A bipartisan coalition of 30 state attorneys general led by New York AG Eric Schneiderman and Colorado AG Cynthia Coffman have sent a letter to members of Congress urging them to reject a proposed amendment to the Higher Education Act (HEA) that would preempt state law requirements for servicers of federal student loans.

The letter followed (but did not mention) the U.S. Department of Education’s publication of an interpretation asserting that the HEA preempts state regulation of federal student loan servicers.  Both the AGs’ letter and the ED’s interpretation come in the wake of a wave of new state student loan servicing laws and enforcement activity.

The proposed HEA amendments would preempt state law requirements regarding licensing, disclosures, communications with borrowers that apply to the origination, servicing, or collection of a federal student loan.

The AGs assert that, contrary to ED’s interpretation, the amendments “would represent a stark departure from the traditional cooperative state-federal approach to enforcement—and would wrongly cast aside the long tradition of congressional deference to state prerogatives under the HEA.”  Despite the AGs’ characterization, the ED’s interpretation is based on, and consistent with, the HEA and federal preemption law.

 

 

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has written to the Department of Education urging the ED to issue preemption guidance.

In its letter, NCHER urges the ED “to issue regulatory guidance that clearly states that federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”  Earlier this month, the Education Finance Council, another national trade group representing higher education finance organizations, wrote to the ED requesting similar guidance.

In its letter, NCHER discusses the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the Higher Education Act (HEA).  NCHER also discusses the resulting compliance costs of such requirements and their potential to create borrower confusion.

In addition, NCHER observes that a number of state attorneys general have begun to take action against student loan servicers for activities governed by the HEA, federal regulatory requirements, and the terms of federal contracts.  It urges the ED to take “a leadership role” with regard to federal contractors, which could include intervening with an AG’s office on behalf of an agency or working with both parties to achieve a resolution.  According to NCHER, state AGs “should not be permitted to make an end run around the Department by intimidating its contracted loan servicers.”  Also discussed in NCHER’s letter is an attempt by Connecticut to apply its registration requirement for collection agencies to guaranty agencies that have agreements with the ED.

 

 

 

An attempt by the Pennsylvania Attorney General to use her Dodd-Frank Section 1042 authority recently met with only partial success in Pennsylvania federal district court.  Section 1042 allows state attorneys general and regulators to bring civil actions for violations of Dodd-Frank’s prohibition of unfair, deceptive, or abusive acts or practices (UDAAP).  The AG’s action in Commonwealth of Pennsylvania v. Think Finance, Inc., et al., was brought against several companies and their individual principal for allegedly (1) engaging in “rent-a-bank” and “rent-a-tribe” schemes to market Internet loans, and (2) charging interest rates that were usurious under state law.

In addition to alleging various state law violations, including that the defendants had engaged in “racketeering,” the AG alleged that the defendants had violated the Dodd-Frank UDAAP prohibition by (1) conditioning loans on the borrower’s use of electronic payments in violation of the Electronic Fund Transfer Act (EFTA) prohibition on compulsory use; (2) “inducing consumers to provide highly personal information;” and (3) taking unreasonable advantage of consumers’ lack of understanding.  The AG also claimed that the defendants should be liable for the UDAAP claims under a “common enterprise” theory.

The AG claimed that the defendants had violated the EFTA and engaged in a UDAAP by giving customers “the option of receiving the loan proceeds in their bank account quickly if the consumer agrees to electronic direct deposit and repayment, while conditioning the alternative option of payment by mail on the consumer agreeing to wait as long as a week for the borrowed cash.”  The court ruled that the AG had not stated a claim for a UDAAP claim because the AG “fails to connect the Defendants’ incentivizing electronic payments with a lack of understanding on the part of the consumer.”  The court also observed that it “was difficult” to see how the automatic payment option was itself “unfair or deceptive.”  It noted that the AG had not pled that the option caused injury to consumers and commented that the defendants’ promise to provide loans by direct deposit “as soon as tomorrow” was not itself injurious but was “reflective of the desperation of the consumer prior to engaging with the Defendants.”

The court also found that the AG had failed to state a claim for a UDAAP violation based on the allegation that consumers were induced to provide “highly personal information.”  It agreed with the defendants’ argument that this ground failed because the AG had not indicated how consumers were harmed “beyond a general allegation that it ‘makes them vulnerable to future improper use of that information.'”

