March, 2018
Washington -- The Trump Administration's Secretary of Education, Betsy DeVos, is about to attempt federal preemption of laws and regulations pertaining to student loan servicing.
This is at the request of the servicers, who do not want to deal with state consumer rights laws and especially with state attorneys general, who seek to protect their citizens from improper and downright shoddy loan servicing.
The servicing is so bad that several states have taken legal action against Navient and PHEAA, two of the major servicers. So has the federal Consumer Financial Protection Bureau, in the case of Navient. Borrowers individually are losing thousands of dollars (and millions collectively) to servicer incompetence, manipulation of regulations, and sometimes outright deceit about whose interests they represent, not to mention inept Department of Education oversight.
Read the CFPB charge against Navient, to get the flavor of the issues.
There is not much hope that the Department of Education can right the regulatory ship, or is even trying to. For all practical purposes it has been sunk irretrievably into the mud of conflicts of interest and abuse of recusal. The top managers at the Department come right out of the industry the Department is supposed to be regulating.
The irony is that the Trump Administration, and its supporters in Congress, often tout the benefits of state rather than federal administration. This is not one of those cases. This preemption is all about making bucks off the powerless, and taking away borrower remedies.
The reason this preemption attempt is misguided, and should fail when tested in court, is that the states are often trying only to enforce federal laws and regulations on the servicers. Unless there is a conflict between state and federal laws, the supremacy clause of the U.S. Constitution, upon which preemption arguments are based, is not an issue.
The case that has precipitated the DeVos preemption attempt is Massachusetts Attorney General Maura Healey's suit against PHEAA. Massachusetts alleges servicing violations contrary to both Massachusetts law and U.S. law. Inasmuch as the Massachusetts consumer protection standards are somewhat different than federal standards, the U.S. Department of Justice has filed a memorandum in the case taking note. But there is nothing in the memorandum that suggests the Attorney General is prevented from protecting her borrowers from servicing that violates federal law. Indeed, Massachusetts cites violations of the U.S. Code as a basis for the lawsuit.
It would be a mistake to try to justify preemption over the totality of student loan servicing based on an exception rather than the rule.
Even if this misguided attempt at preeption should succeed, there is still a role for state consumer protection offices in student loan servicing. Borrowers themselves have the right to sue all the major student loan servicers, and states can help their consumers navigate the process. A good public policy remedy for borrower abuse would be for state consumer protection agencies to act as clearinghouses and assistance centers for class action and other direct borrower actions.
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* Minutes after this was posted, a Massachusetts court ruled that the Healey suit against PHEAA could move forward, citing the reasons expressed above.
