with the school, "substantial functions or responsibilities normally performed by lenders before making FFEL program loans." Id. As will be discussed later in this opinion, a key consequence flows from the establishment of such a relationship.
B. FTC HOLDER RULE
The Federal Trade Commission's ("FTC") "Preservation of Consumers' Claims and Defenses" rule, which is commonly referred to as the "Holder Rule", precludes a seller of goods or services under certain circumstances from accepting as payment a consumer credit contract unless it includes a clause by which claims and defenses against the seller are made available against the holder.
See 16 C.F.R. § 433.1, et. seq. Plaintiff asserts that her student loan contracts are void for failure to include the notice of claims and defenses required by the FTC Holder Rule. She contends that the non-inclusion of the FTC Notice in the student loan notes violated the New Jersey Consumer Fraud Act (NJCFA), N.J.S.A. § 56:8-2 et. seq., and that the FTC Holder Rule should be implied into the notes under either Federal law or the NJCFA. Moreover, plaintiff asserts that the absence of the FTC Notice renders the student loan notes unconscionable and contracts of adhesion under New Jersey law.
Conversely, the non-school defendants assert that the language of the FTC Act, 15 U.S.C. § 41, et. seq., and of the Truth in Lending Act (TILA), 15 U.S.C. § 1601, et. seq., make clear that, prior to 1994
, the FTC Holder Rule was inapplicable to student loan transactions. First, the non-school defendants note that the regulatory language indicates that the FTC Holder Rule incorporates TILA, and Regulation Z, 12 C.F.R. § 226, et. seq. Second, they point out that "Congress expressly exempted student loans from the purview of TILA in 1982, see 15 U.S.C. § 1603(6) (1982), and the FTC expressly exempted student loans from Regulation Z soon thereafter." Jackson v. Culinary School of Washington, 788 F. Supp. 1233, 1249 (D.D.C. 1992) (Jackson I)(citing 12 C.F.R. § 226.3(f) (1983)). Hence, based on these statutory and regulatory amendments, the non-school defendants, like the defendants in Jackson I, contend that the FTC Holder Rule did not apply to student loans prior to 1994. Moreover, even assuming that the FTC Holder Rule did apply to student loan notes before 1994, the non-school defendants still maintain that plaintiff cannot obtain relief because the FTC Notice was omitted from the contracts at issue.
The FTC Holder Rule, as first promulgated in 1975, was clearly intended to apply to school loans. The FTC noted that loans pertaining to vocational schools, in particular, was an area where the rule was needed.
In its Statement of Basis and Purpose, the FTC declared that "the rule expressly applies to credit contracts arising from sales of services, such as trade or vocational school agreements...." Federal Trade Commission, Preservation of Consumers' Claims and Defenses, Final Regulations, Proposed Amendment and Statement of Basis and Purpose, 40 Fed.Reg. 53506, 53524 (1975). Furthermore, the staff guidelines stated that, "services such as ... vocational training are covered." Guidelines on Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses, 41 Fed. Reg. 20022, 20024 (1976).
Although the 1982 amendments to TILA exempted student loans from the Act's coverage, neither the language nor legislative history of TILA or the FTC Holder Rule indicate that Congress or the FTC intended to include any and all subsequent amendments to TILA in the Holder Rule's definitional terms. Jackson I, 788 F. Supp. at 1250. As the court explained in Jackson I :
In amending [TILA] in 1982, Congress did not purport to limit the FTC's ability to protect against consumer fraud. The legislative history of [TILA] suggests that student loans were removed from the coverage of that Act and also exempted from state law disclosure rules because the Higher Education Act already governed the lenders' disclosure obligations with respect to student loans. See S.Rep. No. 641, 97th Cong., 2d Sess. 91 (1982), U.S. Code Cong. & Admin. News 1982, pp. 3054, 3134. Nothing in the legislative history of [TILA] indicates Congress made a determination that student loans, in toto, should be removed from the protection of consumer protection laws.
Id. at 1250-51 (citing 40 Fed. Reg. 53,506 (Nov. 18, 1975)). (emphasis added). Moreover, the FTC's own rulemaking "does not indicate that the FTC desired the definitional terms for the Holder Rule to change depending upon subsequent exemptions applied to [TILA]." Id. (citing 40 Fed. Reg. 53,506 (Nov. 18, 1975)). Hence, based on the standard rules of statutory construction, the definitional terms
in the FTC Holder Rule should be read without regard to the 1982 amendments to TILA. Id. Such an analysis makes manifest that the FTC Holder Rule has always applied to guaranteed student loans.
The contention that the Holder Rule did not become applicable to student loans until 1994 is incorrect. The FTC, not the Department of Education, has the authority to adopt, modify, or interpret the FTC Holder Rule. The FTC has repeatedly stated that the Holder Rule as adopted in 1975 applies to student loans. In 1992, Congress transferred the responsibility for drafting loan forms from guarantor and lenders to the Secretary. In 1993, the Secretary, in response to this directive, required that the language incorporating the terms of the FTC Holder Rule be included in promissory notes evidencing student loans. Thus, the 1994 action of the Secretary did not have the effect of imposing a new requirement. Rather, it required that an existing requirement be complied with.
Notwithstanding the application of the FTC Holder Rule to plaintiff's student loan transactions, the non-school defendants assert that the omission of the FTC Notice from the student loan notes precludes plaintiff from obtaining relief under the rule. The movants essentially contend that the FTC Holder Rule can only be given effect if the lender actually includes the FTC Notice as an express term of the contract.
Furthermore, they assert that the Notice cannot be read into the contract where the lender omits the Notice even if the lender was aware or should have been aware that the loan is subject to the FTC Rule.
Notwithstanding the conclusion that the FTC Holder Rule was applicable to plaintiff's student loans, the parties agree that violation of the rule does not give rise to a federal private cause of action. Whether the absence of the § 433 notice in plaintiff's loan instruments gives rise to a state law claim raises issues of state law and preemption. These issues will be discussed in subsequent sections of this opinion.
Plaintiff asserts that because CLC "originated" her student loans within the meaning of 34 C.F.R. 682.200(b), the lenders and assignees take the promissory notes subject to all the claims and defenses she has against the school. In response, the non-school defendants aver that no origination relationship existed because everything that was done by CLC was either mandated or permitted by the HEA. Furthermore, the non-school defendants argue that the alleged key consequence of an origination relationship, i.e. lender and assignee liability, has not been promulgated as a rule pursuant to the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., but rather has only been contained in a series of pronouncements by the Secretary of Education. Hence, they maintain that they cannot be held liable as a matter of law.
"Origination" is defined by federal regulations governing the student loan program as:
A special relationship between a school and a lender, in which the lender delegates to the school, or to an entity or individual affiliated with the school, substantial functions or responsibilities normally performed by lenders before making loans. In this situation, the school is considered to have 'originated' a loan made by the lender.
The Secretary determines that 'origination' exists if, for example --