The U.S. Department of Education finalized its proposal to rescind the Obama administration’s “Borrower Defense” rule issued in November 2016, replacing it with “Institutional Accountability Regulations” (the “Regulations”) effective July 1, 2020. The Regulations will significantly change the “Borrower Defense” rule. Such changes include once again allowing pre-dispute arbitration agreements.
The Regulations will apply to student loans disbursed on or after July 1, 2020. Loans disbursed prior to that date are still governed by either the pre-November 2016 regulations that do not prohibit arbitration or class-action waivers, or the “Borrower Defense” rule that prohibited both mandatory and voluntary pre-dispute arbitration agreements, whether or not they contain opt-out clauses.
Under the new Regulations, if a school receiving Title IV assistance under the Higher Education Act makes a “plain language disclosure” available to students and the public, it can require federal student loan borrowers to agree to pre-dispute arbitration agreements or class action waivers as a condition of enrollment.
Further, the Regulations create a new federal standard for asserting a “borrower defense” regarding both Direct Loans and loans repaid by Direct Consolidated Loans. A borrower must base their defense to payment (or request to recover payments made, referred to as “affirmative” or “offensive” claims) on the financial harm resulting from a misrepresentation by a school to a borrower of a material fact regarding (a) enrollment or continuing enrollment at the school, or (b) the provision of educational services for which the loan is made on which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan. A borrower must set forth their claim, whether defensive or affirmative, within three years of the end of the borrower’s enrollment at the school alleged to have made the misrepresentation. Borrowers are held to a preponderance of the evidence standard when bringing forward such claims.