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Chae v. SLM Corp.

January 25, 2010

ANN CHAE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED; WILLIAM COAKLEY, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED; HOON KOO, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED; CARLOS A. PINEDA, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
SLM CORPORATION, DBA SALLIE MAE; SALLIE MAE SERVICING CORPORATION; SALLIE MAE, INC., DEFENDANTS-APPELLEES, AND UNITED STATES OF AMERICA, PLAINTIFF-INTERVENOR-APPELLEE.



Appeal from the United States District Court for the Central District of California Manuel L. Real, District Judge, Presiding, D.C. No. 2:07-cv-02319-R-RC.

The opinion of the court was delivered by: Gould, Circuit Judge

FOR PUBLICATION

Argued and Submitted November 5, 2009 -- Pasadena, California

Before: Ronald M. Gould and Carlos T. Bea, Circuit Judges, and William T. Hart,*fn1 District Judge.

OPINION

Appellants urge error in the district court's grant of summary judgment rejecting student borrowers' claims that challenge loan servicer methods of calculating interest, assessing late fees and setting the repayment start date on their loans. We must determine the preemptive scope of the statutes and regulations governing lenders and third-party loan servicers under the Federal Family Education Loan Program of the Higher Education Act. We conclude that the student borrowers' claims are preempted by this federal law and we affirm the district court's grant of summary judgment on that ground.

I.

The Higher Education Act (HEA) of 1965, now codified at 20 U.S.C. §§ 1001-1155, was passed "to keep the college door open to all students of ability, regardless of socioeconomic background." Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1030 (9th Cir. 2009) (internal quotation marks omitted). As part of that effort, Congress established the Federal Family Education Loan Program (FFELP), a system of loan guarantees meant to encourage lenders to loan money to students and their parents on favorable terms.*fn2 See 20 U.S.C. §§ 1071-1087-4; Rowe, 559 F.3d at 1030. The Secretary of the Department of Education (DOE) is authorized to "pre-scribe such regulations as may be necessary to carry out the purposes" of the FFELP. 20 U.S.C. § 1082(a)(1). Under that authority, the DOE has promulgated detailed regulations. See 34 C.F.R. §§ 682.100-682.800. We preliminarily review how the FFELP operates, and thereafter explain the procedural history of this case.

A.

The FFELP regulates a series of transactions related to student loans. The first layer of transactions occurs between lenders and student or parent borrowers. Eligible banks, credit unions, schools, government agencies, non-profits, and others may make loans to students. 34 C.F.R. § 682.101(a). The lenders must abide by the terms of the FFELP, and the DOE may terminate the participation of any lender who does not follow the rules. 34 C.F.R. §§ 682.700-.713. Lenders may assign their loans to third-party loan servicers, in which case the loan servicer must also abide by the FFELP regulations. See 20 U.S.C. § 1082(a)(1); 34 C.F.R. §§ 682.203, 682.700(a).

A second layer of FFELP transactions involves "guaranty agencies" that guarantee the lenders' loans. A guaranty agency is a "State or private nonprofit organization that has an agreement with the Secretary under which it will administer a loan guarantee program under the Act." 34 C.F.R. § 682.200(b); see also 34 C.F.R. § 682.400 (requiring that a guarantee agency enter into four specific agreements with the DOE before it may participate in the FFELP). When a borrower defaults on his or her student loan and the lender is unable to recover the amount despite due diligence, the lender recoups its loss from the guarantor. 34 C.F.R. § 682.102(e)(7) ("If a borrower defaults on a loan, the guarantor reimburses the lender for the amount of its loss. The guarantor then collects the amount owed from the borrower.").

A third level of FFELP transactions takes place between the guaranty agencies and the DOE. Guaranty agencies must enter agreements with the DOE in order to participate in the FFELP. 20 U.S.C. § 1078(c). After an agreement is entered, the DOE acts as a secondary insurer on the loans guaranteed by the agency. 20 U.S.C. §§ 1071(a)(1)(D), 1078(c). When a lender assigns its guaranty agency a defaulted loan, the guaranty agency must take diligent steps to recover the default amount, but, having done so, may then recover up to one hundred percent of its losses from the DOE if it is unable to collect the debt. 34 C.F.R. §§ 682.404(a), 682.410(b)(6).

The FFELP governs four types of loans. Three of these are at issue in this appeal.*fn3 First, Stafford Loans are made to students, 20 U.S.C. §§ 1071(c), 1078, 1078-8, and may be either subsidized or unsubsidized. For subsidized Stafford Loans, the government pays interest on the loan during specified periods, such as when the student borrower is attending school on at least a part-time basis. 20 U.S.C. § 1078(a)-(b). For unsubsidized Stafford Loans, the student is responsible for all accrued interest from the time the loan is disbursed and the government pays none of it. 20 U.S.C. § 1078-8(e)(3). The second type of loan here involved is a Consolidation Loan, which allows the borrower to consolidate multiple loan obligations with one lender. See 20 U.S.C. § 1078-3(a). The third type of loan falls under the Supplemental Loans to Students Program, which applied to periods of student enrollment beginning before July 1, 1994, and has since been discontinued. 34 C.F.R. § 682.100(a)(2).

Congress directs the DOE to issue common application forms and promissory notes to be used by FFELP participants.

20 U.S.C. §§ 1082(m)(1)-(4). These common forms include a free application form, master promissory note, and common loan deferment form. Id. The purpose of the common forms is to standardize the terms and formatting to help applicants understand their loan obligations. Id. § 1082(m)(1)(B).

B.

The plaintiffs in this diversity action-Ann Chae, William Coakley, Hoon Koo, and Carlos A. Pineda-took out Stafford, Supplemental, and Consolidated Loans from various lenders between 1993 and 2006. Sallie Mae, Inc. (Sallie Mae) was the loan servicer for each of the plaintiffs' loans.*fn4 In its capacity as a third-party servicer, Sallie Mae performed administrative and servicing functions related to the loans, such as issuing billing statements, collecting and processing payments, assessing and collecting late fees, and giving notices to borrowers required by FFELP regulations.

The plaintiffs sued Sallie Mae, on behalf of a purported class of similarly-situated borrowers, complaining about three practices Sallie Mae uses in servicing student loans. First, the plaintiffs challenge Sallie Mae's use of the "daily simple interest" or "simple daily interest" method of calculating interest. This calculation method applies a borrower's payment on the date the payment is received, not the date the payment is due, such that interest accrues based on the number of days since the last payment. This means that borrowers who make payments before the due date pay less overall interest, while borrowers who make payments after the due date pay more overall interest. The plaintiffs claim that the terms of the loan agreements prevent Sallie Mae from using the daily simple method of calculating interest. Instead, the plaintiffs allege that their loan contracts require Sallie Mae to use the "installment method." Under the installment method, the total amount of interest is fixed and does not vary depending on the date when payment is remitted. The plaintiffs in their complaint asserted that Sallie Mae's failure to use the installment method conflicts with the FFELP statutes and regulations, offends the terms of the loan documents and otherwise violates California law.

Second, the plaintiffs challenge Sallie Mae's practice of assessing late fees. When permitted by the borrower's promissory note, Sallie Mae charges a late fee of up to six percent of each installment remitted more than fifteen days after it is due. The plaintiffs allege that California law prohibits Sallie Mae from ...


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