Litigation Update re Student Loan Servicing Cases

1. Litigation Update re Student Loan Servicing Cases NCHER Legal Meeting Alexandria, Virginia Chris Murray and David Meschke Public Litigation Denver/Washington, D.C. April 12, 2019

2. Federal Preemption Review

3. Continuum of Likely Success inStudent Loan Servicer Cases Lesser chance of preemptionFacts & CircumstancesGreater chance of preemption State AttorneysGeneral actions broadly applicable financial laws/regulations Borrower Actions State Licensing Schemes

4. Types of Federal Preemption Larger Impact Smaller Impact • Field Preemption – Applies where “the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject, or if the goals sought to be obtained and the obligations imposed reveal a purpose to preclude state authority.” Wisc. Pub. Intervenor v. Mortier, 501 U.S. 597, 605 (1991). • Conflict or Obstacle Preemption – Applies when a state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 373 (2000). • Express Preemption – Applies where Congress indicates its intent to displace state law through express language in a federal law.

5. Court Rulings - Field Preemption • In every case thus far, the court has determined that the federal law/the Higher Education Act (the “HEA”) does not preempt borrower/state Attorneys General claims against student loan servicers or state laws attempting to regulate student loan servicers through licensure. • However . . . • the Department of Education has made statements recently setting the stage for field preemption; • federally issued or guaranteed student loans are approximately 50% of the financial assets of the federal government; and • Since 2010 virtually all new federal student loans are issued pursuant to the Direct Loan program where the federal government owns the loan.

6. Court Rulings – Conflict Preemption • Landmark case is Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010). • Reasoned that Congress intended FFELP to operate uniformly and aimed for uniformity of FFELP regulations. • Held that California state law claims for deceptive practices against Sallie Mae regarding interest calculation, late fees, and repayment start dates would stand as an obstacle to FFELP’s uniform operation and thus are preempted. • “Having carefully considered the FFELP and the purposes of Congress in the HEA, we conclude, beyond any doubt, that subjecting the federal regulatory standards to the potentially conflicting standards of fifty states on contract and consumer protection principles would stand as a severe obstacle to the effective promotion of the funding of student loans.” • The scope of this holding is currently being litigated.

7. Court Rulings – Express Preemption • Key provision comes from 20 U.S.C. 1098g of the HEA: • "Loans made, insured, or guaranteed pursuant to a program authorized by Title IV of the Higher Education Act ... shall not be subject to any disclosure requirements of any State law." • Cases are a mixed bag. • Some have held that consumer protection claims against student loan servicers are merely re-styled improper disclosure claims: • Chae v. SLM Corp., 593 F.3d 936, 945 (9th Cir. 2010) • Nelson v. Great Lakes Educational Loan Services, Inc., et al. (S.D. Ill. Dec. 19, 2017) • Lawson-Ross v. Great Lake Higher Educ. Corp. (N.D. Fla. Oct. 4, 2018) • Others have distinguished Chae and held that claims under general consumer protection laws for unfair/deceptive practices aren’t preempted: • Genna v. Sallie Mae, Inc. (S.D.N.Y. Apr. 17, 2012) • Pennsylvania v. Navient Corp. (M.D. Pa. Dec. 17, 2018)

8. Leslie Miller Conflict Preemption • A type of conflict preemption based on the seminal case Leslie Miller, Inc. v. Arkansas, 352 U.S. 187, 189–90 (1956) , which held that Arkansas cannot require a construction company to obtain a state contractor’s license to perform work at a federal air force base because it would give the state “a virtual power of review” over the federal government’s “responsibility” determination. • At issue in Student Loan Servicing Alliance v. Taylor, et al. in the U.S. District Court of the District of Columbia. • “This case involves the important question of whether the District of Columbia – and inferentially other states – may require student loan servicers who manage federally-owned and federally-guaranteed student loans to obtain a license to operate in the District of Columbia in an effort to protect the consumers of those loans.”

9. SLSAv. Taylor Holding • “Courts have consistently held that any state law that impedes the federal government’s ability to contract – including state licensing regimes that effectively second guess the United States’ contracting decisions – are preempted.” • Because “the D.C. licensing scheme, in effect, requires SLSA’s members to ‘desist from performance until they satisfy a state officer upon examination that they are competent [to perform their duties] and pay a fee for permission to go on’” (quoting Leslie Miller, 352 U.S. at 190), “there is a risk that the federal government will contract with a servicer after evaluating its qualifications under federal law and regulations, and that servicer nevertheless will be determined to be unqualified by the Commissioner and barred from operating in the District of Columbia.”

10. Intergovernmental Immunity • The doctrine specifies that state laws are unconstitutional if they regulate the federal government directly or discriminate against it. • It can be characterized as a different way of looking at the issue in the Leslie Miller line of cases. • In SLSA v. Taylor, the judge explained that “Leslie Miller has also been characterized as a discussion of the intergovernmental immunity doctrine, which is logical given the overlap between second-guessing federal contracting decisions as prohibited under conflict preemption and the direct regulation by a state of the federal government prohibited under the intergovernmental immunity doctrine.”

11. Recent Wins and Losses Lesser chance of preemption Facts & Circumstances Greater chance of preemption State AttorneysGeneral actions broadly applicable financial laws/regulations Borrower Actions State Licensing Schemes • Penn v. Navient • Lost on express preemption • Mass v. PHEAA • Pending after PHEAA’s motion to dismiss denied • Nelson (Ill.) • Won on express preemption • On appeal (7th Cir.) • Lawson-Ross (Fla.) • Won on express preemption • Davis v. Navient (N.Y.) • Lost on express preemption • SLSA v. Taylor (D.C.) • Won on Leslie Miller conflict preemption as to government-owned loans • Likely would have won on intergovernmental immunity and obstacle preemption grounds, too • PHEAA v. Perez (Conn.) • voluntarily dismissed

12. Broader Impact of SLSA v. Taylor – holding is not just for student loan servicers Federal Law v. State Licensing Schemes

13. New Developments • States are proposing new student loan regulation schemes to attempt to work around SLSA v. Taylor • Example: New York • States that a license is not required to engage in the business of servicing government-owned federal student loans but . . . • Servicers must comply with requirements regarding books and records; reports and electronic filing, prohibited practices, examinations, etc., and be subject to penalties for violations. • This is licensing without the slip of paper that is the license. • Such schemes likely run afoul of principles of conflict preemption and intergovernmental immunity

14. QUESTIONS? . . . OR QUIBBLES?

15. DON’T BE A STRANGER Christopher O. Murray David B. MeschkeBrownstein Hyatt Farber Schreck, LLP cmurray@bhfs.com; dmeschke@bhfs.com 410 Seventeenth Street 1155 F Street NW, Suite 1200 Suite 2200 Washington, D.C. 20004Denver, CO 80202 202.296.7353 tel 303.223.1183 tel