United States: When An Act Is Not A Disclosure, States Win The Preemption Battle

Last Updated: January 23 2019
Article by Joseph Cioffi

Like Ali v. Frazier II and III, it's not much of a rivalry if one side keeps winning the decision.

The battle began when the Department of Education fired a shot across the bow with its letter arguing that state laws attempting to regulate student loan servicers – whether through licensing requirements or consumer protection laws – were preempted by federal law, which calls for uniform administration of federal student loan programs. Now state victories are starting to pile up.

Given consumer disclosures are regulated under federal laws, the Higher Education Act (HEA) and the Truth-in-Lending Act (TILA), defendants may seek to have state-based claims tossed on the basis that servicing failures complained of should be characterized as such. But two recent decisions finding no preemption – one in federal court in Illinois and another in state court in Pennsylvania – each denying servicer Navient Corporation's motions to dismiss allegations of servicing misconduct, show the Department of Education and defendants relying on this approach have an uphill battle ahead.

People of Illinois v. Navient Corporation

The HEA explicitly states that loans made pursuant to federal programs are not to be subject to any disclosure requirements of any state law. Accordingly, in this Illinois case Navient argued where the state makes claims that "seek to impose disclosure requirements that differ from the HEA's otherwise-comprehensive disclosure rules for federal student loans" those are "improper state disclosure requirements." The court ruled, however, that the allegations related to an overall scheme to steer borrowers into forbearances, not just that a failure to disclose the availability of income-driven repayment plans. Thus, given the alleged conduct, the HEA did not preempt Illinois law.

The court followed the same logic to find no preemption with respect to the Truth-in-Lending Act origination allegations. The court held there was no federal-state conflict because the issue was deceptive and unfair conduct, and not a failure to make disclosures.

The court also found no preemption with respect to allegations of Navient's income-driven repayment plan recertification practices. Even though disclosures were made by Navient to borrowers and Navient may have technically complied with general notice requirements, the court ruled federal law does not prescribe how the notice is to be delivered and express preemption is not to be applied so broadly that deceptive practices could not be questioned. Therefore, state claims based on allegedly deceptive practices were not preempted by federal law.

Commonwealth of Pennsylvania v. Navient Corporation

In a more recent decision from December, a federal court in Pennsylvania followed the Illinois court's reasoning with respect to the HEA and TILA, holding that the HEA only requires particular disclosures be made in connection with federal student loans and governs generally how they should be made, but it does not preempt the enforcement of a statute of general applicability under a state's traditional police power exercised through consumer protection laws. The court went so far as to reject the Department of Education's "post-litigation" interpretation of the HEA, including the preemption issue, finding the informal statement unpersuasive and further pointing out that it was not binding on the court.

Disclosure is Key

Both these cases rejected the prior holding of Chae v. SLM Corp. from the Ninth Circuit that found federal preemption of state consumer protection laws through the HEA. But as both courts pointed out, the Chae case involved "billing statements, coupon books, and standardized loan applications that were allegedly misleading" thus falling squarely within "disclosures" which the HEA was meant to govern and even the court in Chae found certain fraudulent and deceptive practices outside the disclosure-related billing statements to not be expressly preempted.

Looking Ahead

Both opinions were detailed and well-reasoned, coming in at 47 pages and 70 pages, respectively. Such deep analyses of federal preemption and the intent of the federal student loan and lending statutes will lend strong support to state-based actions that track similar allegations, making it more challenging for defendants to win dismissals going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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