Schools are no longer permitted to rely on binding pre-dispute arbitration agreements and class action waivers with Direct Loan borrowers in connection with so-called “borrower defense claims.”

This is the first of a series of Alerts focused on the U.S. Department of Education’s 2016 Borrower Defense to Repayment (BDR) Rule, first issued by the Obama administration, and the March 15, 2019, guidance regarding the implementation of that rule.

This Alert addresses the actions that postsecondary institutions participating in the federal Direct Loan Program must take now and in the near future if they require students to enter into binding pre-dispute arbitration agreements or class action waivers with the institution. Below, we address how the guidance may affect ongoing arbitrations and current and future arbitration agreements. We will cover the financial responsibility reporting requirement triggers in our next Alert.

The March 15, 2019, guidance makes clear that the 2016 BDR Rule is now in effect. Accordingly, schools are no longer permitted to rely on binding pre-dispute arbitration agreements and class action waivers with Direct Loan borrowers in connection with so-called “borrower defense claims.” Borrower defense claims are those based on an act or omission of the institution attended by the claimant student that relates to the making of a Direct Loan for enrollment at the institution or the provision of educational services for which the loan was provided. The guidance excludes, for example, personal injury tort claims and sexual and racial harassment claims from being categorized as borrower defense claims. Other claims, such as educational malpractice claims, may also be excluded, so long as they do not meet the definition of a borrower defense claim.

Schools should keep in mind certain key deadlines as they work with counsel to determine the best path forward for complying with the 2016 BDR Rule.

March 25, 2019 – Deadline for schools to notify claimants involved in pending arbitration of a borrower defense claim that the school will not use a pre-dispute arbitration agreement to stop the student from bringing a lawsuit. The guidance provides the language to be used in these notices. Schools should consult with counsel if they are unsure whether a pending arbitration involves a borrower defense claim.

May 14, 2019 – Deadline for schools to either stop using binding pre-dispute arbitration agreements and class action waivers or to include the language from the regulation removing borrower defense claims from the scope of these agreements. Schools should consult with counsel about amending such arbitration agreements if they seek to retain them for claims other than borrower defense claims.

May 14, 2019 – Deadline for providing students who signed a binding pre-dispute arbitration agreement with a notice that the school will not rely on the agreement for borrower defense claims. The notice must be provided no later than upon exit counseling or the filing of the school’s initial response to a demand for arbitration or service of a complaint involving a borrower defense claim.

June 13, 2019 – Deadline for submitting records to U.S. Department of Education relating to arbitrations and lawsuits involving borrower defense claims that are pending as of, or initiated after, July 1, 2017.