83 FR 10619 - Federal Preemption and State Regulation of the Department of Education's Federal Student Loan Programs and Federal Student Loan Servicers

DEPARTMENT OF EDUCATION

Federal Register Volume 83, Issue 48 (March 12, 2018)

Page Range		10619-10622
FR Document		2018-04924

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.

Federal Register, Volume 83 Issue 48 (Monday, March 12, 2018)

[Federal Register Volume 83, Number 48 (Monday, March 12, 2018)]
[Rules and Regulations]
[Pages 10619-10622]
From the Federal Register Online [www.thefederalregister.org]
[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: ED.NoticeResponse@ed.gov.
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
document is the document published in the Federal Register. You may
access the official edition of the Federal Register and the Code of
Federal Regulations via the Federal Digital System at: www.thefederalregister.org/fdsys. At this site you can view this document, as well as all other
documents of this Department published in the Federal Register, in text
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by the Department.

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

Federal Register / Vol. 83, No. 48 / Monday, March 12, 2018 / Rules and Regulations 10619

PART 117—DRAWBRIDGE DEPARTMENT OF EDUCATION rights of the Federal government related
OPERATION REGULATIONS to federally held debt. (Boyle v. United
34 CFR Chapter VI Technologies Corp., 487 U.S. 500, 504–
■ 1. The authority citation for part 117 05 (1988); Buckman Co. v. Plaintiffs’
Federal Preemption and State Legal Comm., 531 U.S. 341, 347 (2001);
continues to read as follows: Regulation of the Department of United States v. Victory Highway Vill.,
Authority: 33 U.S.C. 499; 33 CFR 1.05–1; Education’s Federal Student Loan Inc., 662 F.2d 488, 497 (8th Cir. 1981).)
Department of Homeland Security Delegation Programs and Federal Student Loan Accordingly, the servicing of Direct
No. 0170.1. Servicers Loans is an area ‘‘involving uniquely
■ 2. Revise § 117.625 to read as follows: AGENCY: Office of the Secretary, Federal interests’’ that must be
Department of Education. ‘‘governed exclusively by Federal law.’’
§ 117.625 Black River (Port Huron). (Boyle, 487 U.S. at 504.)
ACTION: Interpretation.
(a) The draw of the Military Street A. Interest of the United States
Bridge, mile 0.33, shall open on signal; SUMMARY: Recently, several States have
enacted regulatory regimes that impose Recently, the United States filed a
except that, from May 1 through October Statement of Interest in a lawsuit
new regulatory requirements on
31, from 8 a.m. to 11 p.m., seven days brought by the Commonwealth of
servicers of loans under the William D.
a week, the draw need open only on the Massachusetts against a Department
Ford Federal Direct Loan Program
hour and half-hour for recreational (Direct Loan Program). States also loan servicer alleging violations of
vessels, or at any time when there are impose disclosure requirements on loan Massachusetts State law for allegedly
more than five vessels waiting for an servicers with respect to loans made unfair or deceptive acts related to the
opening, and from November 1 through under title IV of the Higher Education servicing of Federal student loans and
April 30 if at least 12-hours advance Act of 1965, as amended (HEA). Finally, administration of programs under the
notice is given. State regulations impact Federal Family HEA. (Statement of Interest by the
Education Loan (FFEL) Program United States, Massachusetts v.
(b) The draw of the Seventh Street
servicing. The Department believes such Pennsylvania Higher Education
Bridge, mile 0.50, shall open on signal;
regulation is preempted by Federal law. Assistance Agency, d/b/a FedLoan
except that, from May 1 through October Servicing, No. 1784–CV–02682 (Mass.
31, from 8 a.m. to 11 p.m., seven days The Department issues this notice to
clarify further the Federal interests in Super. Ct., filed Jan. 8, 2018).) The
a week, the draw need open only on the United States explained that
quarter-hour and three-quarter-hour for this area.
Massachusetts is improperly seeking to
recreational vessels, or at any time when DATES: March 12, 2018.
impose requirements on the
there are more than five vessels waiting FOR FURTHER INFORMATION CONTACT: Department’s servicers that conflict with
for an opening, and from November 1 Kathleen Smith, Deputy Chief Operating the HEA, Federal regulations, and
through April 30 if at least 12-hours Officer, U.S. Department of Education, Federal contracts that govern the
advance notice is given. Federal Student Aid, 830 First Street Federal loan programs. Accordingly,
NE, Union Center Plaza, Washington, Massachusetts’ claims are preempted
(c) The draw of the Tenth Street DC 20202–5453. Telephone: (202) 377–
Bridge, mile 0.94, shall open on signal; because the State has sought to
4533 or via email: ED.NoticeResponse@ proscribe conduct Federal law requires
except that, from May 1 through October ed.gov. and to require conduct Federal law
31, from 8 a.m. to 11 p.m., seven days If you use a telecommunications prohibits. We believe that attempts by
a week, the draw need open only on the device for the deaf (TDD) or a text other States to impose similar
hour and half-hour for recreational telephone (TTY), call the Federal Relay requirements will create additional
vessels, or at any time when there are Service, toll free, at 1–800–877–8339. conflicts with Federal law.
more than five vessels waiting for an SUPPLEMENTARY INFORMATION: Congress This is not a new position. The
opening, and from 11 p.m. to 8 a.m. if created and expanded the Direct Loan United States has previously responded
at least 1-hour advance notice is Program with the goal of simplifying the when State law has been utilized in a
provided, and from November 1 through delivery of student loans to borrowers, way that conflicts with the operation
April 30 if at least 12-hours notice is eliminating borrower confusion, and purposes of loan programs the
given. avoiding unnecessary costs to taxpayers, Department administers pursuant to the
(d) The draw of the Canadian National and creating a more streamlined student HEA. On October 1, 1990, the
Railroad Bridge, mile 1.56, shall open loan program that could be managed Department issued a notice of its
on signal; except from November 1 more effectively at the Federal level. interpretation of regulations governing
Recently, several States have enacted the FFEL Program (then known as the
through April 30 if at least 12-hours
regulatory regimes or applied existing Guaranteed Student Loan program) (55
advance notice is given. State consumer protection statutes that FR 40120) that prescribe the actions
Dated: Febuary 23, 2018. undermine these goals by imposing new lenders and guaranty agencies must take
J.M. Nunan regulatory requirements on the to collect loans. The Department
Rear Admiral, U.S. Coast Guard, Commander, Department’s Direct Loan servicers, explained its view that these regulations
Ninth Coast Guard District. including State licensure to service preempt State law regarding the conduct
[FR Doc. 2018–04914 Filed 3–9–18; 8:45 am] Federal student loans. State servicing of these loan collection activities.
laws are purportedly aimed only at In 2009, the United States intervened
BILLING CODE 9110–04–P
student loan servicers, but such in Chae v. SLM Corporation, 593 F.3d
daltland on DSKBBV9HB2PROD with RULES

