The U.S. Court of Appeals for the Third Circuit recently affirmed the denial of a motion to dismiss filed by a federal student loan lender and servicer against claims raised by the Commonwealth of Pennsylvania alleging violations of federal and state consumer protection laws after the Consumer Financial Protection Bureau filed suit raising similar claims.
In so ruling, the Third Circuit held that the Commonwealth's parallel enforcement action under the federal Consumer Protection Act of 2010 was permitted by the statute's plain language, and the federal Higher Education Act of 1965 does not expressly preempt the Commonwealth's claims under Pennsylvania's Unfair Trade Practices and Consumer Protection Law to the extent they are based on affirmative misrepresentations and misconduct, rather than failures of disclosure, and no other preemption principle barred the Commonwealth's claims.
A copy of the opinion is available at: Link to Opinion
In January 2017, the Consumer Financial Protection Bureau ("CFPB"), along with the States of Illinois and Washington filed similar lawsuits against a prominent federal student loan lender and servicer ("Servicer") alleging, among other things, that it supposedly failed to adequately disclose the availability of income-driven repayment (RPA) programs to borrowers, instead steering its borrowers into forbearance to their detriment by adding interest to the loan's principal and losing credit for months that would have been counted towards forgiveness.
Nine months later, in October 2017, the Commonwealth of Pennsylvania (the "Commonwealth") filed similar claims against the Servicer, alleging violations of the Pennsylvania's Unfair Trade Practices and Consumer Protection Law, 73 Pa. Const. Stat. §§ 201, et seq. (the "PA Protection Law") for supposedly unfairly and deceptively originating risky, expensive loans, which had a high likelihood of default, among other unlawful conduct; the PA Protection Law for allegedly steering borrowers suffering long-term financial hardship into costly forbearances; the Consumer Protection Act for allegedly steering borrowers suffering long-term financial hardship into costly forbearances; the PA Protection Law for alleged loan servicing failures related to recertification of IDR plans; the Consumer Protection Act for alleged loan servicing failures related to recertification of IDR plans; the PA Protection Law for alleged misrepresentations relating to cosigner releases; the Consumer Protection Act for alleged misrepresentations relating to cosigner releases; the PA Protection Law for alleged repeated payment processing errors; and the Consumer Protection Act for the same alleged repeated payment-processing errors.
The Commonwealth's complaint differed from the other actions in that it also challenges the pre-2007 loan origination practices of the Servicer's corporate predecessor (Count I), and its alleged "fail[ure] to disclose a date certain by which a borrower must submit materials to recertify an [IDR] plan."
The Servicer moved to dismiss the Commonwealth's complaint for failure to state a claim arguing: (i) that the Consumer Protection Act of 2010, 12 U.S.C. § 5552, et seq. (the "Consumer Protection Act" or the "Act") precluded the Commonwealth from filing a concurrent, parallel enforcement action lawsuit, and; (ii) that the federal Higher Education Act of 1965, 20 U.S.C. § 1001 et seq., (the "Education Act"), preempts the Commonwealth's loan servicing claims under its Unfair Trade Practices and Consumer Protection, 73 Pa. Cons. Stat. §§ 201-1 to 201-9.3 Law (the "PA Protection Law").
These arguments were rejected by the trial court, which held (i) that Section 5552(a)(1) of the Consumer Protection Act, 12 U.S.C. § 5552(a)(1), unambiguously confers a right on state attorneys general to file suit to enforce the Consumer Protection Act, and that there is nothing in the Act that would bar a parallel state action; (ii) that the Commonwealth's action survived under express-preemption principles in that the claims were not an attempt to impose disclosure requirements on Navient, but were instead distinct allegations of unfair and deceptive business practices brought pursuant to Pennsylvania's traditional state police powers, and; (iii) that conflict preemption did not apply because uniformity was not an express goal of Congress in enacting the Education Act and, even if it were, this goal is not defeated by allowing the Commonwealth to enforce its consumer protection laws. Pennsylvania v. Navient Corp., 354 F. Supp. 3d 529, 543-53 (M.D. Pa. 2018).
The Third Circuit granted permission to appeal two of the three questions of law certified by the trial court for interlocutory appeal: (1) whether the Commonwealth may bring a parallel enforcement action under the Consumer Protection Act after the Bureau has filed suit; and (2) whether the Education Act preempts the Commonwealth's loan-servicing claims under the PA Protection Law.
Turning first to the issue of whether the Consumer Protection Act barred concurrent actions, the Third Circuit noted that the plain language of Section 5552 permits the attorney general of any state to bring a civil action to enforce provisions of the Act. 12 U.S.C. § 5552(a)(1). Moreover, while other provisions of the Consumer Protection Act expressly prohibit concurrent claims, section 5552 does not.
