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Business Regulation & Regulated Industries

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Tussling Over
Preemption:
Emerging
Battleground
Between State
Authorities and
Student Loan
Servicers
12 Min Read

By: David M. Ge4tings (/author/davidmge4tings/), Stephen C.

Piepgrass (/author/stephencpiepgrass/), Timothy St. George
(/author/tim-st-george/), Amir Shachmurove (/author/amir-
shachmurove/)
| May 15, 2018

IN BRIEF
• The DepaPtment of Education and state a4torneys
 general are preparing to clash over the question of
whether federal preemption bars, in whole or in paPt,
regulation by the states of federal student loan
sePvicers.
• What arguments will the states advance in response to
the renewed emphasis on federal preemption by the
DOE and DOJ, and how will the DOE and DOJ counter?

ATter an unexpectedly slow staPt, the Trump

administration’s deregulatoPy push Tinally gained
momentum in late 2017.

In the Tield of student lending, this slowdown aXected

the DepaPtment of Education (DOE), the Consumer
Financial Protection Bureau (CFPB), and the
DepaPtment of Justice (DOJ). Unwilling to let this
vacuum stand, various states invoked their own
consumer protection laws and passed new regulations
regarding some of the most visible paPticipants in the
student loan market: the DOE’s sePvicers of federal
student loans, the middlemen be4ween borrowers, and
the market’s biggest lender. In response, the DOJ and
DOE have sought to s4ymie these eXoPts by invoking an
argument infrequently made in prior years: essentially,
federal law—they now argue—preempts all such state
regulatoPy action.

This aPticle examines these events and summarizes

likely arguments.

STATE OF THE LAW

Federal Government’s Regulato3y Framework for Post-
Seconda3y Education
Passed to keep the door to higher education open to all
students of abili4y regardless of socioeconomic
background, the Higher Education Act of 1965 (HEA)
commenced the federal government’s large-scale
involvement in higher education. Among other
initiatives and programs, this far-reaching statute
established the Federal Family Education Loan Program
(FFELP), a now-defunct system of loan guarantees
meant to encourage lenders to loan money to students
and their parents on favorable terms.

The HEA authorized the secretaPy of DOE to “prescribe

such regulations as may be necessaPy to carPy out the
purposes
(h4tps://www.law.cornell.edu/uscode/text/20/1082)” of
the act and sePved as the legal anchor for numerous
DOE regulations. The Health Care and Education
Reconciliation Act of 2010 (HCERA) dismantled the
FFELP. Although current loans remained unaXected,
HCERA leTt the Federal Direct Loan Program, created in
1993, as the sole source of federal student loans. In
addition, HCERA limited private paPticipation in this
program to sePvicers alone.

Once a student graduates, loan sePvicers act as the

primaPy point of contact be4ween borrowers and the
federal government. Because of their prominent role,
sePvicers have a4tracted the a4tention of state and
federal ojicials. The DOE currently contracts with
eight private sePvicers.

As of JanuaPy 1, 2018, the DOE has three Title IV

Additional SePvicers (TIVAS): (1) Navient Corporation
(Navient); (2) FedLoan SePvicing, an ajiliate of the
Pennsylvania Higher Education Assistance Agency
(PHEAA); and (3) Nelnet, Inc.
The DOE has an additional Tive for-proTit sePvicers: (1)
the Missouri Higher Education Loan Authori4y
(MOHELA); (2) Granite State Management & Resources;
(3) the Oklahoma Student Loan Authori4y (OSLA); (4)
the Higher Education SePvicing Corp. (HESC) and
EdFinancial on behalf of the NoPth Texas Higher
Education Authori4y; and (5) CornerStone.

For decades, the federal government routinely

defended these sePvicers against borrowers’ lawsuits
with precisely the same argument. For example, on
October 1, 1990, the DOE contended that its
regulations governing the FFEL Program, then known as
the Guaranteed Student Loan program, preempted
state laws regarding the conduct of loan collection
activities.

A second such instance took place 19 years later. In

2009, the DOJ, on behalf of the DOE, advanced a
reading of the DOE’s operating statutes in Chae v. SLM
Corporation, a case launched against Sallie Mae, a FFEL
program loan sePvicer, in the U.S. District CouPt for the
Central District of California. SpeciTically, the DOJ
argued in its motion for summaPy judgment that the
state consumer protection laws on which the plaintiXs
relied conTlicted with federal law and were thus
preempted. Both the district couPt and the Ninth
Circuit agreed.