regulation affects the ‘‘[o]bligations and 936 (9th Cir. 2010), a case in which
rights of the United States under its plaintiffs sought to apply State
contracts’’ with servicers and with consumer protection laws to a FFEL
student loan borrowers, the Program loan servicer, to explain that
‘‘relationship between a Federal agency the State laws on which the plaintiffs
and the entity it regulates,’’ and the relied conflicted with Federal law.

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10620 Federal Register / Vol. 83, No. 48 / Monday, March 12, 2018 / Rules and Regulations

(Brief of Plaintiff-Intervenor-Appellee, saving taxpayer dollars (See 139 Cong. 9.108–5). The Department selects
Chae v. SLM Corp., 593 F.3d 936 (9th Rec. S5585, S5628 (1993)), Congress contractors for Direct Loan servicing
Cir. 2010) (No. 08–56154).) The Ninth designed a program in which servicing under 20 U.S.C. 1087f and 1018a. State-
Circuit concluded, among other things, would be ‘‘provided at competitive imposed registration and licensure
that the precisely detailed provisions of prices’’ by entities ‘‘selected by and requirements conflict with these Federal
the HEA ‘‘show congressional intent responsible to the Department of authorities by adding to Federal
that FFELP participants be held to clear, Education.’’ (20 U.S.C. 1087f(a)(1); H.R. requirements and are thus preempted.
uniform standards.’’ (Chae, 593 F.3d at Rep. No. 103–111, at 107 (1993).) (See United States v. Virginia, 139 F.3d
944.) The court held that State-law The HEA and the Department’s 984, 989 (4th Cir. 1998).)
claims alleging misrepresentation were regulations provide comprehensive For example, a State may purport to
preempted by the HEA’s express rules governing the Direct Loan require a Direct Loan servicer, as a
preemption of State-law disclosure Program, and the Department’s contracts condition of licensure, to demonstrate
requirements, and that other State-law with loan servicers further specify the that it has adopted certain business
claims ‘‘would create an obstacle to the program’s rules and requirements. As standards set by the State regulator; to
achievement of congressional purposes’’ the United States recently noted in the meet certain financial responsibility
and were therefore barred by conflict Statement of Interest in Massachusetts requirements such as liquidity, financial
preemption principles. (Id. at 950.) v. Pennsylvania Higher Education solvency, capitalization, and surety
The Department issues this notice to Assistance Authority, ‘‘The bond requirements; and to submit to
clarify its view that State regulation of Department’s contract with [the loan investigations, audits, and background
the servicing of Direct Loans impedes servicer] is voluminous—spanning more checks by State authorities. Federal law
uniquely Federal interests, and that than 600 pages and including provisions addresses standards of responsibility for
State regulation of the servicing of the governing [the servicer’s] financial prospective contractors, and a State may
FFEL Program is preempted to the controls, internal monitoring, not, ‘‘through its licensing requirements,
extent that it undermines uniform communications with borrowers, and . . . review the federal government’s
administration of the program. many other topics.’’ (Statement of responsibility determination.’’ (Gartrell,
Interest at 5.) In its contracts with loan 940 F.2d at 439.)
B. Direct Loan Program Some State servicing laws also
servicers, including task orders and
Congress created the Direct Loan change requests issued under those purport to impose regulatory
Program as part of the Student Loan contracts, the Department specifies in requirements on servicing that create
Reform Act of 1993 (Pub. L. 103–66). detail the responsibilities and additional conflicts with Federal law.
Under the program, the Federal obligations of the servicers for Direct For example, some State laws impose
government is the direct lender to the Loans and the benefits provided under deadlines on servicers for responding to
