The court of appeals affirmed a district court judgment. The court held that student loan borrowers’ claims against third-party servicer Sallie Mae were preempted by the Federal Family Education Loan Program of the Higher Education Act.
Ann Chae and others (Chae) took out Stafford, Supplemental, and Consolidated Loans from various lenders. Sallie Mae, Inc. (Sallie Mae) was the loan servicer for each of the loans. As a third-party servicer, Sallie Mae performed administrative and servicing functions related to the loans, such as issuing billing statements, collecting and processing payments, assessing and collecting late fees, and giving notices to borrowers required by Federal Family Education Loan Program (FFELP) regulations.
Chae sued Sallie Mae on behalf of a purported class. Chae alleged three challenges to Sallie Mae’s loan servicing practices. Chae claimed first that Sallie Mae’s use of daily simple interest, versus interest calculated under the installment method, violated the terms of the student loan documents and California law. Chae alleged also that state law barred Sallie Mae from charging late fees, and that Sallie Mae deceptively increased the cost and life span of loans by the manner in which it charged interest and set borrowers’ initial repayment dates. Chae maintained that these practices variously violated California business, contract, and consumer protection law.
The federal government intervened. The district court granted the government’s motion for summary judgment, which sought a declaratory judgment that Chae’s state law claims were preempted by federal law.
The court then granted summary judgment in favor of Sallie Mae, holding that all of Chae’s claims were preempted by the Higher Education Act (HEA), 20 U.S.C. §§ 1001, et seq.
The court of appeals affirmed, holding that the student borrowers’ claims were preempted by federal law.
The court of appeals observed that federal preemption occurs when: Congress enacts a statute that explicitly pre-empts state law; state law actually conflicts with federal law; or federal law occupies a legislative field to such an extent that it is reasonable to conclude that Congress left no room for state regulation in that field. The court had previously held that field preemption does not apply to the HEA, leaving the standards governing express preemption and conflict preemption at issue.
Congress enacted several express preemption provisions applicable to FFELP participants. One of those, §1098g, provides that loans made, insured, or guaranteed under a program authorized by the Title IV of the HEA shall not be subject to any disclosure requirements of any state law. The FFELP fell within Title IV and thus was subject to the express preemption provision.
The court concluded that §1098g applied to, and precluded, several of Chae’s state law claims. In particular, Chae maintained that Sallie Mae violated California’s Unfair Competition Law by using billing materials that misled borrowers into believing that interest was calculated on an installment basis rather than as simple daily interest, and that the company set the first loan repayment date in a way that extended the borrower’s overall liability. At their heart these claims were, the court said, improper-disclosure claims. Essentially they were the opposite of state-law requirements governing disclosures that must be made. Viewed in that way, the claims were subject to express preemption under §1098g.
The issue became, then, whether the remaining claims of breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and the use of fraudulent and deceptive practices apart from the billing statements were barred under principles of conflict preemption. Conflict preemption exists where a state law creates an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.
Congress’s goal was that FFELP participants be subject to a uniform set of forms and procedures, even as to all aspects of the loan process. Essentially, Congress intended that the student-loan statutes carry out the unmistakable command that there be a set of rules that would apply across the board. Case authority has held, further, that the FFELP requires uniformly administered standards in order for the program to remain viable.
With that in mind, the court opined, were the law to indulge Chae’s California state law claims, and thereby endorse the possibility of similar claims being asserted under varying state laws in each of the fifty states, it would impair and threaten the efficacy of the federal lending effort for students, the court said.
To the extent Chae cited Fourth Circuit authority for the proposition that it was unclear that the creation of “uniformity” was an important goal of the HEA, the court disagreed. First, that authority was not the law of the Ninth Circuit, and even if it were, it was distinguishable under the facts. The Fourth Circuit decided a dispute involving the contractual relationship between lenders, which was not a relationship that the FFELP was primarily designed to govern.
Given that Congress intended the FFELP to operate uniformly, the court declared that Chae’s state law claims would stand as an obstacle to the FFELP’s uniform operation. Chae’s interest-rate claims, if successful, would create an actual conflict with federal law. However, Congress granted the Department of Education broad authority to implement the FFELP, and that grant of “ample authority” to regulate a detailed legislative scheme was evidence that Congress intended the agency to have the authority to preempt state law.
Likewise, the Department made it clear that imposition of fifty sets of state law governing the interest calculation would threaten its ability to carry out the objectives of program uniformity and stability. An agency’s interpretation of its own regulations is governing where it is not plainly wrong or inconsistent with the regulations.
Finally, the Department noted that allowing states to impose varying interest-calculation requirements would compromise related loan programs, operated by the government, that depend on cross-program uniformity. Those interpretations of the likely effect of state law on the FFELP were reasonable and within the DOE’s statutory grant of authority, with the result that the court deferred to them.
The court’s analysis was not altered by the fact that the DOE had not promulgated a regulation explicitly stating the preemptive effect of its regulations. The DOE had consistently implemented its uniform policy, and the court found nothing to signal that deference to its position was unwarranted.
The court thus concluded that Chae’s allegations that Sallie Mae made fraudulent misrepresentations in its billing statements and coupon books were expressly preempted by the HEA, while conflict preemption prohibited Chae from bringing her remaining claims because, if successful, they would create an obstacle to the achievement of congressional purposes. Having carefully considered the FFELP and the purposes of Congress in the HEA, it was beyond any doubt that subjecting the federal regulatory standards to the potentially conflicting standards of fifty states on contract and consumer protection principles would stand as a severe obstacle to the effective promotion of the funding of student loans. The principles of conflict preemption and federal law supremacy therefore governed.