Preemption

Within its prescribed sphere, federal law reigns

superior to any state law counterpaPts pursuant to the
Supremacy Clause of the U.S. Constitution. The
doctrine of “preemption,” the displacement of state law
by federal law, constitutes a subset of the Tield of
“federalism.” It dates back to Chief Justice John
Marshall’s core “conviction” in McCullough v. MaPyland:
“[T]he States have no power, by taxation, or othePwise,
to retard, impede, burden, or in any manner control the
operations of the constitutional laws enacted by
Congress, to carPy into eXect the powers vested in the
national government
(h4tps://supreme.justia.com/cases/federal/us/17/316/case.html).”
It can take one of three forms
(h4tp://caselaw.Tindlaw.com/us-supreme-
couPt/505/88.html): (1) express preemption; (2) conTlict
(implied) preemption; and (3) Tield (implied)
preemption.

Regardless of the version, Congress’s purpose remains

the ultimate touchstone in evePy preemption case.
Federal couPts, moreover, tend to favor a presumption
against preemption.

Express preemption occurs whenever Congress or a

federal agency enacts a law that directly revokes
speciTied powers from the states. Customarily, the
Supreme CouPt has narrowly and strictly construed
these explicit provisions to presePve traditional areas
of state regulation regarding health, safe4y, and
welfare. As it has oTten repeated, to displace traditional
state regulation, the federal statutoPy purpose must be
“clear and manifest
(h4tps://supreme.justia.com/cases/federal/us/331/218/case.html).”
For this reason, when a statute’s express preemption
clause is susceptible to more than one plausible
reading, federal couPts ordinarily decline to adopt the
preemptive one.

Field preemption, alternatively, requires examination

not of a statute’s text, but rather its structure and
purpose. It 4ypically arises where a federal regulatoPy
scheme occupies the legislative Tield. In some cases,
couPts have found Tield preemption when federal law is
so pePvasive and comprehensive
(h4tps://supreme.justia.com/cases/federal/us/529/89/case.html)
as to compel the inference that Congress leTt no room
for state-level regulation. In other cases, “an Act of
Congress touches a Tield in which [the] federal interest
is so dominant[,] that . . . the federal system will be
assumed to preclude enforcement of state laws on the
same subject
(h4tps://supreme.justia.com/cases/federal/us/496/72/case.html).”
With cePtain impoPtant exceptions, bankruptcy law
constitutes one of the more prominent examples of
this kind of preemption’s application.

Like Tield preemption, conTlict preemption does not

turn on any express statement of congressional intent.
Instead, conTlict preemption bars a state law’s
enforcement when an actual clash be4ween state and
federal law inevitably occurs. It oTten arises where it is
impossible for a private paP4y to comply with both
state and federal requirements or where state law
stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of
Congress. In some cases, Tield preemption may be
treated as “a species of conTlict preemption
(h4tps://supreme.justia.com/cases/federal/us/530/363/),”
where state regulatoPy processes are preempted by
conTlict with federal law as well as by Tield preemption
—and for the same general reasons.

IMPENDING BATTLE OVER FEDERAL

PREEMPTION’S REACH
Initial Forays

For years, as student loan debt crossed the $1.4 trillion

mark and the number of borrowers passed 44 million,
borrowers and their advocates criticized the federal
government’s chosen sePvicers for purpoPtedly not
working on behalf of debtors’ best interests.

Capitulating to these concerns, various states began

enacting laws that forced student-loan sePvicers to
hold licenses to operate within their borders and to
comply with cePtain consumer protection guidelines in
2015.

As these laws took eXect, sePvicers responded with

lawsuits and lobbyists. In paPticular, the National
Council of Higher Education Resources (NCHER), a
student loan industPy trade group, urged the federal
government to endorse the application of Tield and/or
conTlict preemption of state consumer laws purpoPting
to regulate sePvicers’ conduct, in either couPt Tilings or
ojicial agency publications, as one more way of beating
back these escalating eXoPts.

Federal Government’s Position

On March 12, 2018, the DOE formally posted a notice of

interpretation (NI) contending that, under its
interpretation of federal statutoPy and regulatoPy law,
the DOE alone possesses the power to regulate student
loan sePvicers.

The DOE acknowledged the motivation behind this NI:

the enactment by cePtain states of “regulatoPy regimes
that impose new regulatoPy requirements on sePvicers
of loans
(h4tps://ifap.ed.gov/fregisters/a4tachments/FR031218.pdT)”
or disclosure requirements on loan sePvicers with
respect to loans made under the HEA. Such claims, the
NI assePts
(h4tps://ifap.ed.gov/fregisters/a4tachments/FR031218.pdT),
“are preempted because . . . state[s have] sought to
proscribe conduct Federal law requires and to require
conduct Federal law prohibits.” “This is not a new
position,” the NI added
(h4tps://ifap.ed.gov/fregisters/a4tachments/FR031218.pdT).

