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Nelson v. Great Lakes Educational Loan Services, Inc.

United States Court of Appeals, Seventh Circuit

June 27, 2019

Nicole D. Nelson, Plaintiff-Appellant,
v.
Great Lakes Educational Loan Services, Inc., et al., Defendants-Appellees.

          Argued October 23, 2018

          Appeal from the United States District Court for the Southern District of Illinois. No. 3:17-CV-183. Nancy J. Rosenstengel, Chief Judge.

          Before Kanne, Hamilton, and St. Eve, Circuit Judges.

          HAMILTON, CIRCUIT JUDGE.

         Like many students, plaintiff Nicole Nelson borrowed money to pay for her education. Defendant Great Lakes Educational Loan Services, Inc. services repayment of her federally insured loans. On its website, Great Lakes offered to provide guidance to borrowers struggling to make their loan payments. It told borrowers: "Our trained experts work on your behalf," and "You don't have to pay for student loan services or advice, ” because "Our expert representatives have access to your latest student loan information and understand all of your options." Nelson alleges that despite these representations, when she and other members of the putative class struggled to make payments, Great Lakes did not work on their behalf. Instead, Nelson contends, Great Lakes steered borrowers into repayment plans that were to Great Lakes' advantage and to borrowers' detriment.

         Nelson alleges that defendant's conduct violated the Illinois Consumer Fraud and Deceptive Business Practices Act and constituted constructive fraud and negligent misrepresentation under Illinois common law. The district court granted Great Lakes' motion to dismiss, holding that all of Nelson's claims were expressly preempted by this provision of the federal Higher Education Act: "Loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) shall not be subject to any disclosure requirements of any State Law." 20 U.S.C. § 1098g. The district court reasoned that Nelson's claims are expressly preempted because they all allege in substance only that Great Lakes failed to disclose certain information.

         The district court's ruling was overly broad. 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. Those are affirmative misrepresentations, not failures to disclose. Great Lakes chose to make them. A borrower who reasonably relied on them to her detriment is not barred by § 1098g from bringing state-law consumer protection and tort claims against the loan servicer. Tort law has long recognized the difference between mere failures to disclose information and affirmative deceptions. And as we explain below, the Ninth Circuit decision the district court relied upon, Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010), does not apply to claims of affirmative misrepresentations in counseling borrowers in distress.

         Accordingly, Nelson's claims are not expressly preempted to the extent she is alleging that Great Lakes made false or misleading affirmative representations to her in the counseling process. Also, neither conflict preemption nor field preemption applies to her claims. We vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

         I. Factual & Procedural Background

         The district court granted defendant's Rule 12(b)(6) motion to dismiss on preemption grounds, a legal determination that we review de novo. Guilbeau v. Pfizer Inc., 880 F.3d 304, 310 (7th Cir. 2018), citing Toney v. L'Oreal USA, Inc., 406 F.3d 905, 907-08 (7th Cir. 2005). We accept as true all well-pleaded factual allegations in the amended complaint and draw all permissible inferences in Nelson's favor. E.g., Fortres Grand Corp. v. Warner Bros. Entertainment Inc., 763 F.3d 696, 700 (7th Cir. 2014).

         A. Loans Under the Higher Education Act

         The Higher Education Act ("HEA") was enacted "to keep the college door open to all students of ability, regardless of socioeconomic background." Rowe v. Educational Credit Management Corp., 559 F.3d 1028, 1030 (9th Cir. 2009) (citation and internal quotation marks omitted); see also 20 U.S.C. § 1071(a)(1) (identifying purposes of statute). The HEA established the Federal Family Education Loan Program ("FFELP"), a system of loan guarantees administered by the U.S. Secretary of Education that were "meant to encourage lenders to loan money to students and their parents on favorable terms." Chae v. SLM Corp., 593 F.3d at 938-39 (footnote omitted).

         The FFELP regulated three parts of student loan transactions: (1) between lenders and borrowers, (2) between borrowers and guaranty agencies, and (3) between guaranty agencies and the Department of Education. Bible v. United Student Aid Funds, Inc., 799 F.3d 633, 640 (7th Cir. 2015), citing Chae, 593 F.3d at 939. Under the program, lenders used their own funds to make loans to students attending postsecondary institutions. These loans were guaranteed by guaranty agencies and reinsured by the federal government. See 20 U.S.C. § 1078(a)-(c). Thus, the federal government served (and still serves) as the ultimate guarantor on FFELP loans. Bible, 799 F.3d at 640. Lenders assigned the loans to loan servicers like Great Lakes to manage the repayment process with the borrowers.

