81 FR 39329 - Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program
DEPARTMENT OF EDUCATION
Federal Register Volume 81, Issue 116 (June 16, 2016)
Page Range
39329-39422
FR Document
2016-14052
The Secretary proposes to amend the regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to 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. We propose to also amend the Direct Loan Program regulations by prohibiting participating schools from using certain contractual provisions regarding dispute resolution processes, such as mandatory pre-dispute arbitration agreements or class action waivers, and to require certain notifications and disclosures by schools regarding their use of arbitration. We propose to also amend the Direct Loan Program regulations to codify our current policy regarding the impact that discharges have on the 150 percent Direct Subsidized Loan Limit. We also propose to amend the Student Assistance General Provisions regulations to revise the financial responsibility standards and add disclosure requirements for schools. Finally, we propose to amend the discharge provisions in the Federal Perkins Loan (Perkins Loan), Direct Loan, Federal Family Education Loan (FFEL), and Teacher Education Assistance for College and Higher Education (TEACH) Grant programs. The proposed changes would provide transparency, clarity, and ease of administration to current and new regulations and protect students, the Federal government, and taxpayers against potential school liabilities resulting from borrower defenses.
Federal Register, Volume 81 Issue 116 (Thursday, June 16, 2016)
[Federal Register Volume 81, Number 116 (Thursday, June 16, 2016)]
[Proposed Rules]
[Pages 39329-39422]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2016-14052]
[[Page 39329]]
Vol. 81
Thursday,
No. 116
June 16, 2016
Part II
Department of Education
-----------------------------------------------------------------------
34 CFR Parts 30, 668, 674, et al.
Student Assistance General Provisions, Federal Perkins Loan Program,
Federal Family Education Loan Program, William D. Ford Federal Direct
Loan Program, and Teacher Education Assistance for College and Higher
Education Grant Program; Proposed Rule
Federal Register / Vol. 81 , No. 116 / Thursday, June 16, 2016 /
Proposed Rules
[[Page 39330]]
-----------------------------------------------------------------------
DEPARTMENT OF EDUCATION
34 CFR Parts 30, 668, 674, 682, 685, and 686
RIN 1840-AD19
[Docket ID ED-2015-OPE-0103]
Student Assistance General Provisions, Federal Perkins Loan
Program, Federal Family Education Loan Program, William D. Ford Federal
Direct Loan Program, and Teacher Education Assistance for College and
Higher Education Grant Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Secretary proposes to amend the regulations governing the
William D. Ford Federal Direct Loan (Direct Loan) Program to 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. We propose to also amend the Direct Loan Program regulations by
prohibiting participating schools from using certain contractual
provisions regarding dispute resolution processes, such as mandatory
pre-dispute arbitration agreements or class action waivers, and to
require certain notifications and disclosures by schools regarding
their use of arbitration. We propose to also amend the Direct Loan
Program regulations to codify our current policy regarding the impact
that discharges have on the 150 percent Direct Subsidized Loan Limit.
We also propose to amend the Student Assistance General Provisions
regulations to revise the financial responsibility standards and add
disclosure requirements for schools. Finally, we propose to amend the
discharge provisions in the Federal Perkins Loan (Perkins Loan), Direct
Loan, Federal Family Education Loan (FFEL), and Teacher Education
Assistance for College and Higher Education (TEACH) Grant programs. The
proposed changes would provide transparency, clarity, and ease of
administration to current and new regulations and protect students, the
Federal government, and taxpayers against potential school liabilities
resulting from borrower defenses.
DATES: We must receive your comments on or before August 1, 2016.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments submitted by fax or by email or those submitted after
the comment period. To ensure that we do not receive duplicate copies,
please submit your comments only once. In addition, please include the
Docket ID at the top of your comments.
If you are submitting comments electronically, we strongly
encourage you to submit any comments or attachments in Microsoft Word
format. If you must submit a comment in Portable Document Format (PDF),
we strongly encourage you to convert the PDF to print-to-PDF format or
to use some other commonly used searchable text format. Please do not
submit the PDF in a scanned format. Using a print-to-PDF format allows
the U.S. Department of Education (the Department) to electronically
search and copy certain portions of your submissions.
Federal eRulemaking Portal: Go to www.regulations.gov to
submit your comments electronically. Information on using
Regulations.gov, including instructions for accessing agency documents,
submitting comments, and viewing the docket, is available on the site
under ``Help.''
Postal Mail, Commercial Delivery, or Hand Delivery: The
Department strongly encourages commenters to submit their comments
electronically. However, if you mail or deliver your comments about the
proposed regulations, address them to Jean-Didier Gaina, U.S.
Department of Education, 400 Maryland Ave. SW., Room 6W232B,
Washington, DC 20202.
Privacy Note: The Department's policy is to make all comments
received from members of the public available for public viewing in
their entirety on the Federal eRulemaking Portal at
www.regulations.gov. Therefore, commenters should be careful to include
in their comments only information that they wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: For further information related to
borrower defenses, Barbara Hoblitzell at (202) 453-7583 or by email at:
[email protected]. For further information related to false
certification and closed school loan discharges, Brian Smith at (202)
453-7440 or by email at: [email protected]. For further information
regarding institutional accountability, John Kolotos or Greg Martin at
(202) 453-7646 or (202) 453-7535 or by email at: [email protected] or
[email protected].
If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-
800-877-8339.
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of This Regulatory Action
The purpose of the borrower defense regulation is to protect
student loan borrowers from misleading, deceitful, and predatory
practices of, and failures to fulfill contractual promises by,
institutions participating in the Department's student aid programs.
Most postsecondary institutions provide a high-quality education that
equips students with new knowledge and skills and prepares them for
their careers. However, when postsecondary institutions make false and
misleading statements to students or prospective students about school
or career outcomes or financing needed to pay for those programs, or
fail to fulfill specific contractual promises regarding program
offerings or educational services, student loan borrowers may be
eligible for discharge of their Federal loans.
The proposed regulations would give students access to consistent,
clear, fair, and transparent processes to seek debt relief; protect
taxpayers by requiring that financially risky institutions are prepared
to take responsibility for losses to the government for discharges of
and repayments for Federal student loans; provide due process for
students and institutions; and warn students, using plain language
issued by the Department, about proprietary schools at which the
typical student experiences poor loan repayment outcomes--defined in
these proposed regulations as a proprietary school with a loan
repayment rate that is less than or equal to zero percent, which means
that the typical borrower has not paid down at least a dollar on his or
her loans--so that students can make more informed enrollment and
financing decisions.
Section 455(h) of the Higher Education Act of 1965, as amended
(HEA), authorizes the Secretary to specify in regulation which acts or
omissions of an institution of higher education a borrower may assert
as a defense to repayment of a Direct Loan. Current regulations at
Sec. 685.206(c) governing defenses to repayment have been in place
since 1995 but, until recently, rarely used. Those regulations specify
that a borrower may assert as a defense to repayment any ``act or
omission of the school attended by the student that would give rise to
a cause of action against the school under applicable State law.''
In response to the collapse of Corinthian Colleges (Corinthian) and
the flood of borrower defense claims submitted by Corinthian students
[[Page 39331]]
stemming from the school's misconduct, the Secretary announced in June
2015 that the Department would develop new regulations to establish a
more accessible and consistent borrower defense standard and clarify
and streamline the borrower defense process to protect borrowers and
improve the Department's ability to hold schools accountable for
actions and omissions that result in loan discharges.
Consistent with the Secretary's commitment, we propose regulations
that would specify the conditions and processes under which a borrower
may assert a defense to repayment of a Direct Loan, also referred to as
a ``borrower defense,'' based on a new Federal standard. The current
standard allows borrowers to assert a borrower defense if a cause of
action would have arisen under applicable state law. In contrast, the
new Federal standard would allow a borrower to assert a borrower
defense on the basis of a substantial misrepresentation, a breach of
contract, or a favorable, nondefault contested judgment against the
school for its act or omission relating to the making of the borrower's
Direct Loan or the provision of educational services for which the loan
was provided. The new standard would apply to loans made after the
effective date of the proposed regulations. The proposed regulations
would establish a process for borrowers to assert a borrower defense
that would be implemented both for claims that fall under the existing
standard and for later claims that fall under the new, proposed
standard. In addition, the proposed regulations would establish the
conditions or events upon which an institution is or may be required to
provide to the Department financial protection, such as a letter of
credit, to help protect students, the Federal government, and taxpayers
against potential institutional liabilities.
The Department also proposes a regulation that would prohibit a
school participating in the Direct Loan Program from requiring, through
the use of contractual provisions or other agreements, arbitration to
resolve claims brought by a borrower against the school that could also
form the basis of a borrower defense under the Department's
regulations. The proposed regulations also would prohibit a school
participating in the Direct Loan Program from obtaining agreement,
either in an arbitration agreement or in another form, that a borrower
waive his or her right to initiate or participate in a class action
lawsuit regarding such claims and from requiring students to engage in
internal institutional complaint or grievance procedures before
contacting accrediting or government agencies with authority over the
school regarding such claims. The proposed regulations also would
prohibit a school participating in the Direct Loan Program from
requiring, through the use of contractual provisions or other
agreements, arbitration to resolve claims brought by a borrower against
the school that could also form the basis of a borrower defense under
the Department's regulations. The proposed regulations would also
impose certain notification and disclosure requirements on a school
regarding claims that are voluntarily submitted to arbitration after a
dispute has arisen.
Summary of the Major Provisions of This Regulatory Action: For the
Direct Loan Program, we propose new regulations governing borrower
defenses that would--
Clarify that borrowers with loans first disbursed prior to
July 1, 2017, may assert a defense to repayment under the current
borrower defense State law standard;
Establish a new Federal standard for borrower defenses,
and limitation periods applicable to the claims asserted under that
standard, for borrowers with loans first disbursed on or after July 1,
2017;
Establish a process for the assertion and resolution of
borrower defense claims made by individuals;
Establish a process for group borrower defense claims with
respect to both open and closed schools, including the conditions under
which the Secretary may allow a claim to proceed without receiving an
application;
Provide for remedial actions the Secretary may take to
collect losses arising out of successful borrower defense claims for
which an institution is liable; and
Add provisions to schools' Direct Loan program
participation agreements that, for claims that may form the basis for
borrower defenses--
[ssquf] Prevent schools from requiring that students first engage
in a school's internal complaint process before contacting accrediting
and government agencies about the complaint;
[ssquf] Prohibit the use of mandatory pre-dispute arbitration
agreements by schools;
[ssquf] Prohibit the use of class action lawsuit waivers; and
[ssquf] To the extent schools and borrowers engage in arbitration
in a manner consistent with applicable law and regulation, require
schools to disclose to and notify the Secretary of arbitration filings
and awards.
The proposed regulations would also revise the Student Assistance
General Provisions regulations to--
Amend the definition of a misrepresentation to include
omissions of information and statements with a likelihood or tendency
to mislead under the circumstances. The definition would be amended for
misrepresentations for which the Secretary may impose a fine, or limit,
suspend, or terminate an institution's participation in title IV, HEA
programs. This definition is also adopted as a basis for alleging
borrower defense claims for Direct Loans first disbursed after July 1,
2017;
Clarify that a limitation may include a change in an
institution's participation status in title IV, HEA programs from fully
certified to provisionally certified;
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;
Require proprietary schools with a student loan repayment
rate that is less than or equal to zero percent to provide a
Department-issued plain language warning to prospective and enrolled
students and place the warning on its Web site and in all promotional
materials and advertisements; and
Require a school to disclose on its Web site and to
prospective and enrolled students if it is required to provide
financial protection, such as a letter of credit, to the Department.
The proposed regulations would also--
Expand the types of documentation that may be used for the
granting of a discharge based on the death of the borrower (``death
discharge'') in the Perkins, FFEL, Direct Loan, and TEACH Grant
programs;
Revise the Perkins, FFEL, and Direct Loan closed school
discharge regulations to ensure borrowers are aware of and able to
benefit from their ability to receive the discharge;
Expand the conditions under which a FFEL or Direct Loan
borrower may qualify for a false certification discharge;
Codify the Department's current policy regarding the
impact that a discharge of a Direct Subsidized Loan has on the 150
Percent Direct Subsidized Loan Limit; and
Make technical corrections to other provisions in the FFEL
and Direct Loan Program regulations and to the regulations governing
the Secretary's debt compromise authority.
[[Page 39332]]
Please refer to the Summary of Proposed Changes section of this
notice of proposed rulemaking (NPRM) for more details on the major
provisions contained in this NPRM.
Costs and Benefits: As further detailed in the Regulatory Impact
Analysis, the benefits of the proposed regulations include: (1) An
updated and clarified process and the creation of a Federal standard to
streamline the administration of the borrower defense rule and to
increase protections for students as well as taxpayers and the Federal
government; (2) increased financial protections for the Federal
government and thus for taxpayers; (3) additional information to help
students, prospective students, and their families make educated
decisions based on information about an institution's financial
soundness and its borrowers' loan repayment outcomes; (4) improved
conduct of schools by holding individual institutions accountable and
thereby deterring misconduct by other schools; (5) improved awareness
and usage, where appropriate, of closed school and false certification
discharges; and (6) technical changes to improve the administration of
the title IV, HEA programs. Costs include paperwork burden associated
with the required reporting and disclosures to ensure compliance with
the proposed regulations, the cost to affected institutions of
providing financial protection, and the cost to taxpayers of borrower
defense claims that are not reimbursed by institutions.
Invitation to Comment: We invite you to submit comments regarding
these proposed regulations.
To ensure that your comments have maximum effect in developing the
final regulations, we urge you to identify clearly the specific section
or sections of the proposed regulations that each of your comments
addresses, and provide relevant information and data whenever possible,
even when there is no specific solicitation of data and other
supporting materials in the request for comment. We also urge you to
arrange your comments in the same order as the proposed regulations.
Please do not submit comments that are outside the scope of the
specific proposals in this NPRM, as we are not required to respond to
such comments.
We invite you to assist us in complying with the specific
requirements of Executive Orders 12866 and 13563 and their overall
requirement of reducing regulatory burden that might result from these
proposed regulations. Please let us know of any further ways we could
reduce potential costs or increase potential benefits while preserving
the effective and efficient administration of the Department's programs
and activities.
During and after the comment period, you may inspect all public
comments about the proposed regulations by accessing Regulations.gov.
You may also inspect the comments in person at 400 Maryland Ave. SW.,
Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington, DC time,
Monday through Friday of each week except Federal holidays. To schedule
a time to inspect comments, please contact one of the persons listed
under FOR FURTHER INFORMATION CONTACT.
Assistance to Individuals with Disabilities in Reviewing the
Rulemaking Record: On request, we will provide an appropriate
accommodation or auxiliary aid to an individual with a disability who
needs assistance to review the comments or other documents in the
public rulemaking record for the proposed regulations. To schedule an
appointment for this type of accommodation or auxiliary aid, please
contact one of the persons listed under FOR FURTHER INFORMATION
CONTACT.
Background
The Secretary proposes to amend Sec. Sec. 30.70, 668.14, 668.41,
668.71, 668.90, 668.93, 668.171, 668.175, 674.33, 674.61, 682.202,
682.211, 682.402, 682.405, 682.410, 685.200, 685.205, 685.206, 685.209,
685.212, 685.214, 685.215, 685.200, 685.220, 685.300, 685.308, and
686.42 of title 34 of the Code of Federal Regulations (CFR), and also
to add new Sec. Sec. 668.176, 685.222, 685.223, and 685.310 to that
title. The regulations in 34 CFR part 30 pertain to Debt Collection.
The regulations in 34 CFR part 668 pertain to Student Assistance
General Provisions. The regulations in 34 CFR part 674 pertain to the
Perkins Loan Program. The regulations in 34 CFR part 682 pertain to the
FFEL Program. The regulations in 34 CFR part 685 pertain to the Direct
Loan Program. The regulations in 34 CFR part 686 pertain to the TEACH
Grant Program. We are proposing these amendments to: (1) Specify that
the standards used to identify an act or omission of a school that
provides the basis for a borrower defense will depend on when the
Direct Loan was first disbursed; (2) establish a new Federal standard
and limitation periods that the Department will use to identify an act
or omission of an institution that constitutes a borrower defense; (3)
establish the procedures to be used for a borrower to initiate a
borrower defense; (4) establish the standards and certain procedures
that the Department would use to determine the liability of an
institution for the amount of relief arising from a borrower defense;
(5) prohibit schools' use of mandatory pre-dispute arbitration
agreements or class action bans to resolve disputes for claims that
could also form the basis of borrower defense claims or require
borrowers to waive any rights to initiate or participate in class
actions regarding such claims; and impose certain notification and
disclosure requirements relating to a school's use of arbitration; (6)
establish the conditions or events upon which an institution is or may
be required to provide to the Department financial protection, such as
a letter of credit, to help protect the Federal government, and thus
taxpayers, against potential institutional liabilities; (7) require a
proprietary institution with a student loan repayment rate that is less
than or equal to zero percent to place a Department-issued plain
language warning on its Web site and in advertising and promotional
materials, as well as to provide the warning to prospective and
enrolled students; (8) require that a school disclose to prospective
and enrolled students if it is required to provide financial protection
to the Department; (9) expand the allowable documentation that may be
submitted to demonstrate eligibility for a death discharge of a title
IV, HEA loan or a TEACH Grant service obligation; (10) revise the
closed school discharge regulations to ensure borrowers are aware of
and able to benefit from their ability to receive the discharge; (11)
expand the eligibility criteria for the false certification loan
discharge; (12) make technical corrections to the regulation that
describes the authority of the Department to compromise, or suspend or
terminate collection of, debts; (13) make technical corrections to the
regulations governing the Pay as You Earn (PAYE) and Revised Pay as You
Earn (REPAYE) repayment plans; (14) allow for the consolidation of
Nurse Faculty Loans; (15) allow borrowers to obtain a Direct
Consolidation Loan if the borrower consolidates at least one of the
eligible loans listed in Sec. 685.220(b); (16) clarify the conditions
under which the capitalization of interest by FFEL Program loan holders
is permitted; and (17) codify the conditions under which the discharge
of a Direct Subsidized Loan will lead to the elimination or
recalculation of a Subsidized Usage Period under the 150 Percent Direct
Subsidized Loan Limit or the restoration of interest subsidy.
Public Participation
On August 20, 2015, we published a notice in the Federal Register
(80 FR 50588) announcing our intent to
[[Page 39333]]
establish a negotiated rulemaking committee under section 492 of the
HEA to develop proposed regulations for determining which acts or
omissions of an institution of higher education (``institution'' or
``school'') a borrower may assert as a borrower defense under the
Direct Loan Program and the consequences of such borrower defenses for
borrowers, institutions, and the Secretary. We also announced two
public hearings at which interested parties could comment on the topic
suggested by the Department and suggest additional topics for
consideration for action by the negotiated rulemaking committee. The
hearings were held on--
September 10, 2015, in Washington, DC; and
September 16, 2015, in San Francisco, CA.
Transcripts from the public hearings are available at www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
We also invited parties unable to attend a public hearing to submit
written comments on the proposed topics and to submit other topics for
consideration. Written comments submitted in response to the August 20,
2015, Federal Register notice may be viewed through the Federal
eRulemaking Portal at www.regulations.gov, within docket ID ED-2015-
OPE-0103. Instructions for finding comments are also available on the
site under ``How to Use Regulations.gov'' in the Help section.
On October 20, 2015, we published a notice in the Federal Register
(80 FR 63478) requesting nominations for negotiators to serve on the
negotiated rulemaking committee and setting a schedule for committee
meetings.
On December 21, 2015, we published a notice in the Federal Register
(80 FR 79276) requesting additional nominations for negotiators to
serve on the negotiated rulemaking committee.
Negotiated Rulemaking
Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to
obtain public involvement in the development of proposed regulations
affecting programs authorized by title IV of the HEA. After obtaining
extensive input and recommendations from the public, including
individuals and representatives of groups involved in the title IV, HEA
programs, the Secretary in most cases must subject the proposed
regulations to a negotiated rulemaking process. If negotiators reach
consensus on the proposed regulations, the Department agrees to publish
without alteration a defined group of regulations on which the
negotiators reached consensus unless the Secretary reopens the process
or provides a written explanation to the participants stating why the
Secretary has decided to depart from the agreement reached during
negotiations. Further information on the negotiated rulemaking process
can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
On October 20, 2015, the Department published a notice in the
Federal Register (80 FR 63478) announcing its intention to establish a
negotiated rulemaking committee to prepare proposed regulations
governing the Federal Student Aid programs authorized under title IV of
the HEA. The notice set forth a schedule for the committee meetings and
requested nominations for individual negotiators to serve on the
negotiating committee.
The Department sought negotiators to represent the following
groups: Students/borrowers; legal assistance organizations that
represent students/borrowers; consumer advocacy organizations; groups
representing U.S. military servicemembers or veteran Federal loan
borrowers; financial aid administrators at postsecondary institutions;
State attorneys general (AGs) and other appropriate State officials;
State higher education executive officers; institutions of higher
education eligible to receive Federal assistance under title III, parts
A, B, and F, and title V of the HEA, which include Historically Black
Colleges and Universities, Hispanic-Serving Institutions, American
Indian Tribally Controlled Colleges and Universities, Alaska Native and
Native Hawaiian-Serving Institutions, Predominantly Black Institutions,
and other institutions with a substantial enrollment of needy students
as defined in title III of the HEA; two-year public institutions of
higher education; four-year public institutions of higher education;
private, nonprofit institutions of higher education; private, for-
profit institutions of higher education; FFEL Program lenders and loan
servicers; and FFEL Program guaranty agencies and guaranty agency
servicers (including collection agencies). The Department considered
the nominations submitted by the public and chose negotiators who would
represent the various constituencies.
On December 21, 2015, the Department published a notice in the
Federal Register (80 FR 79276) requesting additional nominations for
negotiators to serve on the negotiated rulemaking committee to
represent constituencies that were not represented following the
initial request for nominations. The Department sought negotiators to
represent the following groups: State higher education executive
officers; institutions of higher education eligible to receive Federal
assistance under title III, parts A, B, and F, and title V of the HEA;
two-year public institutions of higher education; private, for-profit
institutions of higher education; and national, regional, or
specialized accrediting agencies.
The negotiating committee included the following members:
Ann Bowers, for-profit college borrower, and Chris Lindstrom
(alternate), U.S. Public Interest Research Group, representing
students/borrowers.
Noah Zinner, Housing and Economic Rights Advocates, and Eileen
Connor (alternate), Project on Predatory Student Lending at Harvard Law
School (at the time of nomination, New York Legal Assistance Group)
representing legal assistance organizations that represent students.
Maggie Thompson, Higher Ed, Not Debt, and Margaret Reiter
(alternate), attorney, representing consumer advocacy organizations.
Bernard Eskandari, Office of the Attorney General of California,
and Mike Firestone (alternate), Commonwealth of Massachusetts Office of
the Attorney General, representing State attorneys general and other
appropriate State officials.
Walter Ochinko, Veterans Education Success, Will Hubbard (first
alternate), Student Veterans of America, and Derek Fronabarger (second
alternate), Student Veterans of America, representing U.S. military
servicemembers or veterans.
Karen Solinski, Higher Learning Commission, and Dr. Michale McComis
(alternate), Accrediting Commission of Career Schools and Colleges,
representing accreditors.
Becky Thompson, Washington Student Achievement Council,
representing State higher education executive officers.
Alyssa Dobson, Slippery Rock University, and Mark Justice
(alternate), The George Washington University, representing financial
aid administrators.
Sharon Oliver, North Carolina Central University, and Emily London
Jones (alternate), Xavier University of Louisiana, representing
minority-serving institutions.
Angela Johnson, Cuyahoga Community College, and Shannon Sheaff
(alternate), Mohave Community College, representing two-year public
institutions.
Kay Lewis, University of Washington, and Jean McDonald Rash
(alternate),
[[Page 39334]]
Rutgers University, representing four-year public institutions.
Christine McGuire, Boston University, and David Sheridan
(alternate), Columbia University, representing private, nonprofit
institutions.
Dennis Cariello, Hogan Marren Babbo & Rose, Ltd., and Chris DeLuca
(alternate), DeLuca Law, representing private, for-profit institutions.
Wanda Hall, EdFinancial Services, and Darin Katzberg (alternate),
Nelnet, representing FFEL Program lenders and loan servicers.
Betsy Mayotte, American Student Assistance, and Jaye O'Connell
(alternate), Vermont Student Assistance Corporation, representing FFEL
Program guaranty agencies and guaranty agency servicers.
Gail McLarnon, U.S. Department of Education, representing the
Department.
The negotiated rulemaking committee met to develop proposed
regulations on January 12-14, 2016, February 17-19, 2016, and March 16-
18, 2016. The Department held informational sessions by telephone for
interested members of the committee on March 1 and March 3, 2016, to
review the Department's loan repayment rate disclosure proposal, and on
March 9 and March 10, 2016, at the request of a non-Federal negotiator,
to hear from Professor Adam Zimmerman of Loyola Law School regarding
agency class settlement processes.
At its first meeting, the negotiating committee reached agreement
on its protocols and proposed agenda. The protocols provided, among
other things, that the committee would operate by consensus. Consensus
means that there must be no dissent by any member in order for the
committee to have reached agreement. Under the protocols, if the
committee reached a final consensus on all issues, the Department would
use the consensus-based language in its proposed regulations.
Furthermore, the Department would not alter the consensus-based
language of its proposed regulations unless the Department reopened the
negotiated rulemaking process or provided a written explanation to the
committee members regarding why it decided to depart from that
language.
During the first meeting, the negotiating committee agreed to
negotiate an agenda of seven issues related to student financial aid.
These seven issues were: Borrower defenses, false certification
discharges, institutional accountability, electronic death
certificates, consolidation of Nurse Faculty Loans, interest
capitalization, and technical corrections to the PAYE and REPAYE plans.
During the second meeting, the negotiating committee agreed to add two
additional issues: Closed school discharges and a technical correction
to the regulations that describe the authority of the Department to
compromise, or suspend, or terminate collection of, debts. Under the
protocols, a final consensus would have to include consensus on all
nine issues.
During committee meetings, the negotiators reviewed and discussed
the Department's drafts of regulatory language and the committee
members' alternative language and suggestions. At the final meeting on
March 18, 2016, the committee did not reach consensus on the
Department's proposed regulations. For that reason, and according to
the committee's protocols, all parties who participated or were
represented in the negotiated rulemaking, in addition to all members of
the public, may comment freely on the proposed regulations. For more
information on the negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
Summary of Proposed Changes
The proposed regulations would--
Amend Sec. 685.206 to clarify that existing regulations
with regard to borrower defenses apply to loans first disbursed prior
to July 1, 2017, and that a borrower defense asserted pursuant to this
section will be subject to the procedures in proposed Sec. 685.222(e)
to (k);
Amend Sec. 685.206 to remove the period of limitation on
the Secretary's ability to recover from institutions the amount of the
losses incurred by the Secretary on loans to which an approved borrower
defense applies;
Amend Sec. 685.206 to clarify that a borrower defense may
be asserted as to an act or omission of the school that relates to the
making of the loan or the provision of educational services that would
give rise to a cause of action against the school under applicable
State law;
Add a new borrower defense section at Sec. 685.222 that
applies to loans first disbursed on or after July 1, 2017;
Provide in Sec. 685.222(a) that a borrower defense may be
established if a preponderance of the evidence shows that the borrower
has a borrower defense claim that relates to the making of the
borrower's Direct Loan or the provision of educational services and
meets the requirements in Sec. 685.222(b), (c), or (d);
Provide in Sec. 685.222(a) that a violation by a school
of an eligibility or compliance requirement in the HEA or its
implementing regulations is not a basis for a borrower defense;
Define in Sec. 685.222(a) the terms ``borrower'' and
``borrower defense'';
Amend the definition of ``misrepresentation'' in Sec.
668.71 to define a misleading statement as one that ``includes any
statement that has the likelihood or tendency to mislead under the
circumstances'' and to include ``any statement that omits information
in such a way as to make the statement false, erroneous, or
misleading'';
Establish in Sec. 685.222(b), (c), and (d) a new Federal
standard upon which a borrower defense may be based--a judgment against
the school, a breach of contract by the school, or a substantial
misrepresentation by the school;
Provide in Sec. 685.222(d)(2) that in determining whether
a school made a substantial misrepresentation, the Secretary may
consider certain factors as to whether the reliance of a borrower on
the misrepresentation was reasonable;
Establish in Sec. 685.222(e) a procedure under which an
individual borrower may assert a borrower defense;
Provide in Sec. 685.222(f) a general description of a
group borrower defense claim process, including the conditions under
which the Secretary may allow a claim to proceed without receiving an
application;
Establish in Sec. 685.222(g) and (h) processes for
borrower defense claims made by groups of borrowers with respect to
closed schools and open schools, respectively;
Specify in Sec. 685.222(i) that the relief granted to a
borrower with an approved borrower defense is based on the facts
underlying the borrower's claim;
Require in Sec. 685.222(j) and (k) cooperation by the
borrower in any borrower defense proceeding and, upon the granting of
relief to a borrower, provide for the transfer to the Secretary of the
borrower's right to recovery against third parties;
Add a new paragraph (k) to Sec. 685.212 to include an
approved borrower defense among the reasons for a discharge of a loan
obligation, and to address borrower defense claims on Direct
Consolidation Loans;
Amend Sec. 685.205 to expand the circumstances under
which the Secretary grants forbearance without requiring documentation
from the borrower to include periods of time when a borrower defense
has been asserted and is under review;
Amend Sec. 685.300 to prevent schools from requiring that
students first engage in a school's internal complaint process before
contacting accrediting and government agencies about the
[[Page 39335]]
complaint; prohibit the use of pre-dispute mandatory arbitration
agreements by schools; prohibit the use of class action lawsuit
waivers; and require schools to disclose to and notify the Secretary of
arbitration filings;
Clarify in Sec. 685.308 that the Secretary may recover
from the school losses from loan discharges, including losses incurred
from approved borrower defenses;
Amend Sec. 668.171 to include conditions and events that
trigger a requirement that the school provide financial protection,
such as a letter of credit. Such conditions and events include
incurring significant amounts of liability in recent years for borrower
defense claim losses, a school's inability to pay claims, and events
that would compromise a school's ability to continue its participation
in the title IV, HEA programs;
Require in Sec. 668.41 a proprietary school with a
student loan repayment rate that is less than or equal to zero percent
to place a Department-issued plain language warning on its Web site and
in advertising and promotional materials, as well as to provide the
warning to prospective and enrolled students;
Require in Sec. 668.41 that a school disclose to
prospective and enrolled students if it is required to provide
financial protection, such as a letter of credit, to the Department;
Amend Sec. 668.175 to state the amounts of financial
protection, such as letters of credit, required in the event of
particular occurrences;
Clarify in Sec. 668.90 when a hearing official must
uphold the limitation or termination requested by the Secretary for
disputes related to the amount of financial protection, such as a
letter of credit, for a school's failure under the financial
responsibility standards;
Clarify in Sec. 668.93 that a limitation sought by the
Secretary on a school's participation in title IV, HEA programs may
include a change in participation from fully certified to provisionally
certified;
Amend Sec. Sec. 674.61, 682.402, 685.212, and 686.42 to
allow for a death discharge of a loan or TEACH Grant service obligation
to be granted based on an original or certified copy of a death
certificate that is submitted electronically or sent by facsimile
transmission, or through verification of death in an electronic Federal
or State database that is approved for use by the Secretary;
Amend Sec. Sec. 668.14(b), 674.33(g), 682.402(d), and
685.214(f) to increase outreach by the Secretary and schools and make
more information available to borrowers eligible for a closed school
discharge so that they are aware of this option;
Amend Sec. 685.215 to update and expand the existing
categories of false certification discharge to include the improper
certification of eligibility of a student who is not a high school
graduate and false certification of a borrower's academic progress;
Amend Sec. 682.211 to require lenders to grant a
mandatory administrative forbearance for borrowers who have filed a
borrower defense claim with the Secretary with the intent of seeking
relief under Sec. 685.212(k) after consolidating into the Direct Loan
Program;
Update the provisions in Sec. 30.70 to reflect the
increased debt resolution authority provided in Public Law 101-552 that
authorizes the Department to resolve debts up to $100,000 without
approval from the Department of Justice (DOJ) as well as other changes
to the Department's claim resolution authority;
Amend Sec. 685.209 by making technical corrections and
clarifying changes to the PAYE and REPAYE repayment plan regulations;
Amend Sec. 685.220 to allow a borrower to obtain Direct
Consolidation Loan, if the borrower consolidates any of the eligible
loans listed in Sec. 685.220(b); and
Clarify in Sec. Sec. 682.202, 682.405, and 682.410 that
guaranty agencies and FFEL Program lenders are not permitted to
capitalize outstanding interest on FFEL loans when the borrower
rehabilitates a defaulted FFEL loan; and
Amend Sec. 685.200 to codify the Department's current
practice regarding the elimination or recalculation of a subsidized
usage period or the restoration of interest subsidy under the 150
Percent Direct Subsidized Loan Limit when a Direct Subsidized Loan is
discharged.
Significant Proposed Regulations
We group major issues according to subject, with the applicable
sections of the proposed regulations referenced in parentheses. We
discuss other substantive issues under the sections of the proposed
regulations to which they pertain. Generally, we do not address
proposed regulatory provisions that are technical or otherwise minor in
effect.
Borrower Defenses (Sec. Sec. 668.71, 685.205, 685.206, and 685.222)
Background: The proposed regulations address several topics related
to the administration of title IV, HEA student aid programs and
benefits and options for borrowers. The Department first implemented
borrower defense regulations for the Direct Loan Program in the 1995-
1996 academic year to protect borrowers. The Department's original
intent was for this rule to be in place for the 1995-1996 academic
year, and then to develop a more extensive rule for both the Direct
Loan and FFEL Loan programs through negotiated rulemaking in the
following year.
However, based on the recommendation of non-Federal negotiators in
the spring of 1995, the Secretary decided not to develop further
regulations for the Direct Loan and FFEL programs. 60 FR 37768. As a
result, the regulations have not been updated in two decades to
establish appropriate processes or other necessary information to allow
borrowers to effectively utilize their options under the borrower
defense regulation.
In May 2015, Corinthian, a publicly traded company operating
numerous postsecondary schools that enrolled over 70,000 students at
more than 100 campuses nationwide, filed for bankruptcy. Corinthian
collapsed under deteriorating financial conditions and while subject to
multiple State and Federal investigations, one of which resulted in a
finding by the Department that the college had misrepresented its job
placement rates. Upon the closure of Corinthian, which included Everest
Institute, Wyotech, and Heald College, the Department received
thousands of claims for student loan relief from Corinthian students.
The Department is committed to ensuring that students harmed by
Corinthian's fraudulent practices receive the relief to which they are
entitled under the current closed school and borrower defense
regulations. The Department appointed a Special Master in June 2015 to
create and oversee a process to provide debt relief for these
Corinthian borrowers who applied for Federal student loan discharges
based on claims against Corinthian.
The current borrower defense regulation, which has existed since
1995 but has rarely been used, requires a borrower to demonstrate that
a school's acts or omissions would give rise to a cause of action under
``applicable State law.'' The regulation is silent on the process a
borrower follows to assert a borrower defense claim.
The landscape of higher education has changed significantly over
the past 20 years. The role of distance education in the higher
education sector has grown substantially. In the 1999-2000 academic
year, about eight percent of students were enrolled in at least one
distance education course; by the 2007-2008 academic year, that number
had
[[Page 39336]]
grown to 20 percent.\1\ Recent IPEDS data indicate that in the fall of
2013, 26.4 percent of students at degree-granting, title IV-
participating institutions were enrolled in at least one distance
education class.\2\ Much of this growth occurred within and coincided
with the growth of the proprietary higher education sector. In the fall
of 1995, degree-granting, for-profit institutions enrolled
approximately 240,000 students. In the fall of 2014, degree-granting,
for-profit schools enrolled over 1.5 million students.\3\ These changes
to the higher education industry have allowed students to enroll in
colleges based in other States and jurisdictions with relative ease.
---------------------------------------------------------------------------
\1\ Learning at a Distance: Undergraduate Enrollment in Distance
Education Courses and Degree Programs (http://nces.ed.gov/pubs2012/2012154.pdf).
\2\ 2014 Digest of Education Statistics: Table 311.15: Number
and percentage of students enrolled in degree-granting postsecondary
institutions, by distance education participation, location of
student, level of enrollment, and control and level of institution:
Fall 2012 and fall 2013.
\3\ 2015 Digest of Education Statistics: Table 303.10: Total
fall enrollment in degree-granting postsecondary institutions, by
attendance status, sex of student, and control of institution:
Selected years, 1947 through 2025--http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=yes.
---------------------------------------------------------------------------
These changes have had an impact on the Department's ability to
apply its borrower defense regulations. The current borrower defense
regulations do not identify which State's law is considered
``applicable'' State law on which the borrower's claim can be based.\4\
Generally, the regulation was assumed to refer to the laws of the State
in which the institution was located; we had little occasion to address
differences in protection for borrowers in States that offer little
protection from school misconduct or borrowers who reside in one State
but are enrolled via distance education in a program based in another
State. Some States have extended their rules to protect these students,
while others have not. As a result of the difficulties in application
and interpretation of the current State law standard, as well as the
lack of clarity surrounding the procedures that apply for borrower
defense, the Department took additional steps to improve the borrower
defense claim process.
---------------------------------------------------------------------------
\4\ In the few instances in which claims have been recognized
under current regulations, borrowers and the school were typically
located in the same State.
---------------------------------------------------------------------------
In a Federal Register notice published on October 20, 2015 (80 FR
63478), the Department announced its intent to establish a negotiated
rulemaking committee to develop proposed regulations that establish,
among other items, the criteria that the Department will use to
identify acts or omissions of an institution that constitute, for
borrowers of Federal Direct Loans, a borrower defense, including a
Federal standard, the procedures to be used for a borrower to establish
a borrower defense, and the standards and procedures that the
Department will use to determine the liability of the institution for
losses arising from approved borrower defenses.
We propose to create a new Sec. 685.222, and amend Sec. Sec.
668.71, 685.205, and 685.206, to establish, effective July 1, 2017, a
new Federal standard for borrower defenses, new limitation periods for
asserting borrower defenses, and processes for the assertion and
resolution of borrower defense claims. In the following sections, we
describe in more detail these proposed changes and other clarifying
changes proposed to improve the borrower defense process.
Borrower Defenses--General (Sec. 685.222(a))
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Section 487 of the HEA provides that the Secretary can take
enforcement action against an institution participating in the title
IV, HEA programs that substantially misrepresents the nature of the
institution's education program, its financial charges, or the
employability of its graduates.
Current Regulations: Section 685.206(c) establishes the conditions
under which a Direct Loan borrower may assert a borrower defense, the
relief afforded by the Secretary in the event the borrower's claim is
successful, and the Secretary's authority to recover from the school
any loss that results from a successful borrower defense. Specifically,
Sec. 685.206(c) provides that a borrower defense may be asserted based
upon any act or omission of the school that would give rise to a cause
of action against the school under applicable State law. The current
regulations in Sec. 685.206(c) are described in more detail under
``Borrower Responsibilities and Defenses (34 CFR 685.206).''
Proposed Regulations: Proposed Sec. 685.222(a) would provide that
borrower defense claims asserted by a borrower for Direct Loans first
disbursed before July 1, 2017, are considered by the Secretary in
accordance with the provisions of Sec. 685.206(c), while borrower
defense claims asserted by a borrower for Direct Loans first disbursed
on or after July 1, 2017, will be considered by the Secretary in
accordance with the provisions of Sec. 685.222.
For borrower defense claims asserted by a borrower for Direct Loans
first disbursed on or after July 1, 2017, proposed Sec. 685.222 would
establish a new Federal standard and new limitation periods. Proposed
Sec. 685.222 would also establish a process for the assertion and
resolution of all borrower defense claims--both those made under Sec.
685.206(c) for Direct Loans first disbursed prior to July 1, 2017, and
for those made under proposed Sec. 685.222. We describe the proposed
regulations relating to the new Federal standard and new limitation
periods under ``Federal Standard and Limitation Periods (34 CFR
685.222(b), (c), and (d) and 34 CFR 668.71),'' and the borrower defense
claim process under ``Process for Individual Borrowers (34 CFR
685.222(e)),'' ``Group Process for Borrower Defenses--General (34 CFR
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)).''
For borrower defense claims asserted by a borrower for Direct Loans
first disbursed on or after July 1, 2017, proposed Sec. 685.222(a)(2)
would provide that a preponderance of the evidence must show that the
borrower has a borrower defense that relates to the making of the
borrower's Direct Loan or the provision of educational services by the
school to the student and that meets the requirements under Sec.
685.222(b), (c), or (d), which are described in detail under ''Federal
Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34
CFR 668.71).''
Section 685.222(a)(3) would clarify that a violation by the school
of an eligibility or compliance requirement in the HEA or its
implementing regulations is not a basis for a borrower defense unless
that conduct would by itself, and without regard to the fact that the
conduct violated an HEA requirement, give rise to a cause of action
against the school under either applicable State law or under the new
Federal standard, whichever is applicable depending on the first
disbursement date of the Direct Loan in question.
Proposed Sec. 685.222(a)(4) would define ``borrower'' and
``borrower defense.'' Under the proposed definitions, ``borrower''
would mean the borrower and, in the case of a Direct PLUS Loan, the
student and any endorsers. Under proposed Sec. 685.222(a)(5),
``borrower defense'' would include one or both of
[[Page 39337]]
the following: a defense to repayment of amounts owed to the Secretary
on a Direct Loan, in whole or in part; and a right to recover amounts
previously collected by the Secretary on the Direct Loan, in whole or
in part.
If the borrower asserts both a borrower defense under Sec. 685.222
and any other objection to an action of the Secretary with regard to
the Direct Loan at issue (such as a claim for a closed school discharge
or false certification discharge), the Secretary would notify the
borrower of the order in which the Secretary considers the borrower
defense and any other objections. The order in which the Secretary will
consider objections, including borrower defense, would be determined by
the Secretary as appropriate under the circumstances.
Reasons: We propose to establish in Sec. 685.222 a new Federal
standard and new limitation periods for borrower defense claims
asserted with respect to loans first disbursed after the expected
effective date of these proposed regulations--July 1, 2017--as well as
a process for the assertion and resolution of all borrower defense
claims, both those made under proposed Sec. 685.206(c) and those made
under proposed Sec. 685.222. The Department believes that the proposed
changes could reduce the number of borrowers who are struggling to meet
their student loan obligations. During the public comment periods of
the negotiated rulemaking sessions, many public commenters who were
borrowers mentioned that they believed that they had been defrauded by
their institutions of higher education and were unable to pay their
student loans or obtain debt relief under the current regulations. For
instance, many of these borrowers stated that they had relied upon the
misrepresentation by their school as to employment outcomes, but later
found out that they were unable to secure employment as had been
represented to them before their enrollment.
We discuss more specifically our reasons for adopting a new Federal
standard and limitation periods under the discussion of ``Federal
Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34
CFR 668.71).'' We discuss our reasons for establishing a borrower
defense claim process under ``Process for Individual Borrowers (34 CFR
685.222(e),'' ``Group Process for Borrower Defenses--General (34 CFR
685.222(f),'' ``Group Process for Borrower Defenses--Closed School (34
CFR 685.222(g),'' and ``Group Process for Borrower Defense Claims--Open
School (23 CFR 685.222(h).'' We explain why the borrower defense
regulations apply only to the Direct Loan Program under ``Discharge of
a Loan Obligation (Sec. 685.212).''
