substantive provisions of the legislation.''
Cipollone, 505 U.S. at 517; see also Navient, 967 F.3d at 292-93;
Lawson-Ross, 955 F.3d at 920; Nelson, 928 F.3d at 648.
When the court in Student Loan Servicing Alliance considered the
District of Columbia's procedures for protecting privacy, resolving
complaints, and mandating compliance with timelines, it concluded that
``[u]pon closer inspection of the state and federal provisions, it is
apparent that there is no actual conflict on the grounds of
impossibility.'' 351 F. Supp. 3d at 60. The court determined that each
objection raised by the plaintiff about the supposed inability to
harmonize Federal and State procedures posited ``a false conflict'' and
could be accommodated by officials who are willing to work together in
taking reasonable steps to do so. Id. at 60-61.
The most recent courts to consider these issues under the rubric of
conflict preemption have consistently determined that the HEA places no
emphasis on maintaining uniformity in Federal student loan servicing
and thus they have upheld State authority to root out fraud and
affirmative misrepresentations in the Federal student aid program. See,
e.g., Navient, 967 F.3d at 292-94; Lawson-Ross, 955 F.3d at 920-23;
Nelson, 928 F.3d at 650-51.
Courts have found conflict preemption to apply to State laws
requiring licensing of the Department's student loan servicers in the
limited circumstances where the licensing scheme purported to
disqualify a Federal contractor from working within the State's
boundaries. It is well-established that States cannot impede the
Federal Government's selection of contractors through the imposition of
a licensing requirement. In Leslie Miller Inc. v. Arkansas, 352 U.S.
187 (1956) (per curiam), the Supreme Court held that Federal bidding
statutes and regulations requiring the selection of
[[Page 44280]]
``responsible bidder[s]'' for Federal contracts would be frustrated by
``giv[ing] the State's licensing board a virtual power of review over
the federal determination'' about selecting its own contractors. Id. at
190.
Two recent Federal court decisions have concluded that this well-
established precedent applies to a State's refusal to license Federal
student loan servicers. In Student Loan Servicing Alliance, the Court
concluded that the District of Columbia's licensing scheme was
preempted because it would bar Federal student loan contractors from
working within the District. See 351 F. Supp. 3d at 61-72, 75-76.
Similarly, in Pennsylvania Higher Education Assistance Agency v. Perez,
457 F. Supp. 3d 112, 122-25 (D. Conn. 2020), the Court concluded that
the State's authority to grant or withhold a license to a Federal
student loan servicer was preempted because it could disqualify Federal
student loan contractors from operating within the State.
E. Direct Loan Program and Preemption
The Direct Loan program, which was created as part of the Student
Loan Reform Act of 1993 (Pub. L. 103-66), poses some specific statutory
and regulatory issues of preemption. In this program, the Federal
government makes loans directly to the borrower and is responsible for
all aspects of the loan from origination through repayment, including
servicing and collection. Congress also provided that the Department
could use contractors to service the loans and for any other purposes
deemed ``necessary to ensure the successful operation of the program.''
20 U.S.C. 1087f(b)(4). When procuring such services, the Department
must comply with all applicable Federal laws and regulations and design
its program so that the loan servicing is ``provided at competitive
prices.'' 20 U.S.C. 1087f(a)(1). And the Department specifies in some
detail ``the responsibilities and obligations of the servicers for
Direct Loans.'' 2018 interpretation, 83 FR 10620.
The 2018 interpretation observed that in some instances, these
provisions would operate to preempt State requirements that directly
conflicted with requirements imposed under Federal law. For example, as
discussed above, an attempt by a State to revoke a license granted by
the Federal government for purposes established under Federal law would
be invalid. Leslie Miller, 352 U.S. at 190. Yet this does not imply
that a State cannot act to impose reasonable, generally applicable
conditions on entities (including Federally licensed contractors)
operating within the bounds of the State, as authorized under its
police powers exercised on behalf of its citizens. See, e.g.,
California Coastal Comm'n v. Granite Rock Co., 480 U.S. 572 (1987)
(``Rather than evidencing an intent to preempt such state regulation,
the Forest Service regulations appear to assume compliance with state
laws.'').
