Feds instruct student loan companies to ignore state regulators
WASHINGTON — The U.S. Education Department issued guidance Friday informing state regulators to back off the companies managing its $1.3 trillion portfolio of student loans, arguing that only the federal government has the authority to oversee its contractors.
“State regulation of the servicing of direct loans impedes uniquely federal interests,” the department wrote. “State regulation of the servicing of the Federal Family Education Loan Program is preempted to the extent that it undermines uniform administration of the program.”
The notice arrives as states have stepped in to fill what many see as a void in the federal oversight of student loan servicers, the companies the Department of Education pays nearly $1 billion to handle debt payments. The move has created great consternation within the industry, which has lobbied Education Secretary Betsy DeVos and Congress to prevent states from imposing additional rules and regulations. Now the department is taking action, but some legal experts say the declaration is a hollow gesture.
“Nowhere in this document does the Department of Education quote a statute from Congress that says the department is authorized to block states from stopping deceptive debt collection practices. That’s because such a law does not exist,” said Christopher Peterson, a law professor at the University of Utah and former enforcement attorney at the Consumer Financial Protection Bureau. “Many states are likely to view this document as legally dubious … and will wait for courts to weigh in with their own interpretation.”
California, Connecticut and the District of Columbia require servicers to obtain a license to operate within their borders as a way to bring the companies under their regulatory purview. Their local agencies have the authority to monitor loan servicers’ compliance with federal laws, investigate their behavior and refer cases to the attorney general.
Each has established a borrower’s bill of rights with minimum standards for timely payment processing, correction of errors and communication. The measures require companies to produce periodic information on their business activities that could be used to identify breakdowns in servicing. Other states, including New York, New Jersey and Illinois, are at various stages of following suit, fueling a movement that many see as an indictment of the poor job the Education Department has done monitoring servicers.
For years, the Consumer Financial Protection Bureau has received thousands of complaints about servicers misplacing paperwork, providing inconsistent information or charging unexpected fees. Critics say the Education Department has done nothing to curb this behavior.
In Friday’s guidance, the department argues that it has sufficient consumer protections in place and state efforts to impose more undermines “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.”