Proposed Sec. 685.222(a) would establish provisions of general
applicability for borrower defense claims. As noted above, we would
clarify in paragraphs (a) and (b) of that section that borrower defense
claims for loans disbursed before July 1, 2017, are made under Sec.
685.206(c) and that borrower defense claims for loans disbursed on or
after July 1, 2017, are made under proposed Sec. 685.222. Although
proposed Sec. 685.206(c) also would specify that it applies to
borrower defense claims for loans disbursed before July 1, 2017, we
believe that also stating the general framework in Sec. 685.222 would
help eliminate any confusion as to which standard applies.
In proposed Sec. 685.222(a)(2) and (5), we would establish the
basic elements of borrower defense claims for loans disbursed on or
after July 1, 2017. Specifically, proposed Sec. 685.222(a)(2) and (5)
would require that a borrower defense claim:
Is supported by a preponderance of the evidence;
Relates to the making of the borrower's Direct Loan or the
provision of educational services; and
Meets the requirements under paragraph (b), (c), or (d) of
the section.
In addition, proposed Sec. 685.222(a)(2) would clarify that a
claim may be brought by a borrower to discharge amounts owed to the
Secretary on a Direct Loan, in whole or in part, or to recover amounts
previously collected by the Secretary on the Direct Loan, in whole or
in part, or both.
A claim is supported by a ``preponderance of the evidence'' if
there is sufficient evidence produced to persuade the decision maker
that it is more likely than not that something happened or did not
happen as claimed. In practice, the decision maker in a borrower
defense proceeding would measure the value, or weight, of the evidence
(including attestations, testimony, documents, and physical evidence)
produced to prove that the borrower defense claim as alleged is true.
We believe this evidentiary standard is appropriate as it is the
typical standard in most civil proceedings. Additionally, the
Department uses a preponderance of the evidence standard in other
processes regarding borrower debt issues. See 34 CFR 34.14(b), (c)
(administrative wage garnishment); 34 CFR 31.7(e) (Federal salary
offset). We believe that this evidentiary standard strikes a balance
between ensuring that borrowers who have been harmed are not subject to
an overly burdensome evidentiary standard and protecting the Federal
government, taxpayers, and institutions from unsubstantiated claims. We
discuss the types of evidence that may be presented in support of a
claim under ``Process for Individual Borrowers (34 CFR 685.222(e)).''
Proposed Sec. 685.222 would clarify that, whether a borrower
defense is brought under the standard described in Sec. 685.206(c) or
the standards in proposed Sec. 685.222(b), (c), and (d), the
Department's position is that it will acknowledge a borrower defense
asserted under the regulations ``only if the cause of action directly
relates to the loan or to the school's provision of educational
services for which the loan was provided.'' 60 FR 37768, 37769. Such
claims may include, for example, fraud in the making of the Direct Loan
in the course of student recruitment or a failure to provide
educational services. In some circumstances, this may include post-
enrollment services like career advising or placement services. The
Department does not recognize as a defense against repayment of the
loan a cause of action that is not directly related to the loan or to
the provision of educational services, such as personal injury tort
claims or actions based on allegations of sexual or racial harassment.
Id. The proposed language is consistent with this longstanding position
and is also reflected in similar proposed language for Sec.
685.206(c). Non-Federal negotiators also requested clarification on
whether borrower defenses may be asserted as to tort claims asserting
that educational institutions and their employees breached their duty
to educate students adequately (otherwise known as ``educational
malpractice''), or to issues relating to academic and disciplinary
disputes. Courts that have considered claims characterized as
educational malpractice have generally concluded that State law does
not recognize such claims.\5\ The Department does not intend in these
regulations to create a different legal standard, and for existing
loans would apply that same principle under Sec. 685.206(c), and would
maintain that same position in applying the standards proposed in Sec.
685.222. Claims relating to the quality of a student's education or
matters regarding academic and disciplinary disputes within the
[[Page 39338]]
judgment and discretion of a school are outside the scope of the
borrower defense regulations. The Department recognizes, however, that
in certain circumstances, such as where a school may make specific
misrepresentations about its facilities, financial charges, programs,
or employability of its graduates, such misrepresentations may function
as the basis of a borrower defense as opposed to being a claim
regarding educational quality.\6\ Additionally, a breach of contract
borrower defense may be raised where a school has failed to deliver
specific obligations, such as programs and services, it has committed
to by contract. The Department also notes that the limitations of the
scope of the borrower defense regulations should not be taken to
represent any view that other issues are not properly the concern of
the Department as well as other Federal agencies, State authorizers and
other State agencies, accreditors, and the courts.
---------------------------------------------------------------------------
\5\ See Bell v. Board of Educ. of City of West Haven, 55 Conn.
App. 400, 739 A.2d 321, 139 Ed. Law Rep. 538 (1999), noting that the
vast majority of courts have refused to recognize a cause of action
for educational malpractice; Sain v. Cedar Rapids Cmty. Sch. Dist.,
626 NW.2d 115, 121 (Iowa 2001) (Educational malpractice almost
universally rejected as a cause of action).
\6\ See, e.g., Sain v. Cedar Rapids Cmty. Sch. Dist., 626 NW.2d
115, 121 (Iowa 2001), recognizing that tort of negligent
misrepresentation applicable in education context.
---------------------------------------------------------------------------
With regard to the other required elements of a borrower defense
claim, we discuss our reason for requiring a borrower defense to meet
the requirements under paragraphs (b), (c), and (d) of proposed Sec.
685.222 under ``Federal Standard and Limitation Periods (34 CFR
685.222(b), (c), and (d) and 34 CFR 668.71).''
Proposed Sec. 685.222(a)(3) would set forth the Department's
longstanding position that an act or omission by the school that
violates an eligibility or compliance requirement in the HEA or its
implementing regulations does not necessarily affect the enforceability
of a Federal student loan obtained to attend the school, and is not,
therefore, automatically a basis for a borrower defense.\7\ The HEA
vests the Department with the sole authority to determine and apply the
appropriate sanction for HEA violations. A school's act or omission
that violates the HEA may, of course, give rise to a cause of action
under other law, and that cause of action may also independently
constitute a borrower defense claim under Sec. 685.206(c) or proposed
Sec. 685.222. For example, advertising that makes untruthful
statements about placement rates violates section 487(a)(8) of the HEA,
but may also give rise to a cause of action under common law based on
misrepresentation \8\ or constitute a substantial misrepresentation
under the new Federal standard and, therefore, constitute a basis for a
borrower defense claim.
---------------------------------------------------------------------------
\7\ As stated by the Department in 1993:
[The Department] considers the loss of institutional eligibility
to affect directly only the liability of the institution for Federal
subsidies and reinsurance paid on those loans. . . . [T]he borrower
retains all the rights with respect to loan repayment that are
contained in the terms of the loan agreements, and [the Department]
does not suggest that these loans, whether held by the institution
or the lender, are legally unenforceable merely because they were
made after the effective date of the loss of institutional
eligibility.
58 FR 13337. Armstrong v. Accrediting Council for Continuing
Educ. & Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999),
opinion amended on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999)
(rejecting claim of mistake of fact regarding institutional
accreditation as grounds for rescinding loan agreements).
\8\ See, e.g., Moy v. Adelphi Inst., Inc., 866 F. Supp. 696, 706
(E.D.N.Y. 1994) (upholding claim of common law misrepresentation
based on false statements regarding placement rates.)
---------------------------------------------------------------------------
In proposed Sec. 685.222(a)(4), we propose to define ``borrower''
to provide clarity and to include all parties who may be responsible
for repaying the Secretary for a Direct Loan to which a borrower
defense claim relates or who are otherwise harmed.
In proposed Sec. 685.222(a)(5), ``borrower defense'' is defined to
include one or both of the following: A defense to repayment of amounts
owed to the Secretary on a Direct Loan, in whole or in part; and a
right to recover amounts previously collected by the Secretary on the
Direct Loan, in whole or in part. Currently, the existing regulation
for borrower defense at Sec. 685.206(c) allows for reimbursement of
amounts paid towards a loan as possible further relief, in addition to
a discharge of any remaining loan obligation, for approved borrower
defenses. The Department believes that the proposed definition will
more accurately capture borrowers' requests for and the Secretary's
ability to offer relief through the borrower defense process--for both
a discharge of any remaining loan obligation and for reimbursement of
amounts paid to the Secretary for the loan that is the subject of an
approved borrower defense.
Federal Standard and Limitation Periods (Sec. 685.222(b), (c), and (d)
and Sec. 668.71)
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Section 487 of the HEA provides that institutions participating in
the title IV, HEA programs shall not engage in substantial
misrepresentation of the nature of the institution's education program,
its financial charges, or the employability of its graduates.
Current Regulations: Section 685.206(c) provides that a borrower
defense may be asserted based upon any act or omission of the school
that would give rise to a cause of action against the school under
applicable State law. The current regulations in Sec. 685.206(c) are
described in more detail under ``Borrower Responsibilities and Defenses
(34 CFR 685.206).''
Subpart F of the Student Assistance General Provisions establishes
the types of activities that may constitute substantial
misrepresentation by an institution and defines ``misrepresentation''
and ``substantial misrepresentation.'' ``Misrepresentation'' is defined
in proposed Sec. 668.71(c) as a false, erroneous, or misleading
statement that an eligible institution, one of its representatives, or
any eligible institution, organization, or person with whom the
eligible institution has an agreement to provide educational programs,
or to provide marketing, advertising, recruiting, or admissions
services, makes directly or indirectly to a student, prospective
student, a member of the public, an accrediting agency, a State agency,
or the Secretary. Under the proposed regulations, we would clarify that
a misleading statement also includes any statement that has the
likelihood or tendency to deceive. A statement is any communication
made in writing, visually, orally, or through other means.
``Misrepresentation'' also includes the dissemination of a student
endorsement or testimonial that a student gives either under duress or
because the institution required the student to make such an
endorsement or testimonial to participate in a program.
``Substantial misrepresentation,'' also defined in Sec. 668.71(c),
means ``any misrepresentation on which the person to whom it was made
could reasonably be expected to rely, or has reasonably relied, to that
person's detriment.''
Proposed Regulations: Proposed Sec. 685.222(b), (c), and (d) would
establish a new Federal standard for a borrower defense.
Proposed Sec. 685.222(b) would provide that if a borrower has
submitted for consideration a nondefault, favorable contested judgment
against the school based on State or Federal law from a court or
administrative tribunal of competent jurisdiction for relief, the
judgment might serve as a basis for a borrower defense. This would
apply regardless of whether the judgment was obtained by the borrower
as an individual or member of a class, or was obtained by a State
attorney general (State AG) or other governmental
[[Page 39339]]
agency. Judgments that could form the basis of a borrower defense under
this section would not be limited to causes of action based on breach
of contract or a substantial misrepresentation under Sec. 685.222(c)
or (d), respectively. Rather, they could also be based on other causes
of action under State or Federal law, provided that the claim relates
to the making of the borrower's Direct Loan for enrollment at the
school, or the provision of educational services for which the loan was
provided. There would be no time limitation on a borrower's ability to
assert a borrower defense based on such a judgment.
Proposed Sec. 685.222(c) would define the conditions under which a
breach of contract might be the basis for a borrower defense and
specify the limitation period for recovering payments previously made
on the loan in connection with such a claim. Under proposed Sec.
685.222(c), a borrower would have a borrower defense if the school that
the borrower received a Direct Loan to attend failed to perform its
obligations under the terms of a contract with the student. A borrower
would be permitted to assert, at any time, a claim based on breach of
contract as a defense to repayment of the amount still outstanding on
the loan. A borrower would be permitted to assert that same claim as
grounds for recovery of amounts previously collected by the Secretary
not later than six years after the breach by the school of its contract
with the student.
Proposed Sec. 685.222(d) would establish the conditions under
which a substantial misrepresentation might serve as the basis for a
borrower defense, and the limitation period for recovering payments
previously made on the loan. Under proposed Sec. 685.222(d), a
borrower would have a borrower defense if the school or any of its
representatives, or any institution, organization, or person with whom
the school has an agreement to provide educational programs, or to
provide marketing, advertising, recruiting, or admissions services,
made a substantial misrepresentation that the borrower reasonably
relied on when the borrower decided to attend, or to continue
attending, the school. ``Substantial misrepresentation'' would have the
definition set forth in subpart F, as amended by these proposed
regulations. The proposed regulations would modify the definition of
misrepresentation in Sec. 668.71(c) to replace the word ``deceive''
with ``mislead under the circumstances.'' The definition would also be
expanded to specify that a misrepresentation includes any statement
that omits information in such a way as to make the statement false,
erroneous, or misleading.
Section 685.222(d) would also establish that a borrower may assert,
at any time, a defense to repayment for amounts still owed on the loan
to the Secretary, but may assert a right to recover funds previously
collected by the Secretary no later than six years after the borrower
discovers, or reasonably could have discovered, the information
constituting the substantial misrepresentation.
The definition of ``substantial misrepresentation'' would require a
borrower to have reasonably relied on a misrepresentation to his or her
detriment. Under proposed Sec. 685.222(d), in determining whether a
borrower's reliance on a misrepresentation was reasonable, the decision
maker, whether a designated Department official or hearing official, as
described in detail under ``Process for Individual Borrowers (34 CFR
685.222(e)),'' ``Group Process for Borrower Defenses--General (34 CFR
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)),'' could consider, among other things,
if the school or its representatives or other specified parties engaged
in conduct such as:
Demanding that the borrower make enrollment or loan-
related decisions immediately;
Placing an unreasonable emphasis on unfavorable
consequences of delay;
Discouraging the borrower from consulting an adviser, a
family member, or other resources;
Failing to respond to the borrower's requests for more
information, including about the cost of the program and the nature of
any financial aid; or
Otherwise taking advantage of the borrower's distress or
lack of knowledge or sophistication.
Reasons: The current borrower defense standard in Sec. 685.206(c)
is wholly dependent upon State law and, as a result, may provide uneven
relief to students affected by the same bad practices but who attended
schools in different States; a Federal standard would help to ensure
fair and equitable treatment of all borrowers. Moreover, the reliance
upon State law presents a significant burden for borrowers who are
making a threshold determination as to whether they may have a claim
and for Department officials who must determine the applicability and
interpretation of laws that may vary from one State to another.
In crafting the Federal standard, the Department sought to
incorporate not only the substantial misrepresentation regulation (34
CFR 668 subpart F), but also other causes of action upon which students
had based complaints against schools in court cases. For example, the
Federal standard maintains the borrower's ability to bring forward a
claim based on a judgment determined by a court or administrative
tribunal applying either State or Federal law. We also noted that a
common claim that students had raised in lawsuits against postsecondary
schools was breach of contract.\9\ These bases for a borrower defense
would ensure that the Federal standard provides effective relief
opportunities for borrowers, and efficient administration of the
process by which the Department and borrowers interpret and apply the
standard, resulting in more timely resolution for all parties involved.
However, we do not believe it would be appropriate to adopt a standard
that would make the fact that the conduct violates an HEA requirement
an automatic ground for a borrower defense, whether that claim is
asserted directly or indirectly based on State law. Such conduct, to
the extent it injures borrowers through substantial misrepresentation
or a breach of contract, would already be covered by the proposed
Federal standard. Moreover, it is not clear that any other such conduct
forms an appropriate basis for loan discharge. Similarly, non-Federal
negotiators suggested that the Department provide that all causes of
action under State law constitute a basis for borrower defense. As
explained previously, we believe that an approach based on State law
would present a significant burden for borrowers and Department
officials to determine the applicability and interpretation of States'
laws and would increase the risk of uneven relief for similarly
situated borrowers; therefore, we decline to adopt such a standard.
---------------------------------------------------------------------------
\9\ See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x
129, 133 (3d Cir. 2011); Chenari v. George Washington Univ., No. CV
14-0929 (ABJ), 2016 WL 1170922 (D.D.C. Mar. 23, 2016).
---------------------------------------------------------------------------
Non-Federal negotiators also proposed other bases for borrower
defense, such as deceptive, unfair, or abusive conduct. We carefully
considered such suggestions and decided that they were not appropriate
for the borrower defense regulations. The Department believes it would
face significant challenges in determining which cases of such conduct
warrant relief. A wide variety of conduct can be considered deceptive,
unfair, or abusive, under both State and Federal law, and
characterizing particular conduct as falling under such standards would
[[Page 39340]]
require the Department to engage in a nuanced application of complex
legal doctrines that vary across jurisdictions and that often have not
been subject to a degree of judicial development sufficient to make
their application to the borrower defense context clear. Furthermore,
some of the significant sources of law regarding such conduct would not
easily transfer to the borrower defense context. Federal and State law
empowers government agencies to pursue relief for deceptive and unfair
conduct.\10\ In exercising this authority, Federal and State agencies
are charged with gathering facts about particular practices, and
weighing appropriate policy considerations to determine whether the
practice warrants the exercise of their authority under these laws. The
borrower defense regulations, on the other hand, are directed
necessarily toward claims by individuals, which should not be subject
to public policy considerations. Nonetheless, we agree with the
negotiators that deceptive, unfair, or abusive practices that may not
otherwise constitute a misrepresentation under the proposed definition
should be taken into consideration when we are evaluating a borrower
defense claim. See ``Substantial misrepresentation: Reasonable
reliance'' in this section for a discussion of how we propose to
consider such conduct for the purpose of a borrower defense claim based
on a substantial misrepresentation.
---------------------------------------------------------------------------
\10\ See, e.g., 12 U.S.C. 5531, 15 U.S.C. 43 (authorities used
or referenced, respectively, by the Consumer Financial Protection
Bureau (CFPB) and State agencies, and the Federal Trade Commission
(FTC)). For deceptive and unfair practices, the CFPB has stated that
its standards are informed by the standards for the same terms as
used by the FTC. See CFPB Bulletin 2013-7, ``Prohibition of Unfair,
Deceptive, or Abusive Acts or Practices in the Collection of
Consumer Debts,'' (Jul. 10, 2013).
---------------------------------------------------------------------------
The Department's substantial misrepresentation regulations (34 CFR
part 668 subpart F) were informed by the FTC's policy guidelines on
deception, and we believe they are more tailored to, and suitable for,
use in the borrower defense context. The Department proposes that in
the borrower defense context, certain factors addressing specific
problematic conduct may be considered to determine whether a
misrepresentation has been relied upon to a borrower's detriment, thus
making the misrepresentation ``substantial'' under the proposed
regulation. With regard to unfair and abusive conduct, we considered
the available precedent and determined that it is unclear how such
principles would apply in the borrower defense context as stand-alone
standards. Such practices are often alleged in combination with
misrepresentations and are not often addressed on their own by the
courts. With this lack of guidance, it is unclear how such principles
would apply in the borrower defense context. Moreover, many of the
borrower defenses the Department has addressed or is considering have
involved misrepresentations by schools, such as in the case of
Corinthian. The Department believes that its proposed standard as
described below will address much of the behavior arising in the
borrower defense context. We believe that the standard that we are
proposing appropriately addresses the Department's interests in
accurately identifying and providing relief to borrowers for misconduct
by schools; providing clear standards for borrowers, schools, and the
Department to use in resolving claims; and avoiding for all parties the
burden of interpreting other Federal agencies' and States' authorities
in the borrower defense context.
As a result, the Department declines to adopt standards for relief
based on unfair and abusive conduct. However, we note that actions
against institutions may be taken, and borrowers may have avenues of
relief outside of the Department, under other Federal or State statutes
based on unfair and abusive conduct, which may result in State or
Federal court judgments. Because the Department does not adopt the
unfair and abusive conduct as a Federal borrower defense standards
unless reduced to a contested judgment against the school under
proposed Sec. 685.222(b), the Department does not consider its own
findings and determinations in the borrower defense context for the
proposed standards in Sec. 685.222 to be dispositive or controlling
for actions brought by any other Federal or any State agency in the
exercise of their power under the statutes on which they rely. We
intend that, to the extent that borrowers fail to establish a claim
under the regulations proposed here, such a determination does not
affect the ability of another agency to obtain relief under a different
standard that the agency is authorized to apply.
We note that the Department commonly uses the term ``hearing
official'' in its regulations, such as 34 CFR subparts G and H
(proceedings for limitation, suspension, termination and fines, and
appeal procedures for audit determinations and program review
determinations). The hearing officials referred to in the proposed
regulations would make decisions and determinations independent of the
Department official described in proposed Sec. 685.222(e) to (h).
Although here we use the term ``Department official'' to describe the
individual who reviews and decides an individual borrower defense claim
pursuant to Sec. 685.222(e), for the group processes described in
proposed Sec. 685.222(g) and (h), we use the term ``Department
official'' to describe the individual who performs a very different
role. In the group process, the ``Department official'' is the
individual who would initiate the group borrower defense process and
who would present evidence and respond to any argument for the group
borrower defense claimants. The decision would then be made by the
hearing official, who is independent of the Department official who
asserts the claims, and that decision would be based on the merits of
the borrower defense claim as described in the proposed regulations,
and not upon other considerations.
Judgment Against a School
As discussed, the Department is declining to adopt a standard based
on applicable State law for loans first disbursed after July 1, 2017,
due, in part, to the burden to borrowers and Department officials in
interpreting and applying States' laws. While we believe that the
proposed standards will capture much of the behavior that can and
should be recognized as the basis for borrower defenses, it is possible
that some State laws may offer borrowers important protections that do
not fall within the scope of the Department's Federal standard. To
account for the situations in which this is the case, the proposed
regulations would provide, as a basis for a borrower defense,
nondefault, contested judgments obtained against a school based on any
State or Federal law, whether obtained in a court or administrative
tribunal of competent jurisdiction. Under the proposed regulations, a
borrower may use such a judgment as the basis for a borrower defense if
the borrower was personally affected by the judgment, that is, the
borrower was a party to the case in which the judgment was entered,
either individually or as a member of a class that obtained the
judgment in a class action lawsuit. As with all the borrower defense
standards, to support a borrower defense claim, the judgment would be
required to pertain to the making of a Direct Loan or the provision of
educational services to the borrower. We believe that the proposed
standard would allow for recognition of State law and other Federal law
causes of action, but would also reduce the burden on the Department
and borrowers of having to make
[[Page 39341]]
determinations on the applicability and interpretation of those laws.
We also propose that a judgment obtained by a governmental agency,
such as a State AG or a Federal agency, that a borrower can show
relates to the making of the borrower's Direct Loan or the provision of
educational services to the borrower, may also serve as a basis for a
borrower defense under the standard, whether the judgment is obtained
in court or in an administrative tribunal. Governmental agencies may
not specifically join individual constituents as parties to a lawsuit;
however, any resulting judgment may result in determinations that an
act or omission of a school was in violation of State or Federal law
and thus be the basis of a borrower defense for an individual within
the group identified as injured by the conduct for which the government
agency brought suit.
In considering a borrower defense claim, for either an individual
borrower under proposed Sec. 685.222(e) for individually-filed
applications or for a group of borrowers under proposed Sec.
685.222(f),(g), and (h), based upon a favorable judgment obtained in
court or an administrative tribunal, the Department will consider the
relief to which that judgment entitles the borrower based upon the
judgment's findings regarding the school's liability under the state or
Federal law at issue, whether or not the form and amount of relief was
prescribed as part of the favorable judgment. Depending on the facts
and circumstances of the judgment, the Department may determine relief
as described in proposed Sec. 685.222(i).\11\ The Department will also
consider to what degree the claimant has already received relief as an
outcome of the judgment at issue, if any.
---------------------------------------------------------------------------
\11\ For example, the judgment may be one obtained by an
enforcement agency and may not identify or require any individual as
a party for whom particular relief is required; the judgment may
simply provide injunctive relief, barring a particular practice as
violating applicable law, but not addressing or requiring any relief
for individuals; or the judgment may find liability, but also
determine that the affirmative claim is time-barred.
---------------------------------------------------------------------------
The Department is aware that many court cases may not result in
contested, nondefault judgments, for reasons such as settlement.
However, we are proposing to limit the basis for a borrower defense
under Sec. 685.222(b) to nondefault, contested judgments in courts or
administrative tribunals. The Department is seeking to establish a
process that results in accurate determinations of borrower defenses
after a careful consideration of evidence. We are proposing to consider
decisions made by courts and administrative tribunals, as the decision-
making process in those forums similarly involves a consideration of
evidence from all parties and the decision is one that has been made on
the merits of the claim. By limiting this standard to nondefault,
contested judgments, we would reduce or eliminate the need for the
Department to evaluate the merit of borrower claims based on State law
by including only those judgments that are in fact the product of
litigation in which both claimant and school challenged the contentions
of the opponent and a tribunal decided the case on the merits. The
standard would echo the principle of res judicata, whereby parties are
bound by a judgment entered by a court of competent jurisdiction and
may not challenge that judgment either before that tribunal or before a
different tribunal. Default judgments generally do not involve the same
level of factual and evidentiary evaluation, or provide a decision on
the merits resulting from a contested hearing where all parties have
had an opportunity to present evidence and arguments. Similarly,
settlements do not require a decision maker to reach a decision after
an evaluation of the evidence. As a result, we propose that judgments
may form the basis of a borrower defense only if they are nondefault,
contested judgments rendered by a court or administrative tribunal of
competent jurisdiction.
Although other court orders that do not rise to the level of a
contested, nondefault judgment (e.g., settlement or motion to dismiss
orders) may not be used to satisfy the proposed judgment standard for
borrower defense claims, the Department welcomes the submission of and
will consider any such orders, other court filings, admissions of fact
or liability, or other evidence used in such a court proceeding as
evidence in the borrower defense process under the other proposed
standards. The Department would also welcome the submission of and will
consider any arbitration filings, orders, and decisions for
consideration in the borrower defense process. Similarly, we recognize
that a party to a suit or administrative proceeding may be barred from
disputing a factual finding or issue decided in that proceeding if that
fact or issue were to arise in a different case, even if the ruling on
the fact or issue was not a final judgment on the merits resulting from
a contested proceeding that meets the standard we propose here. We
propose to take such findings and rulings on such specific facts and
issues into account, and give them appropriate weight if principles of
collateral estoppel would bar the school from disputing the matter.
Breach of Contract
In developing a new Federal borrower defense standard, we recognize
that students enter into enrollment agreements and other contracts with
the school to provide educational services and that borrowers have,
over the years, asserted claims for relief against schools for losses
arising from a breach of those contracts.\12\ We therefore propose to
include a separate ground for relief, based on a breach by the school
of the contract with the borrower, because such claims may not
necessarily fall within the scope of the substantial misrepresentation
component of the Federal standard.
---------------------------------------------------------------------------
\12\ See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x
129 (3d Cir. 2011).
---------------------------------------------------------------------------
The terms of a contract between the school and a borrower will
largely depend on the circumstances of each claim. For example, a
contract between the school and a borrower may include an enrollment
agreement and any school catalogs, bulletins, circulars, student
handbooks, or school regulations.\13\
---------------------------------------------------------------------------
\13\ In Ross v. Creighton University, 957 F.2d 410 (7th Cir.
1992), in describing the limits of a contract action brought by a
student against a school, the court stated that there is `` `no
dissent' '' from the proposition that `` `catalogues, bulletins,
circulars, and regulations of the institution made available to the
matriculant' '' become part of the contract. See 957 F.2d at 416
(citations omitted). See also Vurimindi, 435 F. App'x at 133
(quoting Ross).
---------------------------------------------------------------------------
A non-Federal negotiator requested that we limit the standard to
material breaches of contract.\14\ The Department anticipates that it
may receive borrower defense claims regarding breaches of contract that
may not be considered to be material breaches that would have warranted
a cancellation of the contract between the borrower and the school. For
example, a breach of contract may pertain to a school's failure to
fulfill a specific contractual promise to provide certain training or
courses, but the school may have otherwise performed its other
obligations under its contract with the borrower. The Department is
comfortable with its ability to grant relief commensurate to the injury
to a borrower alleged under the breach of contract standard, which may
constitute full relief or partial relief with respect to a borrower's
Direct Loan. The Department's proposed methods for determining relief,
which would require a consideration of available evidence
[[Page 39342]]
and arguments by a Department official or a hearing official, as
applicable, are discussed in more detail under ``Borrower Relief (34
CFR 685.222(i) and Appendix A).''
---------------------------------------------------------------------------
\14\ See Modern Law of Contracts Sec. 11:1 (quoting Andersen, A
New Look at Material Breach in the Law of Contracts, 21 UC Davis L.
Rev. 1073 (1988)) (``[M]ateriality is best understood in terms of
the specific purpose of the cancellation remedy that material breach
entails.'')
---------------------------------------------------------------------------
The non-Federal negotiator also requested that we exclude claims
for educational malpractice or claims regarding schools' academic
standards. As explained earlier in this discussion, we decline to
impose a materiality requirement, but would consider the circumstances
underlying a breach of contract borrower defense and award relief that
is commensurate with the injury to the borrower. We also explain under
``Borrower Defenses--General (Sec. 685.222(a))''))'' that the
Department does not consider claims relating to educational malpractice
or academic disputes to be within the scope of the proposed borrower
defense regulations.
Substantial Misrepresentation
The proposed Federal standard for borrower defense based upon a
substantial misrepresentation is predicated on existing regulations in
the Student Assistance General Provisions (34 CFR 668 subpart F) that
address misrepresentation. These existing regulations provide a clear
framework regarding the acts or omissions that would constitute
misrepresentations as they relate to the nature of educational
programs, the nature of financial charges, and the employability of
graduates.
Under proposed Sec. 685.222(d), to establish a borrower defense
based on a substantial misrepresentation, a borrower must demonstrate
that (1) there was a misrepresentation by the college made to the
borrower, (2) the borrower reasonably relied on that substantial
misrepresentation when he or she decided to attend, or to continue
attending, the school, and (3) that reliance resulted in a detriment to
the borrower.
Substantial Misrepresentation: Misrepresentation
We have proposed to revise the definition of ``misrepresentation''
in Sec. 668.71 to provide clarity and specificity, as it is important
that the definition of ``misrepresentation,'' whether for the
Department's enforcement purposes or in the borrower defense context,
capture the full scope of acts and omissions that may result in a
borrower being misled about the provision of educational services or
making of a Direct Loan.
Specifically, we propose to replace the word ``deceive'' with
``mislead under the circumstances.'' In some contexts the word
``deceive'' implies knowledge or intent on the part of the school,
which is not a required element in a case of misrepresentation.
Although we stated that the Department ``considers a variety of
factors, including whether the misrepresentation was intentional or
inadvertent'' in the preamble to the final rule for subpart F, 75 FR
66915, we believe that this proposed change would more clearly reflect
the Department's intent that a misrepresentation does not require
knowledge or intent on the part of the school. A non-Federal negotiator
at the negotiated rulemaking requested that specific intent be
considered as an element of misrepresentation. As the Department
explained in the preamble to the final rule for subpart F, 75 FR 66914,
while the Department declines to include a specific intent element, the
Department has always operated within a rule of reasonableness and has
not pursued sanctions without evaluating the available evidence in
extenuation and mitigation as well as in aggravation. Whether using the
definitions in subpart F for the Department's enforcement purposes or
for evaluating a borrower defense claim, we intend to continue to
consider the circumstances surrounding any misrepresentation before
determining an appropriate response. That said, the general rule is
that an institution is responsible for the harm to borrowers caused by
its misrepresentations, even if such misrepresentations cannot be
attributed to institutional intent. We believe this is more reasonable
and fair than having the borrower (or the Department) bear the cost of
such injuries. It is also reflective of the consumer protection laws of
many States.
We also propose to add to the definition of ``misrepresentation'' a
sentence addressing omissions, which would read, ``Misrepresentation
includes any statement that omits information in such a way as to make
the statement false, erroneous, or misleading.'' Some non-Federal
negotiators were concerned about the use of the word ``information'' as
opposed to ``facts.'' These non-Federal negotiators were concerned that
the use of the word ``facts'' might imply a higher standard than would
be required for a borrower to prove a substantial misrepresentation had
occurred. Another non-Federal negotiator believed that a
misrepresentation of ``facts'' more accurately described what should be
required. Although we believe that the two words are effectively
synonymous, we propose to use the word ``information,'' as this change
was endorsed by most of the non-Federal negotiators.
Non-Federal negotiators requested that the Department clarify what
is meant by ``misleading under the circumstances,'' as used in the
proposed definition of ``misrepresentation.'' One non-Federal
negotiator asked whether the term ``under the circumstances'' was a
reference to the use of the term by the Federal Trade Commission (FTC).
In the 1983 FTC Policy Statement on Deception, the FTC clarified that,
for a representation, omission, or practice to be deceptive, it must be
likely to mislead reasonable consumers under the circumstances.\15\ The
FTC looks at the totality of the practice when determining how a
reasonable recipient of the information would respond. If a
representation is targeted to a specific audience, then the FTC
determines the effect of the practice on a reasonable member of that
group. We believe it is appropriate that, in reviewing a borrower
defense claim based on a substantial misrepresentation, we similarly
consider the totality of circumstances in which the statement or
omission occurs, including the specific group at which a statement or
omission was targeted, to determine whether the statement or omission
was misleading under the circumstances. A statement made to a certain
target group of students may not lead to reliance and injury; however,
when the statement is made to a different target group that may not be
the case.
---------------------------------------------------------------------------
\15\ FTC Policy Statement on Deception, 103 F.T.C. 110, 174
(1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)),
available at www.ftc.gov/bcp/policystmt/ad-decept.htm.
---------------------------------------------------------------------------
Moreover, we propose to include the language ``under the
circumstances'' to clarify that, to constitute a substantial
misrepresentation, the misleading statement or omission must have been
made in a situation where the borrower or student should have been able
to rely upon the school to provide accurate information. For example,
if a student is speaking with a course instructor about her
difficulties paying tuition and the course instructor advises her to
meet with the financial aid office because ``there are scholarships
available,'' that circumstance would most likely not create an
expectation that the course instructor is assuring the student that she
will receive a scholarship. However, if a student is speaking with a
financial aid advisor and asks if she will receive scholarships to help
cover the cost of her education and the financial aid advisor says,
``Yes. Most of our students receive scholarships,'' that statement may
be considered misleading under the
[[Page 39343]]
circumstances, given that the speaker is someone whose professional
role is to provide students with guidance pertaining to student aid.
Substantial Misrepresentation: Reasonable Reliance
Although the definition of ``substantial misrepresentation'' in
Sec. 668.71 requires that the borrower reasonably relied on the
misrepresentation, or could reasonably be expected to rely, proposed
Sec. 685.222(d) would require there to have been actual reasonable
reliance. Section 668.71 refers to the Department's enforcement
authority to impose fines, or limit, suspend, or terminate a school's
participation in title IV, HEA programs. As an enforcement body acting
in the public interest, the Department believes that it is appropriate
for the Department to be able to stop misrepresentations even before
any persons are misled, and thus to act upon misrepresentations that
``could have been reasonably relied upon'' by a person. However,
borrower defenses relate to injuries to individual borrowers. Unlike
the Department's interest in public enforcement of its regulations and
laws, an individual borrower's interest in bringing a borrower defense
is predicated upon the harm to the borrower. We also believe that an
actual reliance requirement will protect the Federal Government,
taxpayers, and institutions from unsubstantiated claims. As a result,
we believe that it is appropriate to require that the evidence show
that the misrepresentation at issue influenced the borrower, or led to
the borrower's reliance on the misrepresentation, to the borrower's
detriment. We note, however, that a rebuttable presumption of
reasonable reliance may arise in claims brought for a group of
borrowers, as we discuss in detail under ``Group Process for Borrower
Defenses--General (34 CFR 685.222(f)).''
Generally, reasonable reliance refers to what a prudent person
would believe and act upon if told something by another person.
Moreover, reasonable reliance considers the representation or statement
from the viewpoint of the audience the message is intended to reach--in
this case, prospective or continuing students. Thus, in assessing
whether a substantial misrepresentation has occurred, the Department
would consider the facts of the case in the context of the audience.
As discussed, the standard requires not just that a borrower has
relied upon a misrepresentation to the borrower's detriment, but also
requires that the reliance be reasonable. As discussed in the
introduction to this ``Reasons'' section, non-Federal negotiators
representing students and borrowers, consumer advocacy organizations,
and legal assistance organizations that represent students and
borrowers, advocated that the Federal standard include a provision for
abusive practices on the part of a school, particularly as they relate
to high pressure or aggressive sales tactics. We agree that there has
been evidence of such conduct on the part of some schools, but believe
it would be difficult to develop clear, consistent standards as to when
such conduct, in the absence of any misrepresentation by the school,
should give rise to a right of relief from the loans taken out to
attend the school. However, we also believe that such high pressure or
aggressive sales tactics may make borrowers more likely to rely upon a
misrepresentation. As a result, we have determined that reliance on a
misrepresentation may be appropriately viewed as more reasonable when
the misrepresentation is made in the context of certain circumstances,
including those that may be considered to be high pressure or
aggressive sales tactics.
To address these concerns, in proposed Sec. 685.222(d) we include
a non-exhaustive list of examples of factors that, if present in
conjunction with a misrepresentation on the part of the school, would
likely elevate that misrepresentation to a substantial
misrepresentation. However, as proposed by the Department, the factors
by themselves would not necessarily mandate a finding of substantial
misrepresentation, nor would the absence of any of the factors defeat a
borrower defense based on substantial misrepresentation. It may be
entirely reasonable for a borrower to rely on a misrepresentation
without any of these factors present. Rather, as proposed, the factors
would be non-exhaustive examples of conduct that could be considered in
a determination of whether a borrower's reliance on a misrepresentation
was reasonable, even if such reliance would not have been reasonable in
the absence of such conduct, thus making the misrepresentation
substantial.
Specifically, we looked at the borrower defenses before the
Department and comments from non-Federal negotiators regarding issues
such as schools making insistent demands of students to make
commitments to enroll and the borrowers' lack of information and
resources. As a result, we propose that a misrepresentation, when
coupled with conduct that affects a borrower's understanding of his or
her decision-making timeframe, such as demanding that the borrower make
enrollment or loan-related decisions immediately or placing an
unreasonable emphasis on unfavorable consequences of delay, may lead a
borrower to reasonably rely upon the misrepresentation and, thus,
elevate the misrepresentation to a substantial misrepresentation for
the purposes of asserting a borrower defense. Similarly, conduct that
affects a borrower's information-gathering regarding the risks and
potential benefits of his or her decision, such as discouraging a
borrower from consulting an advisor, a family member, or other
resources or failing to respond to a borrower's reasonable requests for
information, may lead a borrower to reasonably rely upon the
misrepresentation for the purposes of asserting a substantial
misrepresentation as a borrower defense. We also recognize that school
conduct that takes advantage of the borrower's distress or lack of
knowledge or sophistication may also elevate the misrepresentation to a
substantial misrepresentation, by way of affecting a borrower's
reasonable reliance on a misrepresentation, for the purposes of
borrower defense. For example, a school may be found to have made
statements that would not have been misleading to a borrower of average
English ability; however, when made to a borrower with limited English
proficiency in a way that takes advantage of the borrower's lack of
knowledge or sophistication, the circumstances may warrant a borrower
defense under the standard.
As noted above, a non-Federal negotiator requested that the
Department use a ``justifiable'' reliance standard. While a reasonable
reliance standard looks to whether a reasonably prudent person would be
justified in his or her reliance and may be measured against the
behavior of other persons, the justifiable reliance standard is
measured by reference to the plaintiff's capabilities and
knowledge.\16\ As discussed, the proposed standard would allow
consideration of practices that would impact a specific borrower's
understanding and reliance upon a misrepresentation in a way that would
reference the borrower's understanding and knowledge. However, the
Department believes that it is appropriate for the proposed standard to
[[Page 39344]]
consider the perspective of not only the borrower, but of similarly
situated borrowers, especially to the extent it is composed of other
Direct Loan borrowers or potential Direct Loan borrowers who may be
subject to the same misrepresentations by the school. As discussed
under ``Group Process for Borrower Defenses--General (34 CFR
685.222(f)),'' ``Group Process for Borrower Defenses--Closed School (34
CFR 685.222(g)),'' and ``Group Process for Borrower Defense Claims--
Open School (34 CFR 685.222(h)),'' in addition to proposing this
regulation to provide relief for individual borrowers who have filed
applications for relief, the borrower defense regulation also proposes
that the Department may initiate a process for determinations as to
both a school's liability and as to borrower defenses for a group of
borrowers, which may include those who have not applied for relief. As
discussed under ``Group Process for Borrower Defenses--General (34 CFR
685.222(f)),'' the Department anticipates that such proceedings, in
which Secretary may recover from the school the amount of losses from
granting borrower defense relief, will have a significant deterrent
effect on the school and promote compliance among other schools in a
way that will benefit other borrowers. By considering both the
individual borrower's perspective and the perspective of similarly
situated borrowers at the institution, we believe the Department
official or hearing official, as applicable, would be able to determine
an amount of relief that is fair to the borrower and protect the
Department's general interest in other Direct Loan borrowers who have
also attended the school and who may have been subject to the same
misrepresentations.
---------------------------------------------------------------------------
\16\ See Restatement (Third) of Torts: Liab. for Econ. Harm
Sec. 11 TD No 2 (2014)(``[R]easonableness is measured against
community standards of behavior. Justifiable reliance has a
personalized character. It is measured by reference to the
plaintiff's capabilities and knowledge; a plaintiff's sophistication
may affect a court's judgments about what dangers were fairly
considered obvious.'').
---------------------------------------------------------------------------
The non-Federal negotiator also requested that we limit the
standard to material misrepresentations. It is the Department's
understanding that under Federal deceptive conduct prohibitions, a
misrepresentation must be material for deception to occur. In this
context, material misrepresentation involves information important to
consumers, likely to affect the consumer's choice or conduct regarding
a product or service.\17\ The Department believes that a materiality
element is not required in either the proposed amendments to the
definition for the Department's enforcement authority under Sec.
668.71 or as this definition is adopted for the purposes of the
proposed Federal standard under Sec. 685.222(d). In the context of the
Department's enforcement authority, the Department previously declined
in 2010 to adopt a materiality component, stating that the regulatory
definition of ``substantial misrepresentation'' is ``clear and can be
easily used to evaluate alleged violations of the regulations.'' 75 FR
66916.
---------------------------------------------------------------------------
\17\ See, e.g., F.T.C. Policy Statement on Deception, 103 F.T.C.
at 182; see also Restatement (Second) of Torts Sec. 538 (1977)
(``The matter is material if (a) a reasonable man would attach
importance to its existence or nonexistence in determining his
choice of action in the transaction in question; or (b) the maker of
the representation knows or has reason to know that its recipient
regards or is likely to regard the matter as important in
determining his choice of action, although a reasonable man would
not so regard it.'').
---------------------------------------------------------------------------
In adopting the definition of ``substantial misrepresentation'' for
the purposes of borrower defense, the Department similarly believes
that the definition is clear and can be easily used to evaluate
borrower defenses. Moreover, a substantial misrepresentation in the
borrower defense context incorporates similar concepts to materiality.
Under proposed Sec. 685.222(d), the borrower must show that he or she
``reasonably relied'' upon the misrepresentation at issue. As discussed
above, generally materiality refers to whether the information in
question was information to which a reasonable person would attach
importance to, in making the decision at issue. Similarly, in
determining whether the borrower reasonably relied on the
misrepresentation, the Department would consider whether the
misrepresentation related to information to which the borrower would
reasonably attach importance in making the decision to enroll or
continue enrollment at the school. As a result, the Department
considers it unnecessary to add an explicit materiality element to the
definition of ``substantial misrepresentation,'' for the purposes of
claims under the borrower defense regulations.