Where the States impose conduct requirements prohibiting
affirmative misrepresentations by student loan servicers, those
measures are not preempted by general disclosure requirements in
Federal law. See, e.g., Cipollone, 505 U.S. at 529 (``State-law
prohibitions on false statements of material fact do not create
`diverse, nonuniform, and confusing' standards.''). Notably, the courts
have repudiated the expansive approach taken in the 2018
interpretation, which was premised on the claim that the purpose of the
Direct Loan program was to ``establish a uniform, streamlined, and
simplified lending program managed at the Federal level.'' 83 FR 10621.
See, e.g., Navient, 967 F.3d at 293 (finding no legislative support for
uniformity here); Lawson-Ross, 955 F.3d at 921-22 (same); Nelson, 928
F.3d at 651 (same); College Loan Corp. v. SLM Corp., 396 F.3d 588, 597
(4th Cir. 2005) (same). Indeed, it is telling that Congress's own
stated purposes in the HEA itself make no mention of uniformity, see
Lawson-Ross, 955 F.3d at 921, and the Supreme Court has held that
courts are not to infer preemption merely from the comprehensive nature
of Federal regulation. See New York State Dep't of Social Servs. v.
Dublino, 413 U.S. 405, 415 (1973).
The cases rejecting the claims made in the 2018 interpretation
about the need for uniformity also point out that ``[e]ven if we assume
that uniformity is a purpose of the HEA, [claims about affirmative
misrepresentations by loan servicers] would not conflict with that
purpose.'' Lawson-Ross, 955 F.3d at 922-23. Even such uniformity as
does exist in the program ``is not harmed by prohibiting unfair or
deceptive conduct in the operation of the program that is not
explicitly permitted by the HEA.'' Pennsylvania v. Navient Corp., 354
F. Supp. 3d 529, 553 (M.D. Pa. 2018), aff'd, 967 F.3d 273 (3d Cir.
2020). For similar reasons, the arguments in the 2018 interpretation
that accompany the arguments for uniformity, which relate to reducing
costs and treating borrowers equitably while not confusing them, see 83
FR 10620-21, are likewise unavailing. Reducing costs by making
fraudulent or false statements to student loan borrowers is
indefensible as a tactic; and allowing such misconduct to be
perpetrated on a mass scale would neither foster equitable treatment
for borrowers nor spare them any confusion. In addition, relieving
Federal contractors of any exposure to liability for fraud or false
statements would save them money, to be sure, but it would be a
breathtakingly broad assertion of preemption, given that even Federal
contractors are routinely subject to liability for violating State tort
laws.
F. FFEL Program Loans and Preemption
As with the Direct Loan program, the FFEL program poses some
specific statutory and regulatory issues of preemption. The general
treatment of these issues runs parallel to the discussion for Direct
Loans, in that some specific Federal laws and regulations preempt State
laws that conflict squarely on matters such as timelines, dispute
resolution procedures, and some particulars of debt collection and loan
servicing. But here, too, the grounds for preemption of State laws are
narrow and do not properly include any preemption of liability under
State law for other matters, such as affirmative misrepresentations
made to loan borrowers.
In the past, the Department has identified specific types of State
laws that are preempted because they would frustrate the operation and
purposes of the Federal student loan programs. On October 1, 1990, for
instance, the Department issued a notice interpreting its regulations
governing the FFEL Program (then known as the Guaranteed Student Loan
program), which require guaranty agencies and lenders to take certain
actions to collect FFEL Program loans. The Department's position in
that interpretive notice was that the regulations requiring those
activities preempt State laws regarding those very same activities. See
55 FR 40120. More specifically, the Department explained that its
regulations establish minimum collection actions required on all FFEL
obligations, which preempted contrary or inconsistent State laws that
would prevent compliance with the Federal regulations. See id. at
40,121. These regulations for the FFEL Program are now codified at 34
CFR 682.410(b)(8) and (o).
The 2018 interpretation describes some State laws as inconsistent
with specific Federal measures. These include laws creating deadlines
for servicers to respond to borrower inquiries or disputes; deadlines
for notifying borrowers of loan transfers between servicers;
requirements for dispute resolution procedures; and a
[[Page 44281]]
few other miscellaneous items. See 83 FR 10621-22. If these specific
State laws are directly inconsistent with an equally specific Federal
law, they are preempted.
