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.

UPDATE ON BORROWER DEFENSE AND GAINFUL EMPLOYMENT

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.

In other recent litigation, the American Association of Cosmetology Schools gained some minor relief for cosmetology programs. Last week, Federal District Judge Rudolph Contreras blocked the U.S. Department of Education from enforcing part of the Gainful Employment rule against AACS member schools. Mr. Contreras said that the GE rule arbitrarily restricts the appeals process for cosmetology schools whose graduate’s earnings are often paid in cash that isn’t reported to the Internal Revenue Service. The judge ordered the Department to give affected cosmetology programs more flexibility to file earnings appeals and to extend the appeals deadline. The judge says the ruling is “narrowly tailored” and “avoids upending the entire regulation while giving affected AACS schools more options for appeal”.

For context it’s important to understand how many AACS schools are affected; according to the association’s preliminary injunction filings, just three. In a court filing last week, the U.S. Department of Justice had argued that continued implementation of the current regulation serves the public interest, and that allowing the alternative earnings appeal process to go forward may help inform the upcoming rulemaking process.

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 Gainful Employment (GE), but the popular headline in the news suggested incorrectly that GE was somehow also paused. That’s simply not the case and all of the current rules and requirements related to GE remain in effect.

Schools have until July 1st, 2017 to submit alternative earnings appeals to GE Debt-to-Earnings Rates and to provide the required GE program disclosures. Furthermore, schools are still expected to report data on all Title IV students enrolled during the 2016-2017 award year to NSLDS by October 1, 2017 (unless something else changes).

FINAL BORROWER DEFENSE TO REPAYMENT RULES

Borrower Defense Rule To Protect Students

On former President Barack Obama’s last day in office, the Department of Education released final procedural rules which updated ED’s hearing procedures for establishing liability against schools and colleges, and establishing procedural rules governing recovery proceedings under ED’s borrower defense regulations. Under the HEA, the Defense to Repayment process requires ED to discharge a Federal Direct Loan and in some cases FFEL loans, if a student loan borrower establishes, as a defense against repayment, that a school’s actions would give rise to a cause of action against the school. The procedural rules have only amended existing rules and further establish a new Federal standard and a process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school and thus are able to be implemented immediately, without negotiated rulemaking, or public comment.

These regulations establish the procedural rules that would govern such borrower defense and institutional recovery proceedings, and are designed to ensure that institutions are afforded a full and fair opportunity to defend themselves in such proceedings. If the Department determines that a borrower is eligible for relief under the borrower defense regulations, it has the authority to recover losses from an institution. The rules allow the Department to recover losses stemming from both individual borrower relief claims as well as for group claims such as class actions and suits brought by states on behalf of students.

According to the final rules published in the Federal Register, when a borrower defense claim is asserted, ED will notify the school in writing advising them of the pertinent facts, and its intent to recover funds. Schools will have a minimum of 20 days to respond in writing if they believe that ED should not recover funds, and whether they request a hearing or not. If a school chooses not to request a hearing, ED will simply review the school’s response, adjudicate the claim and notify the school of its final determination – however it works out. If a school requests a hearing, ED may either request a hearing date from the Office of Hearings and Appeals or simply withdraw its notice of intent to recover funds. If a school does not respond to the notice altogether, ED will move forward with the claim and seek to recover funds, so its important to point out that if the school wishes to request a hearing, it must do so in its written response or it loses its sole opportunity for a hearing.

It is also important to note that ED retains the right to gather information about claims brought by borrowers in any way it sees fit, including by conducting an examination of records, program review or even by subpoena. Students may be added to a group by ED at their discretion in cases where fraud, or misrepresentation on the part of a school have been deemed widespread as we’ve seen in the case of AIC, Corinthian and ITT. You can read the full Federal Register Notice here: http://bit.ly/2kHCXK0

Summary of Major Provisions of Borrower Defense Regulations

Students have always had the right to seek a discharge of federal Direct Loans they took out to attend a higher education institution if that school committed fraud. Prior regulations never established a process for doing so. State laws were uneven and complicated and often burdensome. As such, very few borrowers have ever asserted a borrower defense to repayment claim to have their loans discharged. Following the collapse of Corinthian College and the resulting large number of students that were seeking relief, the U.S. Department of Education quickly began creating a new borrower defense rule earlier this year to provide relief to borrowers as soon as possible.

The final Borrower Defense Regulations govern the William D. Ford Federal Direct Loan Program and create new standards and processes for determining when student loan borrowers can have their debt forgiven because of fraud or misrepresentation by a school. The regulations simplify the process of determining if a borrower has a defense to repayment by granting the Department the authority to investigate and adjudicate claims while making it easier for defrauded students to seek relief by providing a clear and transparent process.

Circumstances for Borrowers to Obtain Relief

  • A breach of contractual promises between a school and its students;
  • State or Federal court judgments against a school related to the loan or the educational services for which the loan was made; or
  • A substantial misrepresentation by the school about the nature of the educational program, the nature of financial charges, or the employability of graduates.