While the Servicer correctly pointed out that section 5552(b) requires state attorney generals to notify the CFPB before filing such a lawsuit (12 U.S.C. § 5552(b)(1)(A)) and grants the Bureau authority to intervene in such lawsuits (12 U.S.C. § 5552(b)(2)(A)), the Third Circuit concluded that the pre-suit notice requirement does not negate that statute's express authorization of parallel state actions, and the Servicer failed to provide any case law authority supporting that, where a statute allows third-party intervention, concurrent claims are barred.
Lastly, the Third Circuit held that the trial court correctly rejected the Servicer's augment that allowing concurrent claims would overburden the courts, because although "federal courts are indeed inundated with cases, adjudicating this case is a burden the Court is required to assume, absent a recognized statutory or procedural basis that precludes the Commonwealth from bringing its action." Navient, 354 F. Supp. 3d at 546.
Accordingly, the Third Circuit held that the clear statutory language of the Consumer Protection Act permits concurrent state claims, for nothing in the statutory framework suggests otherwise.
Next, the Third Circuit reviewed the Servicer's argument that the Commonwealth's action was preempted, both expressly and impliedly by the federal Education Act. As you may recall, The Supremacy Clause of the Constitution, U.S. Const. art. VI, cl. 2, invalidates any state law that "interferes with or is contrary to federal law[.]" Free v. Bland, 369 U.S. 663, 666 (1962).
In preemption cases, "[the Court's] inquiry is guided by two principles. First, the intent of Congress is the 'ultimate touchstone' of preemption analysis… Second, [Courts] 'start[] with the basic assumption that Congress did not intend to displace state law.'" Farina v. Nokia Inc., 625 F.3d 97, 115-16 (3d Cir. 2010) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)).
The Servicer argued that Counts II and IV of the Commonwealth's Complaint challenging the sufficiency of the Servicer's "disclosures" or "notice" required under the PA Protection law are expressly preempted by Section 1098 of the Education Act which provides that "[l]oans made, insured, or guaranteed pursuant to a program authorized by Title IV of the Higher Education Act . . . shall not be subject to any disclosure requirements of any State law." 20 U.S.C. § 1098g.
Here, the Third Circuit determined that the Commonwealth's claims were not wholly based on failures of disclosure, but instead, sought to hold the Servicer accountable for its misconduct in making numerous affirmative misrepresentations.
Following rulings from the Eleventh and Seventh Circuits, the Third Circuit adopted the distinction between affirmative misrepresentation and failure to disclosure information as required by the Education Act, concluding that Section 1098g does not expressly preempt claims to the extent they are alleging affirmative misrepresentations rather than failures of disclosure. See Lawson-Ross v. Great Lakes Higher Educ. Cop., 955 F.3d 908, 917 (11th Cir. 2020) ("the precise language Congress used in § 1098g preempts only state law that imposes disclosure requirements; 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."); Nelson v. Great Lakes Higher Educ. Cop., 928 F.639, 650 (7th Cir. 2019) ("[w]e recognize that it would be possible to apply state consumer protection laws to impose additional disclosure requirements on loan servicers of federally insured student loans. Such applications would be preempted under § 1098g . . . . But that result is not necessary or 31 inherent in [the borrower's] claims, at least to the extent she alleges affirmative misrepresentations.").
Accordingly, the Third Circuit concluded that the trial court correctly concluded that the Commonwealth's complaint alleges Navient made numerous affirmative misrepresentations, and claims based thereon are not expressly preempted by the Education Act.
The Appellate Court similarly rejected the Servicer's arguments that Section 1098g impliedly conflicted with the Commonwealth's state-law claims, finding no intent that Congress "had the sweeping goal of regulating all misconduct that could possibly occur in student loan financing and requiring uniformity of all claims tangentially related to the Education Act," and that, while not expressly argued by the Servicer, that the Education Act also does not field preempt the regulation of student loans. Nelson, 928 F.3d at 651 ("'[S]tate law and federal law can exist in harmony' under the Education Act."); See, e.g., Lawson-Ross, 955 F.3d at 923; Nelson, 928 F.3d at 651-52; Chae, 593 F.3d at 941–42; Armstrong v. Accrediting Council for Continuing Educ. & Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999); Keams v. Tempe Tech. Inst., Inc., 39 F.3d 222, 226 (9th Cir. 1994).
Accordingly, because the Commonwealth's action was not barred under the plain language of the Consumer Protection Act nor preempted by the Education Act, the trial court's denial of the Servicer's motion to dismiss was affirmed.
Ralph T. Wutscher
Maurice Wutscher LLP
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