As with Direct Loans, however, the limits of preemption are reached
when the discussion moves beyond simply setting specific details of
such ``administrative mechanisms.'' Nelson, 928 F.3d at 651. At the
heart of State laws and regulations in this area are measures designed
to protect consumers. There may be many such measures that are not
preempted by the general disclosure requirements in Federal law, such
as State measures that prohibit affirmative misrepresentations by loan
servicers. See, e.g., Lawson-Ross, 955 F.3d at 922-23. But this
interpretation should not be read to suggest that only State laws and
regulations relating to affirmative misrepresentation are not
preempted. States may consider and adopt additional measures which
protect borrowers and do not conflict with Federal law. These 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.
G. Enhanced Borrower Protections Through Federal-State Cooperation
The final section of the 2018 interpretation cautions that broad
preemption of State student loan servicer laws would not leave
borrowers unprotected, and it elaborates ways that the Department
``continues to oversee loan servicers to ensure that borrowers receive
exemplary customer service and are protected from substandard
practices.'' 83 FR 10622. In this interpretation, the Department
reaffirms these important objectives and its determination to hold
servicers accountable for failing to meet these standards and
expectations. Yet the Department also finds that broad preemption of
State student loan servicer laws would disserve these objectives for
two reasons. First, State officials serve as an essential complement to
the Federal government in protecting their citizens from substandard or
improper practices. Second, as explained below, the Department has
concluded that close coordination with its State partners will further
enhance both servicer accountability and borrower protections.
Accordingly, the Department has considered the matter further and
finds that the approach taken in the 2018 interpretation is seriously
flawed. For all the reasons stated in this interpretation, the
Department is affirmatively changing its approach to preemption of
State student loan servicing laws that was laid out in the 2018
interpretation. To the extent that the final section of the 2018
interpretation purported to provide additional factual material
intended to justify its position, those underpinnings are examined more
carefully below, and the Department concludes that they do not support
the 2018 interpretation either as a historical matter or, as a factual
matter, in the likelihood that such an exclusionary approach will
succeed in attaining its stated objectives. See, e.g., FCC v. Fox
Television Stations, Inc., 556 U.S. 502 (2009) (agency may change prior
policy without being subject to any more searching judicial review
where the agency acknowledges the change of position and accounts for
any claimed factual underpinnings of the prior policy).
As a historical matter, the Federal government and the States have
sought to work closely and cooperatively in certain areas of shared
responsibility, such as law enforcement and consumer protection. All
parties recognize that the country is vast, its population has grown to
immense proportions, and public resources are limited. Administration
of Federal student loans involves managing customer relationships for
tens of millions of borrowers in a variety of circumstances and for
distinct loan programs with different requirements that have grown up
over the past several decades. The complexity and scope of the task is
shown by the Department's longstanding practice of engaging large
private contractors operating nationwide to service millions of
borrowers with cumulative debts that in the aggregate now exceed $1.5
trillion. Managing these outside contractors to assure that the student
loan program operates effectively and in line with its intended
objectives is a substantial undertaking, and the oversight challenges
are evident and significant.
The Department recognizes that collaboration with the States can
supply the means to ensure better oversight of these contractors and
provide more protection for student loan borrowers. Not all States have
invested resources in overseeing loan servicers, but to the extent that
they have, some State attorneys general and State student loan
servicing regulators, with their own capacities and personnel, are able
to maintain a closer perspective on how these loan servicers operate in
their States, including how borrowers are being treated and how their
needs are being met. Although the 2018 interpretation strove to justify
how the Department could perform this oversight task adequately on its
own, a different approach may be more likely to succeed: A coordinated
partnership of interested Federal and State officials could produce a
more robust system of supervision and enforcement to monitor and
improve performance under this far-flung system.
In the 2018 interpretation, the Department explained as a factual
matter how it would seek to monitor servicer compliance with
contractual requirements related to customer service, including call
monitoring, process monitoring, and servicer auditing. See 83 FR 10622.
