Pelfrey v. Educational Credit Management Corp.

Decision Date10 February 1999
Docket NumberNo. CV-98-PT-2422 E.,CV-98-PT-2422 E.
Citation71 F.Supp.2d 1161
CourtU.S. District Court — Northern District of Alabama

Earl P. Underwood, Jr., Underwood & Associates, Anniston, AL, for Patricia Pelfrey, plaintiff.

Mark R. Sure, Keating & Sure Ltd., Chicago, IL, for Educational Credit Management Corporation, defendant.


PROPST, Senior District Judge.

This cause comes to be heard on defendant Educational Credit Management Corporation's ("ECMC") Motion to Dismiss, which has been treated by this court as a motion for summary judgment, filed November 30, 1998. Plaintiff Patricia Pelfrey (hereinafter "Pelfrey" or "plaintiff"), on behalf of herself and a nationwide class, filed a complaint on September 25, 1998, alleging that ECMC violated the federal Fair Debt and Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), in attempting to collect on her student loan. Defendant claim that it is a guaranty agency operating pursuant to the regulations of the Federal Family Education Loan Program ("FFELP"), and that the FDCPA does not apply to such agencies. ECMC thus contends the Pelfrey's claim should be dismissed.

I. Facts

The facts of the case relevant to the summary judgment motion are not complex. Plaintiff obtained a student loan from the Altus Bank on February 24, 1989 in the amount of $2,625.00. The loan was originally guaranteed by the now defunct Alabama Guaranteed Student Loan Program ("AGSLP"), a state guaranty agency. On April 12, 1992, plaintiff filed for bankruptcy under Chapter 13 of the Bankruptcy Code. Plaintiff's loan went into default on or about May 4, 1992. On May 7, 1992, Altus Bank submitted a claim to the AGSLP. Pursuant to its agreement with the bank, AGSLP paid the default claim to Altus on August 19, 1992. AGSLP filed a proof of claim in the bankruptcy proceeding on October 1, 1992 in the amount of $2,952. During the pendency of the proceedings and pursuant to the plaintiff/debtor's Chapter 13 plan, the Chapter 13 trustee made payments on the student loan totaling $960.18.

While Pelfrey's bankruptcy case was pending, AGSLP, as part of its winding up, assigned her account, on August 1, 1996, to ECMC. Plaintiff's bankruptcy case was discharged on January 16, 1998. Following the discharge, during the months of February and March of 1998, ECMC made several phone calls and mailed several letters to the plaintiff with the intention of collecting on the debt. Pelfrey alleges that ECMC violated the provisions of the FDCPA by sending her collection letters which lacked the consumer warning and verification notice required by §§ 1692(e) and (g) of the FDCPA, and which "threatened action that cannot be legally taken." Rather than arguing that the correspondence did not violate the strictures of the FDCPA, defendant contends, as stated above, that it is a guaranty agency and that the FDCPA does not apply to guaranty agencies, such as itself, operating under the auspices of the FFELP.

II. Guaranty Agencies and the FFELP

In 1965, Congress, in response to a perceived need for financial assistance to students in higher education, passed the Higher Education Act of 1965, 20 U.S.C. § 1071, et seq., ("HEA"). The purpose of the HEA is to "keep the college door open to all students of ability," regardless of socioeconomic background. Under the HEA, eligible lenders make guaranteed loans on favorable terms to students or parents to help finance student education. The loans are typically guaranteed by guaranty agencies (state or private) and ultimately by the government.

The HEA provides aid to students through federally-sponsored loan programs or through grants. Federally-sponsored loan programs include: (1) Federal Perkins Loan Programs; (2) Federal Family Education Loan Programs, which include Federal Stafford Loans (subsidized and unsubsidized), Federal Plus (Parent) Loans, and Federal Consolidation Loans; (3) Federal Direct Student Loan Programs, which include the Direct Stafford Loans, Direct Unsubsidized Stafford Loans, and Direct Plus (Parent) Loans. Federal grants include: (1) Federal Pell Grants; and (2) Federal Supplemental Education Opportunity Grants.

The FFELP is authorized under Title VI, Part B, of the HEA.1 As stated above, the FFELP is an umbrella term for four different guaranteed student loan programs. Participating lending institutions, such as Altus Bank, use their own funds to make loans to qualified borrowers attending eligible postsecondary schools. The loans are guaranteed by state agencies, such as the AGSLP, or non-profit organizations, such as ECMC, and are subsidized and reinsured by the United States Department of Education. 20 U.S.C. §§ 1071, 1087-1. The objective of the student loan programs is to make accessible further schooling for students of limited means by encouraging lenders to make funds available to students of limited means throughout the country. Private lenders are encouraged to loan money to students, secondary market participants are encouraged to purchase the loans, and guaranty agencies are created or encouraged to guarantee them.