The court did, however, find that the AG had stated a claim for a UDAAP violation based on the allegation that the defendants had engaged in an abusive act or practice by taking unreasonable advantage of the consumer’s lack of understanding of material risks.  While agreeing with the defendants that the AG had not shown that the defendants had engaged in abusive conduct by failing to disclose the loan terms, it found that the AG had sufficiently pled abusive conduct by alleging that the defendants took unreasonable advantage of the consumer’s lack of knowledge by “[holding] these loans out to be legal.”

With regard to the AG’s attempted use of a “common enterprise” theory, the AG argued that because the FTC Act prohibits unfair or deceptive acts or practices and the FTC has been allowed to use the “common enterprise” theory in FTC Act enforcement actions, the theory should apply to Dodd-Frank UDAAP claims.  In rejecting that argument, the court distinguished the FTC Act by noting that it can only be enforced by the FTC and does not also prohibit abusive conduct.

While involving loans with triple-digit interest rates, the defendants’ inability to use federal preemption to obtain a dismissal of the AG’s racketeering and other state law claims also makes the decision particularly noteworthy for marketplace lenders that partner with banks to originate loans at much lower rates.  Most significantly, the court’s rejection of preemption demonstrates the need for marketplace lenders to be prepared to defend their bank partnerships against “true lender” challenges by revisiting their partnerships’ structure, documentation, and compliance controls with legal counsel.  For more information about the decision, see our legal alert.

Last week, the CFPB issued final determinations as to whether certain Maine and Tennessee laws relating to unclaimed gift cards are preempted by federal law on gift card expiration dates.  The rulings represent the CFPB’s first preemption determinations.  The Tennessee determination was requested by payment card industry representatives and the Maine determination was requested by Maine’s Office of the State Treasurer.   

Under the unclaimed property laws of Maine and Tennessee, certain types of gift cards are presumed abandoned after two years.  However, the Electronic Fund Transfer Act (EFTA) and Regulation E generally prohibit the sale of a gift card that expires sooner than five years after the card is issued, or five years after the date when funds were last loaded onto the card.  The Dodd-Frank Act transferred authority for interpreting Reg E to the CFPB, including authority to make preemption determinations.  

Maine’s Office of the State Treasurer had advised the CFPB that, properly interpreted, Maine law requires an issuer of gift cards presumed to be abandoned to continue to honor the cards indefinitely and allows the issuer to request reimbursement from the state. Because Maine law thus did not interfere with consumers’ ability to use gift cards at the point-of-sale for at least as long as they are guaranteed that right by the EFTA and Reg E, the CFPB determined that it had no basis for concluding that the Maine law was inconsistent with, and therefore preempted by, federal law. 

However, the CFPB found that Tennessee law was inconsistent with the EFTA and Reg E and therefore preempted to the extent it permitted issuers to decline to honor gift cards as soon as two years after issuance.  Unlike Maine law, there was no provision requiring issuers to honor abandoned gift cards after they have transferred the cards’ unused value to Tennessee.  

Because the CFPB’s determination does not relieve issuers of the requirement under Tennessee law to transfer the unused value of gift cards within the state-mandated timeframe, the CFPB observed that complying with the Tennessee  requirement while at the same time having to honor gift cards until the underlying funds are permitted to expire under federal law “imposes possibly burdensome obligations on gift card issuers.”  It appears that an issuer who honored a card after it transferred the card’s value to the state would have to seek reimbursement from the state.  The CFPB also expressed “no opinion on the constitutional due process concerns raised by certain commenters, because the Bureau’s role is solely to determine whether State law [is] inconsistent with the requirements of the EFTA and Regulation E, not to determine whether State law is constitutional.”

The CFPB intends to determine whether certain provisions of Maine and Tennessee laws relating to unclaimed gift cards are preempted by federal law on gift card expiration dates.  The CFPB’s rulings will represent the agency’s first preemption determinations.  According to the CFPB’s “notice of intent to make preemption determination” submitted for publication in the Federal Register, the Tennessee determination was requested by payment card industry representatives and the Maine determination was requested by Maine’s Office of the State Treasurer.  

