A battle between one of the nation’s largest student-loan companies and the state of California has caught the eye national lawmakers.
A group of Democratic senators and members of Congress representing the state sent a letter this week to Jeffrey Noordhoek, the chief executive officer of Nelnet NNI, +0.05% one of two publicly traded student servicers, asking him to reconsider the company’s position that a new California law aimed at regulating student-loan companies doesn’t apply to a subsidiary of his firm.
“We are deeply concerned by Nelnet’s disregard for the rights of states and student loan borrowers,” the letter reads. “Absent a clear instruction from Congress to be able to shield your company from regulators, [the company] must comply with state law.”
The letter is the latest development in a months-long tussle between states, student-loan companies and the federal government over how much power states have to regulate these firms, which manage loans on behalf of the federal government.
That it involves California — one of the largest states in the country both in population and popular imagination — and Nelnet, a firm that recently drastically increased in size by acquiring another student loan company, only raises the stakes.
The timing is crucial for Nelnet
Though perhaps less well-known than its competitor Navient NAVI, -0.22% Nelnet looms large in the student-loan landscape. Earlier this year, the company completed its acquisition of Great Lakes, another major student-loan firm. Now just three large student-loan companies manage the federal government’s portfolio. The combined Nelnet-Great Lakes services roughly 40% of federal government’s student-loan portfolio by dollar volume and works with 41% of federal student-loan borrowers.
The fight with state regulators and national lawmakers comes at a crucial time for Nelnet. The company is exploring entering the private student-loan market. Michael Tarkan, a senior analyst at Compass Point Research and Trading, wrote in a recent note that “this battle bears watching” as the company works towards receiving a bank charter that would allow the firm to offer private loans.
Ben Kiser, a Nelnet spokesman, wrote in an emailed statement that the company requested a meeting with the state’s banking commissioner to discuss the registration requirements and officials look forward to resolving the registration issue “as quickly as possible.”
“We appreciate the concern California lawmakers have for the state’s student loan borrowers,” the statement reads. “We share a similar priority and are focused on serving all borrowers, including those in California, with the best student loan experience possible.”
Federal regulators seem to be backing off the student loan industry
The controversy also comes as student loan borrower advocates grow increasingly concerned about the federal government’s approach to loan servicers and others involved in higher education. Betsy DeVos’s Department of Education rescinded an Obama-era rule last week that would require career programs, which are largely at for-profit colleges, to prove they’re adequately preparing students for jobs.
The agency is also looking to roll back a law aimed at making federal student loan borrowers whole when they’ve been defrauded by their schools.
“With the federal government stepping away from its duty to protect student borrowers, students are now more vulnerable to predatory lending practices,” Mark Stone, the Democratic California Assembly member who introduced the state’s student-loan bill, said in a statement. “To ensure that California borrowers, at least, have the protection they need, it’s more important than ever before to uphold this state law.”
States are taking up the slack
California is the latest state to face controversy over its student-loan law. Over the past few years, several states have passed laws requiring student-loan servicers to obtain a license and abide by certain consumer protections, including notifying borrowers before their loans are transferred and responding to communications about account errors in a timely fashion. The regulations came amid concerns from consumer advocates and states attorneys general that the companies weren’t doing enough to work in borrowers’ best interest. That’s the case, they say, despite the companies’ contracts with the federal government.
As state legislatures increasingly began debating and passing these laws, student-loan firms ramped up their lobbying efforts. They also wrote to DeVos, asking her to intervene by telling state lawmakers they didn’t have the right to regulate the firms. DeVos heeded their request, issuing a memo that said states don’t have the authority to regulate student-loan companies because federal law supersedes — or in legalese, preempts — state regulations.
Nelnet’s subsidiary didn’t apply for a license to operate in California
In California, the state’s new law required student-loan servicers to obtain a license to operate by July 1 of this year. Nelnet did not apply for a license for Great Lakes. Nelnet did apply for a license for its own servicing subsidiary, which services both private and federal loans. But the company contends that only the division of that subsidiary that works with borrowers of private loans is subject to the law. In a letter sent to the state explaining the company’s position, Nelnet representatives cited the DeVos memo in its argument that the California law is preempted by federal law.
Borrower advocates and the California lawmakers argue that memo isn’t binding. “This is just the latest in a series of one of the servicers trying to circumvent these properly executed state laws,” said Ashley Harrington, counsel at the Center for Responsible Lending, a consumer advocacy organization. “States are well within their rights to create these laws and enforce these laws and should remember to do that.”
Whether states have the authority to regulate these companies is currently being debated in court, as student-loan firms cite preemption as a defense in cases where they’ve been sued under state law with varying success. The question of how much the courts take the DeVos memo into account in their decisions is also “a moving target,” said David Rubenstein, a professor at Washburn University School of Law and an expert on preemption.
That’s because, in recent years, the Supreme Court has shown signs of revisiting how much deference to give these kinds of non-binding documents issued by agencies, he said. “If it changes, it’s going to be in the direction of less deference, not more.”
The Nelnet controversy may offer another opportunity for the court to weigh these questions. Unless the battle is resolved politically, it will end up in the courtroom.
In the meantime, California regulators say they’re moving forward with enforcing their own student-loan law.
“Student-loan debt is one of the biggest consumer protection issues facing the country today and this office believes it’s crucial those borrowers be protected to the maximum extent possible,” said Thomas Dresslar, the deputy commissioner of policy and planning at California’s Department of Business Oversight. “We’re going to move as strongly as we can to protect the interests of California student loan borrowers.”
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