Months earlier, just as it had in Chae years prior, the

DOJ had telegraphed its endorsement of this approach
when it took the rare step of Tiling a Statement of
Interest (SOI) in a Massachuse4ts case in defense of
PHEAA, a Pennsylvania-based national sePvicer,
pursuant to longstanding federal law
(h4tps://www.law.cornell.edu/uscode/text/28/517).

In this document, the DOJ reasoned that the sePvicer’s

practices are either required or authorized by federal
statutes, federal regulations, or the sePvicer’s contract
with the DOE; thus, the Massachuse4ts A4torney
General’s state-law claims violated the Supremacy
Clause.

More speciTically, the DOJ argued for conTlict

preemption for three reasons: (1) PHEAA cannot
comply with Massachuse4ts’ interpretation of the
relevant statutes and the actual requirements of
federal law; (2) Massachuse4ts’ claims “stand as an
obstacle to the accomplishment and execution of the
full purposes and objectives of Congress” as expressed
in the HEA; and (3) Massachuse4ts’ requested relief
would likely “require PHEAA to violate its contract with
DOE.”

Although the Massachuse4ts state couPt denied

PHEAA’s motion to dismiss on FebruaPy 28, 2018, in an
opinion released on March 1, 2018, it did not address
the DOJ’s preemption argument. Instead, it
sidestepped the issue by narrowly construing the SOI’s
text.
According to the couPt, the DOE was “not actually
argu[ing] that any of . . . [Massachuse4ts’] claims . . .
[are] preempted by federal law, or that any of the
alleged misconduct by PHEAA at issue here is
ajirmatively allowed by federal law.” Instead, the SOI
amounted merely to an admonition that the state’s
complaint could conTlict with the DOE’s requirements.
Given that “any relief against PHEAA could be
structured . . . as not to intePfere or othePwise conTlict
with the . . . [DOE’s] legal rights, and it is therefore not
inevitable that the . . . [DOE] will have an interest in
whatever judgment may be entered,” the couPt was
disinclined to Tind preemption.

SePvicers applauded the DOE’s position. Within weeks,

many submi4ted comment le4ters requesting the
tendering of similar statements in dozens of pending
state couPt cases. As the NCHER had already argued
(h4tp://www.ncher.us/link.asp?
e=culhane@ballardspahr.com&job=3006248&ymlink=140623706&Tinalurl=h4tp%3A%2F%2Fwww%2EncheP%
in the summer of 2017, state regulations can only “add
an unnecessaPy web of regulations which are both
duplicative and potentially contradictoPy to existing
federal regulations and policies.” Already “heavily
regulated” by the DOE and CFPB, “new state-level
regulations” pointlessly “replicate these requirements
with no additional beneTit for borrowers, and at
burdensome cost to sePvicing entities.” “To do things
for some borrowers in Illinois, a diXerent thing for
borrowers in California, something else diXerent for
folks in Maine—it is a federal program and it gets
confusing,” NCHER’s president maintained.

Response by State-Level Actors and Consumer

Advocates
Consumer advocates and state ojicials have
challenged these preemption arguments. With about a
dozen states having recently passed or considering
legislation to more strictly oversee and license federal
loan sePvicers, 4wo groups announced their outright
opposition to any such assePtion of federal
preeminence. On March 2, 2018, the Conference of
State Bank SupePvisors, which represents regulators in
all 50 states, pointed out that, “Congress has
deliberately presePved this cooperative state-federal
regulatoPy framework for nonbank Tinancial sePvices
activities for the beneTit of consumers and providers of
Tinancial sePvices alike.” Usually, “[p]reemption of state
licensing or regulation is a policy response that
Congress has carefully considered and chosen to do in
cePtain circumstances through speciTic legislation.” It
thus saw as improper DOE’s a4tempt to compel
preemption “through a mere interpretive notice,” a
decision more rightly “rest[ing] with Congress and not
with a federal agency.”

Meanwhile, in equally blunt terms, the a4torneys

general (AGs) of more than 4wo-dozen states rebuked
this campaign, both before and aTter the NI’s
publication. On October 23, 2017, 25 AGs wrote
(h4tps://ag.ny.gov/sites/default/Tiles/devos_le4ter.pdT),
“These requests defy the well-established role of
states in protecting their residents from fraudulent and
abusive practices. . . . The depaPtment cannot sweep
away state laws that apply to student loan sePvicers
and debt collectors.” As one signatoPy, Virginia’s
A4torney General Mark Herring, explained
(h4tps://www.oag.state.va.us/consumer-
protection/index.php/news/249-october-24-2017-ag-
herring-calls-on-secretaPy-devos-to-reject-student-
loan-sePvicing-industPy-s-demand-for-immuni4y-from-
oversight-and-enforcement), “We cannot allow
student-loan sePvicers to sidestep state law and
oversight and deny students and borrowers these vital
protections from student loan abuses.” Within days of
the NI’s release, 30 AGs reiterated
(h4tps://ag.ny.gov/sites/default/Tiles/ag_le4ter_student_loan_preemption.pdT)
these contentions.

