Home Legal and Regulatory Issues The Resurrection of the Obama-Era Borrower Defense to Repayment Rule
The Resurrection of the Obama-Era Borrower Defense to Repayment Rule

The Resurrection of the Obama-Era Borrower Defense to Repayment Rule

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By Katherine Lee Carey, Special Counsel with the Education Regulatory Practice Group, Cooley LLP

A bit of history

Some of us are old enough to remember when the saga of the Borrower Defense to Repayment (BDR) regulations began … all the way back in 2015. Corinthian Colleges had just collapsed, and thousands of students across the country were shocked and frustrated that their school had closed without warning, leaving them with tuition debt and no degree to show for it. During that time, the Department of Education actively encouraged students to seek loan relief through closed school discharge, and the little known, and little utilized, borrower defense to repayment option. For those students who were still enrolled when their campus closed (or had been within the most recent 120 days), closed school discharge was likely a good option, but one that could only be employed if the student agreed to forego the credits they had already earned and start all over at a new school. For other students, who had withdrawn prior to the 120-day cut-off, or wanted to try and complete what they had started at a new institution, closed school discharge was not available.

Thus the Department encouraged students to pursue BDR by submitting documentation of “acts or omissions” of their institution that could be the basis for a claim that the debt should not be repaid. But this invitation created its own set of problems.

The rule didn’t explain what acts or omissions could be used, the regulation was not intended to serve as a loan discharge option (but rather as a defense in a collection proceeding against the borrower), and the regulations that governed it were so limited in scope, that the Department could not rely on them to handle the tens of thousands of applications that began pouring in. At that point, the Department announced its intent to enter negotiated rulemaking to rewrite the BDR regulations.

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What followed in early 2016 was an intense negotiated rulemaking session that highlighted the contrast between the various constituencies’ positions on the purpose of the rule: the Department’s plan to rewrite the BDR rule to include provisions far beyond what the statutory language envisioned in hopes of “avoiding” another precipitous closure; the consumer advocate position that affected borrowers should receive a discharge with minimal support for their claim; and institution and financial aid professionals’ concerns about how the proposed rules lacked due process and could actually cause harm to institutions struggling financially.

The resulting rule, published in October 2016 for a July 1, 2017, effective date, was extremely broad, and included provisions that redefined misrepresentation, changed the bases for making a BDR claim, established a process by which the Department could create groups of borrowers and represent them in seeking relief, created new measures of financial responsibility, banned arbitration and class action waivers and added new repayment rate disclosures that only applied to proprietary schools.

All of this from a single sentence statute from 1994.

A major shift

A mere week after the BDR rule was published in 2016, the outlook on its future changed dramatically. Because the rule was not yet effective, the change in administration to one that had been publicly espousing plans to roll back regulations seemed likely to alter the rule’s course, and it did. As part of the “regulatory reset” that the Trump administration initiated immediately upon taking office, the BDR rule was announced as one that would be “indefinitely delayed” while the Department considered its options for rewriting the rule. At the same time, lawsuits had been, or would be, filed both challenging the rule and challenging the Department’s delay.

In the meantime, the Department announced plans to convene a new negotiated rulemaking panel in early 2018 to rewrite the 2016 version of the rule.

In the intervening period, the lawsuits continued through the courts, and the Department published a new draft rule intended to replace the 2016 rule. However, a court ruling in September 2018 ordered that the 2016 rule become effective in 30 days unless the Department could provide additional support for its position in delaying the rule, a decision which coincided with the Department’s attempts to finalize the new rule. Ultimately, the Department did neither – it did not provide the court with additional information, thus making the 2016 rule immediately effective, and it also did not publish a new rule.

Here we are now

Following the court ruling in September 2018 making the delayed BDR regulations immediately effective, the Department had been promising guidance to institutions so they could understand its expectations for compliance. After six months, that guidance was finally issued on March 15, 2019, via an electronic announcement available at ifap.ed.gov. The rule is complicated, but can be broken into four main parts: the basis and process for the resolution of BDR claims, the financial responsibility “triggers,” the pre-dispute arbitration and class action waiver bans, and required disclosures. (For a refresher on the 2016 rule and all of its components, visit ed.cooley.com.) The following describes the Department’s recent guidance on each primary provision of the 2016 rule.

