BORROWER DEFENSE TO REPAYMENT CLAIMS ARE COMING

The regulations under the 2016 Borrower Defense To Repayment established a standard procedure for ED to follow when evaluating borrower defense to repayment discharge claims for loans that were first disbursed prior to July 1, 2020.
When a borrower makes a claim and attempts to have their loans discharged, ED will notify the school and give them a chance to respond to the borrower’s allegations. In a recent electronic announcement, FSA advised that they’ll begin sending claim information to schools to review and respond to within the next few weeks. This information will likely include a letter from ED with instructions for school personnel to follow, and a copy of the borrower’s discharge application and any supporting evidence. Institutions will have 30 days to respond to any allegations and during that time can provide supporting evidence to ED if they choose to dispute the borrower’s allegations.
Earlier this year new Final Rules pertaining to Borrower Defense were published but won’t got into effect until July 2020. Those rules however will only apply to new loans disbursed on or after July 1, 2020

 

NEW INSTITUTIONAL ACCOUNTABILITY CHANGES

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.

BORROWER DEFENSE FINAL REGULATIONS RELEASED

The United States Department of Education released final regulations for institutional accountability related to Borrower Defense to Repayment loan discharges for Federal Direct Loans. The new regulations revise the standards the Department will use to adjudicate borrower defense to repayment claims and will take effect for all new loans first disbursed on or after July 1, 2020, while preserving the standards for loans that were issued under prior regulations. The Final Regulations preserve three borrower defense periods: 1) Loans first disbursed prior to July 1, 2017, which are subject to pre-2016 regulations; 2) Loans first disbursed on or after July 1, 2017 and before July 1, 2020, which are subject to final regulations published on November 1, 2016, and 3) Loans first disbursed on or after July 1, 2020, which are subject to the 2019 regulations.

Under the new regulations, borrowers who are misled and can demonstrate financial harm caused by their institution can file a claim to have their loan discharged. The Department’s new rules give borrowers up to three years from the time they leave school to file a claim. Claims will be reviewed by ED staff using the “preponderance of the evidence” standard. Both borrowers filing claims and institutions that the borrower attended will be required to provide supporting evidence to ED which will determine if a discharge is warranted.

In the Final Regulation, the Department defines a “misrepresentation” as: a statement, act, or omission by an eligible school to a borrower that is (a) false, misleading, or deceptive, (b) that was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (c) that directly and clearly relates to either 1) enrollment or continuing enrollment at the institution; or 2) the provision of educational services for which the loan was made.

According to ED, some examples of misrepresentation include:

  • actual licensure passage rates that are different from those in marketing materials, website, and communications;
  • actual employment rates materially different from those in the institution’s marketing materials, website, and communications;
  • institutional selectivity or rankings, student admission profiles, or institutional rankings that are materially different from those in marketing materials, websites, and communications;
  • the institution does not possess certifications, accreditation, or approvals for programs that it represents that it possesses; representations regarding the educational resources provided;
  • representations regarding the transferability of credits that, in fact, do not transfer to other institutions;
  • representations regarding the employability or specific earnings of graduates without evidence;
  • representations regarding the availability, amount, or nature of financial assistance provided;
  • representations regarding the amount, method, or timing of payment of tuition and fees that is materially different from the amount, method, or timing of actual tuition and fees;
  • representations regarding whether an institution’s courses or programs are endorsed by employment agencies, industry members, government officials, former students, US armed forces, or others without permission; and
  • representations regarding the prerequisites for enrollment in a course or program.

Within these “Institutional Accountability” regulations, the Department also amended several other regulations including regulations for class action waivers, pre-dispute arbitration agreements, and rules for closed-school and false certification discharges.

The new regulations will permit institutions to use class-action waivers and arbitration agreements if an institution discloses information about their internal dispute resolution and arbitration processes to students as part of in the borrower’s entrance counseling.

The Final Regulations also allow for the borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure. For borrowers claiming a false certification by their school they can also apply and must complete an application.


This information is for informational and educational purposes only.

To learn more about how your institution can adjust its processes and reporting to minimize its risk of these federal student aid compliance issues, please contact us.

UPDATE ON BORROWER DEFENSE

On June 15th the Department of Education published a series of Federal Register Notices and announcements related to several key regulations passed under the Obama Administration.

The notices announced the postponement of certain provisions of the Borrower Defense Regulations (BDR) following a lawsuit by the California Association of Postsecondary Schools which challenged a number of the Borrower Defense regulations. The administration determined that in light of the pending litigation, it was necessary to postpone the regulations until the matter is decided in court. And CAPPS V. DeVos has some teeth.

The Federal Register Notice on Borrower Defense also announced the Department’s intent to establish two new Negotiated Rulemaking Committees and a timeline for public comments and public hearings for, BDR and also Gainful Employment (GE).

Read our recent update on Gainful Employment here.

Read our recent update on the Regulatory Reform Task Force and Call for Public Comments here.

 

REGULATORY REFORM TASK FORCE UPDATE

Department of Education Regulatory Reform Task Force

Back in February the President signed Executive Order 13777 to “reduce regulatory burden”. As required, ED has created a Regulatory Reform Task Force (RRTF) to review regulatory and sub-regulatory guidance throughout the department. The RRTF has been working on identifying regulations that should be changed or eliminated and has published a request for public comments in the Federal Register.

Word on the Hill is that the RRTF has identified more than 150 regulations that may be appropriate for repeal, replacement or modification.

So far however, few public comments have been submitted.

I know one rule that I’d like to see repealed – The selective Service Registration Requirements that require men to register as a condition of receiving Federal Student Aid. Have a rule in mind? The public comment period is open until August 21, 2017. I submitted my comments and you can find more information about submitting your comments here.