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Student loan firms to feds: Tell states to stop regulating us

July 28, 2017

Over the past few years, lawmakers in Maine, California, Illinois and elsewhere have worked to pass state laws that would require student loan companies to abide by certain rules as a way to protect borrowers. Now, these companies are asking the federal government to tell states to stop.

The National Council of Higher Education Resources (NCHER), a trade group that represents student loan servicers and debt collectors, sent a letter to the Department of Education last week urging the agency to issue guidance which “clearly states” that student loan servicers are governed by the Department and other federal agencies and that those rules pre-empt state laws.

James Bergeron, the president of NCHER, said he’d like to see the Department intercede on behalf of his members. Federal student loan servicers “have to provide a service for 44 million borrowers. To do things for some borrowers in Illinois, a different thing for borrowers in California, something else different for folks in Maine — it is a federal program and it gets confusing,” he said.

The government contracts with companies to service federal student loans and in exchange for that lucrative business, the firms are required to follow parameters specified in the contract. For years, borrower advocates have complained that student loan servicers don’t work in borrowers’ best interest in part because the contracts don’t incentivize them to do so.

‘We’re just seeing servicers putting their bottom line over the concerns of students and borrowers and their families.’

Whitney Barkley, the legislative policy counsel at the Center for Responsible Lending

In that environment, states, beginning with Connecticut in 2015, started enacting legislation requiring servicers to abide by certain consumer protections. That effort has picked up over the past several months as borrower advocates grow increasingly concerned that Betsy DeVos’s Department of Education will do little to protect borrowers from mistreatment at the hands of servicers.

“We’re just seeing servicers putting their bottom line over the concerns of students and borrowers and their families,” said Whitney Barkley, the legislative policy counsel at the Center for Responsible Lending, a nonprofit that works to curb harmful lending practices. “There’s clearly been a breakdown somewhere in federal oversight and the folks who are charged with overseeing the servicers at a federal level haven’t done a good job.”

State lawmakers working on these bills say they feel a responsibility to constituents to hold these companies accountable. Though the bills aren’t all the same, many include provisions requiring servicers to become licensed in their state and ban them from misleading borrowers and applying student loan payments in a way that’s contrary to the instructions of the borrower, among other practices, as a condition of keeping the licenses. Many of the bills also include proposals to create an ombudsman to field and adjudicate complaints brought by borrowers.

“I don’t know what the servicers are afraid of,” said Kenneth Zebrowski, a Democratic lawmaker in New York state’s assembly who introduced a student loan bill of rights earlier this year. “Unless protecting students from fraud and unscrupulous practices is complex to these companies, I don’t really understand what their objection is,” Zebrowski added, referring to the contention in the letter that complying with state regulations would make the federal student loan system unnecessarily complicated.

Bergeron, the head of the servicer trade group, said that creating a student loan ombudsman and licensing servicers may be an appropriate role for states, but he’s concerned about specific provisions proposed or implemented by states that NCHER believes are in conflict with what’s required by the federal government.

He cited as an example multiple pages of requirements in Illinois’ bill governing the transfer of loans between servicers, a process on which the federal government’s contract provides some direction. What’s more, Bergeron said complying with state-level regulations would cost more money and so it’s in the federal government’s best interest to intervene on the companies’ behalf because complying with the rules will drive up the cost of servicing for the government.

Whether the Department will agree with the servicers’ rationale that federal law pre-empts state law in this case remains an open question.

Liz Hill, a Department spokeswoman, said in an email that the agency is aware of the issues raised in the letter and is evaluating its response. Student loan companies have argued in the past, both in court and to the Department itself, that certain efforts by states should be pre-empted by federal law, said David Bergeron (no relation to James), a senior fellow at the Center for American Progress, a left-leaning think tank.

But Bergeron, who worked at the Department for 35 years before assuming his current role, said the agency discussed trying to pre-empt state laws in both Republican and Democratic administrations, but he doesn’t remember a situation where they ended up doing so because they felt the standard was so high.

“The only reason that the federal government can pre-empt state laws is if a state law defeats the federal purpose,” he said. “Things that would protect consumers that go beyond federal law, would not be, in my view, subject to preemption by federal law.”

There are also some federal regulators who believe states have a role in overseeing these companies. Seth Frotman, the student loan ombudsman at the Consumer Financial Protection Bureau, said in a statement that regulators at all levels have made strides to improve oversight of the student loan industry that shouldn’t be walked back. “When loan servicers can operate in the shadows, free from rigorous federal and state oversight, consumers too often pay the price,” he said.

Matt Lesser, a representative in Connecticut’s state assembly who introduced and shepherded the first state student loan bill of rights through to passage, said he was surprised at the “chutzpah” of the companies to ask the federal government to take action, particularly given that the regulations are already working successfully in his state, with student loan companies applying and for and receiving licenses.

“These guys in the interest of greed want to be accountable to nobody,” he said. “It’s a bit galling.”

The letter is the latest example of the student loan industry intervening in state efforts to try to regulate it, said state legislators who are working on the bills. Servicers have spent tens of thousands of dollars lobbying in Maine, New York and elsewhere over student loan servicing bills, according to the Associated Press.

Eloise Vitelli, a senator in Maine who introduced a bill to oversee student loan servicers earlier this year, said industry representatives told her lawmakers should wait to regulate the companies until they got more insight into how the federal government would approach it.

“Now they’re trying to push the feds — or ask nicely for the feds — to take action so that they can come back to the states and say see ‘we don’t need you to do anything.’”

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