Student-debt firms shielded from state probes in new federal plan

Student-loan debt collectors accused of misleading borrowers would get more protection under a proposal from the Trump Administration.

The Department of Education is considering issuing a statement that federal law prohibits state governments from regulating companies that collect student debt on the department’s behalf, according to documents reviewed by Bloomberg. The proposal, which would reverse the department’s position in 2016, could aid publicly traded companies such as Navient Corp. and Nelnet Inc., which collect monthly payments and counsel borrowers.

Navient is headquartered in Wilmington, Delaware, but has more than 2,000 employees in Indiana at offices in Fishers, Indianapolis and Muncie. `The company, formerly part of Sallie Mae, owns the 450,000-square-foot former USA Group headquarters in Fishers along Interstate 69, where about 1,400 people work. It also owns a 50,000-square-foot loan-servicing center in Indianapolis.

Former President Barack Obama, whose administration tried to tighten oversight of the companies, was too aggressive in those efforts, Mick Mulvaney, the new chief of the Consumer Financial Protection Bureau, has said. More than 1 million Americans annually default on loans made directly by the department, federal data show.

The Education Department “seems to have taken a position that servicers are more important to the department than borrowers trying to repay the loans,” said Whitney Barkley-Denney, a lawyer at the North Carolina-based not-for-profit Center for Responsible Lending.

Some states said they’d fill the void left by the federal government’s shift. Illinois, California, and Connecticut enacted new laws governing how companies may interact with student-loan borrowers. Attorneys general in Massachusetts, Illinois, Washington and Pennsylvania have filed lawsuits against the Education Department’s loan contractors, alleging consumer abuses.

Education Department representatives Elizabeth Hill, Nathan Bailey and Chris Greene didn’t respond to multiple messages seeking comment.

Congressional Republicans, who have praised state regulation, have scheduled a Tuesday hearing in the House Oversight Committee to explore how states could lead in drafting “smarter” regulations.

States have argued that the federal government’s efforts to block them from policing big banks in the run-up to the 2008 financial crisis exacerbated the mortgage meltdown because it enabled reckless lending.

Federal oversight

Navient has argued in court that states’ cases against it should be dismissed in part because state law is preempted by federal laws that govern the loan company. It also has lobbied state lawmakers who have debated imposing additional requirements. “We will continue to work with state policy makers on reforms that make a difference on the major issues facing borrowers,” said Patricia Christel, a Navient spokeswoman.

Ben Kiser, a Nelnet spokesman, didn’t respond to a request for comment made outside normal business hours.

The National Council of Higher Education Resources, a Washington, D.C.-based trade group that represents student-loan companies, asked the Education Department and Congress to block states’ moves.

The Education Department argues that an increase in costs borne by its contractors would inevitably be passed on to the federal government, potentially “distorting the balance” between the cost of collecting debt and the benefits to borrowers, internal records reviewed by Bloomberg show.

‘Federal Interests’

“The department believes such regulation is preempted by federal law,” officials wrote in a draft Federal Register notice. "State regulation of contractors for the department that service direct loans implicate uniquely federal interests.”

The Education Department historically has sought to change its contractors’ behavior by asking them to stop certain practices, rather than taking them to court. Its main objective is to make credit freely available to college students at the lowest possible cost. Senior officials including Kathleen Smith, James Manning and Mark LaVia are among department officials who formerly worked for the student-loan industry.

Half of the nation’s state attorneys general, including some Republicans, urged Education Secretary Betsy DeVos to reject the student-loan industry’s requests to block state investigations into their businesses.

“These requests defy the well-established role of states in protecting their residents from fraudulent and abusive practices,” the states said in a joint letter. “The department cannot sweep away state laws that apply to student-loan servicers and debt collectors.”