[Federal Register Volume 83, Number 48 (Monday, March 12, 2018)]
[Rules and Regulations]
[Pages 10619-10622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04924]
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DEPARTMENT OF EDUCATION
34 CFR Chapter VI
Federal Preemption and State Regulation 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.
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SUMMARY: Recently, several States have enacted regulatory regimes that
impose new regulatory requirements on servicers of loans under the
William D. Ford Federal Direct Loan Program (Direct Loan Program).
States also impose disclosure requirements on loan servicers with
respect to loans made under title IV of the Higher Education Act of
1965, as amended (HEA). Finally, State regulations impact Federal
Family Education Loan (FFEL) Program servicing. The Department believes
such regulation is preempted by Federal law. The Department issues this
notice to clarify further the Federal interests in this area.
DATES: March 12, 2018.
FOR FURTHER INFORMATION CONTACT: Kathleen Smith, Deputy Chief Operating
Officer, U.S. Department of Education, Federal Student Aid, 830 First
Street NE, Union Center Plaza, Washington, DC 20202-5453. Telephone:
(202) 377-4533 or via email: [email protected].
If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service, toll free, at 1-800-
877-8339.
SUPPLEMENTARY INFORMATION: Congress created and expanded the Direct
Loan Program with the goal of simplifying the delivery of student loans
to borrowers, eliminating borrower confusion, avoiding unnecessary
costs to taxpayers, and creating a more streamlined student loan
program that could be managed more effectively at the Federal level.
Recently, several States have enacted regulatory regimes or applied
existing State consumer protection statutes that undermine these goals
by imposing new regulatory requirements on the Department's Direct Loan
servicers, including State licensure to service Federal student loans.
State servicing laws are purportedly aimed only at student loan
servicers, but such regulation affects the ``[o]bligations and rights
of the United States under its contracts'' with servicers and with
student loan borrowers, the ``relationship between a Federal agency and
the entity it regulates,'' and the rights of the Federal government
related to federally held debt. (Boyle v. United Technologies Corp.,
487 U.S. 500, 504-05 (1988); Buckman Co. v. Plaintiffs' Legal Comm.,
531 U.S. 341, 347 (2001); United States v. Victory Highway Vill., Inc.,
662 F.2d 488, 497 (8th Cir. 1981).) Accordingly, the servicing of
Direct Loans is an area ``involving uniquely Federal interests'' that
must be ``governed exclusively by Federal law.'' (Boyle, 487 U.S. at
504.)
A. Interest of the United States
Recently, the United States filed a Statement of Interest in a
lawsuit brought by the Commonwealth of Massachusetts against a
Department loan servicer alleging violations of Massachusetts State law
for allegedly unfair or deceptive acts related to the servicing of
Federal student loans and administration of programs under the HEA.
(Statement of Interest by the United States, Massachusetts v.
Pennsylvania Higher Education Assistance Agency, d/b/a FedLoan
Servicing, No. 1784-CV-02682 (Mass. Super. Ct., filed Jan. 8, 2018).)
The United States explained that Massachusetts is improperly seeking to
impose requirements on the Department's servicers that conflict with
the HEA, Federal regulations, and Federal contracts that govern the
Federal loan programs. Accordingly, Massachusetts' claims are preempted
because the State has sought to proscribe conduct Federal law requires
and to require conduct Federal law prohibits. We believe that attempts
by other States to impose similar requirements will create additional
conflicts with Federal law.
This is not a new position. The United States has previously
responded when State law has been utilized in a way that conflicts with
the operation and purposes of loan programs the Department administers
pursuant to the HEA. On October 1, 1990, the Department issued a notice
of its interpretation of regulations governing the FFEL Program (then
known as the Guaranteed Student Loan program) (55 FR 40120) that
prescribe the actions lenders and guaranty agencies must take to
collect loans. The Department explained its view that these regulations
preempt State law regarding the conduct of these loan collection
activities.
In 2009, the United States intervened in Chae v. SLM Corporation,
593 F.3d 936 (9th Cir. 2010), a case in which plaintiffs sought to
apply State consumer protection laws to a FFEL Program loan servicer,
to explain that the State laws on which the plaintiffs relied
conflicted with Federal law.