Under the unclaimed property laws of Maine and Tennessee, certain types of gift cards are presumed abandoned after two years.  However, the Electronic Fund Transfer Act and Regulation E generally prohibit the sale of a gift card that expires sooner than five years after the card is issued, or five years after the date when funds were last loaded onto the card.  The Dodd-Frank Act transferred authority for interpreting Regulation E to the CFPB, including authority to make preemption determinations.  In the notice, the CFPB describes the operation of the Maine and Tennessee laws and discusses the issues the CFPB will consider in assessing whether those laws are inconsistent with or provide greater protection to consumers than federal law. 

The notice also discusses the Third Circuit’s decision earlier this year in N.J. Retail Merchants Association v. Sidamon-Eristoff that rejected the gift card issuers’ argument that New Jersey’s two-year abandonment period was preempted by federal law.  (New Jersey has since amended its abandoned property law to increase the period after which gift cards are presumed abandoned from two to five years.)  The CFPB “notes that the court reached its conclusion in the absence of any specific guidance or determination from the [Fed] or from the Bureau.” 

We are glad to see that the CFPB has invited public input on the notice, since the CFPB does not appear to be obligated to do so.  Comments will be due no later than 60 days after the date the notice is published in the Federal Register.  According to the notice, the CFPB will then “analyze any comments received, conduct any further analysis that may be required, and will publish a notice of final action in the Federal Register.

 

We think two posts by Deepak Gupta that recently appeared on the Consumer Law & Policy Blog make for interesting reading.

Last July, on our blog, we wrote about how the hiring of Mr. Gupta by the CFPB’s Office of General Counsel might impact the CFPB’s position on the use of arbitration in consumer financial services contracts. In the first of his posts, Mr. Gupta discusses his departure from the CFPB earlier this year to start his own appellate litigation and policy consulting practice and makes some observations about his experiences at the CFPB.

In his second post, Mr. Gupta discusses the OCC’s new preemption rule, which (to no one’s surprise) he is highly critical of. (We also have written about the OCC rule, including, most recently, the likely impact of Thomas Curry’s appointment as Comptroller on the OCC’s preemption position.)

The CFPB announced on March 14 that it has begun sharing consumer complaints with the FTC’s Consumer Sentinel database. In addition to the FTC, the database can be accessed by other federal agencies and hundreds of state and local agencies. Last August, the CFPB announced that it had entered into an agreement with the FTC that gave the CFPB access to complaints submitted by others to the database and in which the CFPB agreed to share the consumer complaints it received.

As we reported, Director Cordray has stated that the CFPB will be entering into a Memorandum of Understanding with state attorneys general to share information on consumer financial protection issues. According to news reports, Roy Cooper, North Carolina’s AG, has stated that the FTC’s database will be a central component of that sharing process.

The Dodd-Frank Act, by codifying the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association, LLC, authorized state AGS to bring civil actions against national banks and federal savings associations to enforce non-preempted state laws. We will be watching to see whether complaints shared by the CFPB alleging conduct by national banks or federal savings associations that violates state law become the trigger for enforcement actions by state AGs that test the scope of post-Dodd-Frank federal preemption.

That’s the question state-licensed and state-chartered mortgage lenders (state housing creditors) should be asking in light of the CFPB’s interim final rule which became effective July 22, 2011. Because the rule significantly narrows the preemption available under the Alternative Mortgage Transaction Parity Act (AMTPA), the answer to this question could be “no” for many mortgage products now offered by state housing creditors.

So when can state housing creditors still rely on AMTPA preemption? Basically speaking, state housing creditors can now only rely on AMPTA to ignore state laws that prohibit or restrict making variable- or adjustable-rate mortgage loans. If state law doesn’t allow loans such as fixed-rate mortgage loans with interest-only payments or negative amortization features or certain fixed-rate balloon loans, state housing creditors can’t make those loans. And when making variable- or adjustable-rate mortgages, state housing creditors have to pay attention to state law disclosure requirements or restrictions on features such as rate increases for late payments, interest-only payments, and negative amortization.

What this means is that state housing creditors need to immediately review their mortgage products under state law to determine if any products should be eliminated or changed because AMTPA preemption is no longer available. Even if state law doesn’t allow a particular kind of mortgage loan that no longer falls under AMTPA, it’s possible a state-chartered bank or thrift could still make the loan by relying on a state parity law. Those laws are often found in state banking laws and give state-chartered lenders authority to exercise the same powers as national banks and/or federal thrifts. You can find more details about the AMTPA changes in our legal alert.