Substantial Misrepresentation: The Borrower's Detriment
The definition of ``substantial misrepresentation,'' for the
purpose of proposed Sec. 685.222(d), would require that the borrower
reasonably relied on the misrepresentation to the borrower's detriment.
As noted previously, the proposed borrower defense regulations are
intended to provide relief for individual borrowers for schools'
wrongful conduct that led in a meaningful way to harm or injury to the
borrower based upon the borrower's specific circumstances. We believe
that a demonstration of detriment or injury to the borrower will
protect the Federal government, taxpayers, and institutions from
unsubstantiated claims. As a result, we believe that it is appropriate
to require that a preponderance of the evidence demonstrate the
misrepresentation at issue influenced the borrower, or led to the
borrower's reliance on the misrepresentation, to the borrower's
detriment.
Limitation Periods
For each of the bases for a borrower defense under the proposed
Federal standard, the Department considered whether there should be a
limitation on the time period during which borrower defense claims may
be brought and, if so, what the limitation period should be. Because
the availability of evidence for a borrower defense that is based on a
judgment in a court or administrative tribunal is not a concern, as the
only evidence required is the judgment itself, we propose no limitation
period under proposed Sec. 685.222(b) for those claims. However, for
the bases for a borrower defense in proposed Sec. 685.222(c) and (d),
we believe a limitation period is appropriate. A limitation period for
borrower defense claims based on a breach of contract or substantial
misrepresentation, by encouraging borrowers to assert borrower defense
claims while memories and evidence are fresh, would make the claim
resolution process more reliable.
When considering a limitation period that would provide for a
reasonable amount of time during which a borrower might submit a claim,
we also recognized that common law generally allows a debtor to assert
claims from the same transaction as the loan at any time as a defense
to repayment of the loan, but requires a debtor to assert any claim for
recovery of payments already made within the deadlines that would apply
had the debtor brought suit on the claim. Consistent with that
generally applicable principle, we propose here that no limitation
period would apply to borrower defense claims asserted under proposed
Sec. 685.222(c) or (d) as defenses to repayment of any outstanding
loan obligation. To select an appropriate limit on the period during
which a claim for recovery may be made, we looked to the existing
limitation periods under State and Federal law for similar claims. With
regard to a borrower defense claim based on a substantial
misrepresentation, we considered, among other things, limitation
periods applicable to consumer protection and fraud claims, as those
claims often address misleading or deceptive conduct and are, thus,
analogous to claims based on a substantial misrepresentation.
The Department's research indicates that six years is one of the
breach of
[[Page 39345]]
contract limitation periods most commonly used by States, as well as
the limitation period applicable to non-tort claims against the United
States, 28 U.S.C. 2401(a).
Because many non-Federal negotiators' discussions of school
misconduct included discussions of fraud, the Department also
considered existing limitation periods for fraud. Although limitation
periods under State consumer protection laws vary, our research
indicates that three years is one of the most common limitation periods
used by the States.
For claims for recovery of payments already made that are based on
breach of contract, we propose a six-year limitation period that would
begin upon the breach of contract. For claims for recovery of payments
already made that are based on a substantial misrepresentation, we also
propose six years as the limitation period, but the period would begin
when a borrower discovers or should have reasonably discovered the
facts that constitute the misrepresentation. Although six years is
longer than the period afforded under many State laws for fraud and
consumer protection, other States do provide a six-year limitation
period for similar claims, and the Department believes a six-year
period would provide sufficient time for a borrower to gather evidence
related to a substantial misrepresentation.
The non-Federal negotiators representing consumer advocates, legal
assistance organizations, and State AGs suggested that no limitation
period should apply to defenses to repayment of remaining amounts owed
on a debt, under the legal principle of recoupment (asserting a claim
as a defense to repayment). As noted earlier, we propose to adopt this
position. Later, some non-Federal negotiators suggested that,
notwithstanding the distinction under State and Federal law between
recoupment and asserting a claim for an affirmative recovery of amounts
previously paid, the Department should apply no limitation period to
affirmative claims for recovery. In support of this position, they
cited the Department's ability to collect on a Direct Loan until it is
paid in full or discharged. Other non-Federal negotiators, however,
expressed concerns about having no limitation period for borrower
defense claims, stating that such an approach would result in
significant difficulties for a school in responding to allegations due
to a lack of documentary evidence and witnesses and would subject
schools to broader liability than under the current borrower defense
standard based upon State law under Sec. 685.206(c).
After careful consideration of the legal principles cited by the
negotiators, we do not believe there is justification to depart from
the requirements that Federal and State courts generally apply to
affirmative claims to recover amounts already collected on a debt. We
believe the proposed limitation periods are appropriate for the reasons
stated above, regarding existing periods of limitation in State and
Federal law and the Department's interest in the reliability of the
claim resolution process. However, we seek comment on whether the
Department should adopt different limitation periods for borrower
defense claims under Sec. 685.222(c) and (d), and, if so, what the
limitation periods should be, what the supporting rationale for those
periods would be, and why those other limitation periods would meet the
objectives outlined in this section.
Non-Federal negotiators asked the Department to clarify, with
respect to the substantial misrepresentation limitation period, when a
borrower would be deemed to have discovered, or when a borrower should
have reasonably discovered, the facts constituting a substantial
misrepresentation. For example, a borrower may learn of a substantial
misrepresentation upon discussion with other students or borrowers, or
it may be deemed that a borrower should have reasonably known of the
facts underlying a substantial misrepresentation if facts concerning
the misrepresentation are published in nationwide news articles.
However, the borrower must demonstrate when the borrower discovered the
facts underlying the specific substantial misrepresentation forming the
basis of the borrower defense. For example, knowledge of one particular
problem at a school would not necessarily give notice of other,
unrelated problems. Thus, student warnings issued for gainful
employment programs under 34 CFR 668.410 or relating to repayment rate
under proposed Sec. 668.41(h), or the disclosure of proposed financial
protections, such as a letter of credit, under proposed Sec.
668.41(i), would warn students about whether a program could close
soon, the repayment outcomes of borrowers at the school, or the
school's financial risk, but would not put students on notice of
misrepresentations by the school of matters other than earnings and
debt of graduates or financial soundness.
To demonstrate that the borrower is asserting a borrower defense
within six years of discovery of the facts on which the claim is based,
the borrower should explain in the borrower defense application how he
or she learned of the substantial misrepresentation and include any
applicable documents or other information demonstrating the source of
the knowledge. Again, we note that, under the proposed regulations, the
borrower may assert a claim based on substantial misrepresentation
solely for discharge of the remaining amount owed on the Direct Loan at
any time.
Process for Individual Borrowers (Sec. 685.222(e))
Statute: Section 455 of the HEA sets forth the terms and conditions
of Direct Loan Program loans.
Current Regulations: Section 685.206(c) states that borrowers have
the right to assert borrower defenses, but does not establish any
process for doing so.
Proposed Regulations: Proposed Sec. 685.222(e) would establish the
process for an individual borrower to bring a borrower defense.
Proposed Sec. 685.222(e)(1) would describe the steps an individual
borrower must take to initiate a borrower defense claim. First, an
individual borrower would submit an application to the Secretary, on a
form approved by the Secretary. In the application, the borrower would
certify that he or she received the proceeds of a loan to attend a
school; would have the opportunity to provide evidence that supports
the borrower defense; and would indicate whether he or she has made a
claim with respect to the information underlying the borrower defense
with any third party, and, if so, the amount of any payment received by
the borrower or credited to the borrower's loan obligation. The
borrower would also be required to provide any other information or
supporting documentation reasonably requested by the Secretary. The
Secretary would provide notice of the borrower's application for a
borrower defense to the school at issue.
Proposed Sec. 685.222(e)(2) would describe the treatment of
defaulted and nondefaulted borrowers upon the Secretary's receipt of
the borrower defense claim. If the borrower is not in default on the
loan for which a borrower defense has been asserted, the Secretary
would grant an administrative forbearance, notify the borrower of the
option to decline the forbearance and to continue making payments on
the loan, and provide the borrower with information about the
availability of the income-contingent repayment plans under Sec.
685.209 and the income-based repayment plan under Sec. 685.221. If the
borrower is in default on the loan for which a borrower defense has
been asserted, the Secretary would suspend collection activity on the
loan until the
[[Page 39346]]
Secretary issues a decision on the borrower's claim; notify the
borrower of the suspension of collection activity and explain that
collection activity will resume if the Secretary determines that the
borrower does not qualify for a full discharge; and notify the borrower
of the option to continue making payments under a rehabilitation
agreement or other repayment agreement on the defaulted loan.
To process the claim, the Secretary would designate a Department
official to review the borrower's application to determine whether the
application states a basis for a borrower defense, and would resolve
the claim through a fact-finding process conducted by the Department
official. As part of the fact-finding process, the Department official
would consider any evidence or argument presented by the borrower and
would also consider any additional information, including Department
records, any response or submissions from the school, and any
additional information or argument that may be obtained by the
Department official. The Department official would identify to the
borrower, and may identify to the school, the records he or she
considers relevant to the borrower defense. The Secretary provides any
of the identified records upon reasonable request to either the school
or the borrower.
At the conclusion of the proposed fact-finding process, the
Department official would issue a written decision. The decision of the
Department official would be final as to the merits of the claim and
any relief that may be warranted on the claim. If the Department
official approves the borrower defense, the Department official would
notify the borrower in writing of that determination and of the relief
provided as determined under Sec. 685.222(i) or, if the Department
official denies the borrower defense in full or in part, the Department
official would notify the borrower of the reasons for the denial, the
evidence that was relied upon, the portion of the loan that is due and
payable to the Secretary, whether the Secretary will reimburse any
amounts previously collected, and would inform the borrower that if any
balance remains on the loan, the loan will return to its status prior
to the borrower's application. The Secretary would also inform the
borrower of the opportunity to request reconsideration of the claim
based on new evidence not previously provided or identified as relied
upon in the final decision.
Under proposed Sec. 685.222(e)(5)(ii), the Secretary could reopen
a borrower defense application at any time to consider evidence that
was not considered in making the previous decision. The Secretary could
also consolidate individual applications that have common facts and
claims and resolve such borrower defenses as a group through the group
processes described under ``Group Process for Borrower Defenses--
General (34 CFR 685.222(f)),'' ``Group Process for Borrower Defenses--
Closed School (34 CFR 685.222(g)),'' and ``Group Process for Borrower
Defense Claims--Open School 34 CFR 685.222(h)).''
Finally, the Secretary could initiate a separate proceeding to
collect from the school the amount of relief resulting from a borrower
defense.
Reasons: The current regulations for borrower defense do not
provide a process for claims. Since Corinthian's 2015 bankruptcy, the
Department has received a number of borrower defense claims from
individuals outside of the Federal loan relief process initiated by the
Department for Corinthian students in response to the bankruptcy. The
lack of guidance has led to confusion for borrowers and inconsistency
in the types and format of information submitted for such requests. To
ease the Department's administrative burden in reviewing such requests
and the burden of borrowers making borrower defense claims, we propose
Sec. 685.222(e) to establish clear guidelines for individuals who wish
to submit a borrower defense claim.
Many of the non-Federal negotiators at the negotiated rulemaking
sessions emphasized the advantages of deciding claims on a group basis
wherever possible. In response to these arguments, the proposed
regulations would permit the Secretary to consolidate individual claims
that present common facts and claims pertaining to the same school and
resolve those claims through the group processes described under
``Group Process for Borrower Defenses--General (34 CFR 685.222(f)),''
``Group Process for Borrower Defenses--Closed School (34 CFR
685.222(g)),'' and ``Group Process for Borrower Defense Claims--Open
School (34 CFR 685.222(h)).''
To standardize the form of the requests and facilitate the
Department's efficient review, under the proposed process, the
Department would create an easy-to-use claim form for borrower defense
for use by individual borrowers to provide information regarding the
borrower's Direct Loan and evidence the borrower may have in support of
his or her claim, or such other information that the Department may
reasonably decide is necessary. In addition, the application would
require the borrower to indicate if he or she has submitted a claim to,
and received money from, entities aside from the Department for the
same alleged harm underlying the borrower defense claim. We believe
requesting such information is important to make clear to borrowers the
information the Department needs from them, to ensure the fairness of
the discharge process, and to protect Federal taxpayers by prohibiting
borrowers from collecting relief from multiple parties for the same
claim. If the borrower should choose to be represented by counsel, the
Department would work directly with such a representative, upon receipt
of the borrower's consent.
One non-Federal negotiator requested that the Department clarify
what evidence might be considered by the Department official, or
hearing official, in the group processes discussed under ``Group
Process for Borrower Defenses--General (34 CFR 685.222(f)),'' ``Group
Process for Borrower Defenses--Closed School (34 CFR 685.222(g)),'' and
``Group Process for Borrower Defense Claims--Open School (34 CFR
685.222(h)),'' when adjudicating a claim for borrower defense. Evidence
that a borrower could submit as part of the application may include,
but would not be limited to: The borrower's own statement or
declaration regarding the claim, statements of any other persons that
the borrower believes support the claim, and copies of any documents
that may be relevant to the borrower's claim. These documents may
include, for example, copies of the enrollment agreement with the
school, school catalogs, bulletins, letters or other communications,
Web page print-outs, circulars, advertisements, or news articles. In
addition to written materials, documents may also include any media by
which information can be preserved, such as videos or recordings. For
applications filed by an individual, a Department official may also
contact the borrower to obtain more information and such oral
statements may also be evidence that would be considered in the
borrower defense process. The Department official may also consider
other information that the Department has in its possession, such as
information obtained from the school or otherwise obtained by the
Department or third parties (e.g., accreditors, government agencies).
The kind of evidence that will be needed and available to determine the
validity of the borrower's claim will vary from case to case and will
depend on the specific circumstances of each borrower's claim.
The Department also proposes in Sec. 685.222(e)(7) that the
Secretary may initiate a separate proceeding to collect
[[Page 39347]]
from the school the amount of relief resulting from a borrower defense
determined under Sec. 685.222(e). As proposed, the Secretary may
initiate a proceeding to recover against the school, but may also
determine that a separate proceeding will not be initiated. For
example, the Secretary may decide not to initiate such a proceeding due
to evidentiary constraints. The Department intends that the proposed
fact-finding process used for an individual borrower defense claim
would be separate and distinct from the Department's efforts to recover
from schools any losses arising from a borrower defense. The final
decision would determine the amount of relief to be awarded, which in
turn would determine the amount of losses to the Secretary that the
Department can then collect from the school. However, the Department's
proposed regulation would not condition borrower relief awarded in this
proceeding on whether the Secretary has the actual ability to recover
those losses from the school. Rather, the Department will provide
relief to the borrower according to the final decision of this process,
and the Department's action to recover losses from the school will
follow in a separate proceeding.
Group Process for Borrower Defenses--General (Sec. 685.222(f))
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Section 487 of the HEA provides that institutions participating in
the title IV, HEA programs shall not engage in substantial
misrepresentation of the nature of the institution's education program,
its financial charges, or the employability of its graduates.
Current Regulations: Section 685.206(c) states that borrowers have
the right to assert borrower defenses, but does not establish any
process for doing so.
Proposed Regulations: Proposed Sec. 685.222(f) would provide a
framework for the borrower defense group process, including
descriptions of the circumstances under which borrower defense claims
asserted by or with regard to a group could be considered and the
process the Department would follow for borrower defenses for a group.
Generally, we propose that the Secretary would initiate a review of
borrower defense claims asserted by or with regard to a group. This
would occur when, upon consideration of factors including, but not
limited to, the existence of common facts and claims among borrowers
that are known to the Secretary, fiscal impact, and the promotion of
compliance by the school or other title IV, HEA program participants,
the Secretary determines it is appropriate to initiate a process to
determine whether a group of borrowers has a common borrower defense.
The proposed regulations would also provide for members of the
group to be identified by the Secretary from individually filed
applications or from any other source of information. Moreover, if the
Secretary determines that common facts and claims exist that apply to
borrowers who have not filed an application, the Secretary could
include such borrowers in the group.
Once a group of borrowers with common facts and claims has been
identified, under Sec. 685.222(f)(2)(i), the Secretary would designate
a Department official to present the group's common borrower defense
claim in the fact-finding process described in Sec. 685.222(g) or (h)
of this section, as applicable, and would provide each identified
member of the group with notice that allows the borrower to opt out of
the proceeding. The Secretary would notify the school, as practicable,
of the basis of the group's borrower defense, the initiation of the
fact-finding process, any procedure by which to request records, and
how the school should respond.
For a group of borrowers with common facts and claims for which the
Secretary determines there may be a borrower defense on the basis of a
substantial misrepresentation that was widely disseminated, there would
be a rebuttable presumption that all of the members of the group
reasonably relied on the misrepresentation.
Reasons: In response to requests by non-Federal negotiators
representing students and borrowers, consumer advocacy organizations,
and legal assistance organizations, we propose to establish a group
claim process that is designed to be simple, accessible, and fair, and
to promote greater efficiency and expediency in the resolution of
borrower defense claims.
The Secretary would determine whether a group process should be
initiated after consideration of relevant factors. We expect that the
Secretary would initiate a group process only where there are common
facts and claims among the borrowers. These common facts and claims may
emerge, for example, from the Department's analysis of individual
borrower defense claims; the identification by the Secretary of factors
that indicate a school has engaged in substantial misrepresentation
that has potentially impacted a group of borrowers; the Department's
receipt of a judgment possibly affecting a group of borrowers in the
same way; the Department's identification of a breach of contract that
may affect a group of borrowers; or, for loans first disbursed before
July 1, 2017, the Department's knowledge of a violation of State law
relating to the making of Direct Loans or provision of education
services affecting a group of borrowers. Evidence for any of these
determinations might come from submissions to the Department by
claimants, State AGs or other officials, or advocates for claimants, as
well as from the Department's investigations.
We also propose that if the Secretary determines that there are
common facts and claims that may affect numerous borrowers, the
Secretary may include in the group those borrowers whom we can identify
from Department records who are likely to have experienced conduct
involving common facts as those who have filed, and who could be
expected to have similar claims, even if those we identify have not
filed a borrower defense application. The Department believes that
including such borrowers would allow for faster relief for a broader
group of borrowers than if the process is limited to just those who
file applications for relief.
In proposed Sec. 685.222(f), we specify that, in determining
whether to initiate a group process, the Secretary may also consider
other factors. These factors include items such as the fiscal impact of
considering claims only in individual instances and the significant
amount of administrative resources required to consider such claims one
by one, the promotion of compliance by pursuing recovery from the
schools in aggregated amounts that may affect a school's interests, and
the deterrent effect such actions can be expected to have on both the
individual school and similarly situated schools. Although the
Department intends to carefully weigh the above factors in deciding
whether to initiate a group process--which we anticipate will have more
formal processes and procedures, involvement by the school, and
commitment of administrative resources by the Department--the
Department's consideration of such factors for the initiation of a
group process would not prevent individual borrowers from obtaining
determinations. Individual borrowers would be able to continue to seek
relief and obtain determinations as described in proposed Sec.
685.222(e), and could also opt out of a group process as described in
proposed Sec. 685.222(f)(2) at
[[Page 39348]]
the outset and utilize the process in Sec. 685.222(e).
We believe the Secretary is best positioned to make a determination
as to whether a group process is appropriate since the Secretary is
likely to have the most information regarding the circumstances that
warrant use of a group process. However, non-Federal negotiators
requested that State AGs and legal assistance organizations be allowed
to request that the Secretary initiate a group process and to make
submissions in those processes, and that the Secretary be required to
issue written responses to such requests and submissions. The
Department always welcomes cooperation and input from other Federal and
State enforcement entities, as well as legal assistance organizations
and advocacy groups. In our experience, such cooperation is more
effective when it is conducted through informal communication and
contact. Accordingly, we have not incorporated a provision regarding
written responses from the Secretary, but plan to create a point of
contact for State AGs to allow for active channels of communication on
borrower defense issues, and reiterate that we welcome a continuation
of cooperation and communication with other interested groups and
parties. As indicated above, the Department is also fully ready to
receive and make use of evidence and input from other stakeholders,
including advocates and State and Federal agencies.
In response to negotiator concerns, the proposed group process is
designed to ensure that the school has an opportunity for a full and
fair opportunity to be heard regarding claims. We propose that, when
the Secretary determines that the group claim process is appropriate,
the Department would assume responsibility for presenting the group's
claims in the administrative proceeding against the school. Because the
administrative proceeding will determine both the validity of the
borrowers' claims and the liability of the school to the Department,
the Department believes that it is the appropriate party to present the
claims. Additionally, by undertaking this role, the Department intends
to reduce the likelihood that third parties, such as debt
``counselors'' or collection companies, are able to prey upon borrowers
unfamiliar with the borrower defense process by promoting their
services to arrange relief, and to lessen the legal costs and
administrative burden to borrowers in the process.
In response to negotiator concerns, we have proposed that a
borrower could opt out of a group borrower defense claim action, and
instead submit an individual application. This would allow the
individual to make his or her own case (with or without legal
representation), giving the individual the same right to control the
assertion of the individual's claim as would be available in a class
action. Fed. R. Civ. Proc. 23(c). A determination made in the
administrative proceeding on the group claim would be given substantial
weight in any subsequent evaluation of the individual claim of a
borrower who ``opted out'' of the group process.
Finally, for a group of borrowers with common facts and claims for
which the Secretary determines there may be a borrower defense on the
basis of a substantial misrepresentation that was widely disseminated,
there would be a rebuttable presumption that all of the members of the
group to which the representation was made reasonably relied on the
misrepresentation. If a representation that is reasonably likely to
induce a recipient to act is made to a broad audience, we consider it
logical to presume that those audience members did in fact rely on that
representation. We believe there is a rational nexus between the
publication of the misrepresentation and the likelihood of reliance by
the audience such that we propose to adopt a rebuttable presumption
that all members of the group did in fact so rely.\18\ This rebuttable
presumption would shift the burden to the school, requiring the school
to demonstrate that individuals in the identified group did not in fact
rely on the misrepresentation at issue.
---------------------------------------------------------------------------
\18\ Case law requires no more than such a rational nexus:
. . . [A]dministrative agencies may establish presumptions, ``as
long as there is a rational nexus between the proven facts and the
presumed facts.'' Cole v. U.S. Dep't of Agric., 33 F.3d 1263, 1267
(11th Cir. 1994); Sec'y of Labor v. Keystone Coal Mining Corp., 151
F.3d 1096, 1100-01 (D.C. Cir. 1998) (stating that presumptions are
permissible ``if there is `a sound and rational connection between
the proved and inferred facts' '') (quoting Chem. Mfrs. Ass'n v.
Dep't of Transp., 105 F.3d 702, 705 (D.C. Cir. 1997)). ``Appellants
bear `the heavy burden of demonstrating that there is no rational
connection between the fact proved and the ultimate fact to be
presumed.' '' USX Corp., 395 F.3d at 170 (quoting Cole, 33 F.3d at
1267).
U.S. Steel Corp. v. Astrue, 495 F.3d 1272, 1284 (11th Cir.
2007).
---------------------------------------------------------------------------
Group Process for Borrower Defenses--Closed School (Sec. 685.222(g))
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c) states that borrowers may
assert borrower defenses, but does not establish any process for doing
so.
Proposed Regulations: Section 685.222(g) of the proposed
regulations would establish a process for review and determination of
borrower defense claims for groups identified by the Secretary for
which the claims relate to Direct Loans to attend a school that has
closed and has provided no financial protection currently available to
the Secretary from which to recover any losses based on borrower
defense claims, and for which there is no appropriate entity from which
the Secretary can otherwise practicably recover such losses.
Under proposed Sec. 685.222(g)(1), a hearing official would review
the Department official's basis for identifying the group and resolve
the claim through a fact-finding process. As part of that process, the
hearing official would consider any evidence and argument presented by
the Department official on behalf of the group and, as necessary to
determine any claims at issue, on behalf of individual members of the
group. The hearing official would consider any additional information
the Department official considers necessary, including any Department
records or response from the school or a person affiliated with the
school as described in Sec. 668.174(b) as reported to the Department
or as recorded in the Department's records, if practicable. As
discussed under ``Borrower Relief (34 CFR 685.222(i) and Appendix A),''
the hearing official may also request information as described in Sec.
685.222(i)(1).
The hearing official would issue a written decision determining the
merits of the group borrower defense claim. If the hearing official
approves the borrower defense, that decision would notify the members
of the group of that determination and of the relief provided on the
basis of the borrower defense claim. If the hearing official denies the
borrower defense in full or in part, that decision would state the
reasons for the denial, the evidence that was relied upon, the portion
of the loans that are due and payable to the Secretary, and whether
reimbursement of amounts previously collected is granted, and would
inform the borrowers that if any balance remains on their respective
loans, the loans will return to their statuses prior to the group
process. The Secretary would provide copies of the written decision to
the members of the group, and, as practicable, to the school.
Similar to the individual claim process, the hearing official's
decision
[[Page 39349]]
would be final as to the merits of the group borrower defense and any
relief that may be granted on the group borrower defense. However, if
relief for the group was denied in full or in part, an individual
borrower would be able to request that the Secretary reconsider the
borrower defense upon the identification of new evidence in support of
the borrower's individual borrower defense claim as described in
proposed Sec. 685.222(e)(5)(i). Additionally, the proposed regulation
provides that the Secretary may also reopen a borrower defense
application at any time to consider evidence that was not considered in
making the previous decision.
Reasons: When a group borrower defense is asserted with respect to
Direct Loans to attend a school that has closed and has provided no
financial protection currently available to the Secretary from which to
recover any losses based on borrower defense claims, and for which
there is no appropriate entity such as a corporate owner of a school
from which the Secretary can otherwise practicably recover such
losses,\19\ the proposed regulations on the process for resolving the
claim would focus on the arguments and evidence that may be brought by
the Department official before a hearing official.
---------------------------------------------------------------------------
\19\ In some instances, the Department may consider a school
owned by a corporate parent to be financially responsible based on
an evaluation of the consolidated balance sheets of the school, the
parent corporation, and affiliated subsidiaries. 34 CFR
668.23(d)(2). If the school is considered to be financially
responsible only based on the assets of the consolidated entities,
the Department requires the parent corporation to execute the
Program Participation Agreement by which the school participates.
---------------------------------------------------------------------------
We expect that the fact-finding process in this case would occur
after a school has liquidated its assets and, thus, would not typically
involve the school. The evidence and records used to make a
determination would be largely composed of the common facts and claims
that served as the basis for forming the group.
While this group borrower defense process would not typically
involve the school, a hearing official would still preside over the
fact-finding process to ensure that the decision is based on a sound
and thorough evaluation of the merits of the claim. The hearing
official would consider the arguments and evidence presented by the
designated Department official and, as discussed under ``Borrower
Relief (34 CFR 685.222(i) and Appendix A),'' may also request
information under proposed Sec. 685.222(i)(1).
Group Process for Borrower Defense Claims--Open School (Sec.
685.222(h))
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c) states that borrowers may
assert borrower defenses, but does not establish any process for doing
so.
Proposed Regulations: Proposed Sec. 685.222(h) would establish the
following process for groups identified by the Secretary for which the
borrower defense is asserted with respect to Direct Loans to attend an
open school.
A hearing official would resolve the borrower defense and determine
any liability of the school through a fact-finding process. As part of
the process, the hearing official would consider any evidence and
argument presented by the school and the Department official on behalf
of the group and, as necessary, evidence presented on behalf of
individual group members. As discussed under ``Borrower Relief (34 CFR
685.222(i) and Appendix A),'' the hearing official may also request
information as described in Sec. 685.222(i)(1).
The hearing official would issue a written decision, regardless of
the outcome of the group borrower defense. If the hearing official
approved the borrower defense, that decision would describe the basis
for the determination, notify the members of the group of the relief
provided on the basis of the borrower defense, and notify the school of
any liability to the Secretary for the amounts discharged and
reimbursed.
If the hearing official denied the borrower defense in full or in
part, the written decision would state the reasons for the denial, the
evidence that was relied upon, the portion of the loans that are due
and payable to the Secretary, whether reimbursement of amounts
previously collected is granted, and would inform the borrowers that
their loans--in the amounts determined to be enforceable obligations--
will return to their statuses prior to the group borrower defense
process. It also would notify the school of any liability to the
Secretary for any amounts discharged. The Secretary would provide
copies of the written decision to the members of the group, the
Department official, and the school.
The hearing official's decision would become final as to the merits
of the group borrower defense claim and any relief that may be granted
within 30 days after the decision is issued and received by the
Department official and the school unless, within that 30-day period,
the school or the Department official appeals the decision to the
Secretary. A decision of the hearing official would not take effect
pending the appeal. The Secretary would render a final decision
following consideration of any appeal.
After a final decision has been issued, if relief for the group has
been denied in full or in part, a borrower may file an individual claim
for relief for amounts not discharged in the group process. In
addition, the Secretary may reopen a borrower defense application at
any time to consider evidence that was not considered in making the
previous decision, as discussed above.
The Secretary would collect from the school any amount of relief
granted by the Secretary for the borrowers' approved borrower defense.
Relief may include discharge of some or all accrued interest, and the
loss to the government in those instances will include that discharged
interest.
Reasons: The group borrower defense process involving an open
school would be structured to provide substantive and procedural due
process protections to both the borrowers and the school. By having a
Department official present the group's borrower defense claims, the
Department seeks to lessen, if not eliminate, the need for borrowers to
retain counsel in order to pursue relief and remove potential
difficulties that navigating the borrower defense process could present
for borrowers. As proposed, schools would have the opportunity to raise
arguments and evidence, including any defenses, in the proceeding.
Additionally, as discussed under ``Borrower Relief (34 CFR 685.222(i)
and Appendix A),'' the hearing official may also independently request
information as described in Sec. 685.222(i)(1).
The open school process would also provide for an appeal to the
Secretary of the hearing official's decision, by either the school or
the Department official. The proposed regulations would allow
individual members of the group to request reconsideration of their
individual claims upon the presentation of new evidence in the event
the group claim is not successful.
Non-Federal negotiators requested clarification as to whether a
hearing official's determination of borrower relief in the open school
process would be contingent upon the Department's ability to recover
its losses from granting such relief from the school. The final
decision of the hearing official, or of the Secretary upon appeal,
would determine the amount of relief to be
[[Page 39350]]
awarded, which in turn would determine the amount of losses to the
Secretary that the Department can then collect from the school under
proposed Sec. 685.222(h)(5). However, while the final decision will
include a determination as to a school's liability for the conduct in
question, the Department intends that determinations of borrower relief
will be independent of, and not contingent upon, determinations of
school liability that will lead to the Department's ability to recover
the losses it incurs from granting such relief.
Borrower Relief (Sec. 685.222(i) and Appendix A)
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c) states that, in the event
of a successful borrower defense claim against repayment, the Secretary
would notify the borrower that he or she is relieved of the obligation
to repay all or part of the loan and associated costs and fees, and
also affords the borrower further appropriate relief. This further
relief may include, but is not limited to, reimbursement for amounts
paid toward the loan voluntarily or through enforced collection, a
determination that the borrower is not in default and is eligible to
receive title IV, HEA program aid, and updating reports to consumer
reporting agencies.
Proposed Regulations: Proposed Sec. 685.222(i)(1) describes the
proposed process by which a borrower's relief would be determined when
a borrower defense claim is approved under the procedures in Sec.
685.222(e), (g), or (h). The Department official or--for group claims,
the hearing official--charged with adjudicating the claim would
determine the appropriate method for calculating, and amount of, relief
arising out of the facts underlying the borrower's claim, based upon
the information gathered by, or presented to and considered by, the
official. The amount of relief may include a discharge of all amounts
owed to the Secretary on the loan at issue and may include the recovery
of amounts previously collected by the Secretary on the loan, or some
lesser amount. The official would consider the availability of
information required for a method of calculation and could use one or
more of the methods described in Appendix A to the proposed
regulations, or some other method determined by the official. For group
claims, the official could consider information from a sample of
borrowers in the group.
The designated Department official would notify the borrower of the
relief determination and the potential for tax implications and would
provide the borrower an opportunity to opt out of group relief, if
applicable.
Consistent with the determination of relief, the Secretary would
discharge the borrower's obligation to repay all or part of the loan
and associated costs and fees that the borrower would otherwise be
obligated to pay and, if applicable, would reimburse the borrower for
amounts paid to the Secretary toward the loan voluntarily or through
enforced collection.\20\
---------------------------------------------------------------------------
\20\ Reimbursement includes only the actual gross amount paid,
including any amount used to defray collection costs, but does not
include interest on the amount paid.
``Under the long-standing `no-interest rule,' sovereign immunity
shields the U.S. government from interest charges for which it would
otherwise be liable, unless it explicitly waives that immunity[.]''
Sandstrom v. Principi, 358 F.3d 1376, 1379 (Fed. Cir. 2004).
DMS Imaging, Inc. v. United States, 123 Fed. Cl. 645, 660
(2015). There is no waiver of that immunity in the HEA.
---------------------------------------------------------------------------
The Secretary or the hearing official, as applicable, would afford
the borrower such further relief as the Secretary or the hearing
official determines is appropriate under the circumstances. That relief
would include, but not be limited to, determining that the borrower is
not in default on the loan and is eligible to receive assistance under
title IV of the HEA, and updating reports to consumer reporting
agencies to which the Secretary previously made adverse credit reports
with regard to the borrower's Direct Loan.
The total amount of the relief granted with respect to a borrower
defense cannot exceed the amount of the loan and any associated costs
and fees, and would be reduced by the amount of any refund,
reimbursement, indemnification, restitution, compensatory damages,
settlement, debt forgiveness, discharge, cancellation, compromise, or
any other benefit received by, or on behalf of, the borrower that was
related to the borrower defense. The relief to the borrower may not
include non-pecuniary damages such as inconvenience, aggravation,
emotional distress, or punitive damages.
Appendix A describes some of the methods the Secretary could employ
to calculate relief if the requested relief for a borrower defense is
approved in full or in part. The amount of relief may include a
cancellation of the outstanding balance on the loan at issue, or some
lesser amount, and may include the recovery of amounts previously
collected by the Secretary on the portion of the loan determined to be
not enforceable against the borrower as a result of the borrower's
claim, taking into account any limiting factors such as applicable
limitation periods or statutes of limitation. The methods described
include the following:
[ssquf] The difference between what the borrower paid and what a
reasonable borrower would have paid had the school made an accurate
representation as to the issue that was the subject of the substantial
misrepresentation underlying the borrower defense claim;
[ssquf] The difference between the amount of financial charges the
borrower could have reasonably believed the school was charging, and
the actual amount of financial charges made by the school, for claims
regarding the cost of a borrower's program of study; and
[ssquf] The total amount of the borrower's economic loss, less the
value of the benefit, if any, of the education obtained by the
borrower. Economic loss, for the purposes of this section, may be no
greater than the amount of the cost of attendance. The value of the
benefit of the education may include transferable credits obtained by
the borrower,, and, for gainful employment programs, qualifying
placement in an occupation within the Standard Occupational
Classification (SOC) code for which the training was provided, provided
that the borrower's earnings meet the expected salary for the program's
designated occupation(s) or field, as determined using an earnings
benchmark for that occupation. The Department official or hearing
official will consider any evidence indicating that no identifiable
benefit of the education was received by the student.
The Secretary may also calculate the borrower's relief on the basis
of such other measures as the Secretary may determine.
Reasons: The proposed regulations provide for the determination of
relief commensurate with the borrower's injury stemming from the act or
omission of the school asserted in the borrower defense claim. While
some borrower defenses may merit a discharge of the full amount of the
Direct Loan, other claimants may prove an injury in an amount less than
that full amount. After considering relevant facts and data, the
Department official or the hearing official, as applicable, would
determine an amount of relief that is fair to the borrower. This
approach would compensate borrowers fairly for the harm they suffered
while protecting the fiscal interests of the Federal government.
[[Page 39351]]
Proposed Sec. 685.222(i)(5) would provide that the relief provided
to a borrower under Sec. 685.206(c) or Sec. 685.222 may not exceed
the amount of the Direct Loan and associated costs and fees. The
Department's ability to provide relief for borrowers is predicated upon
the existence of the borrower's Direct Loan, and the Department's
ability to provide relief for a borrower on a Direct Loan is limited to
the extent of the Department's authority to take action on such a loan.
Section 455(h) of the HEA, 20 U.S.C. 1087e(h), gives the Department the
authority to allow borrowers to assert ``a defense to repayment of a
[Direct Loan],'' and discharge outstanding amounts to be repaid on the
loan. However, section 455(h) also provides that ``in no event may a
borrower recover from the Secretary . . . an amount in excess of the
amount the borrower has repaid on such loan.'' As a result, the
Department may not reimburse a borrower for amounts in excess of the
payments that the borrower has made on the loan to the Secretary as the
holder of the Direct Loan. Additionally, proposed Sec. 685.222(i)(5)
would reduce a borrower's amount of relief from the borrower defense
process by any amounts that the borrower obtained pursuant to such
other sources for reasons discussed under ``Process for Individual
Borrowers (34 CFR 685.222(e)).'' The rule is intended to prevent a
double recovery for the same injury at the expense of the taxpayer.
Because the borrower defense process relates to the borrower's receipt
of a Federal loan, we would reduce the amount of a borrower's relief
from the borrower defense process by the amount received from such
other sources only if the relief from the other sources also relates to
the Federal loan that is the subject of the borrower defense.
Additionally, proposed Sec. 685.222(i)(5) would also clarify that
a borrower may not receive non-pecuniary damages such as damages for
inconvenience, aggravation, emotional distress, or punitive damages. We
recognize that, in certain civil lawsuits, plaintiffs may be awarded
such damages by a court. However, such damages are not easily
calculable and may be highly subjective. The Department believes that
excluding non-pecuniary damages from relief under this rule would help
produce more consistent and fair results for borrowers.
Subject to these limitations, the Department's proposal would
require that the designated Department official, or hearing official,
as applicable, determine the appropriate method for calculating the
relief to the borrower and the amount of such relief, whether relief to
the borrower was approved in full or in part. Determinations on
borrower defenses may vary widely, depending on the underlying basis of
the claim and circumstances alleged, as well as the level of injury
suffered by or detriment to the borrower. For example, for a borrower
defense claim brought for a breach of a discrete contractual term such
as a school's failure to provide some specific service, the borrower's
injury may be more appropriately calculated in consideration of the
value of that service and may not warrant a full discharge of the
borrower's loan and full reimbursement of payments on the loan made to
the Secretary. For example, if the school contractually promised to
provide tutoring services, but failed to provide such services, then
the borrower would receive the cost of such tutoring services as relief
under the proposed method.
We also recognize that the feasibility of any particular method of
calculation may be limited due to a lack of available information
required for such a method. Information regarding tuition prices among
comparable programs in a specific geographic region may not be
available or suitable for use in the calculation of relief for an
individual borrower's claim, but may in certain circumstances be
available and relevant for the calculation of relief for a group of
borrowers. To permit the Department official or the hearing official,
as applicable, to determine the appropriate method of calculation and
to determine relief, the proposed regulations would provide that the
official may request information for such purposes. Additionally, the
proposed regulations would require the official to consider what
information may be feasibly obtained in selecting a method of
calculation and in making requests for information.
For determinations of relief for a group of borrowers pursuant to
Sec. 685.222(g) and (h), the Department also believes it is
appropriate to allow the hearing official to consider evidence from a
sample of borrowers from the group. The proposed group claim processes
are designed to facilitate the efficient adjudication of borrower
defenses with common facts and claims. We believe that allowing a
calculation of relief based upon information from a sample of borrowers
would facilitate this goal. However, the hearing official would
consider in each case the feasibility of using a sample, and the method
of determining the sample, in determining the appropriate method for
calculating relief.
In proposed Sec. 685.222(i)(1), the Department also cross-
references proposed Appendix A to subpart B of part 685, which lists
specific methods by which a borrower's relief may be calculated.
Appendix A notes that the amount of the borrower's relief may include a
discharge of all amounts owed to the Secretary on the loan at issue, or
a lesser amount, and may include the recovery of amounts previously
collected by the Secretary on the loan. The Department recognizes that
the choice and use of any method listed in Appendix A may vary
depending on the availability of information and underlying facts and
claims for the borrower defense, as noted in paragraph (i)(1), and also
notes that the designated Department official or hearing official, as
applicable, may use another method that is not listed to calculate
relief. However, the Department proposes the methods in Appendix A as
possible methodologies for a designated Department official or hearing
official, as applicable, to consider in determining calculations for
relief.
The first proposed method in Appendix A applies in the case of a
substantial misrepresentation and looks to the difference between what
was actually paid by a borrower in reliance on a misrepresentation, and
what the borrower would have paid if the borrower had been given an
accurate understanding of the subject of the substantial
misrepresentation. The item at issue in the substantial
misrepresentation could include the total cost of attendance at a
school, or could pertain to a specific service related to the making of
the borrower's Direct Loan or the provision of educational services for
which the loan was provided. In some situations, as when the borrower
receives education that proves to be worthless, a substantial
misrepresentation may warrant full relief, without further analysis.
However, in other situations, the Department believes it may be
appropriate to determine a borrower's relief by restoring to the
borrower the value of what he or she paid for, but did not receive. We
believe that such an approach is consistent with the Department's
interest in providing relief to borrowers for the harm they suffered
while protecting the Federal taxpayer and the interests of the Direct
Loan Program.
The second proposed method in Appendix A looks to the difference
between the amount of financial charges a borrower reasonably believed
that a school was charging, and the actual amount of charges made by
the school regarding the cost of a borrower's
[[Page 39352]]
program of study. For example, if a school misrepresented the amount of
a participation fee or the costs of books for a specific class, under
this method, the borrower would be entitled to the difference between
what the borrower reasonably thought the charges were as represented by
the school, and the actual costs of such items. To the extent that a
borrower did, for example, participate in such an experience or did
receive the books, we believe that such an approach balances the
borrower's interest in paying actual costs with the Department's
interest in protecting the Federal taxpayer.
The third proposed method in Appendix A is based on the concept
that, if circumstances warrant, a borrower may be entitled to receive
the total amount of his or her economic loss. Economic loss may not be
greater than the borrower's cost of attendance, which is a term defined
in section 472 of the HEA, 20 U.S.C. 1087ll. Pursuant to section 472, a
borrower may obtain Federal financial aid up to the cost of attendance
at a school and may use that aid only for expenses related to
attendance, which include costs such as tuition and fees; allowances
for books, supplies, transportation, and miscellaneous personal
expenses; allowances for room and board; and allowances for dependent
care for students with dependents, among others. The Department has
stated that it will recognize borrower defenses only if they are
directly related to the making of a Direct Loan or to the school's
provision of educational services for which the loan was provided. 60
FR 37768, 37769. Section 484(a)(4)(A) of the HEA requires the borrower
to commit to use title IV, HEA funds received only to pay expenses
incurred to attend the school. By clarifying that a borrower's relief
under the proposed method may be no greater than the borrower's cost of
attendance at the school, the proposed approach would avoid the
difficulty of attempting to track which particular expense the borrower
paid with the loan proceeds, as opposed to those paid with grant funds
or personal funds. It would do so by including only those costs that
Congress considered to be costs that all title IV, HEA applicants would
incur and warrant Federal consideration and support. The third proposed
method would also note that the relief measured will be reduced by the
value of the benefit, if any, of the education. We recognize that under
some circumstances, a borrower's education will be deemed to have no
value, and thus the borrower's relief would be measured by the
borrower's total economic loss, subject to the limit that the
borrower's relief can only be approved up to the amount of the
borrower's Direct Loan. The proposed method explicitly states that the
Department official, or hearing official, will consider any evidence
that no benefit was received by the student. However, in other
circumstances, we believe it will be appropriate for a designated
Department official or hearing official, as applicable, to consider the
value provided by the education, as determined by the official. For
example, if a borrower obtained transferrable credits, then the
borrower can use those credits towards the completion of his or her
education at another school, thus reducing his or her cost of
attendance at that other institution. However, if transferability of
those credits is limited due to the school's accreditation or for other
reasons, then the hearing official or designated Department official
may consider such factors and assign due value to the credits.
