Student Loan Servicing Alliance v. Dist. of Columbia

351 F.Supp.3d 26

STUDENT LOAN SERVICING ALLIANCE, Plaintiff,

v.DISTRICT OF COLUMBIA, et al., Defendants.

Civil Action No. 18-0640 (PLF)

United States District Court, District of Columbia.

Signed November 21, 2018

David B. Meschke, Richard B. Benenson, Christopher O. Murray, Brownstein Hyatt Farber Schreck LLP, Denver, CO, for Plaintiff.

Gregory Martin Cumming, Jessica N. Krupke, Office of the Attorney General for the District of Columbia, Washington, DC, for Defendants.

OPINION

PAUL L. FRIEDMAN, United States District Judge

This case involves the important question of whether the District of Columbia – and inferentially other states – may require student loan servicers who manage federally-owned and federally-guaranteed student loans to obtain a license to operate in the District of Columbia in an effort to protect the consumers of those loans. Plaintiff Student Loan Servicing Alliance ("SLSA") maintains that the District of Columbia may not regulate such servicers because Congress has preempted the field of regulating student loans servicers or has otherwise preempted the law at issue – D.C. Law 21-214 and the Final Rules. SLSA's position is supported by the United States, which has filed a statement of interest in this case.

Defendants – the District of Columbia; Stephen C. Taylor, Commissioner, Department of Insurance, Securities, and Banking; and Charles A. Burt, Student Loan and Foreclosure Ombudsman – have moved [Dkt. No. 21] to dismiss SLSA's amended complaint or, in the alternative, for summary judgment. SLSA filed a cross-motion [Dkt. No. 27] for summary judgment. Upon careful consideration of the parties' papers, the relevant legal authorities, the oral arguments of counsel at a motions hearing on October 23, 2018, and the entire record in this case, the Court will deny defendants' motion to dismiss; grant defendants' motion for summary judgment in part; and grant in part and deny in part plaintiff's motion for summary judgment.¹

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Higher Education Act

Congress passed the Higher Education Act of 1965 ("HEA"), 20 U.S.C. §§ 1001 - 1155, "[t]o strengthen the educational resources of our colleges and universities and to provide financial assistance for students in postsecondary and higher education." See Pub. L. No. 89-329, 79 Stat. 1219, 1219 (1965); Am. Compl. ¶¶ 22-24. In order to improve access to higher education for all students, Congress created federal student loan programs that "provide federal taxpayer-funded benefits to borrowers that are not found in other consumer loans." See Am. Compl. ¶ 32.

The two student loan programs at issue in this case are the William D. Ford Federal Direct Loan Program ("FDLP"), 20 U.S.C. § 1071, etseq., and the Federal Family Education Loan Program ("FFELP"). See 20 U.S.C. § 1087a, etseq.

The FFELP, originally known as the Guaranteed Student Loan Program, was first created in 1965 as part of the HEA. See Am. Compl. ¶ 26. Later, the FDLP was fully authorized pursuant to the Student Loan Reform Act of 1993 as part of the Omnibus Reconciliation Act of 1993. See id. ¶ 27. The two programs differ in terms of the federal government's role. Under the FDLP, the federal government is the lender; students and their parents borrow directly from the federal government. See 20 U.S.C. § 1087a, et seq. ; U.S. SOI at 2. The FFELP is more complicated.

FFELP loans were originally issued by private lenders and insured by guaranty agencies, and the federal government reinsured the loans. See 20 U.S.C. §§ 1071(a)(1)(D), 1078(c) ; 34 C.F.R. § 682.404 ; Am. Compl. ¶¶ 26, 62 n.6.² In response to the 2008 financial crisis, Congress passed the Ensuring Continued Access to Student Loans Act ("ECASLA"), which authorized the United States Department of Education ("DOED") to purchase FFELP loans from private lenders until the end of the 2009-2010 academic year. See Am. Compl. ¶¶ 29, 71. The DOED purchased approximately 3.91 million FFELP loans under ECASLA, see Am. Compl. ¶ 29, worth $94 million. See id. ¶ 197. For those loans, the federal government is now the "lender." In addition, under the Student Aid and Fiscal Responsibility Act ("SAFRA"), part of the Health Care and Education Reconciliation Act of 2010, Congress discontinued the FFELP program. See id. ¶ 72; PL Facts at 4. For that reason, "over 90 percent of new student loans today are made through FDLP." See id. ¶ 73.

