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Biden administration paves the way for tighter oversight of student loan companies

The Biden administration has revoked legal guidelines issued by the Betsy DeVos-era Department of Education, removing a barrier for states regulating student loan companies.

This week’s announcement is the latest in a years-long battle between state officials, the federal government and student loan companies over who has the power to monitor companies hired by the Department of Education. Education to manage the student loan program.

During the Obama administration, states across the country began to pass laws requiring student loan companies to follow certain rules to operate in their states. But companies backed down, arguing – with backing from a Trump administration memo released in 2018 – that states did not have the right to regulate these federal contractors.

The guidelines released by the Education Department this week essentially reversed the DeVos-era memo and called it “substantially too broad and without legal basis.” Instead, the Biden administration’s guidelines presented the oversight of student loan companies as a state-federal partnership.

“Nothing in this guide requires state governments to play a supporting role, but what it does is an invitation or encouragement for states to do so and for states that have already entered the fray a blanket political and perhaps legal, ”said David Rubenstein, a professor at Washburn University School of Law and expert on preemption, or the interplay between federal and state law.

Lawyers called on Biden administration to revoke DeVos-era memo

The Biden administration’s memo comes as consumer advocates are keeping a close watch on the Education Department to see how officials approach monitoring the student loan and higher education sectors. Earlier this year, the agency released guidelines making it easier for states to access data and records held by student loan companies as part of the oversight of state officials.

But advocates had called for more, including the cancellation of the 2018 DeVos memo. Seth Frotman, executive director of the Student Borrower Protection Center, who urged the Biden administration to rescind the DeVos memo, said the ministry’s decision ended to a “Trump administration-backed student loan industry’s multi-year campaign to obstruct justice.”

“By standing side by side with the state’s consumer protection community, President Biden has the opportunity to end the lawlessness of many in the student loan industry and make it clear that it will not be tolerated “Frotman said in a statement.

Although the guidelines announced this week and the DeVos-era memo focus on the wobbly subject of preemption – essentially the idea that federal law supersedes state law in cases where they conflict with each other. – government and court interpretation of how pre-emption applies to student loan regulation has implications for student loan borrowers who pay their bills.

For years, consumer advocates and borrowers themselves have pointed to student loan service practices that they believe block their access to the loan forgiveness they are entitled to under the law and return the repayment. of their student loans more expensive than necessary.

Concerned about the impact of these practices on their residents and the uneven federal oversight, state lawmakers have begun to pass laws requiring student loan companies to follow certain rules – for example, not to engage in abusive practices or deceptive – in order to operate in their states.

States as “first responders to emerging consumer issues”

These efforts fit well with how state financial regulators see their role, said John Ryan, president of the Conference of State Banking Supervisors, an organization representing state financial regulators. This includes “the ability of states to serve as first responders to emerging consumer issues,” in some cases before they become apparent at the federal level, he said.

As more states began to implement these laws, duty officers fought back and called on the Trump administration for help. In 2017, the National Higher Education Resources Council (NCHER), a business group in the student loan industry, wrote to education ministry officials asking them to issue guidelines that the student loans were governed by federal law – not state.

Several months later, the Trump administration released the memo saying states did not have the power to oversee student loan companies because their regulations were pre-empted by federal law. Companies facing disputes over their service practices have cited the ministry’s guidelines in court.

In a statement, Dan Zibel, vice president and chief counsel for the National Student Legal Defense Network, described the officers’ behavior as leveraging the DeVos memo in court “to escape responsibility.”

“We hope this decision indicates that the Department of Education is moving quickly towards expanding student loan liability and better protecting student borrowers from fraud – especially during our recovery from the pandemic,” said Zibel, who has argued two cases where appellate-level courts found borrowers and states suing student loan officers for deceptive conduct.

Courts haven’t given much weight to the DeVos memo, they can do the same with Biden-era guidelines

Rubenstein, the law professor, described the Trump administration’s interpretation and application of the pre-emption doctrine as “very dubious,” which is why the courts have refused to show him deference. He said it’s possible that because the guidelines released this week provide more nuance and are a “fairer representation of what Congress has intended,” regarding the role of states in loan laws. students – and this intention is what matters most in pre-emption cases – that courts can defer to the new interpretation.

Even if the courts don’t rely on the Biden administration’s guidelines, it signals the courts to look more skeptically at pre-emption claims filed by student loan companies, Rubenstein said.

One of the main points of differentiation between the Biden and Trump administration memos is that the guidelines released this week recognize that there are nuances when it comes to preemption, Rubenstein said. For example, the Biden administration memo notes that when state and federal laws appear to be in conflict, the courts do a careful analysis to see if the state law really conflicts with the text and the purpose. of federal law, said Rubenstein.

“To the extent that federal law is designed to create accountability mechanisms – whether through regulations or contracts – to hold federal loan officers accountable, states can actually support or play an important supporting role. “, did he declare.

This concept echoes the way the Consumer Financial Protection Bureau approached the supervision of student loans under the Obama administration. Richard Cordray, who headed CFPB during this time, now heads the Department of Education’s Federal Student Aid Office, which oversees federal student loan services.

It remains to be seen whether the new guidelines will have a big impact on the way service providers do business, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a business group. Buchanan described the guidelines as a “distraction” from the department taking steps to significantly improve the student loan program, including addressing some of the core issues that state laws address, such as how of which student loan payments are allocated.

“We can’t have this plan of 50 states and the federal government telling us all how to run the program and all of them have different opinions about it,” Buchanan said. “It’s a sure-fire way to ensure confusion for borrowers, service providers and everyone else. ”

Even though the rating has a significant impact on service providers, borrowers, and state regulators, it may only be temporary. While they may differ in their arguments, what the Biden administration and Trump administration memos have in common “is that they do not have the force of law,” Rubenstein said.

“This means it can be retracted with another stroke of the pen,” he added.

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