borrower and is responsible for all that program such as Public Service borrower inquiries and require specific
aspects of the lending process from loan Loan Forgiveness and income-driven procedures to resolve borrower
origination through repayment, repayment plans. disputes. Such laws establish deadlines
including the proper servicing and Recently, States have sought to for completing transfers of loans from
collection of the loan. In signing the impose requirements on servicers that one servicer to another and specific
Master Promissory Note for the loan, the conflict with Federal statutes, protocols for applying overpayments on
borrower promises to repay the loan and Department regulations, and these loans. These are matters specified in the
any applicable interest and fees comprehensive contracts. Most notable laws and regulations governing the
according to the terms and conditions are State regulations requiring licensure Direct Loan Program as well as the
outlined in the HEA, the Department’s of Direct Loan servicers in order to contractual arrangements between the
regulations, and the Note. (20 U.S.C. perform work for the Federal Department and the servicer. The
1087e.) government. ‘‘A State may not enforce Department has enforcement authority
Congress provided that the program licensing requirements which, though to oversee servicer compliance with
would be administered by the valid in the absence of federal these requirements, and ‘‘this authority
Department through student loan regulation, give ‘the State’s licensing is used by the [Department] to achieve
servicers, directing the Secretary to board a virtual power of review over the a somewhat delicate balance of statutory
enter into contracts for loan ‘‘servicing’’ federal determination’ that a person or objectives.’’ (Buckman Co. v. Plaintiffs’
and for ‘‘such other aspects of the direct agency is qualified and entitled to Legal Committee, 531 U.S. 341, 348
student loan program as the Secretary perform certain functions, or which (2001).) The interposition of State-law
determines are necessary to ensure the impose upon the performance of activity requirements may conflict with legal,
successful operation of the program.’’ sanctioned by federal license additional regulatory, and contractual
(20 U.S.C. 1087f(b)(4).) The HEA directs conditions not contemplated by requirements, and may skew the balance
the Secretary to award servicing Congress.’’ (Sperry v. Florida, 373 U.S. the Department has sought in calibrating
contracts only to entities ‘‘which the 379, 385 (1963) (quoting Leslie Miller its enforcement decisions to the
Secretary determines are qualified to Inc. v. Arkansas, 352 U.S. 187, 190 objectives of the program.
provide such services’’ and ‘‘that have (1956)) (footnotes omitted).) State servicing laws also may
extensive and relevant experience and Such licensing requirements undermine Congress’s goal of saving
demonstrated effectiveness.’’ (20 U.S.C. ‘‘interfere[] with the federal taxpayer dollars in administering the
1087f(a)(2).) When procuring such government’s power to select Direct Loan Program. Some State laws
services, the Department must, with contractors’’ and to determine whether purport to impose licensing fees,
specific exceptions, abide by ‘‘all contractors are ‘‘responsible’’ under assessments, minimum net worth
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applicable Federal procurement laws Federal law. (Gartrell Const. Inc. v. requirements, surety bonds, data
and regulations,’’ which include the Aubry, 940 F.2d 437, 438 (9th Cir. disclosure requirements, and annual
Federal Acquisition Regulation (FAR). 1991).) With regard to responsibility reporting requirements on the
(20 U.S.C. 1087f(a), 1018a.) To achieve determinations of prospective contract Department’s servicers that will increase
its goals of streamlining and simplifying awardees, the Department follows FAR the costs of student loan servicing,
the delivery of student loans and of Subpart 9.1 (48 CFR 9.100 through perhaps exceeding the amount a