Similarly, for gainful employment programs, where the explicit purpose
of such programs is to train students for specific vocations, the
Department believes it could be appropriate to consider whether the
borrower obtained qualifying placement with earnings commensurate with
the expected earnings for the occupation or field for which the
borrower obtained his or her training. The expected salary would be
determined using an earnings benchmark for that occupation. Although
the proposed method would note transferable credits and qualifying
placement and earnings for gainful employment program borrowers as
possible indicators of value, this list is not exhaustive and the
hearing official or designated Department official would be permitted
to also consider other factors. As with the other proposed methods, we
believes this approach balances the interest of the Federal taxpayer
with a borrower's interest in paying for only the true cost of his or
her education, in light of the act or omission of the school giving
rise to the borrower defense.
Non-Federal negotiators requested that the Department create a
presumption of full discharge and reimbursement of amounts paid on the
loan whenever a borrower defense is approved by the Department. In
cases where a Department official is making determinations, under
proposed Sec. 685.222(e), such a presumption would shift the burden of
disproving loss to the Department. In cases where a group process has
been initiated under proposed Sec. 685.222(f)-(h), this burden would
be shifted to the school. However, as noted, the Department has a
responsibility to protect the interests of Federal taxpayers and such
burden shifting is not justified when losses from borrower defenses may
be borne by the taxpayer. The Department believes that to balance its
interest in protecting the taxpayer with its interest in providing fair
outcomes to borrowers, the Department must consider the extent to which
claimants actually suffered financial loss when determining relief. In
proposing that designated Department officials and hearing officials
consider such calculations, however, the Department does not preclude
full relief for borrowers; rather, such officials would carefully
consider available evidence and make reasoned determinations as to when
and whether full relief is justified.
Proposed Sec. 685.222(i)(2) lists certain items the designated
Department official or hearing official would include in the
notification to the borrower of the relief determination. Given that
the Department does not have the authority to determine the tax
implications for relief in borrower defenses, which is within the
jurisdiction of the Internal Revenue Service, the notice would simply
advise the borrower that accepting the relief could affect the
borrower's tax obligations. The Department would encourage any borrower
who receives relief to seek advice from tax professionals on the tax
implications of his or her acceptance of that relief.
Relief granted through the group processes described in proposed
Sec. 685.222(f) to (h) may raise specific concerns for members who did
not file an application for borrower defense or members who may not
have been engaged in the process to their satisfaction. As a result,
for determinations of relief for a group of borrowers, the notice would
also provide members of the group with an opportunity to opt out of the
relief determination. This would provide borrowers in a group process
with a second opportunity to opt out of the proceeding, in addition to
the opt-out provided by the notice given at the initiation of the group
process described in proposed paragraph (f)(2). If a borrower declines
to accept the relief determination from the group process, the borrower
may choose to have his or her borrower defense considered on an
individual basis through the process described in proposed paragraph
(e) of this section. As noted earlier, the decision of the hearing
official in a group proceeding would likely bear
[[Page 39353]]
strongly on the resolution of the borrower's claim, if pursued on an
individual basis.
Borrower Cooperation and Transfer of Rights (Sec. 685.222(j) and (k))
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Current borrower defense regulations (Sec.
685.206(c)) do not address borrower cooperation or the transfer of
rights.
Proposed Regulations: Section 685.222(j) of the proposed
regulations would require that a borrower seeking relief through the
borrower defense process reasonably cooperate with the Secretary,
whether relief is sought through an individual application filed under
proposed Sec. 685.222(e) or through the group processes described in
proposed Sec. 685.222(f) to (h). The Secretary would be permitted to
revoke relief granted to a borrower who does not fulfill this
obligation.
In addition, proposed Sec. 685.222(k) would provide that, when the
Secretary grants relief in response to a borrower defense claim, the
borrower is deemed to have assigned to, and relinquished in favor of,
the Secretary any right to a loan refund (up to the amount discharged)
that the borrower may have by contract or applicable law with respect
to the loan or the contract for educational services for which the loan
was received, against the school, its principals, its affiliates, and
their successors, its sureties, and any private fund. If the borrower
asserts and recovers on a claim with a public fund, and if the
Secretary determines that the borrower's recovery from that public fund
was based on the same claim raised as a borrower defense and for the
same loan for which the discharge was granted, the Secretary may
reinstate the borrower's obligation to repay the amount discharged on
the loan based on the amount recovered from the public fund.
Proposed Sec. 685.222(k) would apply notwithstanding any provision
of State law that would otherwise restrict transfer of those rights by
the borrower, limit or prevent a transferee from exercising those
rights, or establish procedures or a scheme of distribution that would
prejudice the Secretary's ability to recover on those rights. However,
Sec. 685.222(k) would not prevent a borrower from pursuing relief
against any party named in Sec. 685.222(k) for claims in excess of
what has been assigned to the Secretary, or for claims unrelated to the
basis of the borrower defense on which the borrower received relief.
Reasons: When a borrower seeks a discharge of a Direct Loan, the
Department would require the borrower's cooperation to determine the
facts of the claim and provide the school with due process, as
appropriate. Absent this cooperation, the Department could be unable to
successfully resolve the borrower's request for relief. Similarly, for
the reasons discussed for requesting such information on claims to
third parties under ``Process for Individual Borrowers (34 CFR
685.222(e)),'' it is important that the Department prevent double
recovery for the same claim, when the borrower has already recovered
from another source.
Borrower Responsibilities and Defenses (Sec. 685.206)
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c) establishes the conditions
under which a Direct Loan borrower may assert a borrower defense, the
relief afforded by the Secretary in the event the borrower's claim is
successful, and the Secretary's authority to recover from the school
any loss that results from a successful borrower defense. Specifically,
Sec. 685.206(c) provides that a borrower defense may be asserted based
upon any act or omission of the school that would give rise to a cause
of action against the school under applicable State law. Under Sec.
685.206(c), a borrower defense is presumed to be raised only in
response to a proceeding by the Department to collect on a Direct Loan,
including, but not limited to, tax refund offset proceedings under 34
CFR 30.33, wage garnishment proceedings under 31 U.S.C. 3720D, salary
offset proceedings for Federal employees under 34 CFR part 31, and
consumer reporting proceedings under 31 U.S.C. 3711(f). Under Sec.
685.206(c), if a borrower defense is successful, the borrower is
relieved of the obligation to pay all or part of the loan and
associated costs and fees, and the borrower may be afforded such
further relief as the Secretary determines is appropriate, including,
among other things, reimbursement of amounts previously paid toward the
loan. Although Sec. 685.206(c) permits the Secretary to seek recovery
from the school of the amount of the loan to which the borrower defense
applies, it also provides that the Secretary may not initiate such a
proceeding after the three-year record retention period referenced in
Sec. 685.309(c).
Proposed Regulations: Proposed Sec. 685.206(c) would specify that
it applies only to borrower defenses asserted with respect to Direct
Loans disbursed prior to July 1, 2017. It would clarify that a borrower
defense must relate to the making of the Direct Loan or the provision
of educational services and define ``borrower defense'' to include one
or both of the following: A defense to repayment of amounts owed to the
Secretary on a Direct Loan, in whole or in part; and a right to recover
amounts previously collected by the Secretary on the Direct Loan, in
whole or in part. Proposed Sec. 685.206(c) would also exclude the
language that specifically refers to the Department's defaulted loan
collection proceedings.
Rather than specifying the available relief in proposed Sec.
685.206(c) for an approved borrower defense, proposed Sec.
685.206(c)(2) would refer to proposed Sec. 685.222(e)-(k), which would
provide procedures for both the assertion and the resolution of a
borrower defense claim, including available relief for an approved
borrower defense.
Proposed Sec. 685.206(c)(2) also would refer to proposed Sec.
685.222(a) for applicable definitions and to specify the order in which
the Department would process multiple loan discharge claims submitted
by the same borrower for the same loan or loans. Under proposed Sec.
685.222(a)(6), the Secretary would determine the order in which
multiple loan discharge claims submitted by the same borrower for the
same loan or loans are processed, and notify the borrower of that
order.
Proposed Sec. 685.206(c) would continue to permit the Secretary to
initiate a proceeding to recover from the school the amount of relief
arising from an approved borrower defense, but it would remove the
three-year limitation on the Secretary's ability to initiate such a
proceeding.
Reasons: The introduction of a definition of ``borrower defense''
streamlines the regulations. The proposed updates to Sec. 685.206
provide clarity to borrowers who have loans first disbursed prior to
July 1, 2017, and who are seeking relief based on a borrower defense
claim. The Department considered whether to change the standard by
which a borrower may assert a borrower defense for loans disbursed
prior to the anticipated effective date of these regulations, or July
1, 2017. However, the existing Direct Loan promissory notes incorporate
the current borrower defense to repayment process for loans
[[Page 39354]]
first disbursed before July 1, 2017, which is based on an act or
omission of the school attended by the student that would give rise to
a cause of action against the school under applicable State law. As a
result, the Department has decided to keep the current standard for
loans first disbursed prior to July 1, 2017. Acts or omissions that may
give rise to a cause of action under applicable State law may include
any cause of action pertaining to the making of the Direct Loan or the
provision of educational services for which the loan was provided.
Similarly, other applicable State law principles governing the State
law cause of action would apply, such as any applicable State law
statutes of limitation.
We discuss under ``Borrower Defenses--General (Sec. 685.222(a))''
the Department's reasons for clarifying that the Department will
acknowledge a borrower defense asserted under the regulations ``only if
the cause of action directly relates to the loan or to the school's
provision of educational services for which the loan was provided.'' 60
FR 37768, 37769. We also discuss the reasons for the proposed
definition of ``borrower defense'' in that part of this NPRM.
Proposed Sec. 685.206(c) would exclude the language that
specifically refers to the Department's defaulted loan collection
proceedings. While many loans that are the subject of a borrower
defense may be in default, the Department has committed in this
proposed rulemaking to establish a process outside of the defaulted
loan collection proceedings to evaluate borrower defenses for loans
regardless of whether the loans are in default or not. We believe that
establishing such a dedicated process will enhance the Department's
efforts to review and process borrower defenses and offer borrowers
more consistent and focused relief.
We also propose to amend Sec. 685.206 to refer to a new section of
the regulations, Sec. 685.222, for the process to be followed when
pursuing a borrower defense claim. Proposed Sec. 685.222 would provide
an expanded description of the regulatory framework for the range of
borrower defense claims, including the process by which claims and
relief are determined.
Proposed Sec. 685.206(c)(2) would refer to proposed Sec.
685.222(a)(6), which addresses the order in which multiple claims for
loan discharge from the same borrower for the same loan or loans will
be processed by the Secretary. The proposed language indicates that, if
the borrower asserts both a borrower defense and any other objection to
an action of the Secretary with regard to that Direct Loan, the
Secretary notifies the borrower of the order in which the borrower
defense and any other objections will be considered. During the
negotiated rulemaking process, a non-Federal negotiator requested that
further clarification be provided regarding the order in which claims
will be determined. The Department did not agree that it was
appropriate to do so within the proposed regulations, since the
particular circumstances may vary and establishing one order for all
cases could result in a progression that could be unfair to individual
borrowers. In general, we will evaluate claims in the order that is
likely to result in a decision for the borrower sooner, while also
effectively and efficiently using the Department's resources.
While a borrower may still assert a borrower defense in connection
with the Department's defaulted loan collection proceedings, the
Department's current experience with borrower defense claims from
Corinthian students suggests that such claims are more likely to arise
outside of such proceedings. However, it is not clear whether this will
be true in the future.
The existing Direct Loan promissory notes incorporate the current
borrower defense to repayment process for loans first disbursed before
July 1, 2017, which is based on an act or omission of the school
attended by the student that would give rise to a cause of action
against the school under applicable State law. Because current
regulations in Sec. 685.206(c) do not include a process for submission
and consideration of claims, the Department intends to extend to
borrowers with loans first disbursed before July 1, 2017, the processes
developed to submit, review, and resolve borrower defense claims for
borrowers with loans first disbursed on or after July 1, 2017.
The Department is also proposing to remove the limitation period on
the Department's ability to initiate a proceeding to recover losses
from approved borrower defenses. We explain the reasons for this
proposed change under the discussion for Sec. 685.206 and Sec.
685.308, ``Remedial Action and Recovery from the Institution.''
150 Percent Direct Subsidized Loan Limit (Sec. 685.200)
Statute: Section 455(q) of the HEA provides that a first-time
borrower on or after July 1, 2013, is not eligible for additional
Direct Subsidized Loans if the borrower has received Direct Subsidized
Loans for a period that is equal to or greater than 150 percent of the
length of the borrower's current program of study (thereinafter
referred to as the ``150 percent limit''). In addition, some borrowers
who are not eligible for Direct Subsidized Loans because of the 150
percent limit become responsible for the interest that accrues on their
loans when it would otherwise be paid by the government. The statute
does not address what effect a discharge of a Direct Subsidized Loan
has on the 150 percent limit. The statute also does not address whose
responsibility it is to pay the outstanding interest on any remaining
loans that have not been discharged, but have previously lost
eligibility for interest subsidy.
Current Regulations: Section 685.200(f)(4) provides two exceptions
to the calculation of the period of time that counts against a
borrower's 150 percent limit--the subsidized usage period--that can
apply based on the borrower's enrollment status or loan amount. The
regulations do not have an exception to the calculation of a subsidized
usage period if the borrower receives a discharge of his or her Direct
Subsidized Loan. They also do not address whose responsibility it is to
pay the outstanding interest on any remaining loans that have not been
discharged, but have previously lost eligibility for the interest
subsidy based on the borrower's remaining eligibility period and
enrollment.
Proposed Regulations: Proposed Sec. 685.200(f)(4)(iii) would
specify that a discharge based on school closure, false certification,
unpaid refund, or defense to repayment will lead to the elimination of
or recalculation of the subsidized usage period that is associated with
the loan or loans discharged.
The proposed regulations would also specify that, when the complete
amount of a Direct Subsidized Loan or a portion of a Direct Subsidized
Loan is discharged, the entire subsidized usage period associated with
that loan is eliminated. In the event that a borrower receives a closed
school, false certification, or, depending on the circumstances,
defense to repayment or unpaid refund discharge, the Department would
completely discharge a Direct Subsidized Loan or a portion of a Direct
Subsidized Consolidation Loan that is a attributable to a Direct
Subsidized Loan.
The proposed regulations would also specify that, when only a
portion of a Direct Subsidized Loan or a portion of a Direct
Consolidation Loan that is attributable to a Direct Subsidized Loan is
discharged, the subsidized usage period is recalculated instead of
eliminated. Depending on the
[[Page 39355]]
circumstances, discharges due to defense to repayment and unpaid refund
could result in only part of a Direct Subsidized Loan or a portion of a
Direct Consolidation Loan that is attributable to a Direct Subsidized
Loan being discharged.
The proposed regulations would specify that when a subsidized usage
period is recalculated instead of eliminated, the period is only
recalculated when the borrower's subsidized usage period was calculated
as one year as a result of receiving the Direct Subsidized Loan in the
amount of the annual loan limit for a period of less than an academic
year. For example, if a borrower received a Direct Subsidized Loan in
the amount of $3,500 as a first-year student and on a full-time basis
for a single semester of a two-semester academic year, the subsidized
usage period would be one year. If the borrower later receives an
unpaid refund discharge in the amount of $1,000, the subsidized usage
period would be recalculated, and the subsidized usage period would
become 0.5 years because the subsidized usage period was previously
based on the amount of the loan and, after the discharge, is based on
the relationship between the period for which the borrower received the
loan (the loan period) and the academic year for which the borrower
received the loan.
In contrast, if the borrower received a Direct Subsidized Loan in
the amount of $3,500 as a first-year student and on a full-time basis
for a full two-semester academic year, the subsidized usage period
would be one year. If the borrower later receives an unpaid refund
discharge in the amount of $1,000, the subsidized usage period would
still be one year because the subsidized usage period would still be
calculated based on the relationship between the loan period and the
academic year for which the borrower received the loan.
Proposed Sec. 685.200(f)(3) would provide that, if a borrower
receives a discharge based on school closure, false certification,
unpaid refund, or defense to repayment that results in a remaining
eligibility period greater than zero, the borrower is no longer
responsible for the interest that accrues on a Direct Subsidized Loan
or on the portion of a Direct Consolidation Loan that repaid a Direct
Subsidized Loan, unless the borrower once again becomes responsible for
the interest that accrues on a previously received Direct Subsidized
Loan or on the portion of a Direct Consolidation Loan that repaid a
Direct Subsidized Loan, for the life of the loan.
For example, suppose a borrower receives three years' worth of
Direct Subsidized Loans at school A and then transfers to school B and
receives three additional years' worth of Direct Subsidized Loans.
Further suppose that at this point, the borrower has no remaining
eligibility period and enrolls in an additional year of academic study
at school B, which triggers the loss of interest subsidy on all Direct
Subsidized Loans received at schools A and B. If the borrower later
receives a false certification discharge with respect to school B, the
borrower's remaining eligibility period is now greater than zero. The
borrower is no longer responsible for paying the interest subsidy lost
on the three loans from school A. If the borrower then enrolled in
school C and received three additional years of Direct Subsidized
Loans, resulting in a remaining eligibility period of zero, and then
enrolled in an additional year of academic study, the borrower would
lose the interest subsidy on the Direct Subsidized Loans received at
schools A and C.
Reasons: The proposed regulations would codify the Department's
current practice in this area and would provide clarity in the
Department's policies and practices. Under the circumstances in which a
borrower receives a closed school, false certification, defense to
repayment, or unpaid refund discharge, a borrower has not received all
or part of the benefit of the loan due to an act or omission of the
school. In such event, we believe that a student's eligibility for
future loans and the interest subsidy on existing loans should not be
negatively affected by having received all or a portion of such loan.
Accordingly, under the proposed regulations, we would increase the
borrower's eligibility for Direct Subsidized Loans or reinstate
interest subsidy on other Direct Subsidized Loans under the 150 percent
limit where the borrower receives a discharge of a Direct Subsidized
Loan and the discharge was based on an act or an omission of the school
that caused the borrower to not receive all or part of the benefit of
the loan.
Administrative Forbearance (Sec. 685.205(b)(6))
Statute: Section 428(c)(3) of the HEA provides for the Secretary to
permit FFEL Program lenders to exercise administrative forbearances
that do not require the agreement of the borrower, under conditions
authorized by the Secretary. Section 455(a) provides that Direct Loans
have the same terms, conditions, and benefits as FFEL Loans.
Current Regulations: Section 685.205(b) of the current regulations
describes the circumstances under which the Secretary may grant
forbearance on a Direct Loan without requiring documentation from the
borrower. Section 685.205(b)(6) specifies that these circumstances
include periods necessary for the Secretary to determine the borrower's
eligibility for a closed school discharge, a false certification of
student eligibility discharge, an unauthorized payment discharge, an
unpaid refund discharge, a bankruptcy discharge, and teacher loan
forgiveness.
Proposed Regulations: We propose to add to Sec. 685.205(b)(6) a
mandatory administrative forbearance when the Secretary is in receipt
of, and is making a determination on, a discharge request based on a
claimed borrower defense. The proposed changes would add cross-
references to the regulations on borrower defense claims (Sec. Sec.
685.206(c) and 685.222). By these references, we would expand the
circumstances under which the Secretary may grant forbearance on a
Direct Loan without requiring documentation from the borrower.
Reasons: During the Department's review of a borrower defense, we
believe borrowers seeking relief should have the option to continue to
make payments on their loans, as well as the option to have their loans
placed in forbearance. Providing an automatic forbearance with an
option for the borrower to decline the temporary forbearance and
continue making payments would reduce the potential burden on borrowers
pursuing borrower defenses.
Mandatory Administrative Forbearance for FFEL Program Borrowers (Sec.
682.211)
Statute: Section 428(c)(3)(D) of the HEA provides for the Secretary
to permit lenders to provide borrowers with certain administrative
forbearances that do not require the agreement of the borrower, under
conditions authorized by the Secretary.
Current Regulations: Section 682.211(i) specifies the circumstances
under which a FFEL lender must grant a mandatory administrative
forbearance to a borrower. The current regulations do not address
circumstances in which a borrower has asserted a borrower defense with
respect to a loan.
Proposed Regulations: Proposed Sec. 682.211(i)(7) would require a
lender to grant a mandatory administrative forbearance to a borrower
upon being notified by the Secretary that the borrower has submitted an
application
[[Page 39356]]
for a borrower defense discharge related to a FFEL Loan that the
borrower intends to pay off through a Direct Loan Program Consolidation
Loan for the purpose of obtaining relief, as reflected in proposed
Sec. 685.212(k). The administrative forbearance would remain in effect
until the Secretary notifies the lender that a determination has been
made as to the borrower's eligibility for a borrower defense discharge.
If the Secretary notifies the borrower that he or she would qualify for
a borrower defense discharge if he or she were to consolidate, the
borrower would then be able to consolidate the loan(s) to which the
defense applies. If the borrower then obtains the Direct Consolidation
Loan, the Secretary would recognize the defense and discharge that
portion of the Consolidation Loan that paid off the FFEL Loan in
question.
Reasons: We are proposing to change the Direct Loan forbearance
regulations in Sec. 685.205(b)(6) to provide for the Secretary to
grant an administrative forbearance to a Direct Loan borrower during
the period when the Secretary is determining the borrower's eligibility
for a borrower defense discharge. Some non-Federal negotiators believed
that a comparable forbearance benefit should be provided to FFEL
Program borrowers who believe that they have a defense to repayment on
a FFEL Loan and intend to seek relief under the Direct Loan borrower
defense provisions by consolidating the FFEL Loan into a Direct
Consolidation Loan, as addressed in proposed Sec. 685.212(k). As
described more fully below regarding proposed Sec. 685.212, that
section will be amended to address how a Direct Consolidation Loan
borrower may assert a defense to repayment of that Consolidation Loan
based on an act or omission of a school the borrower attended using the
Direct Loan, FFEL Stafford or PLUS Loan, or a Perkins Loan paid off by
that Consolidation Loan. If the borrower defense claim is approved in
full, for example, the Secretary would discharge the portion of the
Direct Consolidation Loan that paid off the Direct Loan, FFEL Loan, or
Perkins Loan. Non-Federal negotiators requested that the mandatory
administrative forbearance provisions for FFEL Program borrowers who
are seeking relief based on a borrower defense claim be amended to
mirror the mandatory administrative forbearance provisions for Direct
Loan borrowers who are seeking relief under borrower defense. The
Department agreed that this was appropriate and proposes to revise
Sec. 682.211 to provide this benefit.
Discharge of a Loan Obligation (Sec. 685.212)
Statute: Section 455(h) of the HEA provides that the Secretary may
specify in regulations which acts or omissions of a school a borrower
may assert as a defense to repayment of a Direct Loan. This provision
allows for the discharge of the borrower's Direct Loan pursuant to the
regulations regarding borrowers' defenses to repayment.
Current Regulations: Current Sec. 685.212 states those grounds
specified or explicitly referenced in sections 437 and 455(m) of the
HEA, and section 6 of Public Law 109-382 (authorizing September 11
survivors discharge), on which the Secretary discharges some or all of
a borrower's obligation to repay a Direct Loan. These grounds include
death, disability, closed school, false certification, bankruptcy,
teacher loan forgiveness, public service loan forgiveness, and
September 11 survivors discharge.
Proposed Regulations: We propose to amend Sec. 685.212 to include
discharge of all or part of a borrower's Direct Loan obligation by
reason of a borrower defense that has been approved under Sec.
685.206(c) or proposed Sec. 685.222. The proposed addition would also
specify that, with respect to a Direct Consolidation Loan for which a
borrower defense was approved, the Secretary would provide relief as to
the portion of the Consolidation Loan obligation that repaid the
original Direct Loan, FFEL Loan, Perkins Loan or other federally
financed student loan used to attend the school to which the borrower
defense claim relates. The proposed addition would further describe the
standard we would apply to consideration of borrower defense claims
raised by borrowers to Direct Consolidation Loans and to claims for
return of payments and recoveries on the Consolidation Loan itself, and
to payments and recoveries on the Federally-financed loans that were
paid off by the Direct Consolidation Loan.
Reasons: The proposed changes to Sec. 685.206(c) and proposed new
Sec. 685.222 include new language establishing the grounds on which a
borrower's obligation to repay a Direct Loan may be discharged. This
proposed change to Sec. 685.212 would clarify current policy and
provide for a more complete set of cross-references to the loan
discharge types covered in Sec. 685.212.
The proposed changes would also clarify that an appropriate portion
of a borrower's obligation to repay a Direct Consolidation Loan may be
discharged, if a borrower defense has been approved pursuant to Sec.
685.206(c) or proposed Sec. 685.222. Section 455(h) of the HEA
provides that the Secretary may allow for the discharge of a loan
pursuant to a borrower defense for a loan made ``under this part''--the
Direct Loan Program. This includes Direct Consolidation Loans made
under section 455(g) of the HEA. This proposed change to Sec. 685.212
is also meant to clarify current policy regarding the types of loans
for which a borrower defense may be asserted, and how a borrower's
obligation to repay a Direct Consolidation Loan is affected if a
borrower defense claim has been approved under Sec. 685.206(c) and
proposed Sec. 685.222. Because the act or omission of the school that
would constitute a borrower defense under Sec. 685.206(c) or proposed
Sec. 685.222 would pertain to the making of the Federal loans that
were consolidated into his or her Direct Consolidation Loan or the
provision of educational services for such Federal loans, the proposed
language would clarify that relief for a borrower defense approved as
to a Direct Consolidation Loan will be provided for that portion of the
Consolidation Loan that corresponds to the original loan obtained to
attend the school whose act or omission gave rise to a borrower
defense. Thus, Sec. 685.212 would be amended in new paragraph (k) to
list the Federal education loans that may be paid off by a Direct
Consolidation Loan and with regard to which the borrower may assert a
borrower defense claim. Those original loans include the loans listed
in Sec. 685.220. For some of the discharges already listed in this
section, the relief available is explained here; for others, the relief
is described only in the specific regulations that describe the grounds
and procedure for obtaining relief. Some of the discharges already
listed provide only relief from the obligation to repay the remaining
outstanding balance on the loan, while others, such as closed school
discharges, may provide for both debt relief and refund of payments
already recovered. The relief available for each of the listed
discharges is controlled by the law on which the discharge is based;
the basis and relief available for borrower defense discharges are
stated fully in Sec. 685.206(c) and proposed Sec. 685.222 and will be
reflected in the new Sec. 685.212(k).
Thus, Sec. 685.212 would be amended to clarify that the Secretary
would evaluate a borrower defense claim on a Direct Loan using the
standards stated in Sec. 685.206(c) or, for loans first disbursed, or
made, on or after July 1, 2017, in
[[Page 39357]]
Sec. 685.222. The standard that would be applied would depend upon
factors such as the date that the Direct Consolidation Loan was first
made; whether the underlying loan to which a borrower defense is
asserted is a Direct Loan or some other eligible loan for
consolidation; and whether the issue at hand refers either to a
borrower's defense to repayment to the applicable portion of a Direct
Consolidation Loan that may be attributable to the underlying loan to
which a borrower defense is being asserted, or refers to the borrower's
request for a return of payments collected by the Secretary on the
underlying loan.
Direct Loans Paid Off by Direct Consolidation Loans
Applicable Standard
For Direct Loans for which borrowers may be considering
consolidation, the standards would differ depending on the date on
which the first Direct Loan to which a claim is asserted was made. If
the Direct Loan Consolidation borrower asserts a claim regarding an
underlying Direct Subsidized, Unsubsidized, or PLUS Loan made before
July 1, 2017, we would apply the standard in Sec. 685.206(c). For
underlying Direct Loans made after July 1, 2017, we would apply the
standard stated in Sec. 685.222(b), (c), or (d) to the borrower's
defenses to repayment, as we would if the borrower had challenged those
loans directly through the borrower defense process.
Return of Payments
For underlying Direct Loans made before July 1, 2017, we would
apply applicable state law as to the limitations period pursuant to
Sec. 685.206(c), to any claim for return of payments made or recovered
on the underlying loans or on that portion of the Direct Consolidation
Loan attributable to the paying off of the underlying Direct Loan.
For underlying Direct Loans made on or after July 1, 2017, we would
apply the limitations period in Sec. 685.222(b), (c), or (d), as
applicable, to any claim for return of payments made or recovered on
the underlying loans or on that portion of the Direct Consolidation
Loan attributable to the paying off of the underlying Direct Loan.
Other Eligible Loans Paid Off by Direct Consolidation Loans
Applicable Standard
For other education loans paid off by the Direct Consolidation
Loan, such as FFEL, Perkins, or other eligible loans for consolidation
that are not Direct Loans, the standard that will apply to a defense to
repayment of an applicable portion of the outstanding balance of
borrowers' Direct Consolidation Loans would depend upon the date that
the Direct Consolidation Loan was made. For such defense to repayment
claims raised by Direct Consolidation Loan borrowers with regard to
other education loans paid off by a Direct Consolidation Loan that was
made before July 1, 2017, we would evaluate the defense to repayment
with respect to the underlying loan under the Direct Loan defense
standard in Sec. 685.206(c), as if the challenged loan were a Direct
Loan. For such a Direct Consolidation Loan made on or after July 1,
2017, we would evaluate the borrower's defense to repayment with
respect to the underlying loan under the Direct Loan borrower defense
standard in proposed Sec. 685.222.
Return of Payments
However, for claims for return of payments made or recovered on the
underlying loan, we would return only payments made or recovered by the
Department directly, and only if the borrower proved that the loan or
portion of the loan to which the payment was credited was not legally
enforceable under the law governing the claims on the underlying, paid
off loans. If the borrower seeks recovery of a payment made on the
Direct Consolidation Loan itself, as distinct from payments made on the
underlying paid-off loan, the applicable standard governing claims for
return of payments would be that provided in Sec. 685.206(c) (for
Direct Consolidation Loans made before July 1, 2017) or Sec.
685.222(b), (c), or (d) (for Direct Consolidation Loans made on or
after July 1, 2017). Similarly, depending on the date that the Direct
Consolidation Loan was made, the limitation periods applicable to
claims for return of payments made on the Direct Consolidation Loan
would be those stated in either Sec. 685.206(c) or Sec. 685.222(b),
(c), or (d), accordingly.
In addition, the proposed amendment to Sec. 685.212 would not
allow a borrower to assert a borrower defense more than once for a
claim that is based on the same underlying circumstances and same
evidence, unless allowed under the procedures in proposed Sec.
685.222. For instance, if a borrower asserted a borrower defense with
respect to a loan under either Sec. 685.206(c) or proposed Sec.
685.222 that was denied in full or in part, the borrower may not then
assert a borrower defense with respect to that original loan after
consolidation, absent new evidence as described in proposed Sec.
685.222(e)(5) or a reopening of an application for borrower defense by
the Secretary under that section.
Remedial Action and Recovery From the Institution
General (Sec. Sec. 685.206, 685.308)
Statute: Section 454(a) of the HEA provides that the Secretary may
include in Direct Loan participation agreements with institutions
provisions that are necessary to protect the interests of the United
States and to promote the purposes of the Direct Loan Program, and that
the institution accepts responsibility and financial liability stemming
from its failure to perform its functions pursuant to the agreement.
Current Regulations: The current regulations provide, in Sec.
685.206(c), that the Secretary may initiate an action to recover from a
school whose act or omission resulted in an approved borrower defense
the amount of loss incurred by the Department for that claim, but may
not do so after the end of the record retention period provided under
Sec. 685.309(c), which is three years after the end of the award year
in which the student last attended the institution. See Sec. 685.309,
which references Sec. 668.24.
In addition, current Sec. 685.308 provides that the Secretary may
take various actions to recover for losses caused by institutions, and
describes the procedures that would be used for some claims.
Proposed Regulations: We propose to remove from Sec. 685.206 the
provision stating that the Secretary would not initiate action to
recover after the end of the three-year record retention period. We
further propose to revise Sec. 685.308 to more accurately describe the
instances in which the Secretary incurs a loss for which the
institution is accountable.
Reasons: We propose to remove the limitation on bringing actions
against an institution to recover for losses incurred from borrower
defenses for two reasons. First, the current three-year limitation in
Sec. 685.206(c)(3) cites Sec. 685.309(c), which refers to Sec.
668.24, the general record retention requirements for the title IV, HEA
student financial assistance programs. Section 668.24(e)(2) provides
that the institution is to keep records of borrower eligibility and
other records of its ``participation'' in the Direct Loan Program for
three years after the last award year in which the student attended the
institution. The requirement pertains to the retention of ``program
records''--records of the determination of eligibility for Federal
student financial assistance and management of Federal funds provided
[[Page 39358]]
to the institution for those awards. Sec. Sec. 668.24(a), 685.309.\21\
The Department believes that these records will rarely, if ever, be
needed to address borrower defense claims. Borrower defense claims will
turn on other evidence--advertising, catalogs, enrollment contracts,
recruiting scripts--that have not been and cannot be categorized as
``program records.'' Moreover, institutions have always faced potential
litigation on claims that would also constitute borrower defense
claims, and have already made business judgments as to the need and
period for which to retain business records that may be relevant in
such litigation. The proposed change would do no more than hold the
school to the same risk it has already assessed and for which it has
exercised its business judgment to protect itself. As noted under
``Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and
(d) and 34 CFR 668.71),'' State laws and the new proposed Federal
standard generally provide that the limitation period for affirmative
claims for recovery based on misrepresentation begins only upon the
claimant's discovery of the facts that give notice that the
representation was false, and thus an institution would already be
expected to have accounted for that potential in adopting its own
record retention policies. We are not, however, proposing to impose any
new requirements relating to record retention. Moreover, borrowers--
whether a designated Department official assists in developing the
evidence for the borrower under proposed Sec. 685.222 or not--always
bear the burden of proof, either initially or ultimately.\22\ The
institution thus faces potential risk where a borrower belatedly
asserts a borrower defense only if the borrower--or the Department, for
claims considered as a group, asserts a claim pertaining to the
borrower--meets that burden by producing credible evidence of the facts
on which the claim is based.
---------------------------------------------------------------------------
\21\ The record retention regulation was adopted pursuant to 20
U.S.C. 1232f, which requires each recipient of Federal funds under a
Department program to keep records that disclose ``the amount and
disposition of those funds,'' and to ``maintain such records for
three years after the completion of the activity for which the funds
are used.''
\22\ The rebuttable presumption applicable to group claims
shifts the burden of rebuttal to the school; if the school submits
evidence to rebut that presumption, the burden of proof then, and
only then, shifts back to the borrower.
---------------------------------------------------------------------------
Second, the most readily available tool for recovery of Federal
claims has always been administrative offset, which Federal law
encourages and even requires agencies to use. 31 U.S.C. 3716. That
authority was amended in 2008 to remove its previous 10-year limitation
period.\23\ Case law makes clear that limitations periods adopted by a
legislative authority can be changed or abrogated, and the new
limitation period applied even to claims that may have been barred
under the prior rule.\24\ Because the limitation period in current
Sec. 685.206(c)(3) is solely a regulatory limitation adopted by the
Department pursuant to its regulatory authority and was in no way
compelled by statute, the Department can change or remove that
limitation and can apply the revised rule to any claim, without regard
to when that claim arose. This would not produce an unfair result. As
noted in the background discussion under ``Borrower Defenses (34 CFR
668.71, 685.205, 685.206, and 685.222),'' the borrower defense
provision in Sec. 685.206(c) has been infrequently utilized from 1995
until the recent Corinthian experience, and there is no reason to
believe that any institution would have relied on the three-year
limitation period in current Sec. 685.206(c)(3) to discard business
records that it would otherwise have retained.
---------------------------------------------------------------------------
\23\ ``Notwithstanding any other provision of law, regulation,
or administrative limitation, no limitation on the period within
which an offset may be initiated or taken pursuant to this section
[Sec. 3716] shall be effective.'' 31 U.S.C. 3716(e)(1).
\24\ In re Lewis, 506 F.3d 927, 932 (9th Cir. 2007); U.S. v.
Distefano, 279 F.3d 1241, 1244 (10th Cir. 2002) (noting that ``the
Supreme Court has upheld, against due process challenges, statutes
reviving such barred claims. See Chase Sec. Corp. v. Donaldson, 325
U.S. 304, 311-14, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945); Campbell v.
Holt, 115 U.S. 620, 628, 6 S.Ct. 209, 29 L.Ed. 483 (1885). As have
we. See Bernstein v. Sullivan, 914 F.2d 1395, 1400-03 (10th Cir.
1990).'').
---------------------------------------------------------------------------
We propose to revise Sec. 685.308 to more accurately describe the
grounds on which an institution can cause loss for which the Secretary
holds the school accountable, and the procedures used to establish and
enforce that liability in some particular circumstances. An institution
participates in the title IV, HEA programs only by entering into a
program participation agreement. Under that agreement, the institution
accepts responsibility to act as a fiduciary in handling, awarding, and
accounting for title IV, HEA funds that it awards, and is liable for
the costs of funds it fails to account for, or funds it awards or
causes to be awarded improperly.\25\ An institution participates in the
Direct Loan Program only by entering into a Direct Loan program
participation agreement.\26\ Under that agreement, the institution
agrees to ``originate'' Direct Loans that are made by the Department,
and to accept financial liability for losses ``stemming from'' its
failure to perform its functions under that agreement. The institution
breaches its fiduciary duty as originator of Direct Loans when it
causes a loan to be made to an individual who was ineligible to receive
that loan, or causes an eligible individual to receive a loan in an
ineligible amount, or by its act or omission causes the Secretary to
incur an obligation to discharge a loan or to be unable to enforce the
loan.
---------------------------------------------------------------------------
\25\ See, e.g., Nat'l Career Coll., Inc. v. Spellings, 371 F.
App'x 794, 796 (9th Cir. 2010) (college has fiduciary duties in
handling the public's money. 34 CFR 668.15, 668.16, 668.82); Sistema
Universitario Ana G. Mendez v. Riley, 234 F.3d 772, 775 (1st Cir.
2000) (As a result of fiduciary status, institutions bear burden of
proving that their expenditures of title IV funds were warranted and
that they complied with program requirements); St. Louis Univ. v.
Duncan, 97 F. Supp. 3d 1106, 1109 (E.D. Mo. 2015) (institution acts
as fiduciary and is liable for improperly awarded funds); Maxwell v.
New York Univ., No. 08 CV 3583 (HB), 2009 WL 1576295, at *7
(S.D.N.Y. June 1, 2009), aff'd, 407 F. App'x 524 (2d Cir. 2010)
(school acts as a fiduciary for the Department); Instituto De Educ.
Universal, Inc. v. U.S. Dep't of Educ., 341 F. Supp. 2d 74, 82
(D.P.R. 2004), aff'd sub nom. Ruiz-Rivera v. U.S. Dep't of Educ.,
No. 05-1775, 2006 WL 1343431 (1st Cir. May 10, 2006), and
subsequently aff'd sub nom. Instituto de Educacion Universal v. U.S.
Dep't of Educ., No. 06-1562, 2007 WL 1519059 (1st Cir. May 11, 2007)
(Under HEA, an educational institution operates as a fiduciary to
the Department, and is subject to the highest standard of care and
diligence in administering these programs and accounting to the
Department for the funds it receives. 34 CFR 668.82(a), (b) (1991-
94)); see also Chauffeur's Training Sch., Inc. v. Riley, 967 F.
Supp. 719, 727 (N.D.N.Y. 1997) (institution liable under breach of
contract for costs of payments the Department made to third parties
on account of loans the institution improperly caused to be made).
\26\ This Direct Loan Program Participation Agreement is now
included in, and a separate part of, the general program
participation agreement required by section 487(a) of the HEA.
---------------------------------------------------------------------------
We propose to revise Sec. 685.308 to more accurately describe the
range of these circumstances. In some instances, the Secretary
identifies possible claims for Department losses for which the
Secretary holds the school accountable in audits and program reviews,
and if such claims are asserted in the final determinations that ensue
from these audits or program reviews, the institution may contest the
claims under the procedures in subpart H of part 668. In other
instances, the Secretary asserts these claims in other contexts, and
may follow other procedures to claim recovery. In any such other
procedure, Federal law and Department regulations require the Secretary
to provide the institution notice and an opportunity to dispute the
claim and obtain a hearing on its objections. See 34 CFR 34.20 et seq.
For borrower defense claims, we describe briefly in proposed Sec.
685.222 the procedures we propose to use for these claims and intend to
prescribe them in more detail in the future.
[[Page 39359]]
We also propose to remove the reference to a remedial action
(requiring schools to purchase loans) that was sanctioned under FFEL
regulations in effect when this section was adopted in 1995, but which
has not and will not be used for Direct Loans.
Severability (Sec. 685.223)
Statute: Section 454(a) of the HEA provides that the Secretary may
include in Direct Loan participation agreements with institutions
provisions that are necessary to protect the interests of the United
States and to promote the purposes of the Direct Loan Program; 20
U.S.C. 3474 authorizes the Secretary to adopt such regulations as
needed for the proper administration of programs.
Current Regulations: None.
Proposed Regulations: Proposed Sec. 685.223 would make clear that,
if any part of the proposed regulations for part 685, subpart B,
whether an individual section or language within a section, is held
invalid by a court, the remainder would still be in effect.
Reasons: We believe that each of the proposed provisions discussed
in this preamble would serve one or more important, related, but
distinct, purposes. Each provision would provide a distinct value to
students, prospective students, and their families, the public,
taxpayers, the Federal government, and institutions separate from, and
in addition to, the value provided by the other provisions. To best
serve these purposes, we propose to include this administrative
provision in the regulations to make clear that the regulations are
designed to operate independently of each other and to convey the
Department's intent that the potential invalidity of one provision
should not affect the remainder of the provisions.
Institutional Accountability
Financial Responsibility
General (Sec. 668.171)
Statute: Section 487(c)(1) authorizes the Secretary to establish
reasonable standards of financial responsibility. Section 498(a) of the
HEA provides that, for purposes of qualifying an institution to
participate in the title IV, HEA programs, the Secretary must determine
the legal authority of the institution to operate within a State, its
accreditation status, and its administrative capability and financial
responsibility.
Section 498(c)(1) of the HEA authorizes the Secretary to establish
ratios and other criteria for determining whether an institution has
the financial responsibility required to (1) provide the services
described in its official publications, (2) provide the administrative
resources necessary to comply with title IV, HEA requirements, and (3)
meet all of its financial obligations, including but not limited to
refunds of institutional charges and repayments to the Secretary for
liabilities and debts incurred for programs administered by the
Secretary.
Current Regulations: The current regulations in Sec. 668.171(a)
mirror the statutory requirements that to begin and continue to
participate in the title IV, HEA programs, an institution must
demonstrate that it is financially responsible. The Secretary
determines whether an institution is financially responsible based on
its ability to provide the services described in its official
publications, properly administer the title IV, HEA programs, and meet
all of its financial obligations.