Lenders participating in the program receive two types of federal subsidy payments on loans made to qualified borrowers. First, the Department of Education ("DOE") pays the holder of a qualifying loan the interest that accrues on the loan during specified periods. Second, the DOE pays the holder, for the life of the loan, an additional subsidy, called a special allowance. Pursuant to the governing FFELP regulations, lenders must satisfy due diligence requirements with regard to the making, disbursing, servicing and collecting of student loans. See 34 C.F.R. §§ 682.206-208, 682.411. Loan-making duties, in particular, entail processing the loan application and other required forms, approving the borrower for a loan, determining the loan amount, explaining to the borrower his or her rights and responsibilities, and completing and having the borrower sign the promissory note.

The guarantee agency, when used by the DOE, is the link between the lender and the DOE. It administers the program at the state and local levels. Its primary function is to issue guaranties to lenders on qualifying loans, for which it collects insurance premiums paid by the lenders but passed on to the borrowers. Guaranty agencies must insure one hundred percent of the amount of these loans. If a borrower defaults in repaying her loan, her guaranty agency pays the holder of the loan pursuant to its guaranty commitment after the holder satisfied its due diligence collection requirements and filed a claim with the agency. The holder may be either the eligible lender or another eligible financial institution to whom the loan has been properly assigned. 34 C.F.R. § 682.401(b)(9). Upon payment of the holder's claim, the guaranty agency procures an assignment of the loan and is thereafter charged with attempting to collect the unpaid balance of the loans directly from the defaulting borrower. 20 U.S.C. § 1078(c); 1080a(c)(4).

The guaranty agencies that are authorized to participate in the program are reinsured by the DOE. Pursuant to § 428(c) of the HEA, the DOE may enter into reinsurance agreements with qualifying guaranty agencies to reimburse them for between 80% and 100% of losses incurred in honoring default claims on qualifying loans if they act in accordance with the procedures outlined in the regulations promulgated under the HEA and, specifically, the FFELP. 20 U.S.C. § 1078(c). According to Larry Oxendine, the Director of DOE's Guarantor and Lander Oversight Staff,2 the DOE usually reimburses guarantors under the insurance agreement promptly after they pay default claims. The agencies then hold and collect the loans subject to the right of the DOE to demand assignment when the DOE determines the Federal interests so require. 20 U.S.C. § 1078(c)(1)(A). Thus, guaranty agencies have a continuing obligation to pursue collection activities even after the Secretary pays reinsurance claims. 34 C.F.R. § 682.410(b)(6). Under 20 U.S.C. § 1070(b) the DOE is given broad enforcement authority to implement the provisions of the HEA and the regulations passed thereunder. See L'ggrke v. Benkula, 966 F.2d 1346, 1347-48 (10th Cir.1992) (stating that, pursuant to Title IV of the HEA and the regulations promulgated thereunder, 34 C.F.R. §§ 668 et seq., the Secretary of Education has authority to enforce the provisions of the Act.)

Under the DOE's regulations governing the FFELP guarantors must deposit into their reserve funds all payments and earnings arising from their guaranty program operations. 34 C.F.R. § 682.410(a)(1). The defaulted student loans acquired by the guarantors upon payment of default claims to lenders constitute, according to Oxendine, a significant portion of the assets of guarantors' reserve funds. The assets comprising the reserve fund are deemed by law to be "property of the United States" and may only be used to pay guaranty program expenses and contingent liabilities. 20 U.S.C. § 1072(g)(1). The Secretary of Education may, under 20 U.S.C. § 1072(g)(1)(A), (B), (C), order a guarantor to cease any expenditure or transfer of reserve fund assets that he determines to be improper, and may direct the guarantor to transfer some or all of the assets to the government or to another guarantor as may be necessary to support loan program administration. The DOE, according to Oxendine, therefore considers guaranty agencies to be fiduciaries with regard to the administration of the funds. Additionally, according to Oxendine's statement, the agreements between ECMC and the DOE in this situation actually involve an even greater degree of governmental control over the agency's reserve fund, in that ECMC must, on an annual basis, liquidate the majority of its reserves and return them to the DOE, leaving only an amount sufficient to cover six months...

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