State regulators oppose federal preemption on student loan servicing

Student loan servicers such as Navient and Nelnet, which could benefit from an anticipated policy change by Education Secretary Betsy De Vos, may still find themselves in the crosshairs of state regulators.

John Ryan, president and CEO of the Conference of State Bank Supervisors, warned Devos in a letter Friday that the organization opposes the department's reported plan to preempt state authority over companies that collect debt on the government's behalf.

Ryan called the effort “preemption by regulatory fiat,” saying that it “runs counter to the congressionally mandated state-federal balance in financial regulation and exceeds the department’s authority.”

At issue is whether Nelnet, Navient and other companies that either collect payments on either federally guaranteed student loans or private student loans or that counsel borrowers will be subject only to federal, but not state authority. Several state attorneys general have filed lawsuits against Navient alleging a range of consumer abuses. If the Education Department issues an interpretive notice, Navient would be shielded from these lawsuits.

In his letter, Ryan noted that responsibility for regulating and supervising debt collectors, along with other nonbank financial services, has historically resided at the state level. The CSBS, on behalf of state regulators, operates the Nationwide Multistate Licensing System to license and register those engaged in mortgage, money transmission, consumer finance, debt collection, and other nondepository financial services industries.

“Congress has deliberately preserved this cooperative state-federal regulatory framework for nonbank financial services activities for the benefit of consumers and providers of financial services alike,” the letter states. “Consumers benefit because the proximity of the state regulatory framework has proven to be more accountable to local concerns and enables the public to conduct their own assessment as to whether the degree of consumer protections afforded by a state accords with their personal preferences.”

Ryan added that congress has only chosen to preempt state licensing or regulation in certain circumstances through specific legislation. “The department’s purported interpretation, in addition to flouting congressional intent, also upsets the calibrated state-federal balance of financial regulation of student lending.”

The Department of Education did not immediately respond to a request for comment.