States regain regulatory power over predatory loan officers

In the United States, more than 40 million borrowers collectively owe more than $ 1.5 trillion in federal student loans.

The collection of much of this debt is managed by loan managers, private companies appointed by the US Department of Education. During the Trump administration, the Department of Education adopted an interpretation of the Higher Education Act of 1965 (HEA) and other federal laws that protected lending services from state regulation. .

In August, U.S. Education Secretary Miguel Cardona replaced the Trump-era interpretation with one that confirms that states can prohibit loan officers from using unfair or deceptive practices and can regulate d other aspects of the federal student loan service to protect borrowers.

Although the US federal government guarantees and assumes the risk of federal student loans, lenders have little contact with the federal government beyond submitting a Free Application for Federal Student Assistance (FAFSA). Instead, borrowers interact almost exclusively with their loan manager. In return for providing loan repayment plans, loan consolidations, and other administrative services, loan managers receive payment for each loan they serve. Loan managers make more money when borrowers owe more and repay their loans over long periods of time.

The Federal Student Loans Service has become an important segment of the loan servicing industry. In recent years, however, federal student loan borrowers have accused lending services of putting profits ahead of borrowers by distorting repayment options, pushing borrowers into forbearance, and failing to inform them of loan programs. loan cancellation.

According to the Trump administration’s interpretation, the Department of Education considered state laws regarding loan services invalid, including laws that required “the authorization and monitoring of student loan services” and prohibited ” acts such as engaging in unfair, deceptive or fraudulent acts or practices; erroneous payments; report inaccurate information to credit bureaus; or by refusing to contact an authorized representative of the student loan borrower.

But the Education Department’s new interpretation notes that several courts had determined that the Trump administration’s interpretation lacked binding authority because it required additional analysis and was not thorough, consistent or convincing.

With its new interpretation, the Department of Education has now not only pointed out that states have the legal authority to regulate several aspects of the service of federal student loans; it encourages states to do so and describes how it will support states’ efforts.

Some groups in the student loan services industry, such as the Education Finance Council, argue that federal law should take precedence if it conflicts with state laws. Then-President of the Education Finance Board, Debra Chromy, reportedly expressed concern about the “patchwork of 50 different state laws” that departments and borrowers would have to navigate if state law was not preempted.

Under the new interpretation, the Department of Education makes it clear that while “federal law takes precedence over state regulation in certain limited areas,” states can and should “regulate the service of student loans in many other ways. Which are not preempted by the HEA.

The new interpretation provides several justifications for the new position of the Ministry of Education. For example, under general pre-emption principles, consumer protection is “traditionally occupied by the states” rather than the federal government, so federal pre-emption claims in this area require clear direction from the US Congress.

In addition, the Ministry of Education now rejects the previous administration’s reliance on pre-emption on the ground, scenarios where federal laws govern the entire area of ​​particular law and implicitly exclude state regulation. As the Department observes, no circuit court has found that the field preemption applied to the HEA.

In addition, the current Ministry of Education rejects the previous administration’s use of express preemption, where the wording of a law explicitly takes precedence over states. Although the HEA expressly preempts certain areas of state law, “these provisions are limited and selective,” the ministry notes. Indeed, some courts have ruled definitively that federal law does not “expressly”Preempt state law claims against loan officers who make false statements to borrowers.

The Department’s new interpretation not only allows states to regulate lending services, but also seeks to facilitate coordination with “state partners to further improve service accountability and borrower protection.” In this way, the new interpretation restores the Department of Education’s long-held position on the ability of states to regulate loan services and marks a critical step towards the Biden administration’s goal of “renewing partnerships with state and federal regulators ”.

With this renewed federal support, states can now more easily oversee federal student loan services to protect their residents from predatory practices. If properly enforced, state regulation can better align the private interests of loan officers with those of federal student loan borrowers.