California DBO Sues Student Loan Servicer

On April 2, 2020, the California Department of Business Oversight (DBO) announced that it filed a lawsuit against a student loan servicer servicing over 900,000 Californians as part of the DBO’s investigation into whether the loan servicer was improperly converting federal Teacher Education Assistance for College and Higher Education (TEACH) grants into loans.

The defendant servicer was granted exclusive authority by California in 2012 to ​service and administer the TEACH grant program–a federal financial aid grant program​ that ​awards grants of up to $4,000.00 per year to “highly qualified” students who pursue​​ qualifying teaching careers. The DBO alleges that these TEACH grants have been the subject of ongoing servicer abuse, as servicers have allegedly improperly converted the grants to loans in order to earn higher profits from back interest.

The DBO further alleges that the servicer did not cooperate with the DBO investigation, and specifically refused the DBO’s requests for documents concerning its compliance with California state law. The servicer has claimed that it need not comply with the DBO’s requests because the California law is pre-empted by the federal Higher Education Act, and that the records sought are owned by the U.S. Department of Education, thus they cannot be released under the Federal Privacy Act of 1974.

The DBO action seeks a preliminary and permanent injunction compelling the servicer to comply with California state law, as well as penalties​ of $2,500 per violation of California’s Student Loan Servicing Act.