Statutes of Limitation

The final regulations provide for extensive-look back periods and state that there are no statutes of limitation for a discharge of borrowers’ loan balances still owed, or relief based on State or Federal court judgments. The statutes of limitation for borrower claims to recover payments that have already been made on loans made on or after July 1, 2017, are six years for claims based on misrepresentation and breach of contract.

Opportunity for Group-Wide Discharges

The final regulations establish a process to make it easier for the Department to provide relief to groups of borrowers. Under the new regulations, the Secretary can identify groups of  borrowers from individually filed applications or from any other source of information, and can include borrowers who may not have filed an application for relief, in the event that common facts and claims exist that apply to the group of borrowers. Where there were widespread misrepresentations, the Department may presume that borrowers relied on those misrepresentations without requiring an application.

Student and Taxpayer Protections

The final regulations establish a number of triggering and early-warning events that, if significant enough to cause a school to have a failing financial responsibility composite score, would automatically require the school to provide financial protection to the Department, such as a letter of credit (LOC), that totals at least 10 percent of the amount of Title IV funds received by the school over the previous year. The financial composite score is a measure of a school’s financial viability, with failing scores indicating that schools are at risk of shutting down because they can’t fulfill their financial obligations. The additions to the financial responsibility regulations have potential to put otherwise fiscally sound institutions in financial jeopardy. An excessive amount of automatic triggers could render an institution unable to meet its financial or administrative obligations.

Other triggers that are not tied to the school’s composite score but that indicate risk of closure includes:

  • The institution fails the 90/10 non-Federal revenue requirement;
  • The institution’s cohort default rate exceeds 30 percent two years in a row after appeal.

Early Warnings for Students

Institutions that are required to provide financial protection to the Department due to triggering events discussed above will have to disclose this fact to students.

Additionally, proprietary institutions will be required to include a warning in their advertising and marketing materials if their students have very poor loan repayment outcomes. These disclosure requirements could threaten enrollment, donor relationships and access to capital.

Increased Access to Closed School Discharges

Borrowers will receive accurate and complete information with regard to their eligibility for a closed school discharge earlier in the process and may receive automatic discharges if they do not subsequently re-enroll at another school. With these changes:

  • The Department will send closed school discharge applications and information to borrowers a second time, when their first loan payments are due;
  • Schools  with  teach-out  plans  must  also  provide  the  application for  closed  school  discharge,  as well as information on borrowers’ right to opt-out  of the  teach-out  and  instead  receive  a discharge; and
  • Eligible borrowers who were enrolled at a school that closed on or after November 2013 and who have not re-enrolled at another school within three years of that closure will automatically have their loans discharged.

Protections against Any Pre-dispute Arbitration Agreements

The final regulations ban any pre-dispute arbitration agreements, whether voluntary or mandatory, and whether or not they contain opt-out clauses. The final rule allows students to agree to arbitration of their claims, but only after disputes arise. Schools will no longer be able to forbid class actions for borrower defense-type claims.

Under the new regulations, Gags rules have been banned. More transparency on the outcomes of arbitration is also provided by requiring schools to notify the Secretary when arbitration and judicial claims are filed, and the decisions and awards issued in arbitration and in court proceedings.

Ensuring All Federal Student Loan Borrowers Have Access to Borrower Defense Relief

The final regulations recognize Federal Family Education Loan (FFEL) and Perkins loan borrowers’ ability to receive borrower defense relief through Direct Consolidation Loans. The final regulations also ensure that borrowers with FFEL Loans will have the same access to administrative forbearance as Direct Loan borrowers while their borrower defense claim is being evaluated, and this provision is designated for early implementation on November 1, 2016

False Certification

To provide loan discharge relief in instances where schools falsely certify their students’ high school diploma status, the final regulations specify that a borrower qualifies for a false certification discharge if the borrower reported to the school that the borrower did not have a high school diploma or its equivalent and did not satisfy applicable alternative to graduation from high school  requirements,  but the  school nevertheless arranged a loan. In these situations, the borrower will qualify for a false certification discharge if the school:

    • Falsified the borrower’s high school graduation status;
    • Falsified the borrower’s high school diploma; or
    • Referred the borrower to a third party to obtain a falsified high school diploma.

In addition, the final regulations amend the regulatory provisions granting a false certification discharge without an application to include cases in which the Department has information in its possession showing that the school has falsified the Satisfactory Academic Progress (SAP) of its students

Restoring Semesters of Pell Eligibility for Students Affected by Closed Schools

The Department is also announcing plans to restore semesters of Pell Grant eligibility for eligible students who were unable to complete their programs because their institution closed. This policy is expected to benefit several thousand students immediately, who were at or near their lifetime limit, as well as more students whose institutions might close moving forward, and those who hadn’t reached their limits but who will be able to go back to school if they choose. Congress reduced the lifetime eligibility further to 12 semesters.