The Secretary determines that a private non-profit or for-profit
institution is financially responsible if it satisfies the ratio
requirements and other criteria specified in the general standards
under Sec. 668.171(b). Under those standards, an institution:
Must have a composite score (combining the named measures
of financial health elements to yield a single measure of a school's
overall financial health) of at least 1.5, based on its Equity, Primary
Reserve, and Net Income ratios;
Must have sufficient cash reserves to make required
refunds;
Must be current in its debt payments. An institution is
not current in its debt payment if it is in violation of any loan
agreement or fails to make a payment for 120 days on a debt obligation
and a creditor has filed suit to recover funds under that obligation;
and
Must be meeting all of its financial obligations,
including but not limited to refunds it is required to make under its
refund policy or under Sec. 668.22, and repayments to the Secretary
for debts and liabilities arising from the institution's participation
in the title IV, HEA programs.
Proposed Regulations: We are not proposing any changes to the
composite score requirements under Sec. 668.172 or in appendices A and
B of subpart L, the refund reserve standards under Sec. 668.73, or the
past performance requirements under Sec. 668.174.
We propose to restructure Sec. 668.171, in part, by adding a new
paragraph (c) that provides that an institution is not able to meet its
financial or administrative obligations if it is subject to one or more
of the following actions or triggering events:
Any of the following lawsuits and other actions.
Claims and actions related to a Federal loan or educational
services. Currently or at any time during the three most recently
completed award years, the institution is or was required to pay a
material amount, or incurs a material liability, arising from an
investigation or similar action initiated by a State, Federal, or other
oversight entity, or settles or resolves for a material amount a suit
by that entity based on claims related to the making of a Federal loan
or the provision of educational services. An amount paid or settled is
material if it exceeds the lesser of the threshold amount for which an
audit is required under 2 CFR part 200, currently $750,000, or 10
percent of the institution's current assets. Or, the institution is
being sued by one or more State, Federal, or other oversight entities
based on claims related to the making of a Federal loan or provision of
educational services for an amount that exceeds the lesser of the
threshold amount for which an audit is required under 2 CFR part 200,
currently $750,000, or 10 percent of the institution's current assets.
Claims of any kind. The institution is currently being sued by one
or more State, Federal, or other oversight entities based on claims of
any kind that are not related to a Federal loan or educational
services, and the potential monetary sanctions or damages from that
suit or suits are in an amount that exceeds 10 percent of its current
assets.
False claims and suits by private parties. The institution is
currently being sued in a lawsuit filed under the False Claims Act or
by one or more private parties for claims that relate to the making of
loans to students for enrollment at the institution or the provision of
educational services if that suit (1) has survived a motion for summary
judgment by the institution and has not been dismissed, and (2) seeks
relief in an amount that exceeds 10 percent of the institution's
current assets.
For suits relating to claims of any kind, suits filed under the
False Claims Act, 31 U.S.C. 3729 et seq., or suits by private parties,
during the fiscal year for which the institution has not yet submitted
its financial statements, the institution settled or resolved the suit,
had a judgment entered against it, or incurred a liability for an
amount that exceeds 10 percent of its current assets.
An institution would determine whether any of these suits or
actions exceeded a materiality threshold by using the current assets
reported in its most recent audited financial statements
[[Page 39360]]
submitted to the Department. Except for a suit by private parties, if a
suit or action does not demand a specific amount of relief, the
institution would calculate the potential amount of the relief by
totaling the tuition and fees it received from every student who
attended the institution during the period for which the relief is
sought. In cases where no period is stated in the suit or action, the
institution would total the tuition and fees it received from students
who attended the institution during the three award years preceding the
date that suit or action was filed or initiated.
Repayments to the Secretary. Currently or at any time
during the three most recently completed award years, the institution
is or was required to repay the Secretary for losses from borrower
defense claims in an amount that, for one or more of those years,
exceeds the lesser of the threshold amount for which an audit is
required under 2 CFR 200, currently $750,000, or 10 percent of the
institution's current assets, as reported in the most recent audited
financial statements.
Accrediting agency actions. Currently or at any time
during the three most recently completed award years, the institution's
primary accrediting agency (1) required the institution to submit a
teach-out plan, for a reason described in 34 CFR 602.24(c)(1), that
covers the institution or any of its branches or additional locations,
or (2) placed the institution on probation, show-cause, or similar
status for failing to meet one or more of the agency's standards, and
the accrediting agency does not notify the Secretary within six months
of taking that action that the action is withdrawn because the
institution has come into compliance with the agency's standards.
Loan agreements and obligations. With regard to the
creditor with the largest secured extension of credit, (1) the
institution violated a provision or requirement in a loan agreement
with that creditor, (2) the institution failed to make a payment in
accordance with its debt obligations with that creditor for more than
120 days, or (3) as provided under the terms of the security or loan
agreement, a default or delinquency event occurs or other events occur
that trigger, or enable the creditor to require or impose, an increase
in collateral, a change in contractual obligations, an increase in
interest rates or payments, or other sanction penalty or fee. These
actions would be disclosed in a note to the institution's audited
financial statements or audit opinion, or reported to the Department by
the institution.
Non-title IV revenue. For its most recently completed
fiscal year, a proprietary institution did not derive at least 10
percent of its revenue from sources other than title IV, HEA program
funds, as provided under Sec. 668.28(c) (90/10 revenue test).
Publicly traded institutions. As reported by the
institution, or identified by the Secretary, (1) the Securities and
Exchange Commission (SEC) warns the institution or its corporate parent
that it may suspend trading on the institution's stock, or the
institution's stock is delisted involuntarily from the exchange on
which the stock was traded, (2) the institution disclosed or was
required to disclose in a report filed with the SEC a judicial or
administrative proceeding stemming from a complaint filed by a person
or entity that is not part of a State or Federal action, (3) the
institution failed to file timely a required annual or quarterly report
with the SEC, or (4) the exchange on which the institution's stock is
traded notifies the institution that it is not in compliance with
exchange requirements.
Gainful employment (GE). As determined by the
Secretary each year, the number of students enrolled in GE programs
that are failing or in the zone under the D/E rates measure in Sec.
668.403(c) is more than 50 percent of the total number of title IV
recipients enrolled in all the GE programs at the institution. However,
an institution is exempt from this provision if fewer than 50 percent
of students enrolled at the institution who receive title IV, HEA
program funds are enrolled in GE programs.
Withdrawal of owner's equity. For an institution whose
composite score is less than 1.5, any withdrawal of owner's equity from
the institution by any means, including by declaring a dividend.
Cohort default rates. The institution's two most recent
official cohort default rates are 30 percent or greater, as determined
under subpart N of 34 CFR part 668. However, this provision does not
apply if the institution files a challenge, request for adjustment, or
appeal under that subpart with regard to its cohort default rate, and
that action results in (1) reducing its default rate below 30 percent,
or (2) the institution not losing its eligibility or being placed on
provisional certification.
Other events or conditions. The Secretary determines that
an event or condition is reasonably likely to have an adverse impact on
the financial condition, business, or results of operations of the
institution. These events or conditions would include but are not
limited to whether:
There is a significant fluctuation between consecutive
award years, or over a period of award years, in the amount of Direct
Loan or Pell Grant funds, or a combination of those funds, received by
the institution that cannot be accounted for by changes in those
programs, such as changes in award amounts or eligibility requirements;
The institution is cited by a State licensing or
authorizing agency for failing State or agency requirements;
The institution fails a financial stress test developed or
adopted by the Secretary to evaluate whether the institution has
sufficient resources to absorb losses that may be incurred as a result
of adverse conditions and continue to meet its financial obligations to
the Secretary and students;
The institution or corporate parent has a non-investment
grade bond or credit rating;
As calculated by the Secretary, the institution has high
annual dropout rates; or
Any event reported on a Form 8-K to the SEC.
In addition, we propose to add a new paragraph (d) under which an
institution would notify the Secretary of any action or triggering
event described above no later than 10 days after that action or event
occurs. In that notice, the institution could show that certain actions
or events are not material, or that those actions are resolved.
Specifically, the institution would be permitted to demonstrate that:
For a judicial or administrative proceeding the
institution disclosed to the SEC, the proceeding does not constitute a
material event;
For a withdrawal of owner's equity, the withdrawal was
used solely to meet tax liabilities of the institution or its owners
for income derived from the institution; or, in the case where the
composite score is calculated based on the consolidated financial
statements of a group of institutions, the amount withdrawn from one
institution in the group was transferred to another entity within that
group;
For a violation of a loan agreement, the creditor waived
that violation. However, if the creditor imposes additional constraints
or requirements as a condition of waiving the violation and continuing
with the loan, the institution must identify and describe those
constraints or requirements. In addition, if a default or delinquency
event occurs or other events occur that trigger, or enable the creditor
to require or impose, additional constraints or
[[Page 39361]]
penalties on the institution, the institution would be permitted to
show why these actions would not have an adverse financial impact on
the institution.
Reasons: As discussed under ``Alternative standards and
requirements,'' the Department seeks to identify, and take action
regarding, material actions and events that are likely to have an
adverse impact on the financial condition or operations of an
institution. In addition to the current process where, for the most
part, the Department determines annually whether an institution is
financially responsible based on its audited financial statements,
under these proposed regulations the Department may determine at the
time a material action or event occurs that the institution is not
financially responsible. The consequences of these actions and events
threaten an institution's ability to (1) meet its current and future
financial obligations, (2) continue as a going concern or continue to
participate in the title IV, HEA programs, and (3) continue to deliver
educational services. In addition, these actions and events call into
question the institution's ability or commitment to provide the
necessary resources to comply with title IV, HEA requirements.
Furthermore, we note that recent experiences with Corinthian, in
which the Department ended up with no financial protection for either
closed school or borrower defense claims, highlight the need to develop
more effective ways to identify events or conditions that signal
impending financial problems and secure financial protection while the
institution has resources sufficient to provide that protection either
by a letter of credit, or, by arranging a set-aside from current
payables of Federal funds that could defray losses that may arise.
Applying the routine tests under current regulations did not result in
financial protection, because Corinthian appeared at the time it
provided the Department with its audited financial statements to pass
those tests. Only later--too late to secure financial protection--did
further investigation reveal that Corinthian in fact had failed the
financial tests in current regulations.\27\ Based on that experience,
we conclude that regulations must be revised to better identify signs,
and to augment the Department's tools for detection, of impending
financial difficulties that could be taken into account and that would
have required Corinthian to provide financial protection.
---------------------------------------------------------------------------
\27\ At that very time, in 2013, the State of California had
already sued Corinthian for widespread fraud. California v. Heald
Coll., No. CGC-13-534793 (Sup. Ct. S.F. County, filed Oct. 10,
2013).
---------------------------------------------------------------------------
Most visible among these actions or triggering events are
investigations of, and suits against, institutions by State, Federal,
and other oversight agencies. For example, the FTC has investigated or
filed suit against institutions for deceptive and unfair marketing
practices.\28\ The SEC has investigated institutions for inflating job
placement rates.\29\ The DOJ, CFPB, and various State AGs have
investigated or filed suit against institutions for making false claims
to the Federal and State governments as well as violations of consumer
protection laws, false advertising and deceptive practices, and
falsifying job placement rates.\30\ Putting aside, but in no way
diminishing, the harm inflicted on students by troubling practices that
precipitated these agency actions, the debts or liabilities resulting
from those actions may be substantial.
---------------------------------------------------------------------------
\28\ See, e.g., Fed. Trade Comm'n v. DeVry Educ. Group, Inc.,
C.A. No. 15-CF-00758 (S.D. Ind. Filed Jan. 17, 2016).
\29\ See, e.g., Sec. and Exch. Comm'n v. ITT Educ. Servs. Inc.,
C. A. No. 1:15-cv-00758-JMS-MJD (S.D. Ind. filed May 12, 2015).
\30\ See, e.g., U.S. et al. ex rel. Washington v. Educ. Mgmt.
Corp., C.A. No. 2:07-cv-00461-TFM (W.D. Pa. filed Aug. 8, 2011);
Consumer Fin. Prot. Bureau v. Corinthian Colls., Inc., C.A. No.
1:14-cv-07194 (N.D. Ill., filed Oct. 27, 2015); California v. Heald
Coll., No. CGC-13-534793 (Sup. Ct. S.F. County, filed Oct. 10,
2013).
---------------------------------------------------------------------------
For suits that are settled or investigations that are otherwise
resolved, we initially proposed during negotiated rulemaking to adopt
as materiality thresholds those amounts included in the SEC disclosure
rules for legal proceedings under 17 CFR 229.103, otherwise referred to
as Item 103 of Regulation S-K. Under those regulations, an entity
filing an annual or quarterly report on Form 10-K or 10-Q with the SEC
must disclose information about (1) any administrative or judicial
proceeding that involves a claim for damages that exceeds 10 percent of
the entity's current assets, or (2) any environmental claim where a
governmental authority is a party to the proceeding and the monetary
sanctions are more than $100,000.
Some of the non-Federal negotiators argued that the $100,000
threshold could easily be exceeded by claims resolved in favor of a
small number of students, and that outcome would have no bearing on the
financial operations of most institutions. Those negotiators suggested
that a more reasonable threshold would be the amount applicable to
audits required of non-profit and public entities that expend Federal
funds. Under 2 CFR 200.501 of the Uniform Administrative Requirements,
Cost Principles, and Audit Requirements for Federal Awards (Uniform
Administrative Requirements), a non-Federal entity that expends more
than $750,000 in Federal funds during its fiscal year must conduct an
audit. We agreed, and propose in this NPRM to set the dollar threshold
at the amount specified in the Uniform Administrative Requirements.
The non-Federal negotiators also argued that because the dollar
threshold and the percentage threshold based on SEC disclosure
requirements would apply to a suit based on claims that were not
related to a Federal student aid activity or requirement (for example,
a violation of copyright laws), the Federal protection that would
otherwise be required under this circumstance is not warranted. We
agreed, and propose in this NPRM to apply the dollar and percentage
thresholds to those suits or actions that are based on claims related
to the making of a Federal loan or the provision of educational
services.
The publicity and information stemming from these suits and actions
will make members of the public, and in particular currently enrolled
and former students of the institution, aware or more aware of the
alleged practices that gave rise to these suits and actions. As a
result, we expect current and former students to be better informed and
thus more likely to file borrower defense claims. Some students may
file claims immediately after a suit or action is resolved, while
others may take longer. In any case, because the institution is
required to repay the Secretary for losses from borrower defense
claims, the institution's liability does not end when it pays to
resolve the suit or action; it continues as long as students file
borrower defense claims based on the misconduct alleged and publicized
in the suit. Consequently, if the amount paid by an institution to
resolve the suit is material, it jeopardizes the institution's ability
to meet not only its current financial obligations, but also future
financial obligations stemming from borrower defense claims. For this
reason, we propose that an institution is not financially responsible
during the three-year period following the resolution if the amount the
institution is required to pay is material--that is, it exceeds the
lesser of the dollar or percentage thresholds. If the amount is not
material, we believe it is unlikely that any resulting borrower defense
claims will have an adverse impact on the institution.
[[Page 39362]]
For a suit or action initiated by a State, Federal, or other
oversight agency, or by an individual or relator,\31\ where the
potential monetary sanctions or damages sought exceed 10 percent of an
institution's current assets, we propose that the institution is not
considered to be financially responsible for any year in which that
suit or action is pending or unresolved.\32\
---------------------------------------------------------------------------
\31\ A person may bring a suit under the False Claims Act, 31
U.S.C. 3729 et seq., on behalf of the United States against a party
whom the relator claims submitted false claims to the government.
The suit is referred to as a ``qui tam'' suit, and the person is
referred to as a ``relator.''
\32\ A party who submits false claims may be liable under the
False Claims Act for treble the actual amount of the claim plus a
penalty of at least $5000 per violation. 31 U.S.C. 3729(a)(1)
---------------------------------------------------------------------------
Like a contingent liability, a pending material government or
individual action (one seeking an amount greater than 10 percent of
current assets) would pose a threat to an institution's ability to meet
its current financial obligations, because when a suit or action is
settled or resolved, the institution must satisfy the resulting
liability using current assets. In other words, a significant amount of
current assets (cash and liquid assets, such as securities and accounts
receivable, that can readily be converted to cash) that an institution
would otherwise need to use to pay for typical current liabilities (for
instance, wages payable and accounts payable) would be used instead to
pay for damages stemming from the suit. However, for several reasons,
we propose to treat a pending material State, Federal, or individual
action as a liability for filed against the institution. First, as
previously noted in this discussion, State and Federal suits and
actions aim to address serious violations and harmful practices and may
lead to settlements or compensation for victimized students, with an
attendant financial burden on the institution. Moreover, it is not
uncommon for several State AGs to file suits or take actions against an
institution for the same or similar reasons or for State AGs to join a
Federal action. These combined efforts underscore the severity and
magnitude of the misconduct the suits or actions seek to address.
Second, the impact of a suit or action may hinder or prevent investors
or creditors from providing needed funds to an institution and make it
more expensive for the institution to raise or obtain additional funds.
Also, to protect their investment or stake in the institution,
creditors may condition or alter the terms of existing loan agreements
or otherwise make it more difficult for the institution to obtain
additional loans. Third, the institution will have to use or divert
resources that would otherwise be used to carry out normal operations
to defray the costs of defending the litigation or the costs of
achieving compliance with the State or Federal requirements on which
the actions were based. In addition, it is not uncommon for the
Department to impose additional administrative requirements on an
institution subject to a suit or action, which may further stress the
institution's financial resources. So, due to the severity and likely
success of suits by State and Federal agencies or other oversight
entities, and to account for the costs and risks stemming from a
pending suit, we believe that a potential liability in the amount
considered material under this proposed regulation would threaten an
institution's ability to meet its current and future financial
obligations.
With regard to the threshold relating to current assets, we note
that on May 9, 1973, the SEC published final regulations reducing its
threshold for disclosures relating to legal proceedings from 15 percent
to 10 percent of current assets, stating that the reduced percentage is
a ``more realistic test of materiality.'' 38 FR 12100, 12101
We are not proposing any changes to the composite score
requirements under Sec. 668.172 or in appendices A and B of subpart L,
the refund reserve standards under Sec. 668.73, or the past
performance requirements under Sec. 668.174. We believe that the
current financial ratio regulations in subpart L of part 668 reflect
the kind of consideration of the effect of the financial risks that
judgments and other actions pose on the ability of an institution to
continue operating if faced with the need to satisfy such claims. We
therefore include a brief explanation of the way this has been taken
into account to some extent in the current regulations. For title IV
purposes, KPMG Peat Marwick developed the composite score methodology
that is the key element for establishing the financial responsibility
requirements under 34 CFR part 668, subpart L. That methodology uses
three ratios, Primary Reserve, Equity, and Net Income, to evaluate the
overall financial health of an institution. Under this methodology,
strength factors based on a common scale are assigned to each ratio
result, making it arithmetically possible to weight and add the results
of each ratio together to arrive at a composite score. The strength
factors and weights were designed to reflect the different governing,
mission, and operating characteristics of for-profit and non-profit
institutions, and to allow institutions to offset a poor performance
under one ratio with a good performance under another ratio.
The first of these ratios, the Primary Reserve ratio is a measure
of an institution's expendable or liquid resource base in relation to
its operating size, so it is in effect a measure of the institution's
margin against adversity. A for-profit institution with a Primary
Reserve ratio of 0.05 earns a strength factor of 1.0 which means that
the value of the institution's assets that can be converted to cash
exceeds its liabilities by an amount equal to five percent of its total
expenses. Expressed in days, the institution could continue operations
at its current level for about 18 days (5 percent of 365 days) without
additional revenue or support. 62 FR 62854 (November 25, 1997). A non-
profit institution with the same strength factor score could continue
operations at its current level for about 37 days without additional
revenue or support. Id. At this strength factor level, institutions
have a small amount of expendable capital and would have difficulty
finding resources internally to handle large negative economic events.
Table 1 below shows, for a range of Primary Reserve ratio results, the
margin against adversity expressed both as percentage of expendable
assets that exceed liabilities and the number of days an institution
can continue operations.
[[Page 39363]]
Table 1
----------------------------------------------------------------------------------------------------------------
Liquid assets Survive
exceed without
Primary reserve ratio result liabilities, Strength factor additional
as % of total support, # of
expenses days
----------------------------------------------------------------------------------------------------------------
For-profit Institutions
----------------------------------------------------------------------------------------------------------------
0.00........................................................... 0 0 0
0.25........................................................... 3 0.5 9
0.50........................................................... 5 1 18
0.75........................................................... 8 1.5 27
0.100.......................................................... 10 2 37
0.125.......................................................... 13 2.5 46
0.150.......................................................... 15 3 55
----------------------------------------------------------------------------------------------------------------
Non-profit Institutions
----------------------------------------------------------------------------------------------------------------
0.00........................................................... 0 0 0
0.05........................................................... 5 0.5 18
0.10........................................................... 10 1 37
0.15........................................................... 15 1.5 55
0.20........................................................... 20 2 73
0.25........................................................... 25 2.5 91
0.30........................................................... 30 3 110
----------------------------------------------------------------------------------------------------------------
As illustrated in Table 1, a for-profit institution with a Primary
Reserve strength factor of less than 2.0, or a non-profit institution
with a strength factor of less than 1.0, would generally not have
resources that it could liquidate in the short term to cover current
operations if it also had to pay damages or settle a suit for an amount
that exceeds 10 percent of its expendable assets. However, the
institution may have the ability to borrow the funds needed to cover
operations and pay damages stemming from a suit. For that, we look to
another component of the composite score, the Equity ratio.
The Equity ratio measures the amount of total resources that is
financed by owners or the institution's investments, contributions, or
accumulated earnings and how much of that amount is subject to claims
of third parties. So, the Equity ratio captures an institution's
overall capitalization structure and ability to borrow. The strength
factors for the Equity ratio are the same for non-profit and for-profit
institutions. A strength factor of zero means that that value of an
institution's assets is equal to the value of its liabilities. For a
for-profit institution, the absence of equity provides no evidence of
owner commitment to the business because there are no accumulated
earnings or invested amounts beyond the liabilities that are at risk.
For a non-profit institution, the absence indicates there is little or
no permanent endowment from which the institution could draw in extreme
circumstances. At a strength factor of 1.0, an institution has about
$8.33 of liabilities for every $10.00 of assets. However, this small
amount of equity still makes it difficult for the institution to borrow
significant amounts of money at market rates. For a strength factor of
2.0, the institution has about $6.67 of liabilities for every $10.00 of
assets. At this strength factor and higher levels where an increasing
proportion of the institution's resources are not subject to claims of
third parties, it is more likely that the institution will be able to
borrow significant amounts of money at market rates.
The remaining ratio, Net Income, is a primary indicator of the
underlying causes of a change in an institution's financial condition
because it directly affects the resources reflected on the
institution's balance sheet (continued gains and losses measured by the
ratio will impact all other fundamental elements of financial health
over time). This ratio helps to answer the question of whether an
institution ``operated within its means'' during its most recent fiscal
year. A strength factor of 1.0 for the Net Income ratio means that an
institution broke even for the year--it did not incur operating losses
or add to its wealth with operating gains or surpluses. In other words,
the institution was able to cover its cash and non-cash expenses for
the year, but no more. As the strength factor increases, the wealth and
surpluses added by operating gains help to increase an institution's
margin against adversity.
An institution is financially responsible under the composite score
methodology if, after weighting, the strength factors for all of the
ratios sum to a score that is at least 1.5. For a for-profit
institution, the weighting for each ratio is fairly equal--30 percent
of the score is based on the Primary Reserve ratio, 40 percent on the
Equity ratio, and 30 percent on the Net Income ratio. For a non-profit
institution the weighting places less emphasis on the Net Income ratio
at 20 percent, with the Primary Reserve and Equity ratios at 40 percent
each. As noted previously, the weighting reflects the importance or
significance of the operating characteristics in the two sectors.
In summary, a low strength factor for any of the three ratios
indicates that an institution has little or no margin against
adversity, and may not have the resources necessary to meet its
operating needs. As one or more of the strength factors increase to 2.0
and above, the institution's margin against adversity improves through
a combination of increases in expendable assets, equity, or operating
gains. After accounting for the importance of each of the ratios, the
composite score provides an overall measure of the financial health of
an institution.
However, as shown in Table 1, the methodology contemplates that an
institution should have expendable assets that exceed liabilities by at
least 10 percent to earn a strength factor (1.0 for an non-profit, and
2.0 for a for-profit) for the Primary Reserve ratio that provides for a
margin against adversity in keeping with the minimum passing composite
score of 1.5. While a good performance under the Equity ratio may help
an institution obtain resources to meet its operating and contingency
[[Page 39364]]
needs, or a good performance under the Net Income ratio may increase
its wealth over time, the expendable assets reflected in the Primary
Reserve ratio, which represents 30 percent to 40 percent of the
composite score, are the first line of defense in dealing with an
adverse situation, such as a lawsuit. That is, an institution would
first seek to pay damages resulting from the suit out of expendable
assets or current assets as they are referred to under the comparable
SEC materiality threshold. Either way, paying damages out of liquid
assets for an amount above 10 percent of expendable or current assets
is likely to have an adverse impact on an institution's ability to meet
its current and future financial obligations, particularly if the
institution has little or no liquid assets.
With regard to a suit that is based on claims other than the making
of a Federal loan or the provision of educational services, while that
suit is pending an institution would not be financially responsible. If
the institution settles or otherwise resolves that suit for an amount
that exceeds 10 percent of its current assets, the institution would
still not be considered financially responsible until it submits
audited financial statements that cover the fiscal year in which the
suit was settled or resolved. At that point, the Department would be
able to evaluate the impact of the suit through the calculation of the
institution's composite score. So, until the Department calculates the
institution's composite score, the institution would be treated as if
the suit was still pending.
In cases where a suit or action does not demand a specific amount
as relief, we could allow an institution to estimate and use that
amount in determining whether the suit or action would exceed the
materiality thresholds. However, doing so would lead to inconsistent
and widely differing estimates among institutions, or more concerning,
estimates significantly lower than the potential damages. Consequently,
we propose a uniform approach under which the estimates are based on
the total amount of tuition and fees received by the institution for
students enrolled at the institution during the period for which the
relief is sought. If no period is stated, an institution would estimate
the amount based on the total amount of tuition and fees received by
the institution for the three award years preceding the date the suit
or action was filed or initiated. However, we do not believe this
approach is appropriate for private party actions that do not demand a
specific amount of relief because the reasons for those actions may
impact a more limited group of students. We seek comment on this
approach and on other approaches that provide a reasonable way to
estimate the potential damages from suits and other actions.
With regard to repayments to the Secretary for losses to the
Secretary from resolved borrower defense claims, an institution's
ability to meet its current and future financial obligations is
threatened whenever repayments for those losses rise to levels above
the materiality thresholds, regardless of whether those repayments are
related to or otherwise stem from the factual findings and theories
resulting from an investigation or lawsuit initiated by the Department,
a State or Federal agency, oversight entity, or some other party.
Therefore, we propose to apply the dollar and percentage materiality
thresholds to this triggering event.
To provide background on the proposed trigger relating to a teach-
out plan, under 34 CFR 602.24(c)(1), an accrediting agency requires an
institution to submit a teach-out plan whenever (1) the Secretary takes
an emergency action or initiates a proceeding to limit, suspend, or
terminate the institution's participation in the title IV, HEA
programs, (2) the agency acts to withdraw, terminate, or suspend the
accreditation or pre-accreditation of the institution, (3) the
institution notifies the agency that it intends to cease operations
entirely or close a location that provides 100 percent of at least one
program, or (4) a State licensing or authorizing agency notifies the
accrediting agency that it has or will revoke the institution's license
or legal authorization to provide an educational program. Except for
the closure of small locations, these actions jeopardize the
institution's participation in the title IV, HEA programs. During the
negotiated rulemaking sessions, some of the non-Federal negotiators
noted that an institution may close a location that only a few students
attended. In that case, the negotiators argued that some materiality
threshold should apply because that closure would probably not have an
adverse impact on the institution. Although those negotiators did not
propose any specific thresholds, they suggested that thresholds based
on the number of students enrolled or affected by the closure, or a
dollar amount associated with those students, would be appropriate. We
seek comment on whether the Department should adopt a threshold for
this circumstance, and specifically seek comment on what that threshold
should be.
With regard to a situation where an accrediting agency places an
institution on probation, issues a show-cause order, or places an
institution in a similar status, we view that action as calling into
question the institution's ability to continue to provide educational
services, and it may be a precursor to losing accreditation. Some of
the non-Federal negotiators argued that because an institution may be
placed on probation for a minor infraction or for a reason that could
be readily resolved, the Department should not determine, or at least
not determine immediately, that the institution is not financially
responsible. In response, we suggested, and are proposing in this NPRM,
that the Department would wait six months before making a determination
to provide adequate time for an institution with a minor infraction to
come into compliance with its accrediting agency standards. We also
suggested during the negotiating sessions that we could accept an
accrediting agency determination that an institution's failure to
comply with agency standards within a six-month timeframe has not had
and is not expected to have a material adverse financial impact on the
institution, and that the agency anticipates the institution will come
into compliance within a longer time frame set by the agency under 34
CFR 602.20. However, some of the non-Federal negotiators believed that
an accrediting agency could not make this determination or make
predictions about future compliance by an institution. We seek comment
about whether or how we should provide a way for an accrediting agency
to inform the Department why its action of placing an institution on
probation will not have an adverse impact on the institution's
financial or operating condition.
With regard to the triggers on loan agreements and obligations,
some of the non-Federal negotiators believed that it was inappropriate
to conclude that an institution is not financially responsible if it
violates any loan agreement or fails to make a payment on a loan,
regardless of the amount of or purpose for the loan or whether the loan
was collateralized. In response we suggested, and are proposing in this
NPRM, to apply this trigger when an institution violates a loan
agreement with, or as currently provided under Sec. 668.171(b)(3)(ii),
fails to make a payment for more than 120 days to, the creditor with
the largest secured extension of credit to the institution. We believe
this proposal addresses the materiality concerns raised by the
negotiators and speaks
[[Page 39365]]
directly to an institution's ability to meet its current financial
obligations. However, the creditor may impose penalties or more
restrictive requirements on the institution under the terms of its
security or loan agreements that call into question the institution's
ability to meet its current and future financial obligations. The
Department is particularly concerned about identifying events in which
the institution displays early indications of financial difficulty, and
taking appropriate precautions as early as possible to protect the
taxpayer. Lenders and creditors that provide financing to an
institution under security and loan agreements typically monitor the
institution's financial performance to ensure that it satisfies the
loan requirements and are thus in the best position to identify
contemporaneously any risks or problems that may hinder or prevent the
institution from doing so. If these risks or problems arise, the
creditor may impose penalties and additional restrictions on the
institution, including increasing collateral or compensating balance
requirements. For this reason, we propose to treat the imposition of
penalties and additional requirements in loan agreements as a
triggering event but, under the reporting requirements in proposed
paragraph (d), we will allow the institution to demonstrate that these
actions by the creditor will not have adverse impact on the
institution.
With regard to the 90/10 revenue test, a for-profit institution
that fails the test for a fiscal year is in danger of losing its
eligibility to participate in the title IV, HEA programs if it fails
again in the subsequent fiscal year. Therefore, we believe this is an
appropriate trigger to include.
For a publicly traded institution, we are proposing as triggers
four SEC-related actions that jeopardize the institution's ability to
meet its financial obligations or continue as a going concern. First,
we propose as a trigger an SEC warning to the institution that it may
suspend trading on the institution's stock and take other action
regarding the registration status of the company, pursuant to section
12(k) of the Securities Exchange Act, 15 U.S.C. 78l(k). The SEC does
not make this warning public or announce that it is considering a
suspension until it determines that the suspension is required to
protect investors and the public interest.\33\ In that event, the SEC
posts the suspension and the grounds for the suspension on its Web
site. However, under the reporting requirements in proposed Sec.
668.171(d), the institution would be required to notify the Department
within 10 days of receiving such a warning from the SEC. The SEC may
decide to suspend trading on the institution's stock based on (1) a
lack of current, accurate, or adequate information about the
institution, for example when the institution is not current in filing
its periodic reports, (2) questions about the accuracy of publicly
available information, including information in institutional press
releases and reports and information about the institution's current
operational status, financial condition, or business transactions, or
(3) questions about trading in the stock, including trading by
insiders, potential market manipulation, and the ability to clear and
settle transactions in the stock.\34\
---------------------------------------------------------------------------
\33\ See SEC Investor Bulletin: Trading Suspensions, available
at www.sec.gov/answers/tradingsuspension.htm.
\34\ Id.
---------------------------------------------------------------------------
Second we propose that whenever the exchange on which the
institution's stock is traded notifies the institution that it is not
in compliance with exchange requirements, that notice is a triggering
event. The major exchanges typically require institutions whose stock
is listed to satisfy certain minimum requirements such as stock price,
number of shareholders, and the level of shareholder's equity.\35\ If a
stock falls below the minimum price, other requirements are not met, or
the institution fails to provide timely reports of its performance and
operations in its Form 10-Q or 10-K filings with the SEC, the exchange
may delist the institution's stock. Delisting is generally regarded as
the first step toward Chapter 11 bankruptcy. However, before the
exchange initiates a process to delist the stock, it notifies the
institution and gives it several days to respond with a plan of the
actions it intends to take to come into compliance with exchange
requirements.
---------------------------------------------------------------------------
\35\ See, e.g., New York Stock Exchange Rule 801.00:
Suspension and Delisting: Securities admitted to the list may be
suspended from dealings or removed from the list at any time that a
company falls below certain quantitative and qualitative continued
listing criteria. When a company falls below any criterion, the
Exchange will review the appropriateness of continued listing.
Available at http://nysemanual.nyse.com/lcm/sections/lcm-sections/chp_1_9/default.asp.
---------------------------------------------------------------------------
Third, as proposed, if an institution discloses or is required to
disclose in a report filed with the SEC a judicial or administrative
proceeding stemming from a complaint filed by a person or entity that
is not part of a State or Federal action, that would be a triggering
event. SEC rules require the institution to disclose litigation that is
material within the context of its disclosure obligations to investors.
17 CFR 229.103. We recognize that publicly traded institutions may, to
comply unequivocally with this obligation, report litigation that they
would not otherwise consider to be a material adverse event. As noted
in the description of these proposed regulations above, an institution
that makes such a disclosure of litigation in an SEC filing may explain
in reporting that disclosure to the Department why that litigation or
suit does not constitute a material adverse event that would pose an
actual risk to its financial health.
Fourth, we propose to add as a trigger the institution's failure to
file timely a required annual or quarterly report with the SEC. As
noted previously in this discussion, the late filing of, or failure to
file, a required SEC report may precipitate an adverse action by the
SEC or a stock exchange. We seek comment on how we could more narrowly
tailor these proposed triggers for publicly traded institutions to
capture only those circumstances that could pose a risk to the
institution's financial health.
The proposed GE trigger would apply to an institution at which the
majority of its students who receive title IV, HEA assistance are
enrolled in GE programs, and the majority of those GE students enroll
in failing and zone programs. Since failing and zone programs are in
danger of losing the title IV, HEA eligibility, the corresponding loss
of revenue from those programs may jeopardize the institution's ability
to continue as a going concern. In addition, because most of the GE
students are enrolled in programs that have not enabled former
graduates to earn enough to afford to pay their student loans, we
question the institution's ability to provide adequate educational
services. We seek comment on whether the majority of students that
enroll in zone or failing GE programs is an appropriate threshold or
whether and why we should adopt a different threshold.
The withdrawal of owner's equity is currently an event that an
institution reports to the Department under the provisions of the zone
alternative in Sec. 668.175(d). An institution participates under the
zone alternative if its composite score is between 1.0 and 1.5. We
proposed at negotiated rulemaking and propose in this NPRM to relocate
this provision to the general standards of financial responsibility
under Sec. 668.171. Under the general standards, this provision would
become a trigger in cases where an institution's financial condition is
already precarious and any
[[Page 39366]]
withdrawal of funds from the institution would further jeopardize its
ability to continue as a going concern or its continued participation
in the title IV, HEA programs. However, as noted in the discussion of
these proposed regulations above, an institution may show that the
withdrawal of funds was for a legitimate purpose or that it has no
impact on the institution's composite score.
With regard to the trigger for an institution whose cohort default
rate is 30 percent or more for two consecutive years, the institution
is in danger of losing its program eligibility in the subsequent year
if its cohort default rate is again 30 percent or more. However, if the
institution files a challenge, request for adjustment, or appeal under
subpart N, we propose to wait until that challenge, request, or appeal
is resolved before determining whether the institution violated the
trigger. However, we seek comment on whether this trigger should apply
to an institution whose cohort default rate is 30 percent or more for
any one year because, under that circumstance, the institution is
required by statute to develop a default prevention plan and submit it
to the Secretary, indicating that Congress recognized the risk that
such an institution could pose to borrowers and taxpayers and therefore
warranted a plan for remediation after a single year of low
performance.
As discussed during the negotiated rulemaking sessions, all of
these actions and events would serve as ``automatic triggers,'' meaning
that an institution would not be financially responsible for at least
one year based solely on the occurrence of that action or event, or for
the triggers relating to an action by a State, Federal, or other
oversight entity, including an accrediting agency, would not be
financially responsible for a period of three years after an action by
that agency. During negotiated rulemaking we also discussed, and we
have proposed in this NPRM, other factors or conditions that the
Secretary could consider in determining whether an institution is
financially responsible. These factors and conditions, which we refer
to as ``discretionary triggers,'' are factors or conditions that could
be reasonably likely to have an adverse impact on the financial
condition, business, or results of operations of a particular
institution. If the Secretary determines that any of these factors
alone or in combination calls into question the financial capability of
an institution, the Secretary notifies the institution of the reasons
for that determination.
Two of the discretionary triggers, fluctuations in Direct Loan and
Pell Grant funds and high dropout rates, stem from the statutory
provisions for selecting institutions for program reviews in section
498a(a) of the HEA. 20 U.S.C. 1099c-1(a). Significant increases or
decreases in the volume of Federal funds may signal rapid expansion or
contraction of an institution's operations that may either cause or be
driven by negative turns in the institution's financial condition or
its ability to provide educational services. Similarly, high dropout
rates may signal that an institution is employing high-pressure sales
tactics or is not providing adequate educational services, either of
which may indicate financial difficulties and result in enrolling
students who will not benefit from the training offered and will drop
out, leading to financial hardship and borrower defense claims.
Another discretionary trigger deals with the oversight activities
of a State authorizing or licensing agency, where a failure by an
institution to comply with agency requirements could jeopardize its
ability to operate, or provide educational programs, in that State.
Some non-Federal negotiators expressed support for the proposed use
of a financial stress test that would be developed or adopted by the
Department. Under the test, we would be able to assess or model an
institution's ability to deal with an economic crisis or other adverse
conditions. Like the composite score, the stress test could be used to
assess whether, or to augment an analysis of whether, an institution is
able to meet its financial obligations to students and the Secretary.
An institution's bond or credit rating could be used in a similar way.
During negotiated rulemaking we proposed, and propose in this NPRM,
that an institution with a non-investment grade bond or credit rating
\36\ could be subject to additional scrutiny because any rating below
investment grade indicates that the institution is likely to default on
the debt for which that rating is issued.
---------------------------------------------------------------------------
\36\ Generally, a bond rating lower than Baa3 (Moody's) or BBB-
(Standard and Poor's, Fitch). www.investopedia.com/exam-guide/series-7/debt-securities/bond-ratings.asp.
---------------------------------------------------------------------------
The last discretionary trigger, any event reported by an
institution to the SEC on a Form 8-K, is intended to capture events
that are not included in the automatic triggers but may nevertheless
have a significant adverse impact on business operations. For example,
an institution must report to the SEC that a material definitive
agreement (a contract on which business operations are substantially
dependent) was terminated.
Under the reporting requirements in proposed Sec. 668.171(d), an
institution would notify the Department of any action or event that
constitutes an automatic or discretionary trigger no later than 10 days
after that action or event occurs. Some of the non-Federal negotiators
identified a few events that may not be material or would be resolved
during the reporting period and argued that these events should not
prompt any action by the Department. We agreed, and propose in this
NPRM that, to keep the Department apprised, an institution would still
be required to report those events but the institution may tell us in
its notice why the action or event is not material or that it has been
resolved. If we do not agree with the institution's assessment, the
Department will notify the institution of the reasons for that
determination.
Alternative Standards and Requirements (Sec. 668.175)
Statute: Under sections 437(c) and 464(g) of the HEA, if the
Secretary discharges a borrower's liability on a loan due to the
closure of an institution, false certification, or unpaid refund, the
Secretary pursues a claim against the institution or settles the loan
obligation pursuant to the financial responsibility standards described
in section 498(c).
Section 498(c)(3) of the HEA provides that if an institution fails
the composite score or other criteria established by the Secretary to
determine whether the institution is financially responsible, the
Secretary must determine that the institution is financially
responsible if it provides third-party financial guarantees, such as
performance bonds or letters of credit payable to the Secretary, for an
amount that is not less than one-half of the annual potential
liabilities of the institution to the Secretary for title IV, HEA
funds, including liabilities for loan obligations discharged pursuant
to section 437, and to students for refunds of institutional charges,
including required refunds of title IV, HEA funds.
Under section 498(h) of the HEA, the Secretary may provisionally
certify an institution's eligibility to participate in the title IV,
HEA programs for not more than one year in the case of an institution
seeking an initial certification, or for no more than three years for
an institution that seeks to renew its certification, if, in the
judgment of the Secretary, the institution is in an administrative or
financial condition that may jeopardize its ability to perform its
financial
[[Page 39367]]
responsibilities under a program participation agreement. If, prior to
the end of a period of provisional certification, the Secretary
determines that the institution is unable to meet its responsibilities
under its program participation agreement, the Secretary may revoke the
institution's provisional certification to participate in the title IV,
HEA programs.
Current Regulations: Section 668.13(c) of the current regulations
identifies the reasons and conditions for which the Secretary may
provisionally certify an institution to participate in the title IV,
HEA programs, including an institution's failure to meet the standards
of financial responsibility under Sec. 668.15 or subpart L of the
general provisions regulations. Under Sec. 668.13(c)(4), an
institution may participate in the title IV, HEA programs under a
provisional certification if the institution demonstrates to the
Secretary's satisfaction that it (1) is capable of meeting the
standards of participation in subpart B of the general provisions
regulations within a specified period, and (2) is able to meet its
responsibilities under its program participation agreement, including
compliance with any additional conditions that the Secretary requires
the institution to meet for the institution to participate under a
provisional certification. If the Secretary determines that the
institution is unable to meet its responsibilities under its
provisional program participation agreement, the Secretary may revoke
the institution's provisional certification as provided under Sec.
668.13(d).
As provided under Sec. 668.175, an institution that is not
financially responsible under the general standards in Sec. 668.171
may begin or continue to participate in the title IV, HEA programs only
by qualifying under an alternative standard.
Under the zone alternative in Sec. 668.175(d), a participating
institution that is not financially responsible solely because its
composite score is less than 1.5 may participate as a financially
responsible institution for no more than three consecutive years, but
the Secretary requires the institution to (1) make disbursements to
students under the heightened cash monitoring or reimbursement payment
methods described in Sec. 668.162, and (2) provide timely information
regarding any adverse oversight or financial event, including any
withdrawal of owner's equity from the institution. In addition, the
Secretary may require the institution to (1) submit its financial
statement and compliance audits earlier than the date specified in
Sec. 668.23(a)(4), or (2) provide information about its current
operations and future plans.