[[Page 10620]]
(Brief of Plaintiff-Intervenor-Appellee, Chae v. SLM Corp., 593 F.3d
936 (9th Cir. 2010) (No. 08-56154).) The Ninth Circuit concluded, among
other things, that the precisely detailed provisions of the HEA ``show
congressional intent that FFELP participants be held to clear, uniform
standards.'' (Chae, 593 F.3d at 944.) The court held that State-law
claims alleging misrepresentation were preempted by the HEA's express
preemption of State-law disclosure requirements, and that other State-
law claims ``would create an obstacle to the achievement of
congressional purposes'' and were therefore barred by conflict
preemption principles. (Id. at 950.)
The Department issues this notice to clarify its view that State
regulation of the servicing of Direct Loans impedes uniquely Federal
interests, and that State regulation of the servicing of the FFEL
Program is preempted to the extent that it undermines uniform
administration of the program.
B. Direct Loan Program
Congress created the Direct Loan Program as part of the Student
Loan Reform Act of 1993 (Pub. L. 103-66). Under the program, the
Federal government is the direct lender to the borrower and is
responsible for all aspects of the lending process from loan
origination through repayment, including the proper servicing and
collection of the loan. In signing the Master Promissory Note for the
loan, the borrower promises to repay the loan and any applicable
interest and fees according to the terms and conditions outlined in the
HEA, the Department's regulations, and the Note. (20 U.S.C. 1087e.)
Congress provided that the program would be administered by the
Department through student loan servicers, directing the Secretary to
enter into contracts for loan ``servicing'' and for ``such other
aspects of the direct student loan program as the Secretary determines
are necessary to ensure the successful operation of the program.'' (20
U.S.C. 1087f(b)(4).) The HEA directs the Secretary to award servicing
contracts only to entities ``which the Secretary determines are
qualified to provide such services'' and ``that have extensive and
relevant experience and demonstrated effectiveness.'' (20 U.S.C.
1087f(a)(2).) When procuring such services, the Department must, with
specific exceptions, abide by ``all applicable Federal procurement laws
and regulations,'' which include the Federal Acquisition Regulation
(FAR). (20 U.S.C. 1087f(a), 1018a.) To achieve its goals of
streamlining and simplifying the delivery of student loans and of
saving taxpayer dollars (See 139 Cong. Rec. S5585, S5628 (1993)),
Congress designed a program in which servicing would be ``provided at
competitive prices'' by entities ``selected by and responsible to the
Department of Education.'' (20 U.S.C. 1087f(a)(1); H.R. Rep. No. 103-
111, at 107 (1993).)
The HEA and the Department's regulations provide comprehensive
rules governing the Direct Loan Program, and the Department's contracts
with loan servicers further specify the program's rules and
requirements. As the United States recently noted in the Statement of
Interest in Massachusetts v. Pennsylvania Higher Education Assistance
Authority, ``The Department's contract with [the loan servicer] is
voluminous--spanning more than 600 pages and including provisions
governing [the servicer's] financial controls, internal monitoring,
communications with borrowers, and many other topics.'' (Statement of
Interest at 5.) In its contracts with loan servicers, including task
orders and change requests issued under those contracts, the Department
specifies in detail the responsibilities and obligations of the
servicers for Direct Loans and the benefits provided under that program
such as Public Service Loan Forgiveness and income-driven repayment
plans.
Recently, States have sought to impose requirements on servicers
that conflict with Federal statutes, Department regulations, and these
comprehensive contracts. Most notable are State regulations requiring
licensure of Direct Loan servicers in order to perform work for the
Federal government. ``A State may not enforce licensing requirements
which, though valid in the absence of federal regulation, give `the
State's licensing board a virtual power of review over the federal
determination' that a person or agency is qualified and entitled to
perform certain functions, or which impose upon the performance of
activity sanctioned by federal license additional conditions not
contemplated by Congress.'' (Sperry v. Florida, 373 U.S. 379, 385
(1963) (quoting Leslie Miller Inc. v. Arkansas, 352 U.S. 187, 190
(1956)) (footnotes omitted).)
Such licensing requirements ``interfere[] with the federal
government's power to select contractors'' and to determine whether
contractors are ``responsible'' under Federal law. (Gartrell Const.
Inc. v. Aubry, 940 F.2d 437, 438 (9th Cir. 1991).) With regard to
responsibility determinations of prospective contract awardees, the
Department follows FAR Subpart 9.1 (48 CFR 9.100 through 9.108-5). The
Department selects contractors for Direct Loan servicing under 20
U.S.C. 1087f and 1018a. State-imposed registration and licensure
requirements conflict with these Federal authorities by adding to
Federal requirements and are thus preempted. (See United States v.
