State Law Claims Based on Student Loan Servicer’s Loss Mitigation Representations Not Preempted by the HEA, Seventh Circuit Court of Appeals Holds

Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLPThe Seventh Circuit Court of Appeals struck a blow to student loan servicers’ arguments that certain state law claims brought by borrowers are preempted under the Higher Education Act (HEA). In a lengthy opinion issued on June 27, 2019, in Nelson v. Great Lakes Educations Loan Services, Inc., the court held that a borrower’s state law claims based on alleged misrepresentations made by the servicer about the borrower’s repayment options could proceed.

In Nelson, a student loan borrower financed her education with loans under the Federal Family Education Loan Program (FFELP). The borrower later contacted the servicer of her student loans to discuss her repayment options after she suffered a decline in income. The borrower alleges that her servicer steered her away from a more beneficial income-driven repayment plan and into forbearance and deferment plans, repayment options she contends are more lucrative for the servicer but more burdensome for the borrower.

The borrower then filed a putative class action, asserting state law claims for fraud, negligent misrepresentation, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The borrower specifically alleged that the servicer misrepresented that it was an “expert” working in the borrower’s best interest and then recommended forbearance as the best option for the borrower’s financial trouble.

The servicer filed a motion to dismiss, arguing that the borrower’s claims are preempted under § 1098g of the HEA, which states: “Loans made, insured, or guaranteed pursuant to a program authorized by title IV [of the HEA] shall not be subject to any disclosure requirements of any State Law.” The servicer argued that, since the HEA requires the servicer to make certain disclosures during repayment regarding the repayment options available to a borrower, the borrower’s claims were preempted. The district court agreed that preemption applied and dismissed the borrower’s complaint.

The Seventh Circuit Court of Appeals, however, reversed the district court’s ruling, finding a distinction between a failure to disclose information and an affirmative misrepresentation. The court noted that the borrower alleged “false and misleading statements that [the servicer] made voluntarily, not required by federal law,” including the servicer’s recommendation of forbearance as the best option for the borrower’s financial trouble. In other words, the court found that the servicer’s representations at issue in the lawsuit were not mere failures to disclose certain information or representations that the servicer was required to make under federal law, but instead were “affirmative misrepresentations in counseling.” The court thus found that express preemption did not apply under § 1098g of the HEA. The court also held that field and conflict preemption did not apply.

Among the voluntary affirmative misrepresentations that the court identified were statements on the servicer’s website about its expertise and devotion to borrowers’ best interests. Student loan servicers should take note. While servicers may provide information to borrowers dispelling myths about third-party “debt relief” companies that often prey on distressed borrowers, the Nelson opinion shows the need for servicers to use discretion when communicating with borrowers about the servicer’s role and capabilities, particularly when it comes to repayment options.

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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