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Federal Register / Vol. 83, No. 48 / Monday, March 12, 2018 / Rules and Regulations 10621

servicer receives on a per loan basis regulation implicates uniquely Federal district court recently explained,
under its contract with the Department, interests. As the Supreme Court has ‘‘Congress intended [section] 1098g to
and certainly distorting the balance the recognized, ‘‘obligations to and rights of preempt any State law requiring lenders
Department has sought to achieve the United States under its contracts are to reveal facts or information not
between costs to servicers and taxpayers governed exclusively by Federal law,’’ required by Federal law.’’ (Nelson v.
and the benefits of services delivered to and this area of Federal concern extends Great Lakes Educ. Loan Servs., No.
borrowers. Additionally, where State to ‘‘liability to third persons’’ that 3:17–CV–183, 2017 WL 6501919, at *4
servicing laws go beyond the ‘‘arises out of performance of the (S.D. Ill., Dec. 19, 2017).) Federal law
requirements of Federal law in contract.’’ (Boyle v. United Technologies provides a carefully crafted disclosure
restricting the actions a servicer may Corp., 487 U.S. 500, 504–05 (1988).) regime specifying what information
take to collect on a loan, such laws Here, there is no question that the must be provided in the context of the
impede the ability of the Department to ‘‘imposition of liability on Government Federal loan programs. (See, e.g., 20
protect Federal taxpayers by ensuring contractors will directly affect the terms U.S.C. 1078–3(b)(1)(F); 1083(e)(1) and
the repayment of Federal loans. The of Government contracts,’’ at the very (2); 34 CFR 668.41(b); 674.42; 674.31;
Department’s contracts require servicers least by raising the price of such and 682.205.) The Department interprets
to operate throughout the United States contracts, and ‘‘the interests of the ‘‘disclosure requirements’’ under
because loan borrowers are in all States. United States will be directly affected.’’ section 1098g of the HEA to encompass
A servicer does not have the choice to (Id. at 507.) informal or non-written
refrain from operating in a particular Moreover, ‘‘the civil liability of communications to borrowers as well as
State to avoid licensing fees and other Federal officials for actions taken in the reporting to third parties such as credit
costs imposed by the State. Rather, the course of their duty’’ is another area ‘‘of reporting bureaus.
States are using the servicers’ peculiarly Federal concern, warranting The United States previously
compliance with Federal law and the displacement of State law.’’ (Id. at addressed the scope of section 1098g in
contracts to extract payments that 505.) This area extends to the liability its submission to the Ninth Circuit in
benefit the State at the expense of the of contractors performing their Chae. A State-law claim based on ‘‘a
Federal taxpayer. obligations under contracts with the purported failure of disclosure runs
A requirement that Federal student Federal government because ‘‘there is headlong into express statutory
loan servicers comply with 50 different obviously implicated the same interest preemption provisions,’’ according to
State-level regulatory regimes would in getting the Government’s work the United States; ‘‘[s]uch additional
significantly undermine the purpose of done.’’ (Id.) Here, the loan servicers are requirements are barred whether they
the Direct Loan Program to establish a acting pursuant to a contract with the are enacted legislatively or implied
uniform, streamlined, and simplified Federal government, and the servicers judicially in the context of a tort suit.’’
lending program managed at the Federal stand in the shoes of the Federal (Brief of Plaintiff-Intervenor-Appellee at
level. As courts have recognized, government in performing required 11.) In Chae, the court held that State-
Congress provided ‘‘a clear command actions under the Direct Loan Program. law claims alleging misrepresentation
for uniformity’’ in the HEA with respect ‘‘[W]here the Federal interest requires by a student loan servicer were
