[Federal Register Volume 83, Number 48 (Monday, March 12, 2018)]
[Rules and Regulations]
[Pages 10619-10622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04924]


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DEPARTMENT OF EDUCATION

34 CFR Chapter VI


Federal Preemption and State Regulation of the Department of 
Education's Federal Student Loan Programs and Federal Student Loan 
Servicers

AGENCY: Office of the Secretary, Department of Education.

ACTION: Interpretation.

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SUMMARY: 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.

DATES: March 12, 2018.

FOR FURTHER INFORMATION CONTACT: 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: [email protected].
    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.

SUPPLEMENTARY INFORMATION: 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. (Boyle v. United Technologies Corp., 
487 U.S. 500, 504-05 (1988); Buckman Co. v. Plaintiffs' Legal Comm., 
531 U.S. 341, 347 (2001); United States v. Victory Highway Vill., Inc., 
662 F.2d 488, 497 (8th Cir. 1981).) Accordingly, the servicing of 
Direct Loans is an area ``involving uniquely Federal interests'' that 
must be ``governed exclusively by Federal law.'' (Boyle, 487 U.S. at 
504.)

A. Interest of the United States

    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, Massachusetts v. 
Pennsylvania Higher Education Assistance Agency, d/b/a FedLoan 
Servicing, No. 1784-CV-02682 (Mass. Super. Ct., filed Jan. 8, 2018).) 
The United States explained that Massachusetts is improperly seeking to 
impose requirements on the Department's servicers that conflict with 
the HEA, Federal regulations, and Federal contracts that govern the 
Federal loan programs. Accordingly, Massachusetts' claims are preempted 
because the State has sought to proscribe conduct Federal law requires 
and to require conduct Federal law prohibits. We believe that attempts 
by other States to impose similar requirements will create additional 
conflicts with Federal law.
    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 Chae v. SLM Corporation, 
593 F.3d 936 (9th Cir. 2010), a case in which plaintiffs sought to 
apply State consumer protection laws to a FFEL Program loan servicer, 
to explain that the State laws on which the plaintiffs relied 
conflicted with Federal law.

[[Page 10620]]

(Brief of Plaintiff-Intervenor-Appellee, Chae v. SLM Corp., 593 F.3d 
936 (9th Cir. 2010) (No. 08-56154).) The Ninth Circuit concluded, among 
other things, that the precisely detailed provisions of the HEA ``show 
congressional intent that FFELP participants be held to clear, uniform 
standards.'' (Chae, 593 F.3d at 944.) The court held that State-law 
claims alleging misrepresentation were preempted by the HEA's express 
preemption of State-law disclosure requirements, and that other State-
law claims ``would create an obstacle to the achievement of 
congressional purposes'' and were therefore barred by conflict 
preemption principles. (Id. at 950.)
    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.

B. Direct Loan 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 (See 139 Cong. Rec. S5585, S5628 (1993)), 
Congress designed a program in which servicing would be ``provided at 
competitive prices'' by entities ``selected by and responsible to the 
Department of Education.'' (20 U.S.C. 1087f(a)(1); H.R. Rep. No. 103-
111, at 107 (1993).)
    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 Massachusetts v. Pennsylvania Higher Education Assistance 
Authority, ``The Department's contract with [the loan servicer] is 
voluminous--spanning more than 600 pages and including provisions 
governing [the servicer's] financial controls, internal monitoring, 
communications with borrowers, and many other topics.'' (Statement of 
Interest at 5.) In its contracts with loan servicers, including task 
orders and change requests issued under those contracts, the Department 
specifies in detail the responsibilities and obligations of the 
servicers for Direct Loans and the benefits provided under that program 
such as Public Service Loan Forgiveness and income-driven repayment 
plans.
    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.'' (Sperry v. Florida, 373 U.S. 379, 385 
(1963) (quoting Leslie Miller Inc. v. Arkansas, 352 U.S. 187, 190 
(1956)) (footnotes omitted).)
    Such licensing requirements ``interfere[] with the federal 
government's power to select contractors'' and to determine whether 
contractors are ``responsible'' under Federal law. (Gartrell Const. 
Inc. v. Aubry, 940 F.2d 437, 438 (9th Cir. 1991).) With regard to 
responsibility determinations of prospective contract awardees, the 
Department follows FAR Subpart 9.1 (48 CFR 9.100 through 9.108-5). The 
Department selects contractors for Direct Loan servicing under 20 
U.S.C. 1087f and 1018a. State-imposed registration and licensure 
requirements conflict with these Federal authorities by adding to 
Federal requirements and are thus preempted. (See United States v. 
Virginia, 139 F.3d 984, 989 (4th Cir. 1998).)
    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.'' 
(Gartrell, 940 F.2d at 439.)
    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.'' (Buckman Co. v. Plaintiffs' Legal Committee, 531 U.S. 
341, 348 (2001).) The interposition of State-law requirements may 
conflict with legal, regulatory, and contractual requirements, and may 
skew the balance the Department has sought in calibrating its 
enforcement decisions to the objectives of the program.
    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