BDR claims

With its March 15, 2019, guidance, the Department indicated it will begin applying the 2016 BDR claim standards to all claims asserted by borrowers for loans disbursed after July 1, 2017. Any borrower who seeks a loan discharge under the BDR rules will need to establish the existence of one of the following bases in support of that claim:

  • A decision of a court or administrative tribunal in favor of the student (whether as a plaintiff, member of a class or covered party in a proceeding brought by a government agency against the school) in a contested proceeding.
  • The school’s breach of contract, which is generally the enrollment agreement, either in its express or implied terms, but may also include other documents such program brochures and catalogs that make up the entire contract with a student.
  • A “substantial misrepresentation” by the school or any of its representatives regarding the nature of the educational program, the nature of the financial charges, or the employability of graduates upon which the borrower reasonably relied to his or her detriment. The Department expanded its current definition of misrepresentation to encompass any statement that has the likelihood or tendency to “mislead under the circumstances” and further expanded this concept to include any statement that omits information that makes the statement false, erroneous or misleading, including such statements made unintentionally. The Department also clarified that the borrower must demonstrate actual and reasonable reliance to the borrower’s detriment, two important elements.

Addressed without much detail or fanfare in the announcement, the Department indicated that it will begin utilizing the process for gathering information from students and institutions and processing claims as prescribed in the 2016 rule, and the Jan. 19, 2017, procedural amendments that added the BDR process to Subpart G (Fine, Limitation, Suspension, and Termination Proceedings). This process includes the Department granting loan discharge relief to a student based on the student’s claim, followed by, at the Department’s discretion, an action to recoup the cost of the discharge from the institution.

Financial responsibility triggers

The 2016 rule included a long list of triggers that the Department believes indicate that an institution is not financially responsible, and thus could be at risk of closure. There were essentially three types of triggers in the 2016 rule: those that would, on their face, automatically indicate a lack of financial responsibility (e.g., a failing 90/10 score); those that would trigger a recalculation of the composite score – a result of less than 1.0 being an indicator of a financial responsibility issue (e.g., a liability created by a judicial settlement); and finally, discretionary triggers that the Department may determine are financial responsibility concerns (e.g., a material increase in Title IV receipts year-over-year.)

As part of the 2016 rule, institutions would be required to notify the Department within a certain timeframe (generally 10 days) that such a trigger had occurred, at which point the Department would determine what action was required of the institution to continue participation in the student aid programs.

The Department noted in its announcement that if one of these triggering events impacted an institution during its most recently audited fiscal year, it would have already been reported to the Department in the financial statements submitted for that year. Thus, this guidance approaches this process by requiring institutions to report the events based on one of three conditions: if the trigger occurred following the end of the last fiscal year for which financial statements have been submitted; if the issue has not been reported yet; or if it is ongoing. Specifically, the Department identifies that for the following events an institution needs to submit a separate notification, if the event occurred after the fiscal year-end for the most recent annual audit submission submitted:

  • The institution has a debt or liability arising from a final judgment/determination (judicial or administrative proceeding) or from settlement.
  • The institution is required by its accrediting agency to submit a teach-out plan.
  • For an institution with a composite score of less than 1.5, any withdrawal of an owner’s equity from the institution.
  • A lawsuit against the institution brought by a federal or state authority after July 1, 2017, on claims related to the making of a Direct Loan or the provision of educational services, which has been pending for more than 120 days and which is still pending as of the date of this announcement.
  • Any other type of lawsuit that is still pending as of the date of this announcement against the institution and was brought after July 1, 2017, where summary judgment motions have not been filed under certain circumstances or an institution’s summary judgment motion has been denied.
  • For violations of the 90/10 requirement, an institution must notify the Department 45 days after the end of the institution’s first fiscal year beginning on or after July 1, 2017.
  • For publicly-traded institutions, certain actions by the SEC or stock exchange on which the institution’s stock is listed, institutions must notify the Department of all such events occurring after July 1, 2017.
  • For state licensing or authorizing agency citations and accreditor show-cause orders or accreditor-imposed probation status, institutions must notify the Department of all such events occurring after July 1, 2017, unless they have been resolved as of the date of this announcement.
  • For violations of a requirement in a loan agreement, institutions must notify the Department of all such events occurring after July 1, 2017.

Institutions must report these triggers within 60 days of ED’s announcement (and for future events, within the timeframe identified in the rule.) Note that the list provided by the Department in their guidance does not cover all the possible triggers, so be sure to review the full regulation to ensure you are aware of all potentially reportable events.