Under the provisional certification alternative in Sec.
668.175(f), an institution that is not financially responsible because
it does not meet the general standards in Sec. 668.171(b), or because
of an audit opinion in Sec. 668.171(d) or a condition of past
performance in Sec. 668.174(a), may participate under a provisional
certification for no more than three consecutive years, if the
institution (1) provides an irrevocable letter of credit, for an amount
determined by the Secretary that is not less than 10 percent of the
title IV, HEA program funds the institution received during its most
recently completed fiscal year, (2) demonstrates that it was current in
its debt payments and has met all of its financial obligations for its
two most recent fiscal years, and (3) complies with the provisions
under the zone alternative.
Proposed Regulations: We propose to relocate to proposed new Sec.
668.171(c) two of the oversight and financial events that an
institution currently reports to the Department under the zone
alternative in Sec. 668.175(d)(2)(ii)--actions by an accrediting
agency and any withdrawal of owner's equity from the institution. In
addition we propose to remove from Sec. 668.175(d)(2) the two
reporting events related to loan agreements and debt obligations.
Under the provisional certification alternative in Sec.
668.175(f), we propose to add a new paragraph (4) that ties the amount
of the financial protection that an institution must provide to the
Secretary to an action or triggering event described in Sec.
668.171(c). Specifically, under this alternative, an institution would
be required to provide to the Secretary financial protection, such as
an irrevocable letter of credit, for an amount that is:
For a State or Federal action under Sec. 668.171(c)(1)(i)
or (ii), 10 percent or more, as determined by the Secretary, of the
amount of Direct Loan Program funds received by the institution during
its most recently completed fiscal year;
For repayments to the Secretary for losses from borrower
defense claims under Sec. 668.171(c)(2), the greatest annual loss
incurred by the Secretary during the three most recently completed
award years to resolve those claims or the amount of losses incurred by
the Secretary during the current award year, whichever is greater, plus
a portion of the amount of any outstanding or pending claims based on
the ratio of the total value of claims resolved in favor of borrowers
during the three most recently completed award years to the total value
of claims resolved during the three most completed award years; and
For any other action or triggering event described in
Sec. 668.171(c), or if the institution's composite score is less than
1.0, or the institution no longer qualifies under the zone alternative,
10 percent or more, as determined by the Secretary, of the total amount
of title IV, HEA program funds received by the institution during its
most recently completed fiscal year.
We propose to remove Sec. 668.175(e) because the transition year
alternative, which pertains to fiscal years beginning after July 1,
1997 and before June 30, 1998, is no longer applicable.
In addition, we propose to add a new paragraph (h) that provides
for providing financial protection using a set-aside in lieu of cash or
a letter of credit. If an institution does not provide cash or the
letter of credit for the amount required to participate under the zone
or provisional certification alternatives within 30 days of the
Secretary's request, the Secretary would provide funds to the
institution only under the reimbursement or heightened cash monitoring
payment methods, and would withhold temporarily a portion of any
reimbursement claim payable to the institution in an amount that
ensures that by the end of a nine-month period, the total amount
withheld equals the amount of cash or the letter of credit the
institution would otherwise provide. The Secretary would maintain the
amount of funds withheld under this offset arrangement in a temporary
escrow account, would use the funds to satisfy the debt and liabilities
owed to the Secretary that are not otherwise paid directly by the
institution, and would return to the institution any funds not used for
this purpose during the period for which the cash or letter of credit
was required.
Reasons: The reportable items under the zone alternative were
intended to alert the Department to adverse actions or events that
could occur at any time, or fall outside the scope of activities that
are typically included or disclosed in financial statements, and that
could further degrade the financial health of an institution with
little or no margin against adversity. As noted previously, the
Department is taking a more contemporaneous and broader view of the
actions or events that are likely to have an adverse impact on an
institution, regardless of whether the institution is participating
under the zone or another alternative. As such, the reportable events
under the zone alternative relating to adverse actions by an
accrediting agency or withdrawals of owner's equity fall naturally
under the
[[Page 39368]]
scope of triggering events for the general standards of financial
responsibility. With regard to removing the reporting requirements for
loan agreements and debt obligations from the zone alternative, we note
that while the provisions relating to loan agreements and debt
obligations are currently part of the general standards, the Department
typically relies on footnote disclosures in the financial statements to
determine whether an institution violated those agreements or
obligations. Because we would require under proposed Sec. 668.171(d)
that institutions report these violations no later than 10 days after
they occur, there would be no need to maintain the same reporting under
the zone alternative.
With regard to the proposed changes under the provisional
certification alternative that tie the amount of the financial
protection, such as a letter of credit, to an action or triggering
event, as explained more fully under the discussion of the general
standards in Sec. 668.171, every cited action or event is material
and, on its own, likely to have an adverse impact on the institution.
So, while the Secretary retains the discretion to determine the amount
of the financial protection for any action or event, we propose for
most of the triggering events to set as a floor the longstanding
minimum--10 percent of the amount of title IV, HEA program funds
received by the institution during its most recently completed fiscal
year. To be clear, each of these triggering events would require a form
of financial protection, such as a letter of credit, of at least 10
percent, so an institution with three triggering events would have to
submit financial protection for at least 30 percent of its prior year
title IV, HEA program funds.
For borrower defense claims, the amount of the financial protection
is tied to the prior experience or history of an institution in having
to reimburse the Secretary for losses stemming from those claims and
the potential for future losses. As proposed, the Department would
calculate the amount of the financial protection by looking at the
three most recently completed award years and the current award year to
determine the year in which the greatest Federal losses occurred, and
adding to that amount an estimate for the amount of losses from any
outstanding or pending claims. For example, the estimated loss for
pending claims would be calculated by multiplying the percentage of
prior claims resolved in the students' favor (say 75 percent) by the
total amount of the pending claims (say $500,000), or $375,000. In the
normal course, the Department would first seek reimbursement from the
institution before using the financial protection to recover losses
from borrower defense claims.
For a State or Federal action under Sec. 668.171(c)(1)(i) or (ii),
the amount of the financial protection is based only on Direct Loan
funds, instead of all title IV, HEA funds as for all of the other
triggers, because the Federal protection sought is related directly to
loan liabilities that could arise in the wake of a State or Federal
agency suit against the institution.
With regard to the set-aside, the Department wishes to provide an
alternative to an institution that, for costs or other reasons, is
unable to provide a letter of credit, or cash equivalent to the amount
of the letter of credit, within 30 days. However, while we acknowledge
that obtaining a letter of credit could be costly and time consuming
for some institutions, or obtaining a letter of credit collateralized
by physical assets requiring valuation by a bank or creditor could take
an extended time, we believe that the severity or potential
consequences of the triggering events warrant the Department taking
immediate steps to protect the Federal interest. Therefore, if an
institution does not provide the letter of credit or cash within 30
days of the Secretary's request, the Department would initiate
administrative offsets to implement the set-aside.
Severability
Current Regulations: None.
Proposed Regulations: Proposed Sec. 668.176 would make clear that,
if any part of the proposed regulations for part 668, subpart L,
whether an individual section or language within a section, is held
invalid by a court, the remainder would still be in effect.
Reasons: We believe that each of the proposed provisions proposed
in this NPRM serves one or more important, related, but distinct,
purposes. Each of the requirements provides value to students,
prospective students, and their families, to the public, taxpayers, and
the Government, and to institutions separate from, and in addition to,
the value provided by the other requirements. To best serve these
purposes, we would include this administrative provision in the
regulations to make clear that the regulations are designed to operate
independently of each other and to convey the Department's intent that
the potential invalidity of one provision should not affect the
remainder of the provisions.
Debt Collection
How does the Secretary exercise discretion to compromise a debt or to
suspend or terminate collection of a debt? (Sec. 30.70)
Statute: Section 432(a) of the HEA authorizes the Secretary to
enforce or compromise a claim under the FFEL Program; section 451(b)
provides that Direct Loans are made under the same terms and conditions
as FFEL Loans; and section 468(2) authorizes the Secretary to enforce
or compromise a claim on a Perkins Loan. Section 452(j) of the General
Education Provisions Act (GEPA) authorizes certain compromises under
Department programs, and 31 U.S.C. 3711 authorizes a Federal agency to
compromise or terminate collection of a debt, subject to certain
conditions.
Current Regulations: The current regulation in Sec. 30.70 was
adopted in 1988 to describe the procedures and standards the Secretary
follows to compromise, or suspend or terminate collection of, debts
arising under programs administered by the Department. The HEA has,
since 1965, authorized the Secretary to compromise--without dollar
limitation--debts arising from title IV, HEA student loans. The Federal
Claims Collection Act of 1966 (FCCA), now at 31 U.S.C. 3711, authorized
Federal agencies to compromise, or suspend or terminate collection of,
debts, subject to dollar limitations and compliance with the Federal
Claims Collection Standards (FCCS), now at 31 CFR 900-904. As in effect
in 1988 when the current regulation was adopted, the FCCA required
agencies generally to obtain approval from the DOJ in order to resolve
debts exceeding $20,000, unless DOJ were to prescribe a higher amount.
No higher amount was prescribed, and the Department included that
$20,000 dollar limit in Sec. 30.70.
In 1988, section 452(j) of GEPA (20 U.S.C. 1234a(j)) was enacted to
provide standards and procedures for certain compromises of debts
arising under any program administered by the Department other than the
Impact Aid Program or HEA programs. These provisions were also included
in Sec. 30.70(c), (d), and (e). However, in 1989, the Department
adopted 34 CFR 81.36 to implement these same GEPA standards; that
regulation supersedes current Sec. 30.70(c), (d), and (e) to govern
compromises of debts under certain Department programs. Compromises of
debts under Department programs that do not fall under standards in
Sec. 81.36 would continue to be subject to the standards and dollar
limits generally applicable to Department debts. In 1990,
[[Page 39369]]
in Public Law 101-552, Congress increased the size of debts that
agencies may resolve without DOJ approval to $100,000; that change is
not reflected in Sec. 30.70. Finally, in 2008, Public Law 110-315
amended section 432 of the HEA to require the Department to provide DOJ
an opportunity to review and comment on any proposed resolution of a
claim arising under any of the title IV, HEA loan programs that exceed
$1,000,000. That, too, is not reflected in current Sec. 30.70.
Proposed Regulations: The proposed changes would revise Sec. 30.70
to--
Reflect the increased debt resolution authority
($100,000);
Refer to Sec. 81.36 to describe the authority and
procedures for those compromises of claims that are subject to section
452(j) of GEPA;
Clarify that the generally applicable $100,000 limit does
not apply to resolution of claims arising under the FFEL Program, or
under the Direct Loan Program or Perkins Loan Program; and include the
requirement that the Department seek DOJ review of any proposed
resolution of a claim exceeding $1,000,000 under any of those loan
programs.
Reasons: The current regulations do not reflect a series of
statutory changes that have expanded the Secretary's authority to
compromise, or suspend or terminate the collection of, debts.
Closed School Discharges (Sec. Sec. 668.14, 673.33, 682.402, and
685.214)
Statute: Sections 437(c) and 464(g)(1) of the HEA provide for the
discharge of a borrower's liability to repay a FFEL Loan or a Perkins
Loan if the student is unable to complete the program in which the
student was enrolled due to the closure of the school. The same benefit
applies to Direct Loan borrowers under the parallel terms, conditions,
and benefits provisions in section 455(a) of the HEA.
Current Regulations: Section 668.14(b)(31) provides that, as part
of an institution's program participation agreement, the institution
must submit a teach-out plan, if, among other conditions, the
institution intends to close a location that provides 100 percent of at
least one program offered by the institution or if the institution
otherwise intends to cease operations. Sections 674.33(g), 682.402(d),
and 685.214 describe the qualifications and procedures in the Perkins,
FFEL, and Direct Loan Programs for a borrower to receive a closed
school discharge.
Proposed Regulations: Proposed Sec. 668.14(b)(32) would require,
as part of its program participation agreement with the Department, a
school to provide all enrolled students with a closed school discharge
application and a written disclosure, describing the benefits and the
consequences of a closed school discharge as an alternative to
completing their educational program through a teach-out plan after the
Department initiates any action to terminate the participation of the
school in any title IV, HEA program or after the occurrence of any of
the events specified in Sec. 668.14(b)(31) that would require the
institution to submit a teach-out plan.
Proposed revisions to Sec. 682.402(d)(6)(ii)(F) would require a
guaranty agency that denies a closed school discharge request to inform
the borrower of the opportunity for a review of the guaranty agency's
decision by the Secretary, and explain how the borrower may request
such a review. Proposed Sec. 682.402(d)(6)(ii)(K) would describe the
responsibilities of the guaranty agency and the Secretary if the
borrower requests such a review.
Under current and proposed 682.402(d)(6)(ii)(H) and 685.214(f)(4),
as well as under current Sec. Sec. 674.33(g)(8)(v), if a FFEL or
Direct Loan borrower fails to submit a completed closed school
discharge application within 60 days of the notice of availability of
relief, the guaranty agency or the Department resumes collection on the
loan. However, proposed Sec. Sec. 674.33(g)(8)(vi),
682.402(d)(6)(ii)(I), and 685.214(f)(5) would require the guaranty
agency or the Department, upon resuming collection, to provide a
Perkins, FFEL, or Direct Loan borrower with another closed school
discharge application, and an explanation of the requirements and
procedures for obtaining the discharge.
Proposed Sec. Sec. 674.33(g)(3)(iii), 682.402(d)(8)(iii), and
685.214(c)(2) would authorize the Department, or a guaranty agency with
the Department's permission, to grant a closed school discharge to a
Perkins, FFEL, or Direct Loan borrower without a borrower application
based on information in the Department's or guaranty agency's
possession that the borrower did not subsequently re-enroll in any
title IV-eligible institution within a period of three years after the
school closed.
Reasons: Many borrowers eligible for a closed school discharge do
not apply. The Department is concerned that borrowers are unaware of
their possible eligibility for a closed school discharge because of
insufficient outreach and information about available relief. In some
instances, the closing school might inform borrowers of the option to
complete their program through a teach-out, but fail to advise them of
the option for a closed school discharge. Currently, the Department
sends identified eligible borrowers an application and an explanation
of the qualifications and procedures to obtain a closed school
discharge. Schools that close, or close a location, may also conduct
teach-outs in accordance with their accreditor's standards. The
proposed amendments to the program participation agreement regulations
would provide such information to borrowers earlier in the process, and
would help to ensure that the borrowers receive accurate and complete
information with regard to their eligibility for a closed school
discharge, as well as the consequences of receiving such a discharge.
Non-Federal negotiators cited cases in which schools that were
closing or had closed failed to provide complete or accurate
information to their students about their options. They described
instances in which schools told students that, if the student received
a closed school discharge, the credits that the student earned at the
school would not be transferable to another school. While borrowers who
receive a closed school discharge may be able to transfer the credits
that they have earned, others may struggle to find another institution
willing to accept those credits. Yet relying on the information
provided to them, these borrowers often choose teach-outs rather than
closed school discharges. Though teach-outs can be beneficial to
borrowers in a closed school situation, a closed school discharge may
be a better option for some students.
In the Perkins and Direct Loan Programs, closed school discharge
determinations are generally made by the Department. The Department is
the loan holder for all Direct Loans, and would become the loan holder
for Perkins Loans held by a school that closes. In the FFEL Program,
closed school discharge determinations are generally made by a guaranty
agency. Under the current FFEL Program regulations, a borrower cannot
request a review of a guaranty agency's determination of a borrower's
eligibility for a closed school discharge. Proposed Sec.
682.402(d)(6)(ii)(F) would provide for Departmental review of denied
closed school discharge claims in the FFEL Program in order to provide
an opportunity for a more complete review of their claims, comparable
to that provided in current regulations for false certification claims.
The proposed amendments to the FFEL, Perkins, and Direct Loan
regulations, which would require loan holders to send borrowers a
second closed school application if a borrower fails to submit an
application within 60
[[Page 39370]]
days of the date the first application was sent, are intended to
provide another opportunity to encourage borrowers who may be eligible
for the closed school discharge to apply.
The Department proposed during negotiated rulemaking that the
Secretary allow closed school discharges to be granted without an
application in all three loan programs if the borrower does not re-
enroll in a title IV-eligible program within three years. We asserted
that such borrowers can be assumed to not have completed their academic
program through a teach-out or transfer, and have included these
provisions in the proposed regulations. We also asserted that an
application or discharge request in these cases should not be
necessary. By amending the regulations to provide for more outreach,
disclosure of a borrower's options in a teach-out situation, and review
by the Secretary of guaranty agency determinations, we hope to increase
the number of eligible borrowers who apply for and receive a closed
school discharge.
Death Discharges (Sec. Sec. 674.61(a), 682.402(b)(2), 685.212(a), and
686.42(a))
Statute: Section 420N(d)(2) of the HEA provides for the Secretary
to establish, through regulation, categories of extenuating
circumstances under which a TEACH Grant recipient who is unable to
satisfy all or part of the TEACH Grant service obligation may be
excused from fulfilling that portion of the service obligation.
Section 437(a)(1) of the HEA provides for the discharge of a loan
made under the FFEL Program if the borrower dies. In accordance with
section 455(a)(1) of the HEA, this discharge provision also applies to
loans made under the Direct Loan Program.
Section 464(c)(1)(F)(i) provides that the liability to repay a
Perkins Loan is cancelled upon the death of the borrower.
Current Regulations: For the Perkins Loan Program, Sec. 674.61(a)
provides that an institution must discharge the unpaid balance on a
Perkins Loan if the borrower dies. For the FFEL Program and the Direct
Loan Program, Sec. Sec. 682.402(b)(2) and 685.212(a)(1), respectively,
provide for the discharge of a loan based on the death of the borrower
or, in the case of a PLUS loan made to a parent, the death of the
student on whose behalf the parent borrowed. For the TEACH Grant
Program, Sec. 686.42(a) specifies that the Secretary discharges a
grant recipient's obligation to complete the agreement to serve if the
grant recipient dies. For all of these programs, the current
regulations specify that a death discharge can be granted based on an
original or certified copy of the borrower's, student's, or TEACH grant
recipient's death certificate; an accurate and complete photocopy of
the original or a certified copy of the death certificate; or, on a
case-by-case basis, other reliable documentation of the individual's
death.
Proposed Regulations: We propose to amend Sec. Sec. 674.61(a),
682.402(b)(2), 685.212(a), and 686.42(a) to allow for death discharges
to be granted based on an accurate and complete original or certified
copy of a death certificate that is scanned and submitted
electronically or sent by facsimile transmission, or verification of a
borrower's, student's or TEACH Grant recipient's death through an
authoritative Federal or State electronic database that is approved for
use by the Secretary. The proposed regulations would also make minor
changes to the current death discharge regulatory language to make it
more consistent across the title IV, HEA programs.
Reasons: The proposed regulations would streamline the death
discharge process and reduce administrative burden by allowing for
death certificates to be submitted electronically or by facsimile
transmission, and would further simplify the process in the future by
allowing for death discharges to be granted based on verification of an
individual's death through an authoritative Federal or State electronic
database that the Secretary authorizes to be used for this purpose.
During the negotiations, a non-Federal negotiator asked if, under
the proposed regulations, it would be permissible for a loan holder to
automatically grant a death discharge based on verification of a
borrower's or student's death in an approved State or Federal
electronic database, without the loan holder having received a request
for the death discharge from a family member. The Department responded
that loan holders can only grant death discharges after being informed
of the borrower's or student's death by a family member or other
representative of the deceased individual, but that they can use the
information in an approved electronic database as the necessary
supporting documentation for doing so.
Interest Capitalization (Sec. Sec. 682.202(b)(1), 682.410(b)(4), and
682.405)
Statute: Section 428H(e)(2) of the HEA allows a FFEL Program lender
to capitalize interest when the loan enters repayment, upon default,
and upon the expiration of deferment and forbearance, but does not
specifically authorize the capitalization of interest when a defaulted
loan is rehabilitated.
Current Regulations: The current FFEL Program regulations in
Sec. Sec. 682.202, 682.405, and 682.410 permit FFEL Program lenders to
capitalize interest when the borrower enters or resumes repayment and
requires a guaranty agency to capitalize interest when it pays the FFEL
Program lender's default claim. However, these regulations do not
specifically address whether a guaranty agency may capitalize interest
when the borrower has rehabilitated a defaulted FFEL Loan or whether a
FFEL Program lender may capitalize interest when purchasing a
rehabilitated FFEL Loan from a guaranty agency.
Proposed Regulations: The proposed revisions to the above-
referenced regulations would clarify that the only time that a guaranty
agency may capitalize interest is when it pays the FFEL Program
lender's default claim and, therefore, that capitalization by the
guaranty agency when selling a rehabilitated FFEL Loan is not
permitted. Similarly, the proposed regulations would clarify that
capitalization by the FFEL Program lender when purchasing a
rehabilitated FFEL Loan is not permitted. The proposed regulations
would also clarify, through a conforming change, that, when a guaranty
agency holds a defaulted FFEL Loan and the guaranty agency has
suspended collection activity to give the borrower time to submit a
closed school or false certification discharge application,
capitalization is not permitted if collection on the loan resumes
because the borrower does not return the appropriate form within the
allotted timeframe.
Reasons: Currently, some guaranty agencies and FFEL Program lenders
capitalize interest when the borrower rehabilitates the loan, while
others do not. Also, some guaranty agencies capitalize interest when
resuming collection on a defaulted FFEL Loan when a borrower has not
submitted a closed school or false certification discharge with a
specific timeframe. The Department does not believe that interest
capitalization in either circumstance is warranted, and the Department
does not capitalize interest on loans that it holds in comparable
circumstances. Further, the Department believes that FFEL Program
lenders, in the case of a rehabilitated FFEL Loan, have sufficient
tools at their disposal to ensure that a rehabilitated loan that has an
outstanding interest balance is repaid in full by the end of the
applicable repayment period or, in the case of the income-based
repayment plan, forgiven.
[[Page 39371]]
Loan Repayment Rate Warnings and Financial Protection Disclosures
(Sec. 668.41)
Statute: Under 20 U.S.C. 1221-3 and 3474, the Secretary is
authorized to adopt such regulations as needed for the proper
administration of programs.
Current Regulations: Current Sec. 668.41 requires institutions to
make certain general disclosures of information to enrolled and
prospective students, including availability of financial assistance,
detailed institutional information, retention rate, completion and
graduation rates, and placement of and types of employment obtained by
graduates. Section 668.41 further requires specialized disclosures
related to the ``Annual Security Report and Annual Fire Safety
Report,'' the ``Report on Completion or Graduation Rates for Student-
Athletes,'' and the ``Report on Athletic Program Participation Rates
and Financial Support Data.''
Proposed Regulations
Proprietary Institution Loan Repayment Warning
Proposed Sec. 668.41(h) would expand the reporting and disclosure
requirements under Sec. 668.41 to provide that, for any fiscal year in
which an affected postsecondary institution has a loan repayment rate
that is less than or equal to zero, the institution must deliver a
Department-issued plain language warning to prospective and enrolled
students and place the warning on its Web site and in all promotional
materials and advertisements. In accordance with proposed Sec.
668.41(h)(6), the Department would not calculate a repayment rate for
an institution whose cohort is based on fewer than 10 borrowers. An
institution with 10 or more borrowers that receives a failing repayment
rate will have the opportunity to appeal its rate if the institution
demonstrates that it has a low participation rate under the Direct Loan
program by applying, with slight modifications, the participation rate
index calculation described in Sec. 668.214(b)(1) that institutions
may use to appeal a loss of eligibility due to high cohort default
rates or placement on provisional certification. Consistent with the
existing process, in calculating the participation rate index for the
purposes of proposed Sec. 668.41(h)(6), the institution would divide
the number of students receiving a Direct Loan to attend the
institution during a period of enrollment that overlaps any part of a
12-month period that ended during the six months immediately preceding
the fiscal year for which the Department calculated the loan repayment
rate, by the number of regular students enrolled at the institution on
at least a half-time basis during any part of the same 12-month period.
The resulting percentage would then be multiplied by 30 percent to
yield a participation rate. A figure of 30 percent is used because that
is the minimum cohort default rate that could precipitate a
participation rate challenge. A participation rate equal to or less
than 0.0625 for a fiscal year in which the Department has calculated a
loan repayment rate would exempt the institution from having to deliver
a loan repayment warning under proposed Sec. 668.41(h).
Under proposed Sec. 668.41(h)(3), for each fiscal year, the
Secretary would calculate the loan repayment rate for a proprietary
institution based on the cohort of borrowers whose Direct Loans entered
repayment at any time during the fifth fiscal year prior to the most
recently completed fiscal year. The percentage change between what we
refer to as the ``original outstanding balance (OOB)'' (the amount
owed, as defined more specifically in proposed Sec. 668.41(h)(2)(ii),
when the borrower enters repayment, including any accrued interest) and
the ``current outstanding balance'' (including principal and both
capitalized and uncapitalized interest) as of the end of the prior
fiscal year for each borrower in the cohort would be calculated and
expressed as a percentage reduction of, or increase in, the OOB. For
any loan reported as being in default status at any time during the
``measurement period'' and where there is a percentage reduction of the
original balance, the difference between the OOB and COB would be
considered to be zero; and for any loan that defaulted and had a
percentage increase from the original balance, the difference between
the OOB and COB would be that percentage increase. ``Measurement
period'' is defined in proposed Sec. 668.41(h)(2)(iv) as the period of
time between the date a borrower's loan enters repayment and the end of
the fiscal year for which the current outstanding balance of that loan
is determined. The OOB of a loan does not include PLUS loans made to
parent borrowers, Perkins loans, or TEACH Grant-related loans. For
consolidation loans, the OOB includes only those loans attributable to
the borrower's enrollment in the institution. A median value is then
determined on a scale where percentage reductions in original
outstanding balance are positive values and percentage increases in
original balance are negative values. The median value for all included
borrowers at an institution is the institution's loan repayment rate
for that year.
Proposed Sec. 668.41(h)(4) would provide certain exclusions from
the above calculation. The Secretary would exclude a borrower from the
calculation if one or more of the borrower's loans were in a military
deferment status during the last fiscal year of the measurement period;
one or more of the borrower's loans are either under consideration by
the Secretary, or have been approved, for discharge on the basis of the
borrower's total and permanent disability under Sec. 682.402 or Sec.
685.213; the borrower was enrolled in an institution during the last
fiscal year of the measurement period; or the borrower died.
In proposed Sec. 668.41(h)(5), we describe the process by which
the Department would notify an institution of its loan repayment rate,
and provide the institution an opportunity to challenge that rate.
Specifically, the Department would provide to each institution a list
of students in the cohort as determined under proposed Sec.
668.41(h)(3), the draft repayment rate for that cohort, and the
information used to calculate the draft rate. The institution would
have 45 days to challenge the accuracy of the information used to
calculate the draft rate. After considering any challenges to the draft
rate made by the institution, the Department would notify the
institution of its final repayment rate and whether the institution
must deliver a loan repayment warning to students.
Financial Protection Disclosure
Under proposed Sec. 668.41(i), institutions that are required to
provide financial protection, including an irrevocable letter of credit
or cash under proposed Sec. 668.175(d) or (f), or set-aside under
proposed Sec. 668.175(h), would have to disclose that status, which
would include information about why the institution is required to
provide financial protection, to both enrolled and prospective students
until released from the obligation to provide financial protection by
the Department.
Disclosures to Students
Under proposed Sec. 668.41(h)(7), an institution that is subject
to the loan repayment warning must provide that warning to prospective
and enrolled students and place the warning on its Web site and in all
advertising and promotional materials in a form and manner prescribed
by the Department in a notice published in the Federal Register. Prior
to publishing the notice, the Department would conduct
[[Page 39372]]
consumer testing to improve the effectiveness of the warning language.
Under proposed Sec. 668.41(h)(7), an affected institution would be
required to provide the loan repayment warning to both enrolled and
prospective students by hand delivering the warning as part of a
separate document to the student individually or as part of a group
presentation. Alternatively, an institution could send the warning to a
student's primary email address or by another electronic communication
method used by the institution for communicating with the student. In
all cases, proposed Sec. 668.41(h)(7) would require the institution to
ensure that the warning is the only substantive content in the message,
unless the Secretary specifies additional, contextual language to be
included in the message. Institutions would be required to provide a
prospective student with the warning before the student enrolls,
registers, or enters into a financial obligation with the institution.
Proposed Sec. 668.41(h)(8) would also require that all promotional
and advertising materials prominently include the warning. Promotional
materials include, but are not limited to, an institution's Web site,
catalogs, invitations, flyers, billboards, and advertising on or
through radio, television, print media, social media, or the Internet.
Proposed Sec. 668.41(h)(8) would further require that all promotional
materials, including printed materials, about an institution be
accurate and current at the time they are published, approved by a
State agency, or broadcast.
Finally, an institution would, under proposed Sec. 668.41(h)(9),
be required to post the warning on the home page of the institution's
Web site, in a simple and meaningful manner, within 30 days of the date
the institution is informed by the Department of its final loan
repayment rate. The warning must remain posted to the institution's Web
site until the Department notifies the institution that it is no longer
under a requirement to do so as a result of having a loan repayment
rate greater than zero percent.
Under proposed Sec. 668.41(i), an affected institution would be
required to provide the financial protection disclosure to enrolled and
prospective students in the manner described in proposed Sec.
668.41(h)(7). An affected institution would also be required to post
the disclosure on the home page of the institution's Web site in the
manner described in proposed Sec. 668.41(h)(9) no later than 30 days
after the date on which the Secretary informs the institution of the
need to provide financial protection, until such time as the Secretary
releases the institution from the requirement that it provide financial
protection.
Reasons: In deciding to enroll or continue attendance at any
institution of higher education, students are making a substantial
personal commitment that may mean incurring considerable amounts of
student loan debt. Such a decision should, to the greatest extent
possible, be an informed one. We believe that the warning related to
loan repayment under proposed Sec. 668.41(h) and the financial
protection disclosure under Sec. 668.41(i) would provide students with
important information in making their educational and financial
decisions.
Loan Repayment Rate
The loan repayment rate warning would provide enrolled and
prospective students with valuable information about the repayment
outcomes associated with the Federal student loan debt incurred by
students who attend a proprietary institution. Zero percent or negative
loan repayment rates indicate that borrowers at the institution are
likely to have experienced financial distress as they attempted to
repay their loans and may continue to experience difficulty. Loans in
negative amortization status are viewed with concern.\37\ Students who
borrow to attend institutions should reasonably expect to be in a
financial position that enables them to pay down their loans after
leaving. Warning students of institutions with particularly low--zero
percent or negative--repayment rates will give them critical
information on which to base enrollment and borrowing decisions.
---------------------------------------------------------------------------
\37\ Looney, Adam and Constantine Yannelis. ``A Crisis in
Student Loans? How Changes in the Characteristics of Borrowers and
in the Institutions They Attended Contributed to Rising Loan
Defaults.'' Brookings Institution: http://www.brookings.edu/~/media/
projects/bpea/fall-2015/pdflooneytextfallbpea.pdf.
---------------------------------------------------------------------------
Based on internal analysis of data from the National Student Loan
Data System (NSLDS), the typical borrower in negative amortization--
more than half of those who have made no or negative repayment progress
five years after leaving school--experienced long-term repayment
hardship such as default. Those borrowers are especially unlikely to
satisfy their loan debt in the long-term.38 39 In
particular, we believe that it strikes an appropriate balance to
measure repayment rates after five years, given that those data show
that a substantial proportion of borrowers whose loans are in negative
amortization five years after entering repayment remain in negative
amortization or have defaulted on their loans 10 and even 15 years
after entering repayment.
---------------------------------------------------------------------------
\38\ Borrowers in negative amortization would be considered to
have a ``negative repayment rate'' under the proposed regulations.
\39\ Analysis of NSLDS data was based on a statistical sample of
three cohorts of borrowers with FFEL Loans and Direct Loans entering
repayment in 1999, 2004, and 2009, respectively. The repayment
statuses of the loans were tracked in five-year intervals at five,
ten, and fifteen years after entry into repayment, depending on the
age of the cohort.
---------------------------------------------------------------------------
Several non-Federal negotiators expressed concerns about the
additional administrative burden that would be associated with the
proposed regulations. Several non-Federal negotiators argued that both
the opportunity to review and correct data calculated by the
Department, as well as the obligation to ensure the warnings are
properly provided to all prospective and enrolled students, would add
significant burden for those institutions. Some of those negotiators
suggested that institutions should be able to satisfy the warning
requirement by providing a link from the institution's Web site to the
College Scorecard. Others recommended that the Department be
responsible for the dissemination of loan repayment rates and
associated warnings, perhaps through the Free Application for Federal
Student Aid (FAFSA). Still others proposed the Department explore ways
to limit the warning requirement only to those institutions that
contribute most to negative repayment outcomes.
In response to suggestions that the Department assume
responsibility for disseminating loan repayment rates, we believe that
schools, as the primary and on-the-ground communicators with their
students and the source of much of the information students receive
about financial aid, are well placed to reach their students and to
notify them of the potential risks of borrowing at that institution.
Nonetheless, we recognize the potentially increased administrative
responsibilities attendant to the proposed requirement and agree with
the negotiators who suggested minimizing administrative burden by
applying this requirement only to the sector of institutions where the
frequency of poor repayment outcomes is greatest. Analysis of repayment
performance under the proposed methodology shows that zero and negative
repayment outcomes are endemic to the proprietary sector, but are
relatively rare in the public and non-
[[Page 39373]]
profit sectors.\40\ Proprietary institutions are far more likely to
have poor repayment rates, along with lower post-college earnings and
higher default rates, than public or non-profit institutions, and
therefore pose the greatest risk to students and
taxpayers.41 42 For instance, a preliminary Department
analysis of the College Scorecard five-year undergraduate repayment
rates (using a comparable threshold of 50 percent of borrowers or fewer
making progress on their loans) shows that more than 70 percent of
institutions with a repayment rate below the threshold are proprietary
institutions, and those institutions represent more than two in five of
all proprietary institutions. On the other hand, at both public and
private nonprofit institutions, fewer than 10 percent of institutions
had repayment rates below the threshold.\43\ Based on this analysis,
the financial risk to students is far more severe in the proprietary
sector; so we propose to limit the burden of the warning requirement
only to those institutions. Accordingly, the proposed warning
requirement is tailored to address the sector in which these issues are
most concentrated. By doing so, we would limit burden on postsecondary
institutions generally and better target the Department's efforts to
provide valuable consumer information.
---------------------------------------------------------------------------
\40\ Analysis of NSLDS data was based on a cohort of borrowers
with FFEL Loans and Direct Loans who entered repayment in 2009. The
repayment status of loans taken out for attendance at each
institution was observed five years after entry into repayment.
\41\ The For-Profit Postsecondary School Sector: Nimble Critters
Or Agile Predators? www.nber.org/papers/w17710.pdf; and Miller, Ben
and Antoinette Flores. September 2015. Initial Analysis of College
Scorecard Earnings and Repayment Data. www.americanprogress.org/issues/higher-education/news/2015/09/17/121485/initial-analysis-of-college-scorecard-earnings-and-repayment-data/.
\42\ Looney, Adam and Constantine Yannelis. ``A Crisis in
Student Loans? How Changes in the Characteristics of Borrowers and
in the Institutions They Attended Contributed to Rising Loan
Defaults.'' Brookings Institution: http://www.brookings.edu/~/media/
projects/bpea/fall-2015/pdflooneytextfallbpea.pdf.
\43\ Analysis of the Department's College Scorecard data was
based on a combined cohort of borrowers with FFEL Loans and Direct
Loans who entered repayment in 2008 and 2009. At schools where fewer
than 50 percent of borrowers have repaid at least $1 on their loans
(as is calculated using the Scorecard methodology), the median
borrower has repaid nothing on his loans.
---------------------------------------------------------------------------
Several non-Federal negotiators also expressed concerns about the
methodology for calculating the repayment rate. One negotiator,
commenting on how the cohorts for this proposed repayment rate are
determined, objected to the use of a five-year horizon on the grounds
that students progressing directly to graduate study following
completion of an undergraduate degree may be shortly out of school and
in forbearance or otherwise have accrued interest at the time of the
calculation. Another negotiator expressed concerns that the proposed
new methodology would be overly punitive toward institutions with
historically underserved student populations, and that disclosure of
resulting loan repayment rates would, to an unfair degree, reflect
negatively on them.
While we appreciate the concerns and suggestions raised by
negotiators, we maintain that the loan repayment rate methodology in
proposed Sec. 668.41(h)(3) results in a rate that would provide useful
new information. Specifically, this rate would effectively identify the
proprietary institutions that are generating zero or negative repayment
outcomes and that should be providing warnings to students as they are
assessing the likelihood of their ability to repay the loan debt they
may incur for enrollment at a particular institution, based on the
outcomes of former students who have already entered repayment. Other
repayment rate methodologies, such as those used for the disclosures
required under the Gainful Employment rule and College Scorecard,
calculate the share of borrowers who have reduced their principal
balance by at least one dollar. The rate proposed in this regulation
would measure the extent to which students repaid their loans,
identifying those proprietary institutions at which students are least
likely to repay their loans in full. Moreover, the Department will look
for ways to harmonize the multiple repayment rate methodologies,
contingent on consumer testing and user needs.
We recognize that not all institutions present similar risk.
Therefore, institutions with low numbers of borrowers and low borrowing
rates are accordingly exempted from the proposed warning requirement.
As discussed above, proposed Sec. 668.41(h)(6) would exempt an
institution from the warning requirement if its repayment rate is based
on fewer than 10 borrowers who have entered repayment in the fiscal
year; or if the institution demonstrates that it has a low
participation rate under the Direct Loan program. The exemption for a
repayment rate calculation based on fewer than 10 borrowers reflects
the concern that individuals comprising so small a cohort might be able
to be identified, potentially compromising the privacy of those
individuals. We propose the low participation rate exemption in
recognition that, if the number of students who borrow Direct Loans
constitutes a small percentage of the institution's students, in some
cases due to the institution's low tuition costs, the loan repayment
outcomes of those students may not provide a full picture of student
experiences at the institution.
Under the proposed calculation, borrowers who default at any point
during the measurement period on their loans and who see a percentage
reduction in their loan balances are treated as ``zero'' for the
purposes of the repayment rate; borrowers who default and see a
percentage increase in their loan balances are counted by the actual
percentage increase. Given the significant impact that defaulting has
on borrowers' financial circumstances, this provision is designed to
ensure that institutions are held accountable for, and appropriate
weight is placed on, those students' loan repayment outcomes.
In addressing the negotiators' concerns related to basing the
cohort on a five-year horizon beyond the fiscal year when borrowers
entered repayment, and the possibility that some students may still be
enrolled in or have recently separated from school, we note that
borrowers who are enrolled in an institution (either the same or
another institution) at any time during the last fiscal year of the
measurement period are excluded from the calculation. Even those
students recently out of school and remaining in a forbearance status
(having made no payments on their loans) would not be included unless
their loans went into repayment at some time during the fifth prior
fiscal year. We also believe that the other exceptions included in
proposed Sec. 668.41(h)(4) strengthen the accuracy of the rate.
Regarding concerns that proposed Sec. 668.41(h) would unfairly
target institutions whose enrollment is largely composed of underserved
or economically disadvantaged populations, the Department holds that
the requirement would not identify institutions on the basis that they
enroll large numbers of underserved or economically disadvantaged
populations. Rather, it would identify institutions at which borrowers
on average are unable to repay their loans and accordingly pose a
disproportionate risk to both students and taxpayers. Borrowers are
responsible for managing debt payments, which begin shortly after they
complete a program, even in the early stages of their career, and even
if they come from economically disadvantaged backgrounds. As the U.S.
[[Page 39374]]
District Court for the District of Columbia stated in Association of
Private Sector Colleges & Universities v. Duncan, 110 F.Supp.3d 176,
194 (D.D.C. June 23, 2015), ``[W]hen graduates get low-paying jobs and
then default on their student loans, nobody wins--not the government
(which picks up the tab), and not the student (who may get back on her
feet eventually, but who--in the meantime--may be denied credit, miss
bill due dates, or even file for bankruptcy).'' Indeed, the Department
believes it is even more important to warn students from disadvantaged
populations about the poor repayment outcomes of an institution at
which they are considering enrolling because they will bear the same
responsibility for managing their debt as everybody else.
One negotiator expressed concerns over the intended scope of the
term ``promotional materials'' as now defined in proposed Sec.
668.41(h)(8), pointing out that, at some large institutions, it would
be difficult to put reasonable parameters around what might be
considered promotional material. Other negotiators felt that the speed
with which information about their institutions can be spread using
social media, and the potential scale of dissemination, would make it
impossible for them to ensure compliance with the proposed regulations.
Proposed Sec. 668.41(h)(8)(ii) identifies the most commonly used
methods to promote and advertise an institution, with the qualification
that this list is not exhaustive and promotional materials are not
limited to items on the list. We expect institutions to include the
required warning in such other comparable media and formats in which
they promote and advertise themselves. We invite comment on ways the
Department can ensure that this warning, when included in promotional
and advertising materials, is not hidden or presented in a way that
makes it difficult for the public to see. Regarding the inclusion of
social media as promotional material, we acknowledge the concerns
related to potential burden and scope expressed by negotiators. To that
end, we clarify here that it is not our intention for every ``post'' on
a social media site or every individual ``Tweet'' to be considered
promotional material. However, an institution's landing page on a
social media platform is considered to be promotional material, as are
any advertisements. On any social media profile/page that an
institution maintains on such a platform, the institution would be
required to include the warning.
Financial Protection
The proposed financial protection disclosure would provide enrolled
and prospective students with valuable information about the viability
of the institution as a participant in the Federal financial aid
programs. Under proposed Sec. 668.175(d), (f), or (h), some
institutions would be required to provide financial protection, such as
an irrevocable letter of credit, if the institution is not financially
responsible because of an action or event described in proposed Sec.
668.171(b) or (c). We believe that current and prospective students
have a demonstrable interest in being made aware of the specific
reasons for which their institution was required to provide any
financial protection because these are factors that could have a
significant impact on a student's ability to complete his or her
education at an institution. For the thousands of students in recent
years whose institutions have closed their doors precipitously, advance
notice that those institutions faced significant financial risk and
compliance issues could have allowed students time to reevaluate their
decision to remain at an institution and choose to instead continue
their education without interruption at an institution where the
prospects for completing their education are more certain. We also
believe that students are entitled to know about any such event that is
significant enough to warrant disclosure to investors since students
can have an equal, if not greater, financial stake in the continued
operation of their institution.
Method of Delivery
These provisions are designed to ensure that students receive any
required loan repayment rate warning or financial protection
disclosure. The information we propose to require in the loan repayment
rate warning and financial protection disclosure pertains to material
and deeply concerning problems at an institution that create
significant risk to the educational prospects of students enrolling or
already enrolled at that institution. Students deserve to know
information that could have a significant impact on or relate to their
chances of success.
In addition to our interest in ensuring that students have accurate
and complete information on which to base decisions about attending an
institution, the Department has a significant interest in ensuring
transparency more broadly. Recent events involving the closure of
several large proprietary institutions have shown the need for
lawmakers, regulatory bodies, State authorizers, taxpayers, and
students to be more broadly aware of circumstances that could affect
the continued existence of an institution. Though these additional
disclosure requirements are not a singular remedy for this problem, we
believe them to be an important step toward creating a more transparent
environment in which institutions participate in the title IV, HEA
programs.
