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Federal appeals court rules student loan servicer lawsuit not preempted by federal law
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Federal appeals court rules student loan servicer lawsuit not preempted by federal law

The United States Court of Appeals for the Seventh Circuit ruled late last week that a lawsuit against a student loan servicer based on state consumer protection and fraud laws is not preempted by federal law.

The lawsuit was originally filed by a borrower who relied on the student loan provider’s claim that it had “expert representatives” who could “provide guidance to borrowers struggling to make their loan payments” to decide which payment plan best suited her needs. The borrower argues that she received bad advice and that the statements made by the student loan provider “violated the Illinois Consumer Fraud and Deceptive Business Practices Act and constituted constructive fraud under Illinois common law.”

The case had previously been dismissed in the district court because the court held that it was “expressly preempted” by the Higher Education Opportunity Act, which provides that student loans providers will not be subject to disclosure requirements of state laws. The Court of Appeals for the Seventh Circuit, however, found that ruling to be “overly broad.” The court distinguished between failures to disclose and affirmative misrepresentations, explaining that:

When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information.

The Court of Appeals for the Seventh Circuit vacated and remanded the opinion of the district court. This is possibly the highest court to decide on when federal law does not shield student loan providers from state consumer protection and fraud laws.