The revised rule narrows the types of misrepresentations subject to borrower relief claims and adds procedural protections for institutions defending against claims.
On July 25, 2018, the U.S. Department of Education released a long-awaited Notice of Proposed Rulemaking (NPRM) for a revised Borrower Defense to Repayment (BDR) regulation that rewrites the 2016 Final BDR rule established by the Obama administration. The revised rule narrows the types of misrepresentations subject to borrower relief claims and adds procedural protections for institutions defending against claims. The public can preview the proposed BDR rule on the Department’s website.
Public comments are due within 30 days of publication in the Federal Register.
The effective date of the revised rule would be July 1, 2019. It applies to all Title IV participating institutions of higher education, whether public, nonprofit or proprietary. The proposed federal complaint process at the Department is driven by student borrower claims. Institutions of all types should become familiar with the new rule and then file comments regarding any areas of concern during the open comment period before the rule goes final.
The proposed rule applies to all Direct Loans originated after July 1, 2019, and would:
- Establish a new federal standard for federal student loan borrowers to raise as a defense against repayment of a loan that an institution misrepresented information;
- Amend the prior BDR definition of a misrepresentation to only include acts or omissions made with intent to deceive or with reckless disregard for the truth;
- Establish a process at the Department for filing borrower defense claims by individuals;
- Eliminate the 2016 process for group borrower defense claims;
- Allow the use of mandatory predispute arbitration agreements and class action lawsuit waivers by schools, with certain consumer disclosure requirements;
- Establish a five-year window following a decision on a relief claim for the Department to seek recoupment for the amount of the discharge from an institution;
- Amend the financial responsibility standards to include actions and events that would trigger a requirement that a school provide financial protection, such as a letter of credit, to insure against future borrower defense claims and other liabilities to the Department;
- Amend the false certification discharge provisions; and
- Amend the closed school discharge provisions.
The Department proposes a new federal standard to govern BDR claims on loans made after July 1, 2019, based on alleged misrepresentation. The uniform standard would be based on a misrepresentation made with knowledge of its false, misleading or deceptive nature, or with a reckless disregard for the truth.
“A borrower may assert as a defense to repayment an eligible institution’s misrepresentation—that is, a statement, act, or omission by the school to the borrower that is (i) false, misleading, or deceptive, (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (iii) directly and clearly related to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was made. To relate to the ‘provision of educational services,’ a misrepresentation must relate to the borrower’s program of study.”
The proposed standard would not provide for a defense to repayment based on breaches of contract or other judgments.
The proposed rule would establish a process for the assertion and resolution of borrower defenses to repayment for loans first disbursed on or after July 1, 2019. The Department has left open the question whether to allow “affirmative” claims that allow borrowers to file a fraud claim without first having defaulted on their federal student loan or to accept only “defensive” claims made by borrowers who are already fighting the federal government’s effort to collect on their loan.
The Department will not allow group process or group discharge. The rule adds additional opportunity for institutions to provide information in response to a claim to counter allegations of misrepresentation.
The Department proposes to maintain the previous “preponderance of the evidence” standard that was in the 2016 BDR rule with the caveat that the Department reserves the right to impose a higher evidentiary standard if it turns out in practice that the preponderance standard permits too many unjustified claims to be filed. The Department is seeking further comment on the appropriate standards.
The Department would provide schools and borrowers with opportunities to provide evidence and arguments when a defense to repayment application has been filed and to provide an opportunity for each to respond to the other’s submitted evidence.
The rule would require a borrower to sign an attestation to ensure that financial harm is not the result of the borrower’s workplace performance, disqualification for a job for reasons unrelated to the education received, a personal decision to work less than full time or not at all, or the borrower’s decision to change careers.
Time Limits for Recoupment
The Department proposes to limit the period of time during which the Secretary may recoup funds discharged under these regulations to five years. This would apply to loans disbursed on or after July 1, 2019. The five years would be from the date of the final determination on a borrower’s defense to repayment application.
Closed School Discharge
The Department proposes to amend the closed school discharge regulations to specify that if a closing school provides an opportunity to complete the program of study approved by the school’s accrediting agency and, if applicable, the school’s state authorizing agency, the borrower would not qualify for a closed school discharge. This means that the Department would no longer provide “closed school” discharges to students if the school offers an approved “teach-out” or a wind-down of their program. Also, the current window of 120 days prior to school closure for students enrolled at a school to seek closed school discharge is extended to 180 days prior to closure.
On false certification, the Department is proposing regulatory language that when a borrower provides an institution an attestation of his or her high school graduation status for purposes of admission to the institution, the borrower may not subsequently qualify for a false certification discharge based on not having a high school diploma.
Predispute Arbitration Agreements or Class-Action Waivers
The rule would not prohibit predispute arbitration agreements or class-action waivers. But because predispute arbitration agreements or class-action waivers may limit the availability of certain alternative means of dispute resolution, the Department would require schools that use predispute arbitration agreements or class-action waivers to make a plain language disclosure of those requirements to prospective and enrolled students and place that disclosure on its website where information regarding admissions and tuition and fees is presented.
The NPRM would establish mandatory and discretionary triggering events that could have a material adverse impact on an institution’s financial condition that warrant financial protection.
The mandatory triggering events are:
- Liabilities arising from defense to repayment discharges adjudicated by the Secretary;
- Liabilities from a final judgment or determination arising from an administrative action or judicial proceeding;
- Withdrawal of owner’s equity, except for a withdrawal that is made to satisfy tax liabilities;
- An SEC order suspending trading or revoking the registration of the institution’s securities or suspending trading on a national securities exchange;
- The national exchange on which the institution’s securities are traded notifies the institution that it is not in compliance with listing requirements and as a result its securities are delisted either voluntarily or involuntarily.
Under the provisions of the NPRM, the Department would require financial protection if the amount of the liability or withdrawal of owner’s equity causes the institution’s composite score to fall below 1.0. For the SEC and exchange actions, financial protection would be required when the Department is informed of those actions.
The discretionary triggering events are:
- An institutional accreditor issues a show-cause order that would result in the withdrawal, revocation or suspension of the institution’s accreditation;
- The institution violated a provision of a security or loan agreement and under the terms of that agreement a default or delinquency occurs that enables or requires the creditor to impose restrictions, sanctions or penalties in response to that violation;
- The institution violated a state licensing or authorizing requirement and is notified that its licensure or authorization will be withdrawn or terminated if it does not take steps to come into compliance with that requirement;
- A proprietary institution did not derive at least 10 percent of its revenue from non-Title IV funds for one year; and
- The institution’s two most recent cohort default rates are 30 percent or more—unless the institution files a challenge, request for adjustment or appeal and that action or request remains pending or results in reducing its default rate for either of those years or precludes the rates from resulting in a loss of edibility or provisional certification.
Under the NPRM, the Department would review the reasons and circumstances giving rise to these triggering events and any information provided by the institution before determining whether to require financial protection.
This new proposed BDR rule has both risks and benefits for Title IV institutions. It should be reviewed carefully and institutions should consider using the open 30-day comment period to file public comments in support of key provisions or opposed to provisions, which may be harmful (including recommendations for alternative approaches to the issue, as appropriate).