Virginia, 139 F.3d 984, 989 (4th Cir. 1998).)
For example, a State may purport to require a Direct Loan servicer,
as a condition of licensure, to demonstrate that it has adopted certain
business standards set by the State regulator; to meet certain
financial responsibility requirements such as liquidity, financial
solvency, capitalization, and surety bond requirements; and to submit
to investigations, audits, and background checks by State authorities.
Federal law addresses standards of responsibility for prospective
contractors, and a State may not, ``through its licensing requirements,
. . . review the federal government's responsibility determination.''
(Gartrell, 940 F.2d at 439.)
Some State servicing laws also purport to impose regulatory
requirements on servicing that create additional conflicts with Federal
law. For example, some State laws impose deadlines on servicers for
responding to borrower inquiries and require specific procedures to
resolve borrower disputes. Such laws establish deadlines for completing
transfers of loans from one servicer to another and specific protocols
for applying overpayments on loans. These are matters specified in the
laws and regulations governing the Direct Loan Program as well as the
contractual arrangements between the Department and the servicer. The
Department has enforcement authority to oversee servicer compliance
with these requirements, and ``this authority is used by the
[Department] to achieve a somewhat delicate balance of statutory
objectives.'' (Buckman Co. v. Plaintiffs' Legal Committee, 531 U.S.
341, 348 (2001).) The interposition of State-law requirements may
conflict with legal, regulatory, and contractual requirements, and may
skew the balance the Department has sought in calibrating its
enforcement decisions to the objectives of the program.
State servicing laws also may undermine Congress's goal of saving
taxpayer dollars in administering the Direct Loan Program. Some State
laws purport to impose licensing fees, assessments, minimum net worth
requirements, surety bonds, data disclosure requirements, and annual
reporting requirements on the Department's servicers that will increase
the costs of student loan servicing, perhaps exceeding the amount a
[[Page 10621]]
servicer receives on a per loan basis under its contract with the
Department, and certainly distorting the balance the Department has
sought to achieve between costs to servicers and taxpayers and the
benefits of services delivered to borrowers. Additionally, where State
servicing laws go beyond the requirements of Federal law in restricting
the actions a servicer may take to collect on a loan, such laws impede
the ability of the Department to protect Federal taxpayers by ensuring
the repayment of Federal loans. The Department's contracts require
servicers to operate throughout the United States because loan
borrowers are in all States. A servicer does not have the choice to
refrain from operating in a particular State to avoid licensing fees
and other costs imposed by the State. Rather, the States are using the
servicers' compliance with Federal law and contracts to extract
payments that benefit the State at the expense of the Federal taxpayer.
A requirement that Federal student loan servicers comply with 50
different State-level regulatory regimes would significantly undermine
the purpose of the Direct Loan Program to establish a uniform,
streamlined, and simplified lending program managed at the Federal
level. As courts have recognized, Congress provided ``a clear command
for uniformity'' in the HEA with respect to the FFEL Program, and then
``created a policy of inter-program uniformity by requiring that `loans
made to borrowers [under the Direct Loan Program] shall have the same
terms, conditions, and benefits, and be available in the same amounts,
as loans made to borrowers under [the FFEL Program].' '' (Chae, 593
F.3d at 945 (quoting 20 U.S.C. 1087e(a)(1)).) Indeed, ``Congress's
instructions to the [Department] on how to implement the student-loan
statutes carry this unmistakable command: Establish a set of rules that
will apply across the board.'' (Id.) State regulatory regimes conflict
with this congressional objective.
Uniformity not only reduces costs but also helps to ensure that
borrowers are treated equitably and are not confused about the lending
and repayment process. State-level regulation subjects borrowers to
different loan servicing deadlines and processes depending on where the
borrower happens to live, and at what point in time.