DEBATING THE POTENTIAL RAMIFICATIONS

OF THE FEDERAL GOVERNMENT’S NEW
POSTURE
The legal issues regarding the renewed emphasis on
federal preemption by the DOE and DOJ remain largely
unresolved; however, states will probably contest any
such Tinding with three primaPy arguments.

First, they are likely to argue that consumer Tinancial

protection in the United States has always been a
patchwork of state and federal law, so conTlict or Tield
preemption should not apply.

Second, they are likely to claim that the anti-

preemptive provision of the Dodd-Frank Consumer
Financial Protection Act of 2010 allows them to
circumvent this danger.

Third, they may point to case law suggesting that

informal position statements akin to the NI are entitled
to less deference.

The DOE and DOJ likely will counter these arguments

in several ways.

First, as the DOJ noted in its SOI in Massachuse4ts,

Congress created the Direct Loan Program to simplify
the delivePy of student loans to borrowers and
eliminate borrower confusion, provide borrowers with a
varie4y of repayment plans, replace FFEL, minimize
unnecessaPy cost to taxpayers and borrowers, and
create a more streamlined program that can be
managed more eXectively at the federal level. The
same can be said about the original FFEL program.

State regulation could lead to the emergence of

diXerent plans for loan forgiveness for borrowers in
evePy state, resulting in borrowers being treated
diXerently depending on the state in which they live, to
the detriment of uniformi4y and ejiciency. At the same
time, given that more borrowers may be forgiven aTter
fewer payments, one more objective—that of
consePving taxpayer funds—may be imperiled by overly
aggressive state regulation. The same hit to the U.S.
TreasuPy would come from sePvicers’ requests for
increased payments from the federal government to
compensate for the added administrative complexi4y
created by the need to comply with dozens of
jurisdictions’ new mandates. All these harms would
arguably undermine the abili4y of the DOE to fulTill the
HEA’s obvious and dominant goals—a fact that favors
preemption.

Second, the DOE could point to actual conTlicts

be4ween federal and state laws and regulations with
respect to sePvicing of loans made by private lenders
and guaranteed by the federal government through the
FFEL program. Depending on the state regulation,
examples may include deadlines for borrower
communications and requirements around the
resolution of disputes raised by borrowers.

Third, and perhaps most signiTicantly, the HEA actually

contains an express preemption provision. Per this
section, “[l]oans made, insured, or guaranteed pursuant
to a program authorized by title IV of the Higher
Education Act of 1965 . . . shall not be subject to any
disclosure requirements of any [s]tate law
(h4tps://www.law.cornell.edu/uscode/text/20/1098g).”
The DOE has concluded that this section
“encompass[es all] informal or non-wri4ten
communications to borrowers as well as repoPting to
third paPties such as credit repoPting bureaus.” A couPt
may reasonably concur.

CONCLUSION
Recent events indicate that the DOE and state AGs are
preparing to clash over the question of whether federal
preemption bars (in whole or in paPt) regulation by the
states of federal student loan sePvicers. It remains to
be seen how couPts will resolve this coming conTlict.

ABOUT THE AUTHORS

 Virginia Beach, VA

David M.
Gettings

(/author/davidmge4tings/)

Dave is a paPtner in
Troutman Sanders’
Financial SePvices
Litigation practice,
representing national and
multinational clients in
both federal and state
couPt. The principal areas
of Dave’s practice…
(/author/davidmge4tings/)

+ Follow
 Richmond, VA

Stephen C.
Piepgrass

(/author/stephencpiepgrass/)

Stephen is a paPtner in
Troutman Sanders’
Consumer Financial SePvices
group with a focus in
Enforcement Actions &
Investigations and litigation.
He primarily represents
clients interacting with…

(/author/stephencpiepgrass/)
+ Follow
 Richmond, VA

Timothy St.
George

(/author/tim-st-
george/)

Tim St. George’s

practice includes the
representation of
clients in federal and
state couPt, both at the
(/author/tim-st-george/) trial and appellate level.
Tim focuses his practice
on the areas of complex
litigation and…

+ Follow
 Washinxton, DC

Amir
Shachmurove

(/author/amir-
shachmurove/)

(/author/amir-shachmurove/)
Amir Shachmurove is an
associate in the
Financial SePvices
Litigation section with
experience in such
areas as banking and
Tinance law; complex
commercial litigation;
bankruptcy and
restructuring
generally…

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