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Student Loan Servicing Alliance v. District of Columbia

United States District Court, District of Columbia

June 25, 2018

DISTRICT OF COLUMBIA, et al., Defendants.



         This matter comes before the Court on defendants' motion [Dkt. No. 14] to dismiss plaintiff's complaint. Plaintiff has filed a memorandum [Dkt. No. 16] in opposition to the motion to dismiss, and defendants have filed a reply [Dkt. No. 17] in support of their motion. Having reviewed the complaint, the parties' briefs, and the entire record in this case, the Court will deny defendants' motion without prejudice.


         Plaintiff Student Loan Servicing Alliance (“SLSA”) is a trade organization whose membership is comprised of student loan servicers and affiliates. See Compl. at ¶ 9. In this case, SLSA challenges the lawfulness of District of Columbia Law 21-214, as well as the emergency rules promulgated under that statute, which aim to regulate the student loan servicing industry. See id. at ¶¶ 6-8. SLSA asserts associational standing by virtue of the alleged harms caused to its members by D.C. Law 21-214 and its implementing regulations. See id. at ¶¶ 13-16. SLSA brought its lawsuit against three defendants: Stephen C. Taylor, in his official capacity as Commissioner of the D.C. Department of Insurance, Securities and Banking; Charles A. Burt, in his official capacity as Student Loan and Foreclosure Ombudsman; and the District of Columbia itself. See id. at ¶¶ 10-12; see also Opp'n at 33-34.

         Signed into law on December 7, 2016, D.C. Law 21-214 went into effect on February 18, 2017. See Compl. Ex. B. Formally titled the “Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016, ” D.C. Law 21-214 provides for the development of a licensing and regulatory regime to govern student loan servicers operating in the District of Columbia. In furtherance of this statutory goal, the law also creates a Student Loan Ombudsman position within the Department of Insurance, Securities and Banking (“DISB”). Under D.C. Law 21-214, the DISB Ombudsman is tasked with enforcing the licensing provisions of the law, conducting examinations of student loan servicers and collecting examination fees, and receiving and responding to complaints submitted by borrowers, among other things.

         On September 8, 2017, the DISB Commissioner adopted a Notice of Emergency and Proposed Rulemaking (“First Notice”) under the regulatory authority conferred by D.C. Law 21-214 and delegated to him by the Mayor. See Compl. Ex. C at 2; Compl. Ex. O. This First Notice not only began the rulemaking process, but also implemented emergency interim regulations which immediately went into effect. See Compl. Ex. C at 2. By its own terms, the First Notice explained that the “emergency rulemaking [was] necessary because the District must continue to act swiftly to ensure the long-term financial safety and security of District residents with student educational loans” and provide continuity in the face of regulatory uncertainty at the federal level. See id. at 1. In response to the First Notice, DISB received four comments, including a comment submitted by SLSA. See Compl. Ex. H at 2; Compl. at ¶ 94.

         On December 26, 2017, and prior to the expiration of the First Notice, DISB promulgated a Notice of Second Emergency and Proposed Rulemaking (“Second Notice”). See Compl. Ex. H at 2. The Second Notice similarly initiated a comment period, while becoming immediately effective in the interim. See id. The Second Notice largely mirrored the First Notice, with one notable exception: DISB changed the formula for calculating the annual assessment fee from “$800 $6.60 per loan” to “$0.50 per borrower residing in the District of Columbia serviced by a servicer.” See Opp'n Ex. 1 at 16; see also Compl. Ex. C at 15; Compl. Ex. H at 16. The Second Notice received one comment - submitted by SLSA - before the comment period closed on February 26, 2018. See Mot. Ex. B at 2; Opp'n at 3.

         SLSA filed its complaint in this case on March 20, 2018, challenging D.C. Law 21-214 and the then-operative Second Notice. Specifically, the complaint alleges that the D.C. law and regulations are preempted by federal law on the basis of three recognized theories: express preemption, field preemption, and conflict preemption. See Compl. at ¶¶ 123-93. The complaint also alleges that the regulations conflict with the plain language of D.C. Law 21-214, in violation of the District of Columbia Administrative Procedure Act. See id. at ¶¶ 194-208.[1]

         On April 20, 2018, DISB promulgated a Third Notice of Emergency and Proposed Rulemaking (“Third Notice”). See Mot. Ex. B at 2. Upon its promulgation, the Third Notice superseded the Second Notice, going into immediate effect while also commencing an additional comment period. See id. This Third Notice is currently operative, although it expires on August 18, 2018. See id. The provisions of the Third Notice are substantially similar to those of the Second Notice, although the Third Notice makes a handful of changes. Notably, the Third Notice includes a savings clause that makes record keeping requirements applicable only to the extent allowed by federal law, as well as new language conferring discretion on the Commissioner to “waive or reduce [record keeping] requirements . . . if . . . compliance would require the licensee to violate federal law.” See Opp'n Ex. 2 at 13. The Third Notice also contains provisions expanding the discretion of the Commissioner with regard to examinations and investigations of student loan servicers. See id. at 15. In addition, in promulgating the Third Notice, DISB extended the deadline for the annual assessment of fees for a licensee from November 1 to November 15, 2018, see id. at 12, and reduced the maximum late penalty for filing an annual report from $1, 000 per day to $50 per day, see id. at 10, 17.


         Defendants filed their motion to dismiss the complaint shortly after DISB promulgated its Third Notice implementing a new set of regulations. In their motion, defendants argue that SLSA's claims are moot because the complaint challenges the Second Notice, now superseded by the Third Notice, and the Second Notice is no longer in effect. See Mot. at 9-10. Defendants also move to dismiss the complaint on grounds of justiciability (arguing that SLSA's preemption claims are not ripe and that SLSA lacks standing) and for failure to state a claim upon which relief can be granted (arguing the legal merits of SLSA's preemption claims, as well as the merits of SLSA's D.C. Administrative Procedure Act claim). See id. at 10-32. With a few exceptions, defendants' memorandum in support of its motion largely addresses the merits as they pertain to the Third Notice.

         Instead of seeking leave to amend its complaint, which was based entirely on the Second Notice, SLSA responded to defendants' motion by filing a memorandum in opposition, asserting that “[t]he Third Emergency Rules differ in only minor respects from the superseded Second Emergency Rules” and proceeding to argue the merits of the motion to dismiss with respect to the Third Notice. See Opp'n at 8. In its opposition, SLSA also argues that deeming the complaint moot would promote gamesmanship:

[N]othing prevents Defendants from promulgating further emergency rules or even adopting the language from the First Emergency Rules or Second Emergency Rules in further iterations of emergency rules ad infinitum or as a final rule. If Defendants could moot the claims in this case challenging the Emergency Rules each time they adopt new ones, Defendants could effectively prevent ...

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