In a November 21, 2018 decision, the District Court for the District of Columbia found that the District of Columbia’s (DC) licensing requirements are preempted by federal law for two types of federal student loans, but not for a third. The case at issue is Student Loan Servicing Alliance v. District of Columbia, No. 18-cv-640 (D. D.C. Nov. 21, 2018). The plaintiff (SLSA) is a national membership organization of student loan servicers.
The decision is 70 pages long and goes into detail as to the analysis of applicable constitutional law, including all arguments that the court dispensed with. This article will discuss only the provisions the court found persuasive.
The federal government initially created two types of federal student loan programs: the Federal Direct Loan Program (FDLP) and the Federal Family Education Loan Program (FFELP). The federal government acts as the lender for FDLP, and thus owed these loans. FFELP loans, on the other hand, are issued by private lenders and the federal government acted as a reinsurer.
In 2008, Congress passed the Ensuring Continuing Access to Student Loan Act, which allowed the U.S. Department of Education (ED) to purchase FFELP loans for a limited time. ED purchased 3.91 million loans worth $94 million. The government now acts as the lender/owner of those loans. This split the two federal student loans into three: FDLP loans, ED-owned FFELP loans, and privately owned FFELP loans.
In 2010, Congress discontinued the FFELP program through the Health Care and Education Reconciliation Act. Currently, over 90% of new student loans are made through FDLP.
Congress granted regulatory authority for federal student loans to ED and specifically granted authority to the Secretary of Education to evaluate, contract with, and regulate its third party servicers.
The District of Columbia enacted the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act (DC Law) in 2016 “in response to increasing evidence of misconduct of student loan servicers.” This resulted in DC creating a licensing requirement for student loan servicers.
SLSA filed this lawsuit challenging the constitutionality of the DC Law, specifically the licensing requirement for student loan servicers, arguing that such a requirement is preempted by federal law.
The Court’s Decision
Preemption can be found under multiple different tests and standards, many of which the court raised and dismissed in its decision. However, the court agreed with SLSA in one of the arguments, and thus found that DC’s licensing requirement is unconstitutional for FDLP and government-owned FFELP loans, but not for privately-owned FFELP loans.
SLSA persuaded the court that conflict preemption exists in this case. Conflict preemption nullifies a state law when, among other things, a conflict exists between the state law in question and some Congressional purpose or goal.
The court found that the DC licensing requirement “impermissibly second-guesses” the federal government’s authority to select its third party servicers. Congress’s intent was to allow the Secretary of Education exclusive authority to determine the qualifications of and contract with its third party servicers. The DC licensing requirement creates its own set of requirements. If a servicer does not meet these requirements, it will not be granted a license in DC. According to the court, this creates a “second check” and adds additional requirements for third party servicers selected by the Secretary of Education, thus conflicting with the Secretary's exclusive authority. Due to this, the court found that conflict preemption exists between the DC Law for the two types of government owned loans: FDLP loans and government-owned FFELP loans.
However, the court refused to extend the finding of conflict preemption to privately-owned FFELP loans. The Secretary of Education does not choose third party servicers for privately-owned FFELP loans; the private lender does. While the court agrees with SLSA that Congress had the intent to provide uniformity in the servicing and administration of FFELP loans, the court found that the DC licensing requirement supplements the baseline qualification requirements for third party servicers -- but does not obstruct or impede the Congressional purpose.
This decision may have a big impact on student loan servicing. While the decision analyzed only the DC licensing requirement, the court noted in its opening paragraph that this decision can be inferred to other states as well. In other words, if the Secretary of Education has the exclusive authority to vet and select third party servicers for FDLP and government-owned FFELP loans, then any state’s licensing requirements second guess and impede that authority.
The ARM industry is subject to many federal and state laws and regulations. This decision prompts an interesting question: could any of the myriad state requirements for debt collectors be preempted in a similar way?