The Seventh Circuit Court of Appeals has revived a putative class action accusing United Student Aid Funds Inc. of saddling borrowers with collection charges even when they were following payment plans to the letter. The court, in a split decision, found that the plaintiff had adequately supported her racketeering and contract claims. The decision generated a written order from each of the three judges on the panel. The court reversed U.S. District Judge Tanya Walton Pratt’s March 2014 ruling that had dismissed the case. The appeals court ruling revived lead Plaintiff Bryana Bible’s claims that the student loan administrator unfairly tacked on collection costs to her debt while she was still making payments on it.
The majority held that Ms. Bible’s claims weren’t preempted by the Higher Education Act (HEA), and that there was no conflict between that law and the Racketeer Influenced and Corrupt Organizations (RICO) Act. The majority found that the HEA offers protections for student borrowers to shield them from some of the harsher consequences of failing to repay debt. The ruling also limits the collection costs that could be assessed. The majority wrote in its ruling:
What would be the point of warning the borrower that declining to make repayment arrangements would trigger costly debt collection activities if the guaranty agency could initiate these procedures and assess those costs regardless of whether she agrees to repay?. That the regulations create this sort of safe harbor is not surprising.
The Plaintiff’s lawyers filed a motion for class certification shortly after the appellate ruling came down. Ms. Bible defaulted on her student loan in 2012, but promptly set up what’s known as a rehabilitation program, in which she made lower monthly payments in exchange for keeping the loan current. It was alleged that she had a balance of around $18,000 on her debt when the administrator took it on. Still, the company hit her with $4,500 in collection costs, even though she kept up her end of the agreement, according to allegations in her suit. And USA Funds applied her $50 monthly payments to the collection costs, rather than the loan principal.
Ms. Bible filed suit 2013 seeking to represent a class of borrowers who had been charged for collection costs after agreeing to a deal. Judge Pratt held that Ms. Bible’s contract and RICO claims were preempted by the HEA, and that the law doesn’t provide a private right of action so her claims depending on violations of that act shouldn’t be permitted.
The majority found that neither claim was preempted. However, the judges warned that “it remains to be seen whether she can support that [RICO] claim with evidence of fraudulent intent.” U.S. Circuit Judge David Frank Hamilton wrote the majority opinion, while Judge Joel Martin Flaum wrote an opinion concurring in part and concurring in the judgment, and Judge Daniel Anthony Manion concurred in part but dissented with the court’s ruling in the RICO claim.
Interestingly, the majority opinion deferred to the Secretary of Education’s amicus brief, which the court had invited and permitted the parties to respond to after oral argument in the case. The secretary found that the Higher Education Act limits the way collection costs may be assessed to student loan debt, including when the borrower is still making payments in accordance with an agreement, according to the filings. Judge Hamilton wrote for the majority:
Even if this were not the best interpretation of the statutes and accompanying regulations, it is at least a reasonable one, and we defer to that interpretation because it reflects the reasoned position of the Secretary of Education, who is tasked with administering the program.
Judge Flaum also joined in Judge Hamilton’s deference to the secretary, but said that “an unambiguous regulatory scheme is preferable to soliciting the agency’s interpretive guidance.” Judge Manion, in his dissent, wrote that the majority had wrongly blurred the lines between a rehabilitation agreement and a repayment agreement, each of which he says are covered by different sections of the statute.
It’s very important for students to be protected from unfair collection practices and the costs that go along with them. The student loan industry must be reined in by Congress and by the governmental regulators. Too many companies in that industry are no more than predatory lenders and must be strongly regulated.
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