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DeVos ups ante with state AGs in battle over student loan servicing

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An ongoing battle between the U.S. Department of Education and state regulators over student loan servicing just moved into higher gear.

Several states have imposed new regulatory requirements on companies that service loans that the federal government makes through its Direct Loan Program. States have also taken legal action against servicers. Most recently, Massachusetts' attorney general sued the Pennsylvania Higher Education Assistance Agency, which manages over a fourth of the nation's $1.4 trillion student loan debt, accusing the company of unfair practices.

Department of Education Secretary Betsy DeVos says that the companies hired by the government to service its own loans should only be subject to federal oversight. In January, the department filed a brief in support of PHEAA with the Suffolk County Superior Court.

Now the department is taking things a step further.

On Monday it will publish a notice in the Federal Register stating its view that state regulation of Direct Loans is preempted by federal law. State regulation of the servicing of Direct Loans “impedes uniquely federal interests,” the notice states.

For now, state laws remain in place. But it is possible that the courts will weigh an interpretive notice more heavily than a statement of interest.

How much deference the court will give this kind of notice “is an open question,” according to Vaishali Rao, a partner at the law firm Hinshaw & Culbertson and a former litigator in the Consumer Fraud Bureau of the Office of the Illinois Attorney General.

On one hand, “the Department of Education’s loans are their own loans; that’s a very persuasive point,” Rao said.

On the other hand, she said, whether particular state law provisions are preempted is a fact- specific question, “so language in each state law is going to have to be looked at individually, and it may not be a clean sweep based on this one notice.”

For example, the department made the same arguments regarding preemption in its filing in support of PHEAA’s motion to dismiss in the unfair and deceptive trade practice lawsuits brought by the Massachusetts attorney general. And the court denied the motion.

Massachusetts Attorney General Maura Healey is not deterred.

“Secretary DeVos can write as many love letters to the loan servicing industry as she wants, I won’t be shutting down my investigations or stand by while these companies rip off students and families,” Healey said an emailed statement. “The last thing we need is to give this industry a free pass while a million students a year are defaulting on federal loans.”

Other state regulators have expressed their opposition. John Ryan, president and CEO of the Conference of State Bank Supervisors, warned Devos in a March 2 letter that federal preemption “runs counter to the congressionally mandated state-federal balance in financial regulation and exceeds the department’s authority.”

A CSBS spokeswoman said Friday that the group stands by the letter.

While the Department of Education’s aim may be to shield servicers from state regulation, Rao thinks that the regulatory skirmishes actually complicate compliance, especially in today's environment where private lending and servicing markets are experiencing significant growth.

Since most entities service both federally guaranteed and private student loans, they will likely find themselves figuring out how to comply on at least a portion of their portfolio. “The problem is, how can you efficiently and effectively service across sectors when the standards are so different?" Rao said.

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