WASHINGTON -- The U.S. Department of Education issued guidance Friday informing state regulators to back off the companies managing its $1.3 trillion portfolio of student loans, arguing that only the federal government has the authority to oversee its contractors.
"State regulation of the servicing of direct loans impedes uniquely federal interests," the department wrote. "State regulation of the servicing of the Federal Family Education Loan Program is preempted to the extent that it undermines uniform administration of the program."
The notice arrives as states have stepped in to fill what many see as a void in the federal oversight of student loan servicers, the companies the Education Department pays nearly $1 billion to handle debt payments. The move has created great consternation within the industry, which has lobbied Education Secretary Betsy DeVos and Congress to prevent states from imposing additional rules and regulations. Now the department is taking action, but some legal experts say the declaration is a hollow gesture.
"Nowhere in this document does the Department of Education quote a statute from Congress that says the department is authorized to block states from stopping deceptive debt collection practices. That's because such a law does not exist," said Christopher Peterson, a law professor at the University of Utah and former enforcement attorney at the Consumer Financial Protection Bureau. "Many states are likely to view this document as legally dubious ... and will wait for courts to weigh in with their own interpretation."
California, Connecticut and the District of Columbia require servicers to obtain licenses to operate within their borders as a way to bring the companies under their regulatory purview. Their local agencies have the authority to monitor loan servicers' compliance with federal laws, investigate their behavior and refer cases to the attorney general.
Each has established a borrower's bill of rights with minimum standards for timely payment processing, correction of errors and communication. The measures require companies to produce periodic information on their business activities that could be used to identify breakdowns in servicing.
Other states, including New York, New Jersey and Illinois, are at various stages of following suit, fueling a movement that many see as an indictment of the poor job the Education Department has done monitoring servicers.
"Education Secretary Betsy DeVos is attempting to exempt private contractors that service federal student loans from complying with state law. This is suspicious, unprecedented, and most importantly, without any legal basis under federal law," California Attorney General Xavier Becerra said in a statement. "It is also a direct assault on the work achieved by California. We are prepared to defend the protections we secured for college students by making loan servicers accountable for their conduct every step of the way."
For years, the Consumer Financial Protection Bureau has received thousands of complaints about servicers misplacing paperwork, providing inconsistent information or charging unexpected fees. The bureau has accused some of these companies, including Navient Solutions, of driving borrowers into default with sloppy collection and application of payments. All the while, critics say the Education Department has done nothing to curb this behavior.
In Friday's guidance, the department argues that it has sufficient consumer protections in place and state efforts to impose more undermine "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."
That argument echoes the sentiments of student loan servicing organizations. In July, the National Council of Higher Education Resources, a trade group representing private lenders, loan servicers, debt collectors and loan guarantee agencies, sent a letter urging the Education Department to pre-empt state laws that regulate federal contractors.
Council President James Bergeron said state laws aimed at servicing companies will add "unnecessary complexity to the federal student loan system" and create "a regulatory and supervisory maze in the process" that will lead to confusion.
On Friday, Bergeron praised the department's guidance, saying it "should alleviate many of the most problematic provisions of the existing and pending state laws that create significant differences between the servicing of borrowers residing in certain states, adding unnecessary complexity and cost to the federal student loan system and creating a regulatory maze in the process and confusion for borrowers and their servicers."
A Section on 03/10/2018