As part of the “Borrower Defense to Repayment Final Rules (dubbed institutional accountability final rules), The U.S. Department of Education amended the Student Assistance General Provisions regulations. New rules were added establishing conditions and events that could have an adverse, material effect on an institution’s financial condition, thus warranting protections for students and taxpayers. These are broken up into two categories; mandatory and discretionary financial responsibility triggering events.
Unlike the Borrower Defense to Repayment regulations included in this package which will go into effect on July 1, 2020, the amendments below are scheduled for immediate implementation.
Financial Responsibility – Mandatory and Discretionary Triggering Events
The Final Regulations establish mandatory and discretionary triggering events that have, or could have, a materially adverse impact on an institution’s financial condition that warrant financial protection.
The mandatory triggering events are:
1) Liabilities arising from a settlement, final judgment from a court, or final determination arising from an administrative action or proceeding initiated by a Federal or State entity;
2) Withdrawal of owner’s equity from the institution, unless the withdrawal is a transfer to an entity included in the affiliated entity group upon whose basis the institution’s composite score was calculated;
3) For publicly traded institutions, the Securities and Exchange Commission issues an order suspending or revoking the registration of the institution’s securities or suspends trading of the institution’s securities on any national securities exchange, the national securities exchange notifies the institution that it is not in compliance with the exchange’s listing requirements and the institution’s securities are delisted, or the SEC is not in timely receipt of a required report and did not issue an extension to file the report; and
4) For the fiscal year reported, when an institution is subject to two or more discretionary triggering events, those events become mandatory triggering events, unless a triggering event is resolved before any subsequent event(s) occurs.
Discretionary triggering events in the Final Regulations include:
1) The institution’s accrediting agency issues an order, such as a show-cause order or similar action, that if not satisfied could result in the loss of institutional accreditation;
2) The institution violated a provision or requirement in a security or loan agreement with a creditor;
3) The institution’s State licensing or authorizing agency notified the institution that it has violated a State licensing or authorizing agency requirement and that the agency intends to withdraw or terminate the institution’s licensure or authorization, if the institution does not take the steps necessary to come into compliance;
4) The institution’s failure to meet the 90/10 requirement;
5) As calculated by the Secretary, the institution has high annual dropout rates; and
6) The institution’s two most recent official cohort default rates are thirty percent or greater, unless the institution files a challenge, which results in reducing below thirty percent the official cohort default rate for either of or both of those years or precludes the rates from either or both years from resulting in a loss of eligibility or provisional certification.
Finally, the Final Regulations also update the definitions and terms used to calculate an institution’s composite score and the composite score methodology to align with changes in FASB accounting standards. Existing leases will be grandfathered, and the new regulations only apply to new leases. Existing long-term debt rules are also being grandfathered, but the new rules require tie-ins to plant, property, and equipment new long-term debt. In addition, the Final Regulations revise Appendices A and B of the financial responsibility regulations to conform with the updates and changes in accounting standards.