CT federal district court rules state’s demands to PHEAA for federal student loan documents preempted by federal law

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The Connecticut federal district court has ruled in Pennsylvania Higher Education Assistance Agency v. Perez that demands by the Connecticut Department of Banking (DOB) to the Pennsylvania Higher Education Assistance Agency (PHEAA) for federal student loan documents are preempted by federal law.  PHEAA was represented by Ballard Spahr.

PHEAA services federal student loans made by the Department of Education (ED) under the Direct Loan Program pursuant to a contract between the ED and PHEAA.  PHEAA was issued a student loan servicer license by the DOB in June 2017.  Later in 2017, in connection with the DOB’s examination of PHEAA, the DOB requested certain documents concerning Direct Loans serviced by PHEAA.  The ED denied the DOB’s request, with the ED advising the DOB that, under PHEAA’s contract, the ED owned the requested documents and had instructed PHEAA that it was prohibited from releasing them.  In July 2018, PHEAA filed an action in federal court seeking a declaratory judgment as to whether the DOB’s document demands were preempted by federal law.

In granting summary judgment in favor of PHEAA, the district court ruled that under U.S. Supreme Court precedent, the principle of “obstacle preemption” barred the enforcement of the DOB’s licensing authority over student loan servicers, including the authority to examine the records of licensees.  As explained by the district court, obstacle preemption is a category of conflict preemption under which a state law is preempted if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  According to the district court, the DOB’s authority to license student loan servicers was preempted as to PHEAA because the application of Connecticut’s licensing scheme to the servicing of Direct Loans by federal contractors “presents an obstacle to the federal government’s ability to choose its contractors.”

The district court rejected the DOB’s attempt to avoid preemption of its document demands by arguing that they were not based solely on the DOB’s licensing authority and that the DOB had authority to obtain documents from entities other than licensees.  The district court concluded that the DOB did not have authority to demand documents outside of its licensing authority and that because the licensing requirement was preempted as to PHEAA, the DOB did not have the authority to demand documents from PHEAA based on its status as a licensee.

The district court also concluded that even if the DOB did have investigative authority over PHEAA independent of its licensing scheme, the DOB’s document demands would still be preempted as a matter of “impossibility preemption” (a second category of conflict preemption that applies when “compliance with both federal and state regulations is a physical impossibility.”)

Specifically, the federal Privacy Act prohibits federal agencies from disclosing records—including federal student loan records—containing information about an individual without the individual’s consent.  The Act’s prohibition is subject to certain exceptions, including one for “routine use.”  The ED took the position that PHEAA’s disclosure of the records requested by the DOB would not constitute “routine use.”  The district court found that because PHEAA had contractually acknowledged the ED’s ownership and control over the documents, it was bound by the ED’s interpretation of the Privacy Act and could not have complied with the DOB’s document demands while also complying with the ED’s Privacy Act interpretation.

In addition to granting summary judgment in favor of PHEAA on its declaratory judgment request, the district court enjoined the DOB from enforcing its document demands and from requiring PHEAA to submit to its licensing authority.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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