Some negotiators objected to the lack of specificity with respect
to the wording of the proposed warning. Our intent, however, is to
build a certain amount of flexibility into the proposed regulations to
ensure that the warning is as meaningful as possible to its intended
audience. Accordingly, under proposed Sec. 668.41(h)(7)(i), the
Department would conduct consumer testing to help improve the
effectiveness of the warning language. Upon completion of consumer
testing, the final language would be published in the Federal Register.
For illustrative purposes, we include examples of possible repayment
rate warning language below:
U.S. Department of Education Warning: A majority of
borrowers at this school are not likely to repay their loans.
U.S. Department of Education Warning: A majority of
borrowers at this school have difficulty repaying their loans.
U.S. Department of Education Warning: Most of the students
who attended this school owe more on their student loans five years
after leaving school than they originally borrowed.
During negotiated rulemaking, the Department proposed requiring
institutions to deliver any loan repayment rate warning or financial
protection disclosure to prospective students at the first contact with
those students. Negotiators requested clarification of what is
considered ``first contact,'' believing it to be particularly difficult
to establish at large institutions with which potential students
regularly interact prior to enrolling. We agree with the negotiators
that, in many cases, a point of first contact between an institution
and a student may not be easy to isolate. Accordingly, we propose in
Sec. 668.41(h)(7)(iii) to state that an institution must provide the
warning or disclosure required under this section to a prospective
student before that student enrolls, registers, or enters into a
financial obligation with the institution.
Initial and Final Decisions (Sec. 668.90)
Statute: Section 498(d) of the HEA provides that the Secretary is
authorized to consider the past performance of an
[[Page 39375]]
institution or of a person in control of an institution, in determining
whether an institution has the financial capability to participate in
the title IV, HEA programs. Section 487(c)(1)(F) of the HEA, 20 U.S.C.
1094(c)(1)(F), provides that the Secretary shall prescribe such
regulations as may be necessary to provide for the limitation,
suspension, or termination of the participation of an eligible
institution in any program under title IV of the HEA.
Current Regulations: When the Department proposes to limit,
suspend, or terminate a fully certified institution's participation in
a title IV, HEA program, the institution is entitled to a hearing
before a hearing official under Sec. 668.90. In addition to describing
the procedures for issuing initial and final decisions, Sec. 668.90
also provides requirements for hearing officials in making initial and
final decisions in specific circumstances.
These regulations generally provide that the hearing official
determines whether an adverse action--a fine, limitation, suspension,
or termination--is ``warranted,'' but direct that in specific
instances, the sanction must be imposed if certain predicate conditions
are proven. For instance, in an action involving a failure to provide a
surety in the amount specified by the Secretary under Sec. 668.15, the
hearing official is required to consider the surety amount demanded to
be ``appropriate,'' unless the institution can demonstrate that the
amount was ``unreasonable.''
Further, Sec. 668.90(a)(3)(v) states that, in a termination action
brought on the grounds that the institution is not financially
responsible under Sec. 668.15(c)(1), the hearing official must find
that termination is warranted unless the conditions in Sec.
668.15(d)(4) are met. Section 668.15(c)(1) provides that an institution
is not financially responsible if a person with substantial control
over that institution exercises or exercised substantial control over
another institution or third-party servicer that owes a liability to
the Secretary for a violation of any title IV, HEA program
requirements, and that liability is not being repaid. Section
668.15(d)(4) provides that the Secretary can nevertheless consider the
first institution to be financially responsible if the person at issue
has repaid a portion of the liability or the liability is being repaid
by others, or the institution demonstrates that the person at issue in
fact currently lacks that ability to control or lacked that ability as
to the debtor institution.
Proposed Regulations: The Secretary proposes to amend Sec.
668.90(a)(3)(iii) by substituting the terms ``letter of credit or other
financial protection'' for ``surety'' in describing what an institution
must provide to demonstrate financial responsibility. Additionally,
Sec. 668.90(a)(3)(iii) would be modified to require the hearing
official to uphold the amount of the letter of credit or financial
protection demanded by the Secretary, unless the institution
demonstrates that the events or conditions on which the demand is based
no longer exist or have been resolved in a manner that eliminates the
risk they posed to the institution's ability to meet its financial
obligations, or has now provided the required financial protection. We
propose to further modify Sec. 668.90(a)(3)(v) to list the specific
circumstances in which a hearing official may find that a termination
or limitation action brought for a failure of financial responsibility
for an institution's past performance failure under Sec. 668.174(a),
or a failure of a past performance condition for persons affiliated
with an institution under Sec. 668.174(b)(1), was not warranted. For
the former, revised Sec. 668.90(a)(3)(v) would state that these
circumstances would be compliant with the provisional certification and
financial protection alternative in Sec. 668.175(f). For the latter,
the circumstances would be those provided in Sec. 668.174(b)(2) or
Sec. 668.175(g).
Reasons: The proposed changes to Sec. 668.90(a)(3)(iii) would
update the regulations to reflect both the current language in Sec.
668.175 and proposed changes to that section. The changes would also
create specific conditions under which the hearing official may find
that the letter of credit or financial protection amount demanded would
not be warranted. We believe that the new language would provide more
clarity than the current standard, which only notes that the
institution has to show that the amount was ``unreasonable.'' The
proposed language would clearly establish that the amount would be
unwarranted only if the reasons for which the Secretary required the
financial protection no longer exist or have been resolved, or if some
other acceptable form of financial protection arrangement is in place
with the Secretary.
Our proposed revisions to Sec. 668.90(a)(3)(iii) would reflect
previous, as well as proposed, changes to the financial responsibility
standards. First, the current financial responsibility standards in
Sec. 668.175 require an institution in some instances to provide a
letter of credit in order to be financially responsible. We propose to
modify Sec. 668.90(a)(3)(iii) to reflect that language as well as
changes proposed now to Sec. 668.175 by substituting the terms
``letter of credit or other financial protection'' for ``surety.''
Thus, the proposed changes to Sec. 668.90 would clarify that a
limitation, suspension, or termination action may involve a failure to
provide any of the specified forms of financial protection, letter of
credit or otherwise.
We further propose to modify Sec. 668.90(a)(3)(iii) to state the
specific grounds on which a hearing official may find that a limitation
or termination action for failure to provide financial protection
demanded is not warranted. The proposed change would provide that a
hearing official must adopt the amount of the letter of credit or
financial protection demanded by the Secretary, unless the institution
demonstrates that the events or conditions forming the grounds for the
financial protection or letter of credit no longer exist or have been
resolved in a manner resolving the risk posed to the institution's
ability to meet its financial obligations. The institution would be
permitted to demonstrate that the Department miscalculated the amount
on which the demand is grounded. However, it could not claim that the
event does not constitute grounds for a demand for financial protection
or that the amount demanded is unreasonable based on the institution's
assessment of the risk posed by the event or condition. The institution
could challenge a demand for protection based on delinquency on secured
debt by proving that the delinquency has been cured or a workout
satisfactory to the secured lender has been arranged. In the case of a
demand for financial protection based on pending litigation, the
institution would be permitted to demonstrate that the suit was
dismissed or settled favorably. Alternatively, the institution could
demonstrate that it has provided the Department with appropriate
alternative financial protection (cash or a reimbursement funding
arrangement with the Secretary that will result in set-aside of the
amount required within an agreed timeframe).
The proposed changes to Sec. 668.90(a)(3)(v) would also clarify
and conform with other existing regulations the alternative methods in
current regulations by which an institution may be able to meet the
financial responsibility standards, and thus would be able to claim
that a limitation or termination is unwarranted. Section
668.90(a)(3)(v) would be revised to state the grounds on which a
hearing official is authorized to find that a termination or limitation
action brought for a failure of financial responsibility for an
institution's failure of a past
[[Page 39376]]
performance condition under Sec. 668.174(a) or a failure of a past
performance condition for persons affiliated with an institution under
Sec. 668.174(b)(1) was not warranted. None of these provisions would
be changed under these proposed regulations. The changes would not add
substantive new restrictions, but simply conform Sec. 668.90 to these
substantive requirements already in current regulations. Thus, as
revised, Sec. 668.90(a)(3)(v) would require the hearing official to
find that the limitation or termination for adverse past performance by
the institution itself was warranted, unless the institution met the
provisional certification and financial protection alternative in
current Sec. 668.175(f). For an action based on adverse past
performance of a person affiliated with an institution, the hearing
official would be required to find that limitation or termination of
the institution was warranted unless the institution demonstrated
either proof of repayment or that the person asserted to have
substantial control in fact lacks or lacked that control, as already
provided in Sec. 668.174(b)(2), or the institution has accepted
provisional certification and provided the financial protection
required under Sec. 668.175(g).
Limitation (Sec. 668.93)
Statute: Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094, provides
that the Secretary shall prescribe such regulations as may be necessary
to provide for the limitation, suspension, or termination of an
eligible institution's participation in any program under title IV of
the HEA.
Current Regulations: Section 668.86 provides that the Secretary may
limit an institution's participation in a title IV, HEA program, under
specific circumstances, and describes procedures for a challenge to
such a limitation. Current Sec. 668.93 lists types of specific
restrictions that may be imposed by a limitation action, and includes
in paragraph (i) ``other conditions as may be determined by the
Secretary to be reasonable and appropriate.'' 34 CFR 668.93(i).
Although a change in an institution's status from fully certified
to provisionally certified is not currently a limitation listed in
Sec. 668.93, Sec. 668.13(c) provides that the Secretary may
provisionally certify an institution whose participation has been
limited or suspended under subpart G of part 668, and Sec. 668.171(e)
provides that the Secretary may take action under subpart G to limit or
terminate the participation of an institution if the Secretary
determines that the institution is not financially responsible under
the provisions of Sec. 668.171 or Sec. 668.175.
Proposed Regulations: The Secretary proposes to amend Sec. 668.93
to clarify that a change in an institution's participation status from
fully certified to provisionally certified to participate in a title
IV, HEA program under Sec. 668.13(c) is a type of limitation that may
be the subject of a limitation proceeding under Sec. 668.86.
Reasons: The proposed change to Sec. 668.93 would clarify current
policy and provide for a more complete set of limitations covered in
Sec. 668.93.
Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) Repayment
Plans (Sec. 685.209(a) and (c))
Statute: Section 455(d)(1)(D) of the HEA authorizes the Secretary
to offer Direct Loan borrowers (except parent PLUS borrowers) an
income-contingent repayment (ICR) plan with varying annual repayment
amounts based on the income of the borrower, for a period of time
prescribed by the Secretary, not to exceed 25 years. Section 455(e)(1)
of the HEA authorizes the Secretary to establish ICR plan repayment
schedules through regulations.
Current Regulations: For the PAYE Plan and the REPAYE Plan, current
Sec. 685.209(a)(1)(ii) and (c)(1)(ii), respectively, define ``eligible
loan'' as ``any outstanding loan made to a borrower under the Direct
Loan Program or the FFEL Program except for a defaulted loan, a Direct
PLUS Loan or Federal PLUS Loan made to a parent borrower, or a Direct
Consolidation Loan or Federal Consolidation Loan that repaid a Direct
PLUS Loan or Federal PLUS Loan made to a parent borrower.''
For the REPAYE Plan, current Sec. 685.209(c)(2)(ii)(B) provides
that if a married borrower and the borrower's spouse each have eligible
loans, the Secretary adjusts the borrower's REPAYE Plan monthly payment
amount by determining each individual's percentage of the couple's
total eligible loan debt and then multiplying the borrower's calculated
REPAYE Plan monthly payment amount by this percentage.
For the REPAYE Plan, current Sec. 685.209(c)(4)(iii)(B) specifies
that the annual notification to a borrower of the requirement to
provide updated income and family size information explains the
consequences, including the consequences described in Sec.
685.209(c)(4)(vi), if the Secretary does not receive the information
within 10 days following the annual deadline specified in the
notification. Paragraph (c)(4)(vi) of Sec. 685.209 provides that if
the Secretary removes a borrower from the REPAYE Plan because the
borrower has failed to provide updated income information by the
specified deadline, the Secretary sends the borrower a written
notification containing the borrower's new monthly payment amount and
providing other information, including the borrower's option to change
to a different repayment plan and the conditions under which the
borrower may return to the REPAYE Plan.
Proposed Regulations: The proposed regulations make technical
changes to amend Sec. 685.209(a)(1)(ii) of the PAYE Plan regulations
by adding language to the definition of ``eligible loan'' stating that
this term is used for purposes of determining whether a borrower has a
partial financial hardship and adjusting the monthly payment amount for
certain married borrowers. The definition of ``eligible loan'' in Sec.
685.209(c)(1)(ii) of the REPAYE Plan regulations would be amended by
adding language stating that this definition is used for purposes of
adjusting the monthly payment amount for certain married borrowers.
The proposed regulations would amend Sec. 685.209(c)(2)(ii)(B) of
the REPAYE Plan regulations by adding language to provide that there is
no adjustment to a married borrower's monthly payment amount based on
the eligible loan debt of the borrower's spouse if the spouse's income
is excluded from the calculation of the borrower's monthly payment
amount in accordance with Sec. 685.209(c)(1)(i)(A) or (B).
The proposed regulations would revise Sec. 685.209(c)(2)(v) of the
REPAYE Plan regulations by removing language that refers to the
Secretary's determination that the borrower does not have a partial
financial hardship. Finally, the proposed regulations also would revise
Sec. 685.209(c)(4)(iii)(B) of the REPAYE Plan regulations by removing
the cross-reference to Sec. 685.209(c)(4)(vi).
Reasons: The language that would be added to the definitions of
``eligible loan'' in the PAYE and REPAYE plan regulations is intended
to clarify that the inclusion of certain types of FFEL Loans in the
definitions of ``eligible loan'' does not mean that these loans may be
repaid under the PAYE or REPAYE plans. The PAYE and REPAYE plans are
available only for Direct Loans. The proposed language would clarify
that the FFEL Loans listed in the definitions are taken into
consideration only for certain purposes related to the terms and
conditions of the PAYE and REPAYE plans.
[[Page 39377]]
The proposed change in Sec. 685.209(c)(2)(ii)(B) is needed to
accurately reflect that the monthly payment amount for a married
borrower who files a separate Federal income tax return from his or her
spouse is not adjusted to take into account the spouse's eligible loan
debt if the spouse's income is excluded from the calculation of the
borrower's monthly payment amount in accordance with Sec.
685.209(c)(1)(i)(A) or (B). Paragraphs (c)(1)(i)(A) and (B) provide
that only the borrower's income is used to calculate the monthly REPAYE
Plan payment amount if a married borrower filing separately is
separated from his or her spouse or is unable to reasonably access the
spouse's income information.
The proposed change in Sec. 685.209(c)(4)(iii)(B) removes an
unnecessary reference to the requirement for the annual notification
informing a borrower of the need to recertify income and family size to
provide information about the contents of a separate notification
required under Sec. 685.209(c)(4)(vi) that will be sent if the
borrower is removed from the REPAYE Plan as a result of failure to
recertify income. The information included in that separate
notification is not applicable at the time a borrower is merely being
notified of the requirement to annually recertify income and family
size.
The removal of the reference to partial financial hardship in Sec.
685.209(c)(2)(v) reflects that the concept of partial financial
hardship does not apply under the terms and conditions of the REPAYE
Plan.
False Certification Discharges (Sec. 685.215)
Statute: Section 437(c) of the HEA provides for the discharge of a
borrower's liability to repay a FFEL Loan if the student's eligibility
to borrow was falsely certified by the school. The false certification
discharge provisions also apply to Direct Loans, under the parallel
terms, conditions, and benefits provisions in section 455(a) of the
HEA. Section 484(d) of the HEA specifies the requirements that a
student who does not have a high school diploma or a recognized
equivalent of a high school diploma must meet to qualify for a title
IV, HEA loan.
Current Regulations: Section 685.215(a)(1)(i) provides that a
Direct Loan borrower may qualify for a false certification discharge if
the school certified the eligibility of a borrower who was admitted on
the basis of the ability to benefit but the borrower did not in fact
meet the eligibility requirements in 34 CFR part 668 and did not meet
the eligibility requirements in section 484(d) of the HEA. Section
685.215(a)(1)(iii) provides that a borrower may qualify for a false
certification discharge if the school certified the eligibility of a
student who would not meet requirements for employment in the
occupation for which the training program supported by the loan was
intended due to a physical or mental condition, age, criminal record,
or other requirement accepted by the Secretary that was imposed by
State law. Section 685.215(c) and (d) describes the qualifications and
procedures for receiving a false certification discharge.
Proposed Regulations: Proposed Sec. 685.215(a)(1)(i) would
eliminate the reference to ``ability to benefit'' and specify that a
borrower qualifies for a false certification discharge if the borrower
reported not having a high school diploma or its equivalent and did not
satisfy the alternative to graduation from high school requirements
under section 484(d) of the HEA.
Under proposed Sec. 685.215(a)(1)(ii), if a school certified the
eligibility of a borrower who is not a high school graduate (and does
not meet applicable alternative to high school graduate requirements)
the borrower would 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.
Proposed Sec. 685.215(a)(1)(iv) would specify that a borrower
qualifies for a false certification discharge if the borrower failed to
meet applicable State requirements for employment due to a physical or
mental condition, age, criminal record, or other reason accepted by the
Secretary that would prevent the borrower from obtaining employment in
the occupation for which the training program supported by the loan was
intended.
Proposed Sec. 685.215(c) would update the information specifying
how a borrower applies for a false certification discharge. It would
also specify that the Department would notify a borrower who applies
but does not meet the requirements for a false certification discharge
and explain why the borrower does not meet the requirements.
Proposed Sec. 685.215(c)(1) would describe the requirements a
borrower must meet to qualify for a discharge due to a false
certification of high school graduation status.
Proposed Sec. 685.215(c)(2) would state the requirements a
borrower must meet to obtain a discharge based on a disqualifying
condition, as specified in proposed Sec. 685.215(a)(1)(iv).
Proposed Sec. 685.215(c)(8) would amend the provisions for
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.
Proposed Sec. 685.215(d) would update the procedures for applying
for a false certification discharge, and describe the types of evidence
that the Department uses to determine eligibility for a false
certification discharge. It would also provide that the Department will
explain to the borrower the reasons for a denial of a false
certification discharge claim, describe the evidence that the
determination was based on, and provide the borrower with an
opportunity to submit additional evidence supporting his or her claim.
The Department would consider the response from the borrower, and
notify the borrower whether the determination of eligibility has
changed.
Reasons: We propose to remove the ``ability to benefit'' language
from Sec. 685.215(a)(1)(i) because there is no longer a statutory
basis for certifying the eligibility of non-high school graduates based
on an ``ability to benefit.'' Currently section 484(d) of the HEA
establishes different standards under which a non-high school graduate
may qualify for title IV aid. We believe that it is preferable to refer
to section 484(d) of the HEA by cross-reference, rather than
incorporate the statutory language in the regulations, so that any
future changes to that language would be incorporated into the
regulation. The changes we propose to make to Sec. 685.215(c)(1)
(currently titled ``Ability to benefit'') are intended to conform to
these changes.
The proposed revisions to Sec. 685.215(a)(1)(i) and (ii) are
intended to state more explicitly that a school's certification of
eligibility for a borrower who is not a high school graduate, and does
not meet the alternative to high school graduate requirements, is
grounds for a false certification discharge. We propose these changes
specifically to address the problem of schools encouraging non-high
school graduates to obtain false high school diplomas to qualify for
Direct Loans. Many non-Federal negotiators noted that often borrowers
are misled by schools. These non-Federal negotiators stated that some
schools tell borrowers that a high school diploma is not a requirement
for title IV student aid, or that the borrower will be able to earn a
high school diploma through the
[[Page 39378]]
program for which the borrower is taking out the student loan, so the
borrower should answer ``Yes'' to the high school graduation question
on the FAFSA. Non-Federal negotiators stated that some schools
encourage borrowers to obtain the services of a third party that will
provide them with what appears to be a legitimate high school diploma.
These borrowers often do not understand that the ``high school
diploma'' provided by the third party is worthless. Many non-Federal
negotiators were supportive of the Department's efforts to provide
relief for borrowers who have been victimized in this way. Some of the
non-Federal negotiators, while supportive of this proposal, noted that
borrowers themselves may provide false information to the schools
regarding the borrower's high school graduation status. Unless the
school investigates the borrower's claim to be a high school graduate,
for instance by requesting transcripts, which are harder to falsify,
the school may unknowingly falsely certify the borrower's eligibility.
To address these situations, the Department proposed during the
negotiated rulemaking to include the requirement in proposed Sec.
685.215(a)(1)(i)(A) that the borrower ``reported'' not having a high
school diploma or its equivalent. If the borrower informed the school
that the borrower was not a high school graduate, and the borrower also
did not satisfy the alternative to high school graduation eligibility
criteria, but the school still certified the borrower's eligibility for
title IV aid, the borrower would qualify for a false certification
discharge.
Under proposed Sec. 685.215(a)(1)(ii), a borrower would qualify
for a false certification discharge if the borrower was not a high
school graduate, and the school certified the borrower's eligibility
based on falsified high school graduation status or based on a high
school diploma falsified by the school or a third party to which the
school referred the borrower. The reference in proposed Sec.
685.215(a)(1)(ii)(B) to cases in which a school refers a borrower to a
third party to obtain a false high school diploma would not refer only
to a formal referral relationship between the school and the third
party. An informal relationship involving any level of contact between
the school and the third party would also qualify under the proposed
regulations. A school would be considered to have ``referred the
borrower'' to the third party in any instance in which the school
advised or encouraged a borrower to obtain a false high school diploma
from the third party.
The proposed revision to Sec. 685.215(a)(1)(iv) would clarify that
this section refers to a situation in which a borrower failed to meet
State requirements for employment in the occupation for which the
training program was supported or the loan was intended. These State
requirements would not necessarily have to be imposed by State
statutes; they could be requirements established through State
regulations or other limitations established by the State. The
Department considered using other employment standards, such as Federal
standards, or standards established by non-governmental professional
associations. However, we were unable to find examples of Federal
standards for particular professions, other than standards specifically
for employment in the Federal government. The Department believes that
employment standards established by professional associations could
vary, and that it would not be practical to require schools to
determine which professional association standards to use.
Some of the non-Federal negotiators recommended including limited
English proficiency (LEP) as one of the characteristics that would
disqualify a borrower from working in a particular profession and serve
as the basis for a false certification loan discharge. We reviewed this
proposal, but determined that it would not be practical to determine a
borrower's English language proficiency at the time the borrower
enrolled in the program. While a student's score on the Test of English
as a Foreign Language (TOEFL) is a generally accepted indicator of
English language proficiency, many schools do not administer this test,
the TOEFL is not required for all academic programs, and the scores
required to demonstrate sufficient proficiency differ between schools.
Moreover, the TOEFL is not intended to measure an individual's language
proficiency for any particular profession.
Non-Federal negotiators recommended that the Department require
schools to certify an LEP student's ability to successfully complete a
postsecondary program by either administering an evaluative test such
as the TOEFL; providing the student with complete instruction,
instructional materials, and exams in her or his native language; or
providing specific and sufficient accommodation through an approved
English as a Second Language component. The Department expressed
concern that such a limitation could impede access to postsecondary
education for some LEP students. The Department also noted that
certification of LEP students for Direct Loans does not constitute
false certification of eligibility for title IV, HEA program funds.
Non-Federal negotiators recommended that false certification discharge
apply in cases in which an LEP student is enrolled in a program for a
profession that requires English proficiency, or an LEP student is told
that instruction will be offered in the student's first language or
that the student will be provided English as a Second Language courses,
but after the student takes out a Direct Loan and enrolls, no such
instruction is provided. However, the Department noted that these are
examples of misrepresentation, which would fall under the borrower
defenses regulations.
Current Sec. 685.215(c) requires the borrower to submit a
``written request and a sworn statement'' to apply for a false
certification discharge. We propose replacing this language with a
requirement for a borrower to submit an application for discharge on
``a form approved by the Secretary,'' which more accurately reflects
current practice. The proposed changes to redesignated Sec.
685.215(c)(8) would add, as an example of information that the
Department may use to grant a false certification discharge without an
application, evidence that a school has falsified the SAP of its
students. Although the Department may already do this under the
language in current Sec. 685.215(c)(7), we believe that it is helpful
to specifically address such cases in the regulatory language. This
change would put schools on notice that, if the Department learns of a
school falsifying SAP through a program review or an audit, the
Department has the authority to independently grant false certification
discharges to affected borrowers at that school.
Some of the non-Federal negotiators recommended that we also allow
an individual borrower to apply for a false certification discharge if
the borrower believes that the school falsified the borrower's SAP. We
examined this proposal, and determined that it would be impractical.
Schools have a great deal of flexibility both in determining and
implementing SAP standards. There are a number of exceptions under
which a borrower who fails to meet SAP can continue to receive title IV
loans. As one of the non-Federal negotiators pointed out, borrowers who
are in danger of losing title IV eligibility due to the failure to meet
SAP standards often request reconsideration of the SAP determination.
Schools often work with borrowers in good faith efforts to
[[Page 39379]]
attempt to resolve the situation without cutting off the borrowers'
access to title IV assistance. We do not believe that a school should
be penalized for legitimate attempts to help a student who is having
difficulty meeting SAP standards, nor do we believe a student who has
successfully appealed a SAP determination should then be able to use
that initial SAP determination to obtain a false certification
discharge of his or her student loans. In addition, we believe it would
be very difficult for an individual borrower to sufficiently
demonstrate that a school violated its own SAP procedures. Given these
considerations, we propose to limit false certification discharges
based on falsification of SAP to discharges based on ``information in
the Secretary's possession.'' Such information would include, for
example, findings from program reviews, audits, or other
investigations.
The proposed revisions to Sec. 685.215(d)(3) would provide more
transparency to the process for granting false certification
discharges. For example, under proposed Sec. 685.215(d)(3), when the
Department denies a false certification discharge request, we would
explain the reasons for the denial to the borrower, provide the
borrower with the evidence that the decision was based on, and provide
the borrower the opportunity to provide additional information which
the Department would evaluate. This proposed new language was suggested
by one of the non-Federal negotiators, and was generally supported by
all of the members of the negotiating committee.
In addition to the revisions that we are proposing in this NPRM,
the non-Federal negotiators submitted recommendations to the Department
for additional revisions to the false certification regulations. These
included recommendations to extend the revisions to the FFEL
regulations as well as the Direct Loan regulations; to allow false
certification discharges in cases when a program that the borrower is
enrolled in fails to meet title IV eligibility requirements (although
the program was participating in the title IV, HEA programs at the time
the loan was made); and to require active confirmation when a school
notifies a borrower that an additional loan was made under the
borrower's previously executed Master Promissory Note (MPN), to address
issues of possible forgery of electronic signatures on an MPN.
The Department declined to accept these recommendations. We are not
proposing to extend the revisions to the FFEL Program because no new
loans are being made in the FFEL Program, and we cannot apply these
changes retroactively.
False certification discharges are based on a school falsely
certifying a borrower's eligibility. They do not apply in instances
that do not concern a personal characteristic or qualification of the
borrower, such as ineligibility of the school or the program offered by
the school. See 59 FR 22469 (April 28, 1994).
The recommendations regarding active confirmation and use of the
MPN relate more to the way Direct Loans are awarded and disbursed than
to the false certification requirements, and go beyond the scope of
this regulatory action.
Direct Consolidation Loans (Sec. 685.220)
Statute: Section 455(g) of the HEA provides that the loan types
listed in section 428C(a)(4) may be consolidated into a Direct
Consolidation Loan. Section 428C(a)(4)(E) of the HEA provides that
loans made under part E of title VIII of the Public Health Service Act
are eligible to be consolidated into a Federal Consolidation Loan under
the FFEL Program. Loans made under part E of title VIII of the Public
Health Service Act include both Nursing Student Loans and Nurse Faculty
Loans.
Current Regulations: Current Sec. 685.220(b)(21) specifies that
nursing loans made under subpart II of part B of title VIII of the
Public Health Service Act may be consolidated into a Direct
Consolidation Loan.
Current Sec. 685.220(d)(1)(i) states that a borrower may obtain a
Direct Consolidation Loan if the borrower consolidates at least one
Direct Loan or FFEL Loan. If the borrower has certain other eligible
loan types such as a Perkins Loan or a loan issued by the U.S.
Department of Health and Human Services (HHS), the borrower can only
include these loans in a Direct Consolidation Loan if the borrower also
includes at least one Direct or FFEL loan. Under Sec. 685.220(b),
loans issued by HHS that may be consolidated into a Direct
Consolidation Loan, if the borrower also includes at least one Direct
or FFEL loan, include Health Professions Student Loans (HPSL), and
Loans for Disadvantaged Students (LDS), made under subpart II of part A
of title VII of the Public Health Service Act, Health Education
Assistance Loans (HEAL), and Nursing Loans made under subpart II of
part B of title VII of the Public Health Service Act.
Proposed Regulations
Consolidation of Nursing Loans
The proposed regulations would revise Sec. 685.220(b)(21) to
provide that nursing loans made under part E of title VIII of the
Public Health Service Act may be consolidated into a Direct
Consolidation Loan.
Consolidation of Eligible Loans
We propose to remove current Sec. 685.220(d)(1)(i) to eliminate
the requirement that a borrower must consolidate at least one FFEL or
Direct Program Loan. This would allow a borrower to consolidate under
the Direct Loan Program, if the borrower had any of the eligible loans
listed in Sec. 685.220(b).
Reasons
Consolidation of Nursing Loans
The proposed change is needed to conform Sec. 685.220(b)(21) to
the statutory language in section 428C(a)(4)(E) of the HEA, which
allows for the consolidation of both Nursing Student Loans and Nurse
Faculty Loans. The current regulatory reference to nursing loans ``made
under subpart II of part B of title VIII of the Public Health Service
Act'' includes Nursing Student Loans, but not Nurse Faculty Loans. The
current regulatory language reflects earlier statutory language that
was subsequently amended.
Consolidation of Eligible Loans
The proposed change to remove current Sec. 685.220(d)(1)(i) would
eliminate the requirement that a borrower must have a Direct Program or
FFEL loan to consolidate. As a result, other loan types listed in Sec.
685.220(b), such as Perkins Loans and certain loans issued by HHS,
would also be allowed to access consolidation, even if the borrower did
not also consolidate a Direct Program or FFEL loan.
The proposed change is necessary to be consistent with sections
451(b)(2) and 455(a)(1) of the HEA, which provide that, unless
otherwise specified, Direct Loans are to have the same terms,
conditions, and benefits as FFEL Loans. 20 U.S.C. 1087a(b),
1087e(b)(1). Under the FFEL Program, certain loans issued by HHS (HPSL,
LDS, HEAL, and Nursing loans) and Federal Perkins loans were considered
eligible student loans for consolidation, without any added requirement
that the borrower also consolidate at least one FFEL Loan. 20 U.S.C.
1078-3(a)(4)(B), (D); 34 CFR 682.100(a)(4). The authority for lenders
to make FFEL Consolidation Loans expired on June 30, 2010, under
section 428C(e) of the HEA, 20 U.S.C. 1078-
[[Page 39380]]
3(e). Since current Sec. 685.220(d)(1)(i) does not allow Federal
Perkins loan borrowers and borrowers of loans issued by HHS as listed
in Sec. 685.220 to obtain a Direct Consolidation Loan, unless they
also consolidate either a Direct or FFEL loan, Federal Perkins and HHS
student loan borrowers who do not also have at least one Direct Loan or
FFEL Loan do not currently have access to consolidation. As a result,
these borrowers are not receiving the same terms, conditions and
benefits in the Direct Loan program as in the FFEL Program.
To correct this situation, the Department proposes to allow
borrowers to obtain a Direct Consolidation Loan regardless of whether
the borrower is also seeking to consolidate a Direct Program or FFEL
loan, if the borrower has a loan type identified in Sec. 685.222(b).
Agreements Between an Eligible School and the Secretary for
Participation in the Direct Loan Program (Sec. 685.300)
Statute: Section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6),
provides that schools enter into Direct Loan Participation Agreements
that include provisions needed to protect the interests of the United
States and promote the purposes of the Direct Loan Program.
Current Regulations: Section 685.300 states the requirements for a
school to participate in the Direct Loan Program. First, the school
must meet the requirements for eligibility under the HEA and applicable
regulations. Second, the school must enter into a written program
participation agreement with the Secretary. Under the agreement, the
school agrees to comply with the HEA and applicable regulations.
Paragraph (b) of Sec. 685.300 lists several specific provisions of the
program participation agreement.
Proposed Regulations: Proposed Sec. 685.300(d), (e), (f), (g), (h)
and (i) would add specific provisions to the Direct Loan program
participation agreement related to student claims and complaints based
upon acts or omissions \44\ of a school that are related to the making
of a Federal loan or the provision of educational services for which
the loan was provided and that could also form the basis of borrower
defense claims under Sec. 685.206(c) or proposed Sec. 685.222.
---------------------------------------------------------------------------
\44\ Unless otherwise noted, we use the phrases ``borrower
defense-type claims'' or ``potential borrower defenses'' to refer to
such complaints or disputes.
---------------------------------------------------------------------------
Specifically, proposed Sec. 685.300(d), (e), (f), (g), (h) and (i)
would provide that--
A school may not require any student to pursue a complaint
based on such acts or omissions through an internal institutional
process before the student presents the complaint to an accrediting
agency or government agency authorized to hear the complaint;
The school may not obtain or attempt to enforce a waiver
of or ban on class action lawsuits regarding borrower defense-type
claims;
The school may not compel the borrower to enter into a
pre-dispute agreement to arbitration of a borrower defense-type claim,
or attempt to compel a borrower to arbitrate such a claim by virtue of
an existing a pre-dispute arbitration agreement; \45\ and
---------------------------------------------------------------------------
\45\ Unless otherwise noted, we use the phrase ``pre-dispute
arbitration agreement'' to refer to agreements providing for
arbitration of any future disputes between the parties, regardless
of the label given the agreement, its form or its structure. These
could take the form of stand-alone agreements, as well as such an
agreement that is included within, annexed to, incorporated into, or
otherwise made a part of a larger agreement between the parties.
---------------------------------------------------------------------------
The school must notify the Secretary of the initial filing
of such a claim, whether in arbitration or in court, and must provide
copies of the initial filing, certain subsequent filings, and any
decisions on such claims.
Reasons: Through this rulemaking, the Department is proposing to
address the procedures to be used for a borrower to establish a
borrower defense based on acts or omissions of a school related to the
making of a Direct Loan or the provision of educational services for
which the Direct Loan was provided, and the effect of borrower defenses
on institutional capability assessments, among other things. 80 FR
63479. For disputes involving claims that may be potential borrower
defenses, we propose to add to the Direct Loan program participation
agreement provisions relating to schools' current use of certain
dispute resolution procedures. For the reasons explained here, these
procedures, individually and collectively, can:
Affect whether institutions are held accountable for the
acts and omissions that give rise to borrower defense claims;
Make it more likely that the costs of losses from those
acts or omissions will be passed on to the taxpayer;
Reduce the incentive for institutions to engage in fair
and ethical business practices rather than practices that give rise to
borrower defense claims; and
Frustrate or reduce the effectiveness of the Department's
proposed processes for submitting and determining the validity of
borrower defense claims.
Accordingly, proposed Sec. 685.300(d) through (i), individually
and collectively, are designed to help ensure that the proposed
borrower defense and institutional accountability regulations will
achieve their intended goals--to protect students, the Federal
government, and taxpayers against risks from potential borrower
defenses and potential school liabilities.
We believe that to protect students, taxpayers, and the Federal
government from the risk of loss arising from borrower defense claims
based on the acts or omissions of the school, financial responsibility
for these risks should be placed on the party whose conduct gives rise
to the risk. To do so, borrowers must be free to present these claims
to an authority well-situated to consider the merits of their claims
and provide effective recourse directly against the school.
Accordingly, we propose regulatory changes to Sec. 685.300 that would
support these objectives in separate but complementary ways. In each
case, the proposed regulations would enhance the opportunities for
borrowers with borrower defenses to obtain relief directly from schools
and help ensure that schools are held accountable for their acts or
omissions that give rise to borrower defenses.
Specifically, for Direct Loan participants, we propose to:
Prohibit the use of class action waivers in order to,
among other things, permit the aggregation of claims that may reflect
widespread wrongdoing for which institutions might not otherwise be
held accountable;
Bar the use of mandatory pre-dispute arbitration
agreements, in order to, among other things, prevent institutions from
suppressing individual student complaints and shifting the financial
risk associated with institutional wrongdoing to the Department and the
taxpayers;
Require institutions to modify existing arbitration
agreements or notify individuals who have already executed arbitration
agreements that the institution will not attempt to enforce an existing
arbitration agreement in a manner prohibited by the regulations; and
Require institutions to inform the Secretary of the
assertion and resolution of potential borrower defense claims to enable
the Secretary to monitor compliance with these requirements, to assess
the nature and incidence of acts or omissions that form the grounds on
which claims are asserted, to better focus corrective or enforcement
actions, and to disseminate useful information about the nature and
frequency of such
[[Page 39381]]
claims and the judicial and arbitral outcomes of these claims.
We further propose in Sec. 685.300(d), regarding exhaustion of
internal complaint procedures, to prohibit the school from requiring or
attempting to require students to exhaust a school's internal complaint
process before contacting or communicating a grievance with the
school's accreditor or government agencies--including this Department--
with authority over the school.
In proposing these regulatory changes, the Department is responding
to comments made during negotiated rulemaking by the public and by non-
Federal negotiators, and to a proposal submitted by a negotiator, which
was supported by a number of other negotiators, in each case relating
to the use of arbitration by schools. Proposals the Department received
both from non-Federal negotiators and from the public on this issue are
available at www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html.
During the negotiated rulemaking, we sought comment on two
alternative options. Both options would bar the use of any pre-dispute
arbitration agreements that include a waiver of the student's right to
bring or participate in a class action lawsuit for claims that would
constitute borrower defenses within the scope of Sec. 685.206(c) and
proposed Sec. 685.222--in other words, claims related to the making of
the Direct Loan or the provision of educational services for which the
loan was intended. Both options would also require the school to submit
copies of initial filings of any such claims and each ruling, award, or
decision on the claims to the Secretary. Proposed Option A would
prohibit schools from requiring students to pursue complaints,
grievances, or disputes for such claims through an internal complaint
process before presenting the complaint, grievance or dispute to an
accrediting agency or government agency. Option A would allow the
school to require the arbitration of claims asserted in a class action
only if a court were to deny class certification or dismiss the class
claims. This option would further require schools to ensure that the
arbitration included certain procedural protections to increase the
transparency and fairness of the arbitration proceeding. Option B would
include provisions regarding class action waivers and submission of
filings to the Secretary described above, but would only have barred
the use of pre-dispute arbitration agreements.
Nearly all of the negotiators supported the proposed Option B. Many
negotiators stated that by requiring students to arbitrate disputes,
arbitration clauses function to suppress meritorious student
complaints. They also noted that many schools' arbitration agreements
contain confidentiality clauses. Since arbitration records are not
public like court records, the negotiators noted that potential student
claimants and their representatives generally may not have access to
prior pleadings, awards, or arbitrator decisions. Negotiators also
noted that many school enrollment agreements contain bans on class
claims or have provisions with that effect, which prevents evidence of
widespread patterns and unlawful practices to come to the attention of
students, the public, and the Department. One negotiator, however,
stated that the Department's proposal was outside the notice of issues
to be considered, and thus beyond the scope of the issues for the
rulemaking, and was concerned that neither proposed Option A or Option
B fit within the U.S. Supreme Court precedent regarding arbitration.
However, the negotiator stated that of the two proposed options, Option
B was preferred.
As opposed to the options that were proposed by the Department at
the negotiated rulemaking, in this NPRM, the Department proposes adding
provisions that we believe would similarly prevent schools' use of
internal complaint processes as a barrier to students' communication of
such issues to accreditors or government agencies; ban the use of class
action waivers by schools for potential borrower defense claims;
prohibit mandatory pre-dispute arbitration agreements; and create
transparency regarding the conduct and outcomes of arbitration
proceedings. After evaluating the available research on arbitration and
the concerns of all of the negotiators at the table, the Department has
chosen to propose a modified version of Option B in this NPRM.
The Direct Loan Program Participation Agreement
The Department proposes to add provisions addressing the use of
class action waivers, pre-dispute arbitration agreements, submission of
filings, and internal complaint processes to the Direct Loan program
participation agreements. Section 452(b) of the HEA states, ``No
institution of higher education shall have a right to participate in
the [Direct Loan] programs authorized under this part [part D of title
IV of the HEA].'' 20 U.S.C. 1087b(b). Rather, an institution may
participate only by supplying an application containing ``such
information and assurances as the Secretary may require.'' 20 U.S.C.
1087c(b)(1). Further, section 454 of the HEA directs that a school may
participate in the Direct Loan Program only by virtue of a
``participation agreement.'' 20 U.S.C. 1087d. Section 454 further
states that such program participation agreement shall include, among
other things, ``such other provisions as the Secretary determines are
necessary to protect the interests of the United States and promote the
purposes of this part [Part D of title IV of the HEA, describing the
Direct Loan Program].'' 20 U.S.C. 1087d(a)(6). The Direct Loan
Agreement described in section 454 of the HEA is now included as a
separate component of the program participation agreement required
under section 487(a) of the HEA. 20 U.S.C. 1094(a). The purpose of the
Direct Loan Program is to provide loans to students and parents to
finance the attendance of students in postsecondary education. Loans
are not grants, and are expected to be repaid. The same part of the
HEA, part D, also includes the borrower defense provision, section
455(h) of the HEA, which directs the Department to ``specify in
regulations which acts or omissions of an institution . . . a borrower
may assert as a defense to repayment'' of a Direct Loan. 20 U.S.C.
1087e(h).
While section 455(h) of the HEA authorizes the Department to
establish grounds for a borrower to avoid repaying a Direct Loan, we
believe that the overall ``purpose'' of the Direct Loan Program is to
make loans that will then be repaid. To be repayable, the loans must be
enforceable obligations of the borrowers. Acts and omissions by schools
that give a borrower grounds for avoiding repayment of a Direct Loan
thereby frustrate the achievement of the primary objectives of the
Federal loan program--to both finance education and obtain repayment.
By impeding the ability of borrowers to obtain effective relief
directly from the school, the practices we propose to prohibit in Sec.
685.300(d) through (ii) instead encourage these borrowers to raise
their claims against the school to the Department as reasons for not
repaying their loans, and in so doing, increase the financial risk to
the taxpayer from the claims themselves.
Class Action Waivers
In considering class action waivers, we consider the effect that
such waivers can and have already had on the interests of taxpayers and
the achievement of the purposes and objectives of the Direct Loan
Program.
[[Page 39382]]
Among other things, the Department has reviewed the Notice of Proposed
Rulemaking recently issued by the CFPB (hereinafter the ``CFPB
Arbitration Agreements NPRM'') and considers the analysis and proposals
made there as they bear on these assessments for the Direct Loan
Program.\46\ The CFPB has been charged by statute with evaluating the
use of mandatory, pre-dispute arbitration agreements. 12 U.S.C.
5518(a). The CFPB conducted a comprehensive three-year study of those
agreements' effect on consumers, and has made a preliminary
determination that a ban on the use of mandatory pre-dispute
arbitration agreements regarding covered consumer financial products
and services to preclude assertion of claims through class action
lawsuits would benefit consumers, serve the public interest, and be
consistent with its study.\47\ The CFPB stated that its study, together
with the CFPB's experience and expertise, resulted in the CFPB's notice
of proposed rulemaking regarding class action waivers. The CFPB stated
the following ``preliminary conclusions'':
---------------------------------------------------------------------------
\46\ Consumer Financial Protection Bureau, Arbitration
Agreements, 80 FR 32830 (May 24, 2016).
