Van Hollen, Colleagues Urge the Department of Education to Bolster Federal and State Oversight of Student Loan Servicers

Today, United States Senators Chris Van Hollen (D-Md.), Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio), Cory Booker (D-N.J.), Tammy Baldwin (D-Wis.), Richard Blumenthal (D-Conn.), Raphael Warnock (D-Ga.), and Tina Smith (D-Minn.), sent a letter to Department of Education Secretary Miguel Cardona in support of a recent re-interpretation of Department policy that will significantly enhance oversight and accountability of the student loan program and its contractors by ending federal obstruction of state-level efforts to protect student loan borrowers. Their letter calls for the Department to expand this approach to state laws that protect student loan borrowers and contract negotiations with servicers. Their letter is in response to a request for public comment.

Under former Education Secretary Betsy DeVos, the Department took the position that state regulation of loan servicers was broadly preempted by the Federal government’s oversight role. Federal courts repeatedly rejected this position. This policy interfered with state regulators exercising their authority to protect consumers in their states and prevented states from conducting supervisory examinations of loan servicers. It also obstructed state enforcement actions by allowing student loan servicers to withhold from states the documents and data needed to identify misconduct.

“We urge you to apply this strong preemption framework outlined to state laws that provide additional protections to student loan borrowers, such as requiring loan servicers to be licensed or have in place complaint processing protocols,” wrote the senators. “When servicers or other contractors take positions that obstruct Federal or state oversight, they should face consequences under their current contracts and in future allocations and renewals. We strongly urge you to incorporate accountability for abusive and illegal consumer practices and for failure to cooperate with Federal and state regulators into the ongoing management of the student loan program.” 

See the full text of the letter here and below.

Dear Secretary Cardona:

We write in support of your recent revised legal interpretation of Federal preemption and joint Federal-state regulation and oversight of student loans and loan servicers. This welcome revision to the Department of Education’s (“the Department”) policy will significantly enhance oversight and accountability of the student loan program and its contractors by empowering state regulators to better protect borrowers and consumers.

The previous Administration’s policy that state regulation of loan servicers was broadly preempted by the Federal government’s oversight role was legally flawed. Federal courts repeatedly rejected this position as unsound and an unjustified departure from the Department’s prior position. The previous Administration’s policy also interfered with state regulators exercising their authority to protect consumers in their states. This policy prevented states from conducting supervisory examinations of loan servicers. It also obstructed state enforcement actions by withholding from states the documents and data that they needed to hold loan servicers accountable for misconduct.  

The revised interpretation is not only legally sound, but will also have substantial benefits for borrowers. State attorneys general have been at the forefront of oversight of student loan servicers in recent years, uncovering widespread patterns of misleading and abusive conduct and winning significant settlements for borrowers in their states. For example, Massachusetts Attorney General Maura Healey recently reached a settlement with the Pennsylvania Higher Education Assistance Agency (PHEAA) requiring an audit and correction for any Massachusetts borrower who may have been harmed by PHEAA’s errors or misconduct, which could affect more than 200,000 borrowers. The Department’s revised interpretation also acknowledges that, in partnership with the Department’s own oversight and the Consumer Financial Protection Bureau, state regulators play a crucial role in identifying and addressing misconduct that hurts borrowers and consumers. The revised interpretation of federal preemption will encourage stronger partnership to hold loan servicers and other student loan contractors accountable.

We urge you to apply this strong preemption framework outlined to state laws that provide additional protections to student loan borrowers, such as requiring loan servicers to be licensed or have in place complaint processing protocols. By explicitly endorsing these partnerships, the Department can further align Federal and state actions to protect and support borrowers and consumers. 

Beyond this notice of interpretation, we strongly urge you to carry these preemption principles forward in your contract negotiations with loan servicers. When servicers or other contractors take positions that obstruct Federal or state oversight, they should face consequences under their current contracts and in future allocations and renewals. We strongly urge you to incorporate accountability for abusive and illegal consumer practices and for failure to cooperate with Federal and state regulators into the ongoing management of the student loan program. Future contracts must include meaningful incentives for transparency and improved service and protections for borrowers.

Thank you for your work on this important issue. We look forward to working with you to improve the student loan system so that it puts students and borrowers first.