to the FFEL Program, and then ‘‘created a uniform rule, the entire body of State ‘‘improper-disclosure claims’’ and,
a policy of inter-program uniformity by law applicable to the area conflicts and therefore, preempted pursuant to
requiring that ‘loans made to borrowers is replaced by Federal rules.’’ (Id. at section 1098g. (Chae, 593 F.3d at 942.)
[under the Direct Loan Program] shall 508.) The disposition of federally held The court found the ‘‘allegations in
have the same terms, conditions, and debt such as government-issued loans is substance to be a challenge to the
benefits, and be available in the same a Federal interest that requires allegedly-misleading method [the
amounts, as loans made to borrowers uniformity because State intervention servicer] used to communicate with the
under [the FFEL Program].’ ’’ (Chae, 593 harms the Federal fisc.1 Accordingly, plaintiffs about its practices.’’ (Id. at
F.3d at 945 (quoting 20 U.S.C. the Department believes that the 942–43.) As the court explained, ‘‘the
1087e(a)(1)).) Indeed, ‘‘Congress’s statutory and regulatory provisions and State-law prohibition on
instructions to the [Department] on how contracts governing the Direct Loan misrepresenting a business practice ‘is
to implement the student-loan statutes Program preclude State regulation, merely the converse’ of a State-law
carry this unmistakable command: either of borrowers or servicers. requirement that alternate disclosures
Establish a set of rules that will apply be made.’’ (Id. at 943 (quoting Cipollone
across the board.’’ (Id.) State regulatory C. Prohibited Disclosure Requirements v. Liggett Grp., 505 U.S. 504, 517
regimes conflict with this congressional Congress has provided that ‘‘[l]oans (1992)).)
objective. made, insured, or guaranteed pursuant To the extent that State servicing laws
Uniformity not only reduces costs but to a program authorized by title IV of attempt to impose new prohibitions on
also helps to ensure that borrowers are the [HEA] shall not be subject to any misrepresentation or the omission of
treated equitably and are not confused disclosure requirements of any State material information, those laws would
about the lending and repayment law.’’ (20 U.S.C. 1098g.) As a Federal also run afoul of the express preemption
process. State-level regulation subjects provision in 20 U.S.C. 1098g.
borrowers to different loan servicing 1 See, e.g., United States v. Scholnick, 606 F.2d
deadlines and processes depending on D. FFEL Program Loans
160, 164 (6th Cir. 1979) (holding that ‘‘in any
where the borrower happens to live, and consideration of remedies available upon default of The HEA and Department regulations
at what point in time. a Federally held or insured loan, Federal interest governing the FFEL Program preempt
predominates over State interest’’ because of ‘‘an
These conflicts with statutes, State servicing laws that conflict with,
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overriding Federal interest in protecting the funds
regulations, Federal contracts, and of the United States and in securing Federal or impede the uniform administration
congressional objectives suggest that investments’’); United States v. Wells, 403 F.2d 596, of, the program. State laws that require
State regulation of loan servicers would 597–98 (5th Cir. 1968) (‘‘The national loan program FFEL Program servicers to respond to a
of the Veterans Administration cannot be subjected
be preempted by Federal law. That to the vagaries of the various State laws which
borrower’s inquiry or dispute within a
result is even more evident where, as in might otherwise control all or some phases of the certain period of time, for example,
the Direct Loan Program, State loan program.’’). conflict with the applicable Federal

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Document Created: 2018-11-01 08:50:53
Document Modified: 2018-11-01 08:50:53

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Interpretation.
Dates		March 12, 2018.
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]
FR Citation		83 FR 10619