The types of federal student loans created by the HEA, therefore, can be grouped into three different categories for purposes of this lawsuit. First are the FDLP loans – those are owned by the federal government. Second are the FFELP loans that were purchased by the federal government under ECASLA ("Government-Owned FFELP loans") – those are now owned by the federal government. Third are the original FFELP loans ("Commercial FFELP loans") – those are owned by private lenders and the federal government reinsures or guarantees them.³

The DOED extensively regulates the federal student loan industry and has established specific standards and procedures to which borrowers, lenders, educational institutions, and other actors – including loan servicers – must adhere. See 34 C.F.R. Parts 682, 685. With respect to FDLP loans, "DOED is responsible for all aspects of the lending process, from origination to repayment." See Def. Facts ¶ 29 (citing 34 C.F.R. § 685.100(a) ). In contrast, "[u]nder the FFELP, DOED is responsible for providing guarantees to lenders against losses, reinsuring loans, and subsidizing loans made by private and non-profit lenders." See Def. Facts ¶ 22 (citing 34 C.F.R. § 682.100(a) ).

Consequently, student loans constitute an enormous industry, and the federal government plays a major role. Thirty-four million Americans are obligated to pay federal student loans, and the federal government made, owns, or guarantees 92 percent of all student loans in the United States. See Am. Compl. ¶ 4.⁴ Federal student loans represent a large proportion of the federal government's assets: "Nearly half of the financial assets of the United States government – over a trillion dollars – are promissory notes related to unpaid loans made to America's students for their higher education." See id. ¶ 3. "[O]utstanding federal student loans have more than doubled from less than $600 billion in 2008 to over $1.4 trillion today." See id. ¶ 34.⁵ The District of Columbia, in particular, is "the most indebted jurisdiction in the country when it comes to average federal student debt." See Am. Br. Lawyers' Committee at 16. "As of March 31, 2018, the average student loan borrower in the District of Columbia had approximately $51,192.00 in outstanding federal student debt." See Am. Compl. ¶ 35.

B. Federal Regulation of Student Loan Servicers

Student loan servicers serve as a kind of middle-man between lenders and borrowers. Student loan servicers "process[ ] Income-Driven Repayment (‘IDR’) applications, maintain[ ] account records, send[ ] statements and other account notices, process[ ] payments, process[ ] paperwork associated with a myriad of payment statuses, operat[e] incoming and outgoing call enters to help inform and educate borrowers about their loans and select the best repayment plan within their budget, and even facilitat[e] temporary cessation of payments, all in an effort to avoid the consequences of delinquency and default." See Am. Compl. ¶ 58. The HEA and its implementing regulations govern certain procedures that loan servicers must follow and standards they must meet in servicing federal student loans. See id. ¶ 39 (citing 20 U.S.C. §§ 1082, 1087a, 1087e ).

Congress has delegated to the Secretary of Education the authority to contract directly with servicers for the administration of FDLP loans. See 20 U.S.C. § 1087f. The HEA specifies certain standards that the Secretary must adhere to in selecting and contracting with servicers, 20 U.S.C. § 1087f, but the "[r]egulations do not define the terms of DOED's contracts with FDLP servicers." See Def. Facts ¶ 32 (citing 34 C.F.R. Part 685).

The HEA also grants the Secretary of Education the authority to prescribe regulations to "carry out the purposes of [the FFELP program] ... applicable to third party servicers" and "to establish minimum standards with respect to sound management and accountability."See 20 U.S.C. § 1082(a)(1).⁶ Pursuant to this authority, the DOED has issued regulations that dictate certain standards of financial and administrative capability that servicers must meet to contract with private lenders to service FFELP loans. See 34 C.F.R. § 684.416. DOED regulations also establish processes to limit, suspend, or terminate a third-party servicer's eligibility to contract with private lenders, 34 C.F.R. § 682.700, and impose certain obligations on FFELP loan servicers, including reporting requirements. See id. § 682.208. In addition, the DOED manages the office of Federal Student Aid, which "audits the servicers and communicates daily with them," maintains a "Feedback System," and receives complaints through the "FSA Ombudsman Group — a neutral and confidential resource available to borrowers to resolve disputes related to their loans." See U.S. SOI at 5-6 (quoting DOED Notice at 5).

The federal government's relationship with servicers, therefore, differs based on the type of federal student loans being serviced. First are the FDLP loans, owned by the federal government – the federal government contracts directly with servicers. Second are the Government-Owned FFELP loans that were purchased by the federal government under ECASLA and are now owned by the federal government – those are serviced pursuant to federal government contracts. Third are the Commercial FFELP loans, owned by private lenders and the federal government reinsures or guarantees them. The private lenders contract directly with third-party servicers.

C. The District of Columbia Law and Final Rules

The Council of the District of Columbia enacted the Student Loan Ombudsman...