These conflicts with statutes, regulations, Federal contracts, and
congressional objectives suggest that State regulation of loan
servicers would be preempted by Federal law. That result is even more
evident where, as in the Direct Loan Program, State regulation
implicates uniquely Federal interests. As the Supreme Court has
recognized, ``obligations to and rights of the United States under its
contracts are governed exclusively by Federal law,'' and this area of
Federal concern extends to ``liability to third persons'' that ``arises
out of performance of the contract.'' (Boyle v. United Technologies
Corp., 487 U.S. 500, 504-05 (1988).) Here, there is no question that
the ``imposition of liability on Government contractors will directly
affect the terms of Government contracts,'' at the very least by
raising the price of such contracts, and ``the interests of the United
States will be directly affected.'' (Id. at 507.)
Moreover, ``the civil liability of Federal officials for actions
taken in the course of their duty'' is another area ``of peculiarly
Federal concern, warranting the displacement of State law.'' (Id. at
505.) This area extends to the liability of contractors performing
their obligations under contracts with the Federal government because
``there is obviously implicated the same interest in getting the
Government's work done.'' (Id.) Here, the loan servicers are acting
pursuant to a contract with the Federal government, and the servicers
stand in the shoes of the Federal government in performing required
actions under the Direct Loan Program.
``[W]here the Federal interest requires a uniform rule, the entire
body of State law applicable to the area conflicts and is replaced by
Federal rules.'' (Id. at 508.) The disposition of federally held debt
such as government-issued loans is a Federal interest that requires
uniformity because State intervention harms the Federal fisc.\1\
Accordingly, the Department believes that the statutory and regulatory
provisions and contracts governing the Direct Loan Program preclude
State regulation, either of borrowers or servicers.
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\1\ See, e.g., United States v. Scholnick, 606 F.2d 160, 164
(6th Cir. 1979) (holding that ``in any consideration of remedies
available upon default of a Federally held or insured loan, Federal
interest predominates over State interest'' because of ``an
overriding Federal interest in protecting the funds of the United
States and in securing Federal investments''); United States v.
Wells, 403 F.2d 596, 597-98 (5th Cir. 1968) (``The national loan
program of the Veterans Administration cannot be subjected to the
vagaries of the various State laws which might otherwise control all
or some phases of the loan program.'').
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C. Prohibited Disclosure Requirements
Congress has provided that ``[l]oans made, insured, or guaranteed
pursuant to a program authorized by title IV of the [HEA] shall not be
subject to any disclosure requirements of any State law.'' (20 U.S.C.
1098g.) As a Federal district court recently explained, ``Congress
intended [section] 1098g to preempt any State law requiring lenders to
reveal facts or information not required by Federal law.'' (Nelson v.
Great Lakes Educ. Loan Servs., No. 3:17-CV-183, 2017 WL 6501919, at *4
(S.D. Ill., Dec. 19, 2017).) Federal law provides a carefully crafted
disclosure regime specifying what information must be provided in the
context of the Federal loan programs. (See, e.g., 20 U.S.C. 1078-
3(b)(1)(F); 1083(e)(1) and (2); 34 CFR 668.41(b); 674.42; 674.31; and
682.205.) The Department interprets ``disclosure requirements'' under
section 1098g of the HEA to encompass informal or non-written
communications to borrowers as well as reporting to third parties such
as credit reporting bureaus.
The United States previously addressed the scope of section 1098g
in its submission to the Ninth Circuit in Chae. A State-law claim based
on ``a purported failure of disclosure runs headlong into express
statutory preemption provisions,'' according to the United States;
``[s]uch additional requirements are barred whether they are enacted
legislatively or implied judicially in the context of a tort suit.''
(Brief of Plaintiff-Intervenor-Appellee at 11.) In Chae, the court held
that State-law claims alleging misrepresentation by a student loan
servicer were ``improper-disclosure claims'' and, therefore, preempted
pursuant to section 1098g. (Chae, 593 F.3d at 942.) The court found the
``allegations in substance to be a challenge to the allegedly-
misleading method [the servicer] used to communicate with the
plaintiffs about its practices.'' (Id. at 942-43.) As the court
explained, ``the State-law prohibition on misrepresenting a business
practice `is merely the converse' of a State-law requirement that
alternate disclosures be made.'' (Id. at 943 (quoting Cipollone v.
Liggett Grp., 505 U.S. 504, 517 (1992)).)
To the extent that State servicing laws attempt to impose new
prohibitions on misrepresentation or the omission of material
information, those laws would also run afoul of the express preemption
provision in 20 U.S.C. 1098g.