It also described how it uses contracting requirements to incentivize
improved customer service and maintain mechanisms for reviewing and
responding to complaints about customer service. But the Department's
limited resources for compliance monitoring must also encompass various
other issues unrelated to customer service, such as compliance with
billing practices and other related operational issues. And many of the
recently enacted State laws are designed to focus squarely on customer
service issues: Servicers engaging in unfair, deceptive, or fraudulent
acts or practices; servicers misapplying payments; servicers reporting
inaccurate information on borrower performance to credit bureaus; and
servicers refusing to communicate with borrowers' authorized
representatives. See, e.g., Conn. Gen. Stat. Sec. 36a-850 (2016); 110
Ill. Comp. Stat. 992/20-20(i) (2018); Colo. Rev. Stat. Sec. 5-20-109
(2019). Notably, a growing number of States are taking the trouble to
enact these laws because of the documented need for more attention to
problems adversely affecting their citizens. Rather than viewing this
activity by the States as inconvenient or detrimental to its
objectives, the Department now recognizes that State regulators can be
additive in helping to achieve the same objectives championed in the
2018 interpretation. Rather than expending time and effort contesting
the authority of the States in unproductive litigation, the Department
intends to work with the States to share the burdens and costs of
oversight to ensure that loan servicers are accountable for their
performance in better serving borrowers.
Indeed, a collaborative approach where Federal and State officials
work together to achieve shared objectives will likely produce a sum
that is greater
[[Page 44282]]
than its individual parts. The Department's budget is not unlimited and
maintaining effective oversight of student loan servicers that deal
with tens of millions of borrower accounts is a mammoth task. Further
examples discussed in the 2018 interpretation only underscore this
point. For instance, the Department has built incentives into the
servicer contracts to favor better-performing servicers at the expense
of poorer-performing ones, to attain higher levels of customer
satisfaction. See id. But by the same token, regulatory oversight by
the States is likewise intended and designed to secure higher levels of
servicer performance and to limit instances of poor customer service
and other abuses through different mechanisms and channels. The same is
true of the other example highlighted in the 2018 interpretation, which
explains how the Department's formal complaint process can help
borrowers elevate customer service issues for heightened attention and
prompt resolution. See id. But as with the Department itself, State
regulators and State attorneys general have staff members who are
typically available to field and respond to complaints. Here again, the
cumulative force of combining these joint efforts augments, rather than
detracts from, the goal of improving customer service.
The concept of ``cooperative federalism'' laid out here can and
should also lead to mutual efforts to make improvements in other areas
of student loan servicing that support greater access to higher
education. The core purpose of State laws and regulations overseeing
student loan servicers is to protect their citizens who are borrowers
of student loans and their families. The reason they took out those
loans in the first place was to secure the benefits of higher education
and to cope with the financial costs involved. Consideration of these
broader objectives reveals many opportunities for productive
cooperation that can be fruitfully pursued between Federal and State
officials who share these objectives and are interested in pursuing
them jointly. In short, an approach that is marked by Federal-State
cooperation is likely to secure better implementation of student aid
programs as well as better service to borrowers and their families. Out
of this cooperation may come a broader understanding of how these
mutual efforts can advance the central goal of facilitating affordable
access to higher education for students in every part of the country.
For these reasons, the Department is issuing this interpretation with
the explicit purpose of revoking and superseding the 2018
interpretation.
Accessible Format: On request to the contact person listed under
FOR FURTHER INFORMATION CONTACT, individuals with disabilities can
obtain this document in an accessible format. The Department will
provide the requestor with an accessible format that may include Rich
Text Format (RTF) or text format (txt), a thumb drive, an MP3 file,
braille, large print, audiotape, or compact disc, or other accessible
format.
Electronic Access to This Document: The official version of this
document is the document published in the Federal Register. You may
access the official edition of the Federal Register and the Code of
Federal Regulations via the Federal Digital System at <a href="http://www.govinfo.gov">www.govinfo.gov</a>.
At this site you can view the document, as well as all other documents
of this Department published in the Federal Register, in text or
Portable Document Format (PDF). To use PDF you must have Adobe Acrobat
Reader, which is available free at the site.
You may also access documents of the Department published in the
Federal Register by using the article search feature at
<a href="http://www.federalregister.gov">www.federalregister.gov</a>. Specifically, through the advanced search
feature at this site, you can limit your search to documents published
by the Department.
Miguel Cardona,
Secretary of Education.
[FR Doc. 2021-17021 Filed 8-11-21; 8:45 am]
BILLING CODE 4000-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on August 12, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.