Arbitration and class action waiver bans

Prior to explaining the steps institutions should be taking to implement this element of the 2016 rule, the Department points out that institutions are not completely prohibited from including a pre-dispute arbitration or class action waiver as part of the enrollment process, because the ban is only applicable to claims made in relation to a borrower defense claim (meaning, relating to an act or omission by the school in relation to the making of a Direct Loan or the attendant educational services.) Nor does the rule ban the use of arbitration once a claim has been made, as long as the borrower agrees to pursue an alternative dispute resolution process. As this guidance was included in the original rule’s preamble, this was obviously intended to clarify that the very presence of such a provision is not a per se violation.

The Department then goes on to reiterate what the rule requires, giving a 60-day window to comply. Institutions can approach implementing this provision in a number of ways: 1) remove arbitration and class action waiver language altogether (whether in the enrollment agreement or in a separate agreement); 2) amend the arbitration/class action provisions using the Department’s required language; 3) issue notice to student borrowers that arbitration and class action waivers cannot be enforced in borrower defense-based claims, again using the Department’s required language, at the earlier of either exit counseling or when a student makes a demand for arbitration; or 4) institutions can issue a blanket notice to all students who signed a pre-dispute arbitration or class action waiver agreement, immediately.

This guidance also addresses pending disputes.

The Department points out that any student borrower who is currently engaged in the arbitration process with an institution based on a pre-dispute arbitration provision or class action waiver is not obligated to continue to pursue relief through the arbitral process.

Further, if an institution is engaged in the arbitration process currently, it must provide the student the required notice about the unenforceability of the provisions within 10 days of the Department’s announcement.

Finally, as required by the 2016 BDR rule, institutions must report all judicial and arbitration claims pending as of July 1, 2017, and initiated thereafter, and submit the associated records to the Department within 90 days of the announcement.

Disclosures

The 2016 BDR rule also included two disclosure provisions, one relating to a “failing” repayment rate (which only applies to proprietary schools) and one regarding when an institution experienced a financial “trigger” event. For both provisions, the Department indicates in the March 15 announcement that further consumer testing will be completed to determine how best to communicate information to students, and that a future Federal Register notice will indicate what information will be required in those publications, and the method of delivery.

What does the future hold?

Although the 2016 BDR rule is now in effect, its future is still unclear. There is still pending litigation, initiated by the California Association of Private Postsecondary Schools, challenging the BDR rule. And now that the rule is in effect, there is a chance that additional litigation will be in the pipeline. The Department has also indicated that it intends to either reissue a Notice of Proposed Rulemaking for the previously issued 2018 version of the BDR rule in the coming months to potentially allow for a July 1, 2020, implementation, or, if necessary reconvene a negotiated rulemaking panel to develop yet another version. If a new negotiated rulemaking is necessary, the soonest that could possibly result in a new rule would be July 2021. Even with these variables and the potential for changes, it seems likely that the current version will remain in effect until at least July 2020. Until then, schools must do the work to truly understand this rule, and operationalize its requirements.

In the meantime, as the great Tom Petty once sang … the waiting is the hardest part.

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Katherine Lee Carey

KATHERINE “KATE” LEE CAREY’S  practice focuses on the legal, accreditation, administrative and regulatory interface with education institutions and companies that provide services to the education industry. She provides clients with interpretation and implementation guidance on legal and regulatory changes, including impact analysis and strategic plans to implement complex regulatory requirements and compliance structures. Kate has extensive experience in the development and implementation of legislative and policy priorities at the federal and state levels and in accreditation and licensing matters. Prior to joining Cooley, Kate was the general counsel and vice president for government affairs for a private university in Southern California. She is a member and regular presenter with the California Association of Private Postsecondary Schools (CAPPS), Career Education Colleges and Universities (CECU), and the National Association of College and University Attorneys (NACUA) as well as serving as chair of the advisory committee for the California Bureau for Private Postsecondary Education (BPPE).



Contact Information: Katherine Lee Carey // Special Counsel // Cooley LLP // 858-550-6089 // kleecarey@cooley.com // www.cooley.com/people/katherine-lee-carey // www.cooley.com/services/practice/education // www.ed.cooley.com // Social Media: https://www.linkedin.com/in/kleecarey/

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