On 19 January, the U.S. Department of Education published regulations to establish procedural rules governing certain proceedings under the Department's borrower defense regulations and to update the Department's related hearing procedures for actions to establish liability against a higher education institution. The regulations were effective immediately on 19 January, but the Department will accept comments on or before 20 March 2017 and may conduct additional rulemaking based on comments received from the public.

On 1 November 2016, the Department published regulations to establish a new federal standard and a process for determining whether a Direct Loan borrower has a defense to repay on a Direct Loan based on an act or omission of an institution (the borrower defense regulations). Those regulations are effective 1 July 2017. Under the borrower defense regulations, if the Department determines that a borrower is eligible for relief, the Department has the authority to recover monetary losses from the institution whose conduct gave rise to the borrower defense. These new regulations supplement the borrower defense regulations by establishing procedural rules that will govern the two-part borrower defense and recovery proceedings where the Department asserts borrower defense claims on behalf of a group of borrowers. The new regulations do not address the process the Department will use to evaluate individual borrower defense claims; that process is set forth in the borrower defense regulations at 34 C.F.R. 685.222(e).

The new regulations establish the following process for resolution of group borrower defense claims:

-- Notice: A designated Department official sends the institution a notice by certified mail that declares the Secretary's intent to determine the validity of borrower defense claims on behalf of a group and to recover from the institution for related losses. The notice will include a "statement of facts and law" and will specify that the Secretary will take action to recover amounts from the institution on a set date at least 20 days after mailing of the notice unless the institution provides a written response and/or requests a hearing. The notice also will specify whether the designated Department official intends to proceed with an action in two phases (i.e., a determination whether an institution's act or omission gave rise to a valid borrower defense claim, and subsequently a determination of the amount of borrower defense relief) or a single action that combines those phases.

-- Institutional response: The Secretary will not take action to recover amounts if the institution either (a) sends to the designated Department official by the set date a written response indicating why the Secretary should not recover from the institution, and/or (b) requests a hearing: -

- If the institution submits a written response but does not request a hearing, the designated Department official will notify the institution whether the Secretary will take the proposed recovery action and, if so, the date of such action and the amount of the recovery. The Department may collect the recovery from "any available funds," including but not limited to offsetting the amounts against funds to be provided to an institution through Title IV programs in which the institution participates or drawing on a letter of credit.

-- If the institution submits a written response and requests a hearing, the designated Department official may, in the official's sole discretion, withdraw the notice or transmit the response and request for a hearing to the Department's Office of Hearings and Appeals, which will set the place and date for the hearing, which must be at least 15 days after the designated Department official receives the institution's request.

-- Borrowers are not permitted to intervene or appear in the course of the proceedings, except as witnesses put forth by either party.

-- Prehearing conference: The hearing officer may convene a prehearing conference if he or she believes it would be useful, or if the conference is requested by the designated Department official who brought the proceeding or by the institution. The prehearing conference is designed to allow the parties to settle or narrow the scope of the dispute. At this stage, either party may also make a motion for summary disposition of the action.

-- Hearing: The hearing--which may be conducted in person, by telephone, or by video conference--is intended to be an orderly presentation of arguments and evidence. The procedures to be used in the hearing are set by the hearing official, and formal rules of evidence and procedures used in a court of law generally are not applicable (e.g., discovery is not permitted), except that discussions of settlement are not admissible. Either party may call witnesses, including no more than three qualified expert witnesses. The hearing is transcribed, and copies of the transcription are made available to the parties.

The designated Department official generally has the burden of persuasion for all claims: the Department must prove the merit of the claims it asserts on behalf of members of the group, and the Department also must prove the merit of claims it asserts in connection with losses already adjudicated and discharged through the individual process but aggregated in the group process for purposes of assessing monetary liability. However, for a borrower defense claim based on a substantial misrepresentation (see 34 CFR 682.222(d)), the designated Department official has the burden of persuasion regarding the substantial misrepresentation, and the institution has the burden of persuasion in establishing any offsetting value of the education received by the students (see 34 CFR 685.222(i)(2)(i)).

-- Appeal: The decision of the hearing officer becomes final unless, within 30 days after the initial decision is issued and received by both parties, the institution or designated Department official appeals the decision to the Secretary. Where the borrower defense and recovery proceeding is conducted in two phases, the hearing official first determines whether the institution is liable for the act or omission and issues an initial decision on the question of liability only. If a party appeals the decision from the liability phase, the Secretary may affirm, modify, or reverse the initial decision or may remand the case to the hearing official for further proceedings.

The new regulations also amend the Department's existing regulations governing the process used to assess a fine, limitation, suspension, or termination against an institution by adding procedures through which the Department may seek to recover a monetary liability assessed against an institution under the borrower defense regulations. The process outlined in the new regulations could be used when the Department brings an action for liability against an institution under the new borrower defense regulations, which are effective 1 July 2017, or those regulations' predecessor.

Institutions should review the new regulations to understand how they will be expected to respond to a group borrower defense claim and how such claims will be adjudicated. Institutions should submit any comments to the Department on or before 20 March.