Borrower Defense Claim Report

The report released today provides updated numbers on borrower defense claims received and announces the approval of more than 11,000 new claims based on the Department’s findings concerning Corinthian’s misleading job placement rates. To date, more than 15,000 claims have been approved, with a combined outstanding loan balance of $247 million.

http://www2.ed.gov/documents/press-releases/borrower-defense-final-regulations.pdf

Armageddon: Borrower Defense 

A meteor becomes a meteorite when an asteroid survives its passage through the atmosphere and strikes the earth. Often this impact is unnoticeable and occasionally, well, there are big ones. Sometimes really big ones. Devastating ones. And the bigger they are, the further away you can see them coming. You’d have to be living on another planet if you didn’t see this one coming…

  The U.S. Department of Education announced final “Borrower Defense” regulations earlier this month, a windfall for thousands of borrowers affected by the closure of Corinthian colleges seeking debt relief from their federal student loans.   According to the headlines, the new rules “protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct.”

Key Provisions:

Early Implementation of Automatic Closed School Discharge

Borrowers whose school closed on or after Nov. 1, 2013, and have not re-enrolled in another Title IV participating institution within three years will automatically have their loans discharged. The Department intends to designate this provision for early implementation as soon as operationally possible before July 1, 2017. Corinthian borrowers will, therefore, benefit from this streamlined process sooner.

 Banning All Pre-dispute Arbitration Agreements

Under the final regulations, Pre-dispute Arbitration agreements have been permanently banned regardless of whether such clauses are a condition of enrollment. These provisions allow students to choose where to pursue claims against an institution after claims arise but also prohibit institutions from banning class action lawsuits by students.

Determining Borrower Defense Loan Relief

The Department will determine in a reasonable and practical way the appropriate relief for a borrower defense claim, taking into account any educational benefit received.

It doesn’t sound so bad does it? No problem helping Corinthian students, and although arbitration agreements were originally intended to save everyone a little money, they were abused. No big deal losing them. I’m even okay with the Department adjudicating borrower defense claims. But what’s contained deep within the 927 page unofficial Fed Register Notice scares me. And it should terrify you if you’re in the school biz.

Now we aren’t talking an extinction level event here, but there is no question that some institutions aren’t going to survive the impact of these new provisions.

 The regulations that scare me the most:

 Triggers for Automatic Letter of Credit of at least 10% of the institutions revenue:

    •  Include failing 90/10,
    • Cohort Default Rate greater than 30%,
    • Failing Composite Score

Borrower Defense Claims can be filed by borrowers because of:

    • Contractual Breach –failing to deliver any service students have contracted for
    • Misrepresentation – including omissions defined as “any statement that omits information in such a way as to make the statement false, erroneous, or misleading”
    • State and Federal Court judgments against a school
    • Investigations by the Department of Ed and others

Debt-Relief Process still to be determined by separate “procedural rule”:

    • No timeline specified for “procedural rule”
    • Schools are already responsible for forgiven loans
    • Expected to define “substantial misrepresentation”
    • Rule will explain how schools will be permitted to defend themselves against allegations of fraud

  As we demonstrated in our Misrepresentation & Qui Tams webinar back in September, recent court cases have set new precedents for misrepresentation. Although these new regulations have not yet fully defined misrepresentation, you can bet that these recent court cases will help to inform the coming conversation. The discussions in the preamble to the new regulations already state that borrower defense claims can be made when a school fails to deliver any number of specific obligations to students. As such, almost anything is fair game for a borrower defense claim when a school makes specific misrepresentations. Mislead students about instructor qualifications, appropriateness of equipped laboratories, facilities, financial charges, programs or the employability of your school’s graduates, or otherwise breaches its contract and you risk possible BD claims. And then there’s outcomes, licensure pass rates, Gainful Employment, Default Rates, accreditation, Title IX…the list goes on. And although the for-profit model has been the one in the spotlight, these issues touch every college campus in the country.

Schools from ranging from the local mom and pop career school to the private liberal arts colleges with online degrees should begin discussing misrepresentation their staff on campus while taking time to review current processes. 

The appearance of compliance will not be enough to survive this asteroid.

Notice of Proposed Rulemaking – Borrower Defense to Repayment

Federal Student Aid released the Notice of Proposed Rulemaking (NPRM) on the Borrower Defense to Repayment Regulations. The proposed changes will change the conditions and the ways students can seek discharges on their federal loans. The NPRM is published so that folks like you can weigh in and comment on the proposed rules for determining whether a borrower has a defense to repayment on a federal direct loan based on an act or omission of a school, proposed revisions to the financial responsibility standards and the creation of new disclosure requirements for schools. Comments are due by 8/1/16. Read the full NPRM at http://bit.ly/29cnKug