         In 2010, Congress ordered a halt in new FFELP loans and transitioned to a "Direct Loan" program, in which the United States serves as the lender and contracts with nongovernmental entities to service loans issued by the Department. 20 U.S.C. § 1071(d); see also Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2201 et seq., 124 Stat. 1029, 1074. Federal Direct Loans "have the same terms, conditions, and benefits" as those issued under the FFELP. 20 U.S.C. § 1087e(a)(1).

         Central to the preemption issue here, the HEA requires lenders and loan servicers to make certain "disclosures" before disbursement of loans, before repayment of loans, and during repayment of loans. See 20 U.S.C. § 1083. Required disclosures include the core terms of the loan at origination, as well as before and during repayment. § 1083(a), (b), & (e). But when a borrower is having difficulty making payments, as Nelson was, § 1083(e)(2)(A) requires loan servicers to provide: "A description of the repayment plans available to the borrower, including how the borrower should request a change in repayment plan." Loan servicers must also provide to distressed borrowers descriptions of forbearance and other options to avoid default and expected costs or fees associated with those options. § 1083(e)(2)(B) & (2)(C).

         The HEA includes several express preemption provisions, including the one dealing with "disclosures," which is the focus of this appeal. Entitled "Exemption from State disclosure requirements," again it provides: "Loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) shall not be subject to any disclosure requirements of any State law." 20 U.S.C. § 1098g. Both Federal Direct Loan Program and FFELP loans are so authorized, so lenders and loan servicers are not subject to "disclosure requirements" imposed by state law.

         B. Nelson's Loans and Claims

         Nicole Nelson financed her education with federal student loans. Great Lakes, Nelson's loan servicer, manages borrowers' accounts, processes payments, assists borrowers with alternative repayment plans, and communicates with borrowers about the repayment of their loans. Great Lakes services many billions of dollars in federal student loans for millions of borrowers.

         Nelson began repaying her loans in December 2009. In September 2013, she changed jobs and her income dropped. She contacted Great Lakes, and its representative led Nelson to believe that "forbearance" was the best option for her personal financial situation. A few months later, Nelson lost her new job. She contacted Great Lakes again in March 2014. Great Lakes' representative again did not inform her of income-driven repayment plans and instead steered her into "deferment." Nelson alleges that Great Lakes' representatives were working off of a script provided to them by Great Lakes when they made these recommendations to her. Nelson alleges that she relied on the information provided by Great Lakes.

         Forbearance is "the temporary cessation of payments, allowing an extension of time for making payments, or temporarily accepting smaller payments than previously were scheduled." 34 C.F.R. § 682.211(a)(1). Nelson argues that forbearance is not appropriate for borrowers experiencing long-term financial difficulty. Under forbearance, unpaid interest is capitalized (i.e., added to the loan principal), which can substantially increase monthly payments after the forbearance period ends.

         Federal law requires lenders and loan servicers to offer income-driven repayment plans, which set monthly loan payments as a percentage of a borrower's discretionary income. See 20 U.S.C. § 1098e(b); 34 C.F.R. §§ 682.215 & 685.208. Nelson argues that these plans are more appropriate in situations of longer-term financial hardship. These plans can offer borrowers extended payment relief and reduced monthly payments that can still count toward various loan forgiveness programs. Despite the availability of these plans, Nelson alleges, Great Lakes steered borrowers away from income-driven repayment plans that are less lucrative to lenders and toward more burdensome options, especially forbearance. Am. Cplt. ¶ 6. Nelson asserts that enrolling borrowers in income-driven repayment plans is "time-consuming" and requires "lengthy and detailed conversations" with the borrowers about their financial situations. She argues that Great Lakes thus "failed to perform its core duties in the servicing of student loans."

         To help focus on the factor we view as decisive here-the difference between affirmative misrepresentation and failure to disclose information-we lay out next some of the details of Nelson's allegations.

         Count I of Nelson's Amended Complaint asserts violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815Ill.Comp.Stat. 505/1 et seq. She highlights seven unfair acts and practices in servicing loans:

(a) Holding themselves out to be experts in student loan servicing issues or offering "expert" help;
(b) Holding themselves out as working on Plaintiff's and Class Members' behalves, when they worked for the ...

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