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DeVos: States Don't Have Authority to Regulate Loan Servicers

March 12, 2018
 
 

Education Secretary Betsy DeVos on Friday weighed in on a dispute over whether states have the authority to regulate federal student loan servicers, issuing a legal interpretation saying that the federal government exclusively has the power to provide that oversight.

DeVos argued, as the Trump administration has elsewhere, that those regulations conflict with federal law and the obligations of federally contracted entities.

The pre-emption notice was blasted by Democratic officials as well as consumer groups who called it another attempt to weaken protections for student loan borrowers. Industry groups had argued for the declaration, saying that states across the country enacting their own particular rules would create a “regulatory maze.”

It’s not clear, though, what immediate effect the notice will have. When word of the pre-emption declaration leaked ahead of its publication, Democratic attorneys general said it would not stop their enforcement activities.

The states’ role in regulating servicers is likely to be settled for good either by the courts or by Congress. Legislation currently in the House to reauthorize the Higher Education Act would effectively bar the states from any oversight role.

And while loan servicer groups have focused on state rules such as licensing requirements, the Trump administration has argued in court attorneys general do not have the legal authority to sue those companies.

Several states -- along with the Consumer Financial Protection Bureau -- have sued servicers for misleading or overcharging borrowers, including a lawsuit brought by Massachusetts attorney general Maura Healey against the Pennsylvania Higher Education Assistance Agency over deceptive practices.

In January, the Department of Justice issued a court filing in response to that case, arguing Healey did not have standing. Earlier this month, a Superior Court judge rejected a motion by PHEAA to dismiss the lawsuit, although the ruling did not address the pre-emption issue.

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