Office of the Secretary, Department of Education.
Interpretation.
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.
March 12, 2018.
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:
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.
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. (
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,
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
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.
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 (
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
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.” (
Such licensing requirements “interfere[] with the federal government's power to select contractors” and to determine whether contractors are “responsible” under Federal law. (
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.” (
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.” (
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
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].' ” (
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.” (
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.” (
“[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.” (
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.” (
The United States previously addressed the scope of section 1098g in its submission to the Ninth Circuit in
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.
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
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. (
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.
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.
You may also access documents of the Department published in the