## Facts

- Congress administers a federal student loan program under Title IV of the Higher Education Act, with private entities often using third-party servicers to perform administrative functions.
- In 1992, Congress authorized the Secretary of Education to issue regulations for third-party servicers, including financial responsibility standards and assessment of liabilities for program violations.
- The Department conducted negotiated rulemaking for the regulations and, during that process, discussed limiting servicers’ liability (including a proposed cap tied to servicer fees).
- The negotiated rulemaking did not produce a consensus adopting a fee-based cap on servicer liability.
- After notice-and-comment rulemaking, the Department issued regulations making servicers jointly and severally liable with program participants for losses stemming from violations of governing statutes, regulations, or program agreements, without a fee-based cap.
- The servicers claimed the Department acted in bad faith during negotiated rulemaking by allegedly committing to follow a consensus and then abandoning the liability-cap concept in the final rules.

## Issues

1. Whether alleged bad faith during negotiated rulemaking, including withdrawing a proposed liability cap, can invalidate regulations issued through notice-and-comment rulemaking.
2. Whether the Higher Education Act amendments authorized the Secretary to impose joint and several liability on third-party servicers, and whether the regulations were arbitrary or otherwise unlawful under APA review.

## Decision

- The Seventh Circuit affirmed the district court’s judgment upholding the regulations.
- The court held that negotiated rulemaking does not bind the agency to negotiation positions or alleged commitments where the final rule is adopted through the APA process.
- The court held that the 1992 amendments granted broad authority to regulate third-party servicers, including imposing joint and several liability for program violations.
- The court concluded the liability regime was a reasonable policy choice and not arbitrary or capricious.

## Legal Principles

- Negotiated rulemaking produces proposals for later APA notice-and-comment rulemaking; it does not operate as a contract that restricts the agency’s rulemaking discretion.
- A rule is not invalid merely because the agency altered or abandoned positions taken during negotiations; the central inquiries are statutory authorization and APA arbitrariness review.
- Statutory authority to regulate third-party servicers’ financial responsibility and to assess liabilities for program violations can support joint and several liability designed to protect federal funds.
- Courts defer to an agency’s policy choice among reasonable alternatives when the agency acts within delegated authority and provides a rational justification.

## Conclusion

The Seventh Circuit upheld Education Department regulations making third-party student-loan servicers jointly and severally liable for losses from program violations, rejecting claims that negotiation conduct or earlier liability-cap proposals constrained the agency’s final rule under the APA.


USA Grp. Loan Servs., Inc. v. Riley, 82 F.3d 708 (7th Cir. 1996)