D. FFEL Program Loans
The HEA and Department regulations governing the FFEL Program
preempt State servicing laws that conflict with, or impede the uniform
administration of, the program. State laws that require FFEL Program
servicers to respond to a borrower's inquiry or dispute within a
certain period of time, for example, conflict with the applicable
Federal
[[Page 10622]]
regulation that allows servicers 30 days after receipt to respond to
any inquiry from a borrower. (34 CFR 682.208(c).) Deadlines for
notifying borrowers of loan transfers between servicers similarly
conflict with Federal statutes and regulations that allow for 45 days
for notification. (20 U.S.C. 1078(b)(2)(F); 34 CFR 682.208(e)(1).)
These deadlines are set after careful consideration of the need for
timely responses and notifications to borrowers balanced against the
time the servicer needs to ensure an accurate response and the costs of
doing so. A uniform response time is also vital given the congressional
purpose to ensure borrowers are treated equally in the administration
of the program.
The imposition of required dispute resolution procedures under
State law would also conflict with the specific Federal regulations
that govern the resolution of disputes raised by borrowers. (See 34 CFR
682.208(c)(3)(i) and (ii).) State laws that require servicers to
communicate directly with the authorized representatives of a borrower
could conflict with Federal regulations that mandate direct
communications with borrowers and provide for specific exceptions when
a FFEL Program participant such as a servicer is authorized to
communicate with a borrower's representative. (See, e.g., 20 U.S.C.
1083(a); 1092c; 1077(a)(2)(H); 34 CFR 682.205(a)(1) and (b);
682.209(a)(6)(iii); 682.402; 682.210.)
Finally, the State servicing laws may conflict with two express
preemption provisions applicable to FFEL Program Loans. Federal
regulations ``preempt any State law, including State statutes,
regulations, or rules, that would conflict with or hinder
satisfaction'' of certain requirements regarding guaranty agency
imposition of collection charges, reporting to consumer reporting
agencies, and collection efforts on defaulted loans. (34 CFR
682.410(b)(8).) Federal regulations also preempt State laws that would
conflict with or hinder the efforts of lenders or their servicers to
satisfy and comply with the due diligence steps for loan collection
included in those regulations. (34 CFR 682.411(o)(1).) Recently enacted
State servicing laws appear to conflict with these preemption
provisions.
E. Existing Borrower Protections
The Secretary emphasizes that the Department continues to oversee
loan servicers to ensure that borrowers receive exemplary customer
service and are protected from substandard practices. First, the
Department monitors servicer compliance with the Department's
contracts, which include requirements related to customer service.
These oversight efforts include, but are not limited to, call
monitoring, process monitoring, and servicer auditing, conducted both
remotely and on-site by the Department's office of Federal Student Aid
(FSA). FSA has dedicated staff with the responsibility to ensure that
servicers are adhering to regulatory and contractual requirements for
servicing loans. For example, FSA reviews interactions between
servicers and borrowers and compares the servicers' performance against
a detailed Department checklist. FSA provides its performance
evaluations to servicers through written reports and meetings and
requires servicers to alter their practices when needed to correct
deficiencies. FSA also maintains direct access to servicer systems and
therefore can review individual borrower accounts to evaluate the
servicers' treatment of those accounts against regulatory and
contractual requirements.
Second, the Department's procurement and contracting requirements
incentivize improved customer service by allocating more loans to
servicers that meet performance metrics such as high levels of customer
satisfaction and by paying servicers higher rates for loans that are in
a non-delinquent status such as those enrolled in an income-driven
repayment plan. Poor-performing servicers lose loans in their portfolio
to better-performing servicers.
Third, FSA maintains a Feedback System, which includes a formal
process for borrowers to report issues or file complaints about their
loan experiences, including problems with servicing. Borrowers may also
elevate complaints to the FSA Ombudsman Group--a neutral and
confidential resource available to borrowers to resolve disputes
related to their loans.
The Department seeks to promote exemplary customer service for
student loan borrowers, consistent with the framework Congress
established for the Federal student loan programs.
Accessible Format: Individuals with disabilities can obtain this
document and a copy of the application package in an accessible format
(e.g., braille, large print, audiotape, or compact disc) on request to
the person listed under FOR FURTHER INFORMATION CONTACT.
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Dated: March 7, 2018.
Betsy DeVos,
Secretary of Education.
[FR Doc. 2018-04924 Filed 3-9-18; 8:45 am]
BILLING CODE 4000-01-P