As we’ve been tracking for over a year now, courts across the country have addressed the significant question of whether the federal laws governing federally owned or guaranteed student loans preempt state laws placing burdens on servicers of those loans. Last week, the Eleventh Circuit became the latest court to weigh in, holding in Lawson-Ross v. Great Lakes Higher Ed. Corp. that the Higher Education Act’s (HEA) disclosure requirements do not preempt claims of affirmative misrepresentation by the loan servicer. Although court cases have come down on both sides of this dispute, this circuit-level decision marks a new chapter in the ongoing controversy.

Background

In Lawson-Ross, the court’s preemption analysis turned on the precise claims raised by the plaintiffs. The plaintiffs (who were borrowers whose student loans were serviced by Great Lakes) had asserted claims for affirmative misrepresentation, rather than an allegation of failure to disclose. Specifically, the plaintiffs alleged that Great Lakes representatives “told them they were eligible for forgiveness of their loans through the [Public Service Loan Forgiveness Program], and only later did they discover they were not eligible—after they had already made payments that could not then be counted toward the PSLF Program.” According to the plaintiffs, Great Lakes had informed them that they were eligible for the PSLF Program and would qualify for loan forgiveness after making 120 payments, when the majority of the loans for each borrower were not federal direct loans, and thus were not eligible. The plaintiffs claimed that they had been harmed by these misrepresentations because they lost the opportunity to seek to consolidate their student loans into a different sort of loan that may have been eligible for forgiveness and thus made payments that they may not have been required to make.

The plaintiffs filed a class action complaint, asserting claims for breach of fiduciary duty, negligence, unjust enrichment, breach of an implied contract, and violation of Florida’s Consumer Collection Practices Act, all premised on the allegation that they had spent years making payments they believed would qualify for the PSLF Program, only to be told otherwise later.

Great Lakes moved to dismiss the case, contending that the claims were expressly preempted by Section 1098g of the HEA, which preempts “any disclosure requirements of any State law.” According to Great Lakes, all the claims were preempted as nondisclosure claims based on the alleged failure to disclose information about the PSLF Program.

Notably, after Great Lakes filed their motion to dismiss, the Department of Education issued its notice on March 12, 2018, announcing that “Congress intended section 1098g to preempt any State law requiring lenders to reveal facts or information not required by Federal law” and that any state laws imposing “new prohibitions on misrepresentation or omission of material information” violated section 1098g’s express preemption provision. Great Lakes maintained the borrowers’ claims were only restyled non-disclosure claims. The federal district court in Florida agreed. In dismissing the case the district court construed the misrepresentations as a “failure to provide accurate information.” The plaintiffs appealed.

Eleventh Circuit – No Preemption

On appeal, the Eleventh Circuit saw things differently. Although section 1098g expressly preempts state laws that require additional disclosures, the court found it was not to be read so broadly and that “state law causes of action arising out of affirmative misrepresentations a servicer voluntarily made that did not concern the subject matter of required disclosures impose no disclosure requirements.” The court concluded there was no express preemption, conflict preemption, or field preemption for such claims.

The court focused on the required disclosures for repayment options under the HEA’s section 1083(e). It concluded that the affirmative misrepresentation-based claims were different in kind from the disclosure-based claims. The plaintiffs were not in default and were merely requesting information on loan forgiveness programs, the court reasoned. According to the allegations in the complaint, Great Lakes voluntarily provided the borrowers false information about their eligibility for the PSLF Program, thus giving rise to a non-preempted claim.

The court also distinguished and downplayed the similar Chae v. SLM case from the Ninth Circuit because the claims there challenged how the servicer communicated information the HEA required, whereas the present case involved claims not of required information being misleadingly communicated, but rather affirmative, voluntary misrepresentations.

The court’s finding of a clear distinction between the mandatory disclosures in Chae and the voluntary statements made by Great Lakes may be subject to further litigation. After all, a servicer of a federal student loan could hardly be expected to tell a borrower that the servicer can’t answer questions about the PLSF Program. While the Eleventh Circuit was considering an appeal from a dismissal (which required the allegations in the complaint to be accepted as true), that part of its holding could be challenged as the case progresses.

While the majority of the opinion focused on express preemption, the court also addressed Great Lakes’s other preemption arguments. The court went on to conclude there was no conflict preemption because where Congress has explicitly addressed preemption there is implication that it did not intend to preempt other areas of state law. The court further found no conflict preemption because uniformity – as Great Lakes argued was a goal in the federal student loan program – was, in fact, not a goal of the HEA, despite the contrary view drawn from the Chae decision. Finally, the court dispatched Great Lakes’ argument of field preemption, calling it the “weakest of its preemption arguments” because the HEA does not occupy the field of debt collection practices and does not impliedly preempt state laws.

Conclusion – Misrepresentation-Based Claims May Not Be Preempted

This reversal of the district court’s dismissal of a class action provides a significant development in the ongoing preemption controversy, and servicers of federal student loans should pay particular attention to the decision when evaluating the preemption defense. Although this decision is only binding in the Eleventh Circuit (Alabama, Florida, and Georgia), courts in several other jurisdictions also have or will soon be addressing this preemption issue:

• Oral argument took place on March 11, 2020, in Commonwealth of Pennsylvania v. Navient Corp, et al., where the Third Circuit Court of Appeals will decide whether the HEA preempts state claims that a servicer of federal student loans did not disclose details about federal student loans. The district court held that the HEA did not expressly or through conflict preemption foreclose the Commonwealth’s state law claims brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.
• The Seventh Circuit Court of Appeals reversed the district court’s decision in Nelson v. Great Lakes Educational Loan Services, Inc., holding the HEA did not preempt affirmative misrepresentation claims. The court noted that, “when a plaintiff alleges a defendant’s false affirmative misrepresentation, recasting the claim as imposing a ‘disclosure requirement’ is not necessary and may not even be appropriate,” which was similar reasoning to the Eleventh Circuit’s decision in Lawson-Ross.
• In Minner v. Navient Corp., the United States District Court for the Western District of New York held that the HEA did not preempt state law claims that a student loan servicer’s statements to a borrower steered him into repayment options that allegedly harmed him financially.
• A federal district court in the Central District of California held in Winebarger v. Pennsylvania Higher Education Assistance Agency that the HEA did preempt state law claims brought by a student loan borrower against a servicer alleging that the servicer failed to disclose information about the PSLF Program’s application related to the borrower’s loans. The district court reasoned that the borrowers’ state law claims rest “on an alleged misrepresentation – that [the servicers] provided an inaccurate qualifying payment count for [Public Service Loan Forgiveness Program] eligibility – and, thus, the Court concludes that these claims are preempted because the failure to provide accurate information is, in essence, nothing more than a disclosure claim.”

Stay tuned for updates on this significant issue for the student lending industry.