[[Page 10621]]

servicer receives on a per loan basis under its contract with the 
Department, and certainly distorting the balance the Department has 
sought to achieve between costs to servicers and taxpayers and the 
benefits of services delivered to borrowers. Additionally, where State 
servicing laws go beyond the requirements of Federal law in restricting 
the actions a servicer may take to collect on a loan, such laws impede 
the ability of the Department to protect Federal taxpayers by ensuring 
the repayment of Federal loans. The Department's contracts require 
servicers to operate throughout the United States because loan 
borrowers are in all States. A servicer does not have the choice to 
refrain from operating in a particular State to avoid licensing fees 
and other costs imposed by the State. Rather, the States are using the 
servicers' compliance with Federal law and contracts to extract 
payments that benefit the State at the expense of the Federal taxpayer.
    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].' '' (Chae, 593 
F.3d at 945 (quoting 20 U.S.C. 1087e(a)(1)).) Indeed, ``Congress's 
instructions to the [Department] on how to implement the student-loan 
statutes carry this unmistakable command: Establish a set of rules that 
will apply across the board.'' (Id.) State regulatory regimes conflict 
with this congressional objective.
    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.'' (Boyle v. United Technologies 
Corp., 487 U.S. 500, 504-05 (1988).) Here, there is no question that 
the ``imposition of liability on Government contractors will directly 
affect the terms of Government contracts,'' at the very least by 
raising the price of such contracts, and ``the interests of the United 
States will be directly affected.'' (Id. at 507.)
    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.'' (Id. at 
505.) This area extends to the liability of contractors performing 
their obligations under contracts with the Federal government because 
``there is obviously implicated the same interest in getting the 
Government's work done.'' (Id.) Here, the loan servicers are acting 
pursuant to a contract with the Federal government, and the servicers 
stand in the shoes of the Federal government in performing required 
actions under the Direct Loan Program.
    ``[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.'' (Id. at 508.) The disposition of federally held debt 
such as government-issued loans is a Federal interest that requires 
uniformity because State intervention harms the Federal fisc.\1\ 
Accordingly, the Department believes that the statutory and regulatory 
provisions and contracts governing the Direct Loan Program preclude 
State regulation, either of borrowers or servicers.
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    \1\ See, e.g., United States v. Scholnick, 606 F.2d 160, 164 
(6th Cir. 1979) (holding that ``in any consideration of remedies 
available upon default of a Federally held or insured loan, Federal 
interest predominates over State interest'' because of ``an 
overriding Federal interest in protecting the funds of the United 
States and in securing Federal investments''); United States v. 
Wells, 403 F.2d 596, 597-98 (5th Cir. 1968) (``The national loan 
program of the Veterans Administration cannot be subjected to the 
vagaries of the various State laws which might otherwise control all 
or some phases of the loan program.'').
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C. Prohibited Disclosure Requirements

    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.'' (Nelson v. 
Great Lakes Educ. Loan Servs., No. 3:17-CV-183, 2017 WL 6501919, at *4 
(S.D. Ill., Dec. 19, 2017).) Federal law provides a carefully crafted 
disclosure regime specifying what information must be provided in the 
context of the Federal loan programs. (See, e.g., 20 U.S.C. 1078-
3(b)(1)(F); 1083(e)(1) and (2); 34 CFR 668.41(b); 674.42; 674.31; and 
682.205.) The Department interprets ``disclosure requirements'' under 
section 1098g of the HEA to encompass informal or non-written 
communications to borrowers as well as reporting to third parties such 
as credit reporting bureaus.
    The United States previously addressed the scope of section 1098g 
in its submission to the Ninth Circuit in Chae. A State-law claim based 
on ``a purported failure of disclosure runs headlong into express 
statutory preemption provisions,'' according to the United States; 
``[s]uch additional requirements are barred whether they are enacted 
legislatively or implied judicially in the context of a tort suit.'' 
(Brief of Plaintiff-Intervenor-Appellee at 11.) In Chae, the court held 
that State-law claims alleging misrepresentation by a student loan 
servicer were ``improper-disclosure claims'' and, therefore, preempted 
pursuant to section 1098g. (Chae, 593 F.3d at 942.) The court found the 
``allegations in substance to be a challenge to the allegedly-
misleading method [the servicer] used to communicate with the 
plaintiffs about its practices.'' (Id. at 942-43.) As the court 
explained, ``the State-law prohibition on misrepresenting a business 
practice `is merely the converse' of a State-law requirement that 
alternate disclosures be made.'' (Id. at 943 (quoting Cipollone v. 
Liggett Grp., 505 U.S. 504, 517 (1992)).)
    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.

D. FFEL Program Loans

    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

[[Page 10622]]

regulation that allows servicers 30 days after receipt to respond to 
any inquiry from a borrower. (34 CFR 682.208(c).) Deadlines for 
notifying borrowers of loan transfers between servicers similarly 
conflict with Federal statutes and regulations that allow for 45 days 
for notification. (20 U.S.C. 1078(b)(2)(F); 34 CFR 682.208(e)(1).) 
These deadlines are set after careful consideration of the need for 
timely responses and notifications to borrowers balanced against the 
time the servicer needs to ensure an accurate response and the costs of 
doing so. A uniform response time is also vital given the congressional 
purpose to ensure borrowers are treated equally in the administration 
of the program.
    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. (See 34 CFR 
682.208(c)(3)(i) and (ii).) State laws that require servicers to 
communicate directly with the authorized representatives of a borrower 
could conflict with Federal regulations that mandate direct 
communications with borrowers and provide for specific exceptions when 
a FFEL Program participant such as a servicer is authorized to 
communicate with a borrower's representative. (See, e.g., 20 U.S.C. 
1083(a); 1092c; 1077(a)(2)(H); 34 CFR 682.205(a)(1) and (b); 
682.209(a)(6)(iii); 682.402; 682.210.)
    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.

E. Existing Borrower Protections

    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.
    Accessible Format: Individuals with disabilities can obtain this 
document and a copy of the application package in an accessible format 
(e.g., braille, large print, audiotape, or compact disc) on request to 
the person listed under FOR FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this 
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    Dated: March 7, 2018.
Betsy DeVos,
Secretary of Education.
[FR Doc. 2018-04924 Filed 3-9-18; 8:45 am]
 BILLING CODE 4000-01-P