\47\ CFPB, Small Business Advisory Review Panel for Potential
Rulemaking on Arbitration Agreements, Oct. 7, 2015 (SBREFA Outline)
at 4.
---------------------------------------------------------------------------
(1) The evidence is inconclusive on whether individual arbitration
conducted during the Study period is superior or inferior to individual
litigation in terms of remediating consumer harm; (2) individual
dispute resolution is insufficient as the sole mechanism available to
consumers to enforce contracts and the laws applicable to consumer
financial products and services; (3) class actions provide a more
effective means of securing relief for large numbers of consumers
affected by common legally questionable practices and for changing
companies' potentially harmful behaviors; (4) arbitration agreements
block many class action claims that are filed and discourage the filing
of others; and (5) public enforcement does not obviate the need for a
private class action mechanism.
CFPB Arbitration Agreements NPRM, 81 FR 32830, 32855.
The CFPB identified several features of class actions in the
consumer financial services markets that we consider applicable to the
postsecondary education market. First, the CFPB noted that class
actions facilitate relief for individual consumers because they
``provide a mechanism for compensating individuals where the amounts at
stake for individuals may be so small that separate suits would be
impracticable.'' \48\ Second, class actions ``strengthen incentives''
for industry members to ``engage in robust compliance and customer
service on an ongoing basis.'' \49\ While government agencies ``can and
do bring enforcement actions against companies that cause injury to
large numbers of consumers, government resources to pursue such
lawsuits are limited.'' \50\ Thus, the CFPB preliminarily concludes,
``Public enforcement is not a sufficient means to enforce consumer
protection laws and consumer financial contracts.'' \51\ As the CFPB
stated, ``When companies can be called to account for their misconduct,
public attention on the cases can affect or influence their individual
business practices and the business practices of other companies more
broadly.'' \52\ Moreover, the CFPB preliminarily finds that ``exposure
to consumer financial class actions creates incentives that encourage
companies to change potentially illegal practices and to invest more
resources in compliance in order to avoid being sued.'' \53\ Based on
its comprehensive study of the use of pre-dispute arbitration
agreements in the financial services sector, the CFPB now proposes to
bar the use of arbitration agreements to preclude the pursuit of class
actions, which includes the use of class action waivers in arbitration
agreements--agreements that require consumers in the financial services
markets to agree to forego class action.\54\
---------------------------------------------------------------------------
\48\ CFPB Arbitration Agreements NPRM, at 81 FR 32833; see also
SBARP, at 15.
\49\ Id. As the CFPB noted in its study, in the 46 consumer
class actions and six individual suits filed by consumers in which
defendant companies obtained orders compelling arbitration, in only
12 instances did a consumer then pursue arbitration, and none of the
12 were class arbitrations. CFPB, Arbitration Study, March 2015,
Sec. 6.7.1.
\50\ Id. As the CFPB also noted in its study, government
enforcement authorities brought some 1150 administrative or judicial
enforcement actions during the 2010-2012 survey period, of which
some 133 address the same conduct as that on which consumers had
brought a class action lawsuit; in 71 percent of these instances,
the private class action preceded the government enforcement action.
CFPB Arbitration Study, March 2015, Sec. 9.1.
\51\ CFPB Arbitration Agreements NPRM, at 81 FR 32860.
\52\ CFPB Considers Proposal to Ban Arbitration Clauses that
Allow Companies to Avoid Accountability to Their Customers, Oct. 7,
2015, available at www.consumerfinance.gov/newsroom
\53\ CFPB Arbitration Agreements NPRM, at 81 FR 32864.
\54\ www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/ CFPB
Arbitration Agreements NPRM, 81 FR 32830, 32925, to be codified at
12 CFR 1040.4.
---------------------------------------------------------------------------
The proposed CFPB rule describes the financial services markets to
which the CFPB rule would apply.\55\ We believe the findings and
reasoning of the CFPB support the protections for Direct Loan borrowers
of the kind we propose here. Agreements that bar relief by class action
lawsuits for potential borrower defenses remove the risk to a school
that the threat of such a class action would pose and, thus, they
eliminate the financial incentive for the school to comply with the law
that such a risk of a class action would otherwise create.\56\ By doing
so, class action waivers impede borrowers from obtaining compensatory
relief for themselves, and further prevent borrowers from obtaining
injunctive relief to compel a school, in a timely manner, to desist
from the conduct that caused them injury and could continue to cause
other borrowers injury in the future. Class action waivers effectively
allow a school to perpetuate misconduct with much less risk of adverse
financial consequences than if the school could be held accountable in
a class action lawsuit.
---------------------------------------------------------------------------
\55\ See CFPB Arbitration Agreements NPRM, 81 FR 32830, 32925,
to be codified at 12 CFR 1040.3 (describing covered services); See
also: SBREFA Outline at 22.
\56\ The Department makes no distinction between class action
waivers included in arbitration agreements and such waivers
established otherwise, such as in an enrollment agreement that does
not include any reference to or agreement regarding arbitration. The
negative effects of such waivers discussed here hold regardless of
where the waiver is established.
---------------------------------------------------------------------------
Recent history demonstrates the need to address bans by
postsecondary institutions on class actions for potential borrower
defense claims. Corinthian Colleges included explicit class action
waiver provisions in enrollment agreements, and used those, with
mandatory pre-dispute arbitration clauses, to resist class actions by
students.\57\ Government investigations established that Corinthian had
for years engaged in widespread misrepresentations and other abusive
conduct. In April 2015, the Department levied a $30 million fine
against Heald, a chain owned by Corinthian, for misrepresenting its
placement rates, but several days later, Heald and the remaining
Corinthian-owned schools closed, and Corinthian filed for bankruptcy
relief. The State of California sued Corinthian in September 2013, and
obtained a $1.1 billion judgment against the company only in March
2016, after the company had filed for bankruptcy relief. The CFPB sued
Corinthian in September 2014, and obtained a $531 million judgment
[[Page 39383]]
against the company only in October 2015--well after Corinthian had
become insolvent and filed in bankruptcy. None of these government
actions actually achieved affirmative recovery for Corinthian Direct
Loan borrowers.\58\ Yet in 2012, a class of students attending
Corinthian Colleges, including Heald College and Everest Institute,
Miami, had filed class actions against the schools for students who
attended the schools since 2005 (Everest) or 2009 (Heald), for
``misrepresenting the quality of its education, its accreditation, the
career prospects for its graduates, and the cost of education.''
Ferguson v. Corinthian Colleges, 733 F.3d 928 (9th Cir. 2013).
Corinthian defended by claiming that the arbitration clause in their
enrollment agreements barred relief in a class action, and in an August
2013 ruling the Ninth Circuit Court of Appeals agreed. Id. Another
class action filed in 2011 in Illinois against Corinthian Colleges by
students, alleging deception about placement rates, was similarly
barred. Montgomery v. Corinthian Colleges, C.A. No. 11-C-365 (N.D.Ill.
Mar. 25, 2011). Other Corinthian students unsuccessfully pursued relief
through individual and class actions against Corinthian schools, and,
in each instance, Corinthian successfully opposed the suits and
obtained rulings compelling individual arbitration of the student
claims.\59\ In yet another case, Corinthian opposed recovery by a
student who had been compelled to arbitrate, and had obtained a
favorable award from the arbitrator that granted relief not only to the
individual student but to a class of students; Corinthian argued, and
the court agreed, that the arbitration agreement barred even class
arbitrations. Reed v. Fla. Metropolitan Univ., 681 F.3d 630 (5th Cir.
2012), abrogated by Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064,
186 L. Ed. 2d 113 (2013).
---------------------------------------------------------------------------
\57\ See, e.g., Montgomery v. Corinthian Colleges, C.A. No. 11-
C-365 (N.D.Ill. Mar. 25, 2011); Ferguson v. Corinthian Colleges,
Inc., 773 F.3d 928 (9th Cir. 2013).
\58\ This Department and the CFPB did achieve substantial relief
in 2015 for many Corinthian students who had obtained private loans,
but only through negotiations with the Educational Credit Management
Corporation, which acquired some of the Corinthian schools.
\59\ Eakins v. Corinthian Colleges, Inc., No. E058330, 2015 WL
758286 (Cal. Ct. App. Feb. 23, 2015); Okwale v. Corinthian Colleges,
No. 1:14-CV-135-RJS, 2015 WL 730015 (D. Utah Feb. 19, 2015); Kimble
v. Rhodes College, No. C-10-5786, 2011 WL 2175249 (N.D. Cal. June 2,
2011); Miller v. Corinthian Colleges, 769 F.Supp.2d. 1336 (D. Utah
2011); Rodriguez v. Corinthian Colleges, Inc., No. 07-CV-02648-
EWNMJW, 2008 WL 2979505 (D. Colo. Aug. 1, 2008); Ballard v.
Corinthian Colleges, Inc., No. C06-5256 FDB, 2006 WL 2380668 (W.D.
Wash. Aug. 16, 2006); Anderson v. Corinthian Colleges, Inc., No.
C06-5157 FDB, 2006 WL 2380683 (W.D. Wash. Aug. 16, 2006).
---------------------------------------------------------------------------
If the student class actions had been able to proceed, the class
actions could have compelled Heald College and the Corinthian Colleges,
generally, to provide financial relief to the students and to change
their practices while Corinthian was still a viable entity. Instead,
impacted borrowers with Direct Loans from attendance at any of the
Corinthian Colleges will only be able to obtain relief by raising the
schools' misconduct as a defense to their Federal loans through the
Department's current borrower defense process under Sec.
685.206(c).\60\ As of the close of March 2016, the Department had
granted discharge relief in the amount of $42,318,574 to 2,048 Direct
Loan borrowers making claims related to Heald, Everest Institute, and
Wyotech.\61\ As of June 1, the Department had received more than 23,000
claims relating to Corinthian and other schools.
---------------------------------------------------------------------------
\60\ Because Corinthian required pre-dispute arbitration
agreements, students were unable to successfully pursue individual
lawsuits against the schools.
\61\ Third Report of the Special Master for Borrower Defense to
the Under Secretary, March 25, 2016, available at https://www2.ed.gov/documents/press-releases/report-special-master-borrower-defense-3.pdf.
---------------------------------------------------------------------------
Similarly, the inability of borrowers to bring class actions
removed the deterrent force that the threat of being sued in a class
action posed to other industry members during this same period. Federal
and State reviews of for-profit school practices over the past five
years, recounted, for example, in the Department's notice of proposed
rulemaking for Program Integrity: Gainful Employment, 79 FR 16426
(March 25, 2014), show numerous instances in which major for-profit
schools engaged in deceptive acts of the kind on which students were
attempting to sue. However, during that same period, courts regularly
rebuffed the students' attempts by compelling the students to submit
their claims to arbitration. See, e.g., Rosendahl v. Bridgepoint Educ.,
Inc., No. 11CV61 WQH WVG, 2012 WL 667049 (S.D. Cal. Feb. 28, 2012). Had
students been able to bring class actions against Corinthian or other
industry members, it is reasonable to expect that other schools would
have been motivated to change their practices to avoid facing the risk
of similar suits.
Class action bans eliminate this incentive. By doing so, these
agreements increase the likelihood that borrowers who have such claims
will present them solely to the Department as defenses to repayment of
their taxpayer-funded Federal loans. The Department's borrower defense
process gives limited relief for borrowers, providing only discharge of
the borrower's Federal loan obligation, and potential recovery of past
payments made to the Secretary, rather than compensation in damages
from the school for his or her losses. Recoveries through the court
system --for the cost of the loan itself--would eliminate any need to
seek relief from the Department--and the taxpayers. In addition,
recoveries in damages may include other losses the borrower incurred as
well, such as the tuition an individual privately paid or the value of
the time spent at the institution. In the Department's experience,
borrower defense claims are presented to the Department well after the
underlying act or omission that gave rise to the claim has occurred, at
a point at which the school may well have ceased operations and there
may be less reliable evidence available to borrowers. That shifts the
financial risk of a school's insolvency to the taxpayer, rather than to
the school as the responsible party.
We believe that class action lawsuits not only provide a vehicle
for addressing a multitude of relatively small claims that would
otherwise not be raised--or raised only as borrower defense claims--but
create a strong financial incentive for both a defendant school and
other similarly situated schools to comply with the law in their
business operations. Pre-dispute arbitration agreements coupled with
class action waivers eliminate this incentive by preventing the
aggregation of small claims that may reflect widespread wrongdoing. We
believe that banning class action waivers as they pertain to potential
borrower defense claims would promote direct relief to borrowers from
the party responsible for injury, encourage schools' self-corrective
actions, and, by both these actions, lessen the amount of financial
risk to the taxpayer in discharging loans through the defense to
repayment process.
Pre-Dispute Arbitration Agreements
Because pre-dispute arbitration agreements bar the student from
bringing an individual lawsuit against the school for relief, these
agreements pose some of the same risks to borrowers and the taxpayer as
those posed by class action waivers. Even if the borrower were not
contractually foreclosed from pursuing a class action suit, Federal and
State rules impose requirements on class actions that may well prevent
particular borrowers from bringing and successfully maintaining a class
action. For such borrowers, mandatory pre-dispute arbitration
agreements bar them from seeking
[[Page 39384]]
judicial relief.\62\ The ability to compel arbitration allows the
school to bar the individual from bringing a suit, either individually
or, by joinder, with other borrowers, and thereby avoid the publicity
and financial risks described earlier that follow from class actions.
Similarly, foreclosing individual or joinder actions eliminates, for
other industry members, the risk that a well-publicized lawsuit will
inspire similar individual or joinder actions against those schools,
and therefore dampens or eliminates the incentive for other schools to
comply with the law in their business dealings with their student
customers. In addition, a well-publicized lawsuit is more likely to
attract the attention and risk of compensatory or prophylactic
enforcement action by this Department and other government agencies.
Foreclosing individual student lawsuits removes this risk, much like
class action waivers. Accordingly, mandated arbitration can be expected
to frustrate the Federal and Direct Loan interests for the same
reasons, though to a lesser degree, than class action waivers.
---------------------------------------------------------------------------
\62\ Fed. R. Civ. Proc. 23 requires, for example, that questions
of law or fact common to members of the class predominate over
issues affecting only individual members. Fed. R. Civ. P. 23(b)(3).
Courts have not infrequently denied class certification for student
loan borrowers raising class action fraud claims against schools:
When students who seek to be named as plaintiffs in a proposed
class action may have considered a variety of factors in deciding to
enroll in a school alleged to have defrauded them, absent are
typical and predominant questions whether such plaintiffs relied
upon misrepresentations made by the school in deciding to enroll
therein; class certification must therefore be denied. Rodriguez v.
McKinney, 156 FRD. 112, 116 (E.D.Pa. 1994) (no predominance); Graham
v. Sec. Sav. & Loan, 125 FRD. 687, 691 n. 4 (N.D.Ind. 1989) (no
typicality), aff'd sub nom. Veal v. First Am. Sav. Bank, 914 F.2d
909 (7th Cir. 1990); see Torres v. CareerCom Corp., 1992 WL 245923,
at *5 (E.D.Pa. Sept. 18, 1992) (no predominance); see generally
Seiler Jr. v. E.F. Hutton & Co., 102 FRD. 880, 890 (D.N.J. 1984) (no
typicality).
Morgan v. Markerdowne Corp., 201 FRD. 341, 348 (D.N.J. 2001).
---------------------------------------------------------------------------
We note that the CFPB considered a ban on mandatory pre-dispute
arbitration agreements, and in light of its mandate, preliminarily
found the evidence to be ``inconclusive whether individual arbitration
conducted during the Study period is superior or inferior to individual
litigation in remediating consumer harm . . .'' 81 FR 32830, 32855,
32921. The CFPB did acknowledge that a ban on pre-dispute arbitration
agreements would ``give[ ] providers [of financial services the] same
incentives to comply with the law as the proposed rule [banning class
action waivers]. 81 FR 32830, 32921. Section 1028(b) of the Dodd-Frank
Act provides that the mandate of the CFPB with respect to any
regulation the CFPB adopts regarding arbitration is to determine
whether, it would be in the ``public interest and for the protection of
consumers'' to ``prohibit or impose limitations on the use of an
agreement . . . for a consumer financial product or service providing
for arbitration of any future dispute between the parties . . .'' 12
U.S.C. 5518(b). Also, under section 1028(b), ``the findings in such
rule shall be consistent with the study.''
The Department proposes to act under a different mandate, under
section 454(a)(6) of the HEA, to adopt ``provisions as the Secretary
determines are necessary to protect the interests of the United States
and to promote the purposes of this part [the Direct Loan Program under
Part D of title IV of the HEA].'' 20 U.S.C. 1087d(a)(6).
As discussed above, the interests at stake in this determination
are not the interests of the ``public'' and ``consumers,'' but the
interests of the Federal taxpayers whose funds are at risk for borrower
defense claims asserted on Federal Direct Loans, and the objective at
stake here, as discussed, is the successful financing of postsecondary
education by providing loans repayable by current recipients for the
benefit of future generations of borrowers. Because the interests at
stake in regard to Direct Loans, though not inconsistent with those
prescribed in the Dodd-Frank Act, are different, the Department, for
the reasons stated here, considers individual litigation a better tool
to protect the taxpayers' interests in the Direct Loan program than
individual arbitration.
The current regulations in Sec. 685.206(c) require Department
decision makers to apply the State law applicable to the variety of
causes of action that constitute borrower defenses to repayment. Under
the proposed regulations, this standard would continue to apply to
grievances by borrowers related to existing Direct Loans and, thus,
continue to require Department officials to acquire sufficient
familiarity with the law of the States to properly apply that law to
thousands of borrower defense claims. The Federal interest, and the
purposes of the Direct Loan program, are frustrated to the extent that
schools are able to bar individuals with Direct Loan-related grievances
from having those claims adjudicated by State courts, which are well-
situated to adjudicate these claims under judicial procedures that
assure appellate review of trial court rulings. We recognize the
desirability of this option by retaining, under the proposed new
standard in Sec. 685.222, the option to obtain borrower relief based
on a favorable judgment of a court of competent jurisdiction, even if
the judgment rests on a State law-based cause of action. By requiring
institutions to permit individual borrowers access to judicial forums
for claims that may constitute borrower defenses, the proposed
regulations would allow borrower claims based on State law causes of
action to be resolved locally, by tribunals well versed in that law,
and whose decisions are subject to appellate review, unlike the far
more narrow review to which arbitral awards are subject.\63\ Permitting
this access would promote a balanced evolution of the borrower defense
standard, assuring that borrowers with meritorious State law claims
will be able to pursue those in an appropriate forum, thereby reducing
both the incentive for borrowers to assert their claims only through
the Department process, and the burden on the Federal administrative
process to continue to evaluate those claims.
---------------------------------------------------------------------------
\63\ See 9 U.S.C. 10.
---------------------------------------------------------------------------
Accordingly, we propose to prohibit a Direct Loan participating
school from requiring the student to agree, prior to a dispute about a
potential borrower defense claim, to arbitrate such a dispute. We refer
to such agreements as ``mandatory pre-dispute arbitration agreements''
and define those agreements as ``mandatory'' if the school requires the
student to agree to arbitrate either as part of the enrollment
agreement or in any other form the student is required to execute in
order to enroll or continue in school. We recognize that some pre-
dispute arbitration agreements allow the consumer within a set period
to affirmatively opt-out of an agreement to arbitrate. We include in
the proposed definition that such agreements are binding unless the
student affirmatively opts out of the agreement, and we invite comment
on whether opt-out agreements should be considered ``mandatory''
agreements.
Transparency of the Arbitral Process and Outcomes
The Department currently has little opportunity to monitor, and
more importantly timely respond to, grievances that borrowers present
in arbitration and even private suits, and the defenses and arguments
raised by title IV participants in opposing relief. We propose,
therefore, to require schools to provide us, in a timely manner, with
copies of initial and certain subsequent filings in judicial or
arbitral tribunals, and decisions and awards rendered in those
proceedings.
[[Page 39385]]
The CFPB also proposes to require companies that use pre-dispute
arbitration agreements to submit to the CFPB copies of initial
arbitration claim filings made or received by the companies,
arbitration awards, and certain other records.\64\ The CFPB states that
it is considering whether to make these available to the public by
posting them to its Web site. The CFPB notes that this would permit the
CFPB and the public to monitor arbitrations on an ongoing basis and
identify trends that might ``indicate problematic business practices
that harm consumers, particularly since many claims settle before an
award is rendered.'' \65\
---------------------------------------------------------------------------
\64\ CFPB Arbitration Agreements NPRM, 81 FR 32830, 32926 (May
24, 2016), to be codified at 12 CFR 1040.4(b)(1).
\65\ SBREFA Outline, at 20.
---------------------------------------------------------------------------
We propose the same kind of requirement here, for similar reasons.
Lack of timely notice and confidentiality provisions make it difficult
for the Department to discern patterns and practices that may generate
borrower defense claims, involve misuse of title IV, HEA funds, or
constitute misrepresentations of the kind that the HEA authorizes the
Department to remedy by fines and other actions. Without knowledge of
the kinds of claims and relief granted, we cannot evaluate whether
further measures are needed, or whether the school is resisting class
action complaints on claims that would constitute borrower defenses
under the proposed regulations.
The proposed submission requirement for institutions that use
arbitration agreements would enable the Department to analyze the
claims that may also be potential borrower defense claims, the schools'
responses, and the outcomes of the claims in arbitration. We would be
able then, as needed, to publicize both the kinds of potential borrower
defense claims asserted and the decisions on those claims, and to
decide whether either an immediate response or intervention was needed,
or whether systemic correction action was warranted.\66\ We would also
be better able to evaluate the merits of a claim that a borrower later
raises as a borrower defense to repayment. We believe that proposed
Sec. 685.300(g), which would require schools to submit copies of
filings for arbitration, responses, awards, and certain other documents
within 60 days of the filing or receipt by the school, as applicable,
is needed to enable the Secretary to monitor and evaluate these claims
and thereby protect the interests of the United States and promote the
purposes of the Direct Loan Program.\67\ In contrast, the Secretary has
a far greater and more immediate interest in claims and defenses
asserted in litigation, because court rulings on those assertions may
construe the HEA and Department regulations, and thus have far greater
effect than arbitration decisions. The issues will be joined as early
as 20 days after the service of the complaint, when the defendant must
answer or move to dismiss the complaint. To participate in a timely
manner in litigation in which the parties assert their interpretations
of the HEA and regulations, the Department needs prompt notice of these
filings, in order to identify those that raise these kinds of
assertions, and we propose in Sec. 685.300(h) that the school submit
copies of each complaint, any counterclaim, any dispositive motion
filed by either party, any ruling on a dispositive motion, and any
judgment, within 30 days of receipt or filing by the school. We believe
the proposed submission requirements are appropriate for the reasons
stated above. However, we seek comment on whether the Department should
adopt different submission, transparency, or procedural fairness
requirements, and if so, what the supporting rationale for those
requirements would be, and why those other requirements would meet the
objectives outlined in this section.
---------------------------------------------------------------------------
\66\ Schools and other institutions participating in the title
IV, HEA programs have defended suits by borrowers by contending that
borrowers cannot rely on State law to redress conduct by a defendant
that also violates an HEA requirement, because, they argue,
enforcement of HEA requirements is vested solely in the Secretary,
not in private parties. See, e.g., Sanchez v. ASA College Inc., in
which the defendant school raised this argument:
Defendants also assert that dismissal is warranted because the
HEA grants the Secretary ``exclusive authority'' to remedy any Title
IV violations and, thus, that the HEA precludes Plaintiffs' claims
based on failures to comply with its provisions. (Defs. Mem. 10-15).
Sanchez v. ASA Coll., Inc., No. 14-CV-5006 JMF, 2015 WL 3540836,
at *4 (S.D.N.Y. June 5, 2015). The Department, with timely notice in
that instance, was able to file a statement of interest to rebut
this serious misconception that a party injured by conduct that
violates an HEA requirement of law cannot sue for relief for that
injury in reliance on a State law that would allow a party to sue
for relief for that conduct. A suit for relief based on State law in
such a situation is not an attempt to find a private right of action
for relief under the HEA.
\67\ The 60-day submission requirement is the same period as
proposed by the CFPB for submission of arbitral filings. CFPB
Arbitration Agreements NPRM, 81 FR 32830, 32926, to be codified at
12 CFR 1040.4(b)(2).
---------------------------------------------------------------------------
To the extent that a school may now include in its arbitration
agreements a confidentiality provision, the rule would require the
school to remove that provision or modify its use to the extent needed
to make these disclosures.
Federal Arbitration Act
A negotiator asserted that the Department does not have the
authority to proscribe waivers of class action litigation or use of
mandatory pre-dispute arbitration agreements, citing recent Supreme
Court rulings upholding contractual agreements to arbitrate that held
that the Federal Arbitration Act (FAA) protects enforceable arbitration
agreements and expresses a ``liberal Federal policy favoring
arbitration.'' \68\ The FAA protects the validity and enforceability of
arbitration agreements. Section 2 of the FAA states: ``[a] written
provision in any . . . contract . . . to settle by arbitration a
controversy thereafter arising out of such contract . . . shall be
valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.'' 9 U.S.C. 2. This
act was intended to reverse judicial hostility to arbitration and to
put arbitration agreements on an equal footing with other
contracts.\69\ The negotiator contended that the FAA as applied in case
law barred the Department from adopting a rule that would ban either
such class action waivers or mandatory pre-dispute arbitration
agreements.
---------------------------------------------------------------------------
\68\ AT&T Mobility v. Concepcion, 563 U.S. 333 (2011).
\69\ Id. at 342.
---------------------------------------------------------------------------
The Department does not have the authority, and does not propose,
to displace or diminish the effect of the FAA. However, the Department
has clear authority to regulate the conduct of institutions that wish
to participate in the Direct Loan Program. As noted earlier, section
452(b) of the HEA states, ``No institution of higher education shall
have a right to participate in the [Direct Loan] programs authorized
under this part [part D of title IV of the HEA].'' 20 U.S.C. 1087b(b).
If a school chooses to participate in the Direct Loan Program, it must
enter into a Direct Loan Program participation agreement. 20 U.S.C.
1087d. Section 454(a)(6) of the HEA authorizes the Department to
include in that participation agreement ``provisions that the Secretary
determines are necessary to protect the interests of the United States
and to promote the purposes of'' the Direct Loan Program. 20 U.S.C.
1087d(a)(6). We propose to adopt regulations that limit the use of
arbitration agreements under this authority. We discuss earlier the
reasons we consider the proposed limits on arbitration to be necessary
to protect the interests of the United States and promote the purposes
of the Direct Loan Program. Under proposed Sec. 685.300(f), an
institution would
[[Page 39386]]
remain free to require students to enter into mandatory pre-dispute
arbitration agreements, so long as those agreements exclude any
requirement to arbitrate a potential borrower defense. An institution
that does not choose to accept these provisions is free to include
arbitration requirements in its enrollment agreements, and to exercise
its contractual rights under such agreements to compel arbitration.
However, under the proposed regulations, the institution would not be
permitted to obtain or exercise such agreements and continue to
participate in the Direct Loan Program unless those agreements exclude
any requirement that the student arbitrate a potential borrower defense
claim.
Implementation for Agreements Regarding Arbitration
Institutions that intend to mandate pre-dispute arbitration
agreements or obtain class action waivers from students after the
effective date of the proposed regulations will be required to include
provisions in those agreements that exclude from any class action
waiver or commitment to arbitrate those claims that relate to the
making of the Direct Loan or the provision of educational services by
the institution. The proposed regulations include provisions explaining
the institution's commitment not to attempt to compel arbitration or
resist class actions, as applicable, for claims that are potential
borrower defense claims.
We recognize that many agreements regarding arbitration or class
action waivers have already been executed and more may be executed
prior to the date on which the proposed regulations may be issued in
final and take effect. The proposed regulations therefore require that
an institution that has such agreements not only to comply with the
regulations that would bar the institution from attempting to exercise
mandatory pre-dispute arbitration agreements or class action waivers
regarding borrower defense-type claims, but also to either amend the
agreements, or at least notify, the students who executed those
agreements that the institution would not attempt to exercise those
agreements in a manner proscribed by the regulations.
The institution would be required to notify students who had
already executed a non-compliant arbitration or class action waiver
agreement no later than the date on which the institution provides exit
counseling, which provides a useful context in which to explain the
change. For those who have executed a non-compliant arbitration or
class action waiver but whom the institution has already provided exit
counseling that included or accompanied the notice or amendment, the
proposed rule would require the institution to provide the notice or
amendment within 60 days of the date on which the institution receives
a complaint in a lawsuit by a former student that raised borrower
defense claims, or a demand for arbitration of a borrower defense
claim. As proposed here, the institution would be barred from opposing
such a lawsuit on the ground that the borrower had already agreed to
waive class action relief or individual lawsuit for relief for such a
claim. We request comment on whether the institution should provide
notice to currently-enrolled students or to former students, and if so,
when and to whom those notices should be required.
Severability
While the Department is confident that the provisions addressing
arbitration in Sec. 685.300(d), (e), (f), (g), (h) and (i) would not
violate the FAA, it has carefully considered the negotiator's view, and
the possibility that a court might rule that any of these provisions is
invalid based on the FAA or any other reason. The Department considers
the separate provisions barring waivers of class actions, barring
mandatory pre-dispute arbitration agreements, and requiring the
institution to provide to the Department copies of initial filings and
subsequent filings, awards, and decisions in borrower defense suits or
arbitrations, to be valuable independently and to operate independently
and to serve separate but complementary objectives. Accordingly, in an
abundance of caution, we propose in Sec. 685.309 to specify the
Department's intent that if any provision of subpart C of part 685 is
held invalid, the remaining parts shall not be affected.
Executive Orders 12866 and 13563
Regulatory Impact Analysis
Introduction
Under Executive Order 12866, it must be determined whether this
regulatory action is ``significant'' and, therefore, subject to the
requirements of the Executive order and subject to review by the Office
of Management and Budget (OMB). Section 3(f) of Executive Order 12866
defines a ``significant regulatory action'' as an action likely to
result in a rule that may--
(1) Have an annual effect on the economy of $100 million or more,
or adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local, or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule);
(2) Create serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) Materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles stated in the
Executive order.
This proposed regulatory action would have an annual effect on the
economy of more than $100 million because the proposed regulations
would have annual federal budget impacts of approximately $199 million
in the low impact scenario to $4.2323 billion in the high impact
scenario at 3 percent discounting and $198 million and $4.17 billion at
7 percent discounting, additional transfers from affected institutions
to student borrowers via reimbursements to the Federal government, and
annual quantified costs of $14.9 million related to paperwork burden.
Therefore, this proposed action is ``economically significant'' and
subject to review by OMB under section 3(f) of Executive Order 12866.
Notwithstanding this determination, we have assessed the potential
costs and benefits, both quantitative and qualitative, of this proposed
regulatory action and have determined that the benefits would justify
the costs.
We have also reviewed these regulations under Executive Order
13563, which supplements and explicitly reaffirms the principles,
structures, and definitions governing regulatory review established in
Executive Order 12866. To the extent permitted by law, Executive Order
13563 requires that an agency--
(1) Propose or adopt regulations only on a reasoned determination
that their benefits justify their costs (recognizing that some benefits
and costs are difficult to quantify);
(2) Tailor its regulations to impose the least burden on society,
consistent with obtaining regulatory objectives and taking into
account--among other things and to the extent practicable--the costs of
cumulative regulations;
(3) In choosing among alternative regulatory approaches, select
those approaches that maximize net benefits (including potential
economic, environmental, public health and safety, and other
advantages; distributive impacts; and equity);
[[Page 39387]]
(4) To the extent feasible, specify performance objectives, rather
than the behavior or manner of compliance a regulated entity must
adopt; and
(5) Identify and assess available alternatives to direct
regulation, including economic incentives--such as user fees or
marketable permits--to encourage the desired behavior, or provide
information that enables the public to make choices.
Executive Order 13563 also requires an agency ``to use the best
available techniques to quantify anticipated present and future
benefits and costs as accurately as possible.'' The Office of
Information and Regulatory Affairs of OMB has emphasized that these
techniques may include ``identifying changing future compliance costs
that might result from technological innovation or anticipated
behavioral changes.''
We are issuing these proposed regulations only on a reasoned
determination that their benefits would justify their costs. In
choosing among alternative regulatory approaches, we selected those
approaches that maximize net benefits. Based on the analysis that
follows, the Department believes that these proposed regulations are
consistent with the principles in Executive Order 13563.
We also have determined that this regulatory action would not
unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
In this regulatory impact analysis we discuss the need for
regulatory action, the potential costs and benefits, net budget
impacts, assumptions, limitations, and data sources, as well as
regulatory alternatives we considered.
Under ``Initial Regulatory Flexibility Act Analysis,'' we consider
the effect of the proposed regulations on small entities.
Need for Regulatory Action
The proposed regulations address several topics related to the
administration of title IV, HEA student aid programs and benefits and
options for borrowers. As stated in the preamble, the Department first
implemented borrower defense regulations for the Direct Loan Program in
the 1995-1996 academic year to protect borrowers. The Department's
original intent was for this rule to be in place for the 1995-1996
academic year, and then to develop a more extensive rule for both the
Direct and FFEL loan programs through negotiated rulemaking in the
following year.
However, based on the recommendation of non-Federal negotiators in
the spring of 1995, the Secretary decided not to develop further
regulations for the Direct Loan and FFEL programs. As a result, the
regulations have not been updated in two decades to establish
appropriate processes or provide other necessary information to allow
borrowers to effectively utilize borrower defenses.
For instance, the current regulations require an analysis of State
law in order to determine the validity of a borrower defense claim.
This approach creates complexities in determining which State law
applies and potential inequities, as students in one State may receive
different relief than students in another State, despite having common
facts and claims.
For example, the landscape of higher education has changed
significantly over the past 20 years. In particular, the role of
distance education in the higher education sector has grown
substantially. In the 1999-2000 academic year, about eight percent of
students were enrolled in at least one distance education course; by
the 2007-2008 academic year, that number had grown to 20 percent.\70\
Recent IPEDS data indicate that in the fall of 2013, 26.4 percent of
students at degree-granting, title IV participating institutions were
enrolled in at least one distance education class.\71\ Much of this
growth occurred within, and coincided with, the growth of the
proprietary higher education sector. In the fall of 1995, degree-
granting, for-profit institutions enrolled approximately 240,000
students. In the fall of 2014, degree-granting, for-profit schools
enrolled over 1.5 million students.\72\ These changes to the higher
education industry have allowed students to enroll in colleges based in
other States and jurisdictions with relative ease.
---------------------------------------------------------------------------
\70\ Learning at a Distance: Undergraduate Enrollment in
Distance Education Courses and Degree Programs (http://nces.ed.gov/pubs2012/2012154.pdf).
\71\ 2014 Digest of Education Statistics: Table 311.15: Number
and percentage of students enrolled in degree-granting postsecondary
institutions, by distance education participation, location of
student, level of enrollment, and control and level of institution:
fall 2012 and fall 2013.
\72\ 2015 Digest of Education Statistics: Table 303.10: Total
fall enrollment in degree-granting postsecondary institutions, by
attendance status, sex of student, and control of institution:
Selected years, 1947 through 2025 (http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=yes).
---------------------------------------------------------------------------
These changes have also had an impact on the Department's ability
to apply its borrower defense regulations. The current borrower defense
regulations do not identify which State's law is considered the
``applicable'' State law on which the borrower's claim can be
based.\73\ Generally, the regulation was assumed to refer to the laws
of the State in which the institution was located; we did not have much
occasion to address differences in protection for borrowers in States
that offer little protection from school misconduct or borrowers who
reside in one State but are enrolled via distance education in a
program based in another State. Some States have extended their rules
to protect these students, while others have not.
---------------------------------------------------------------------------
\73\ In the few instances prior to 2015 in which claims have
been recognized under current regulations, borrowers and the school
were typically located in the same State.
---------------------------------------------------------------------------
As noted in the preamble, Corinthian, a publicly traded for-profit
higher education company that enrolled over 70,000 students at more
than 100 campuses nationwide, filed for bankruptcy in 2015 after being
the subject of multiple investigations and actions by Federal and State
governments. While the Department is committed to ensuring that
students harmed by Corinthian's misrepresentations receive the relief
to which they are entitled under the current borrower defense and
closed school discharge regulations, the Department also recognized
that the existing rules made this process burdensome, both for
borrowers and for the Department. As the Department began to determine
the best process for dealing with the fall-out of the Corinthian
bankruptcy, it became apparent that under the current process,
significant Department resources would be required to review individual
State laws to determine the law that would be applicable to claims that
might be received from many of these individual borrowers. In order to
create and oversee a process to provide debt relief for these
Corinthian students who applied for Federal student loan discharges
based on claims against Corinthian, the Department appointed a Special
Master in June of 2015.
As a result of this experience, the Department is proposing new
regulations that would develop a Federal standard for borrower defense
to help ensure that all Direct Loan borrowers have a process to obtain
adequate loan relief for injury caused by the acts or omissions of the
institutions they attended. The proposed regulations would also provide
clarity to the process by which a borrower defense is asserted and
resolved. To protect taxpayers and the Federal government, the
Department also seeks to hold institutions responsible for their acts
and omissions that give rise to borrower
[[Page 39388]]
defenses. The proposed regulations would also limit required
arbitration or internal institutional dispute resolution processes for
borrower defense claims.
Additionally, to enhance and clarify other existing protections for
students, the proposed regulations would update the basis for obtaining
a false certification discharge, clarify the processes for false
certification and closed school discharges, require institutions to
provide applications and explain the benefits and consequences of a
closed school discharge, and establish a process for a closed school
discharge without an application for students who do not re-enroll in a
title IV-participating institution within three years of an
institution's closure. The proposed regulations would also codify the
Department's practice that a discharge based on school closure, false
certification, unpaid refund, or defense to repayment will result in
the elimination or recalculation of the subsidized usage period
associated with the loan discharged.
The Department also proposes to amend the regulations governing the
consolidation of Nursing Student Loans and Nurse Faculty Loans so that
they align with the statutory requirements of section 428C(a)(4)(E) of
the HEA; clarify rules regulating the capitalization of interest on
defaulted FFEL Loans; require that proprietary schools with zero or
negative loan repayment rates warn prospective and enrolled students of
those repayment rate outcomes; require that a school disclose on its
Web site and to prospective and enrolled students if it is required to
provide financial protection to the Department; clarify the treatment
of spousal income in the PAYE and REPAYE plans; and make other changes
that we do not expect to have a significant economic impact.
We believe that our proposals in this NPRM represent our best
efforts to engage all sectors of the postsecondary industry and develop
regulations that are both effective and practical.
Summary of Proposed Regulations
The table below briefly summarizes the major provisions of the
proposed regulations.
Table 2--Summary of Proposed Regulations
----------------------------------------------------------------------------------------------------------------
Provision Reg section Description of provision
----------------------------------------------------------------------------------------------------------------
Borrower defense to repayment
----------------------------------------------------------------------------------------------------------------
Applicability.................................. Sec. 685.206 Clarifies that existing regulations
apply to loans first disbursed before
July 1, 2017.
State Law...................................... Sec. 685.206 Clarifies that a borrower defense
claim may be asserted if an
institution violates applicable State
law as it relates to the making of
the loan or the provision of
educational services.
Federal Standard and Process................... Sec. 685.222 Adds a new section addressing borrower
defenses for loans first disbursed on
or after July 1, 2017, and defines
circumstances under which a borrower
defense may be established.
Establishes a process for asserting
and determining a borrower defense
claim for loans first disbursed
before and after July 1, 2017.
Misrepresentation.............................. Sec. 668.71 Amends the definition of
Sec. 685.222(d)(2) ``misrepresentation'' for what the
Secretary may consider in determining
whether schools engaged in
misrepresentation for Sec. 668.71,
adopts the definition for Sec.
685.222, and in Sec. 685.222
requires that a borrower must have
reasonably relied on the
misrepresentation.
Remedial Action and Recovery from the Sec. 685.206 Removes provision that the Secretary
Institution. will not initiate action to recover
after the end of the three-year
record retention period.
Sec. 685.222(e) Establishes that the Secretary may
initiate an action to recover for the
amount of relief resulting from an
individually filed and determined
borrower defense application.
Sec. 685.222(h)(5) Indicates that the Secretary will
recover the amount of relief
resulting from a group process for
borrower defenses with respect to
loans made to attend an open school.
Sec. 685.308 Revises to describe grounds on which
an institution causes a loss for
which the Secretary holds schools
accountable, along with the
procedures to establish and enforce
that liability.
Administrative Forbearance..................... Sec. 685.205(b)(6) Adds a mandatory administrative
forbearance during the period when
the Secretary is determining the
borrower's eligibility for a borrower
defense discharge.
Sec. 682.211 Mirrors the Direct Loan mandatory
administrative forbearance for FFEL
program loans.
[[Page 39389]]
Limits on Dispute Resolution Procedures........ Sec. 685.300(b)(11), Adds to Direct Loan program
(d)-(i) participation agreement provisions
relating to schools' use of certain
dispute resolution procedures. Under
these proposed provisions, schools
may not: (1) Require students to
pursue borrower defense complaints
through an internal institutional
process before the student presents
the complaint to an accrediting
agency or government agency; (2)
require arbitration of a potential
borrower defense claim asserted
through a class action lawsuit until
a court has denied class
certification or dismissed the class
claim, and, if that ruling may be
subject to appellate review on an
interlocutory basis, the time to seek
such review has elapsed or the review
has been resolved, or (3) compel a
student to enter into a pre-dispute
agreement to arbitrate a borrower
defense claim, or to rely in any way
on a pre-dispute arbitration
agreement with respect to any aspect
of a borrower defense claim.
Requires institutions to include the
notices and provisions in Sec.
685.300(e)(3) in any agreements
entered into after effective date of
this regulation with a student
recipient of a Direct Loan for
attendance at the school, or, with
respect to a Parent PLUS Loan, a
student for whom the PLUS loan was
obtained, including any agreement
regarding arbitration.
Requires institutions to notify the
Secretary of the initial filing of
the claim, whether in court or in
arbitration, and provide copies of
the complaint and any counterclaim,
any pre-dispute arbitration agreement
filed with the arbitrator or
arbitration administrator, any
dispositive motion filed by a party
to the suit, and the ruling on any
dispositive motion and the judgment
issued by the court.
For agreements executed before the
effective date of the proposed
regulation, requires institutions to
comply with the regulations and
either amend the agreements or notify
students that the institution would
not attempt to exercise those
agreements in a manner proscribed by
the proposed regulations.
Notification would occur no later
than exit counseling, or in the case
of previously enrolled students who
did not receive the updated exit
counseling and who sue or file for
arbitration, the date on which the
institution files its initial
response or answer to a complaint in
a lawsuit or demand for arbitration
made by a student who was not already
provided with notice or amendment.
----------------------------------------------------------------------------------------------------------------
Closed School Discharge
----------------------------------------------------------------------------------------------------------------
Provide Application............................ Sec. 668.14(b)(32) Requires a school to provide to all
enrolled students, after the
Department initiates any action to
terminate the school's participation,
a closed school discharge application
and a written disclosure of the
benefits and consequences of a closed
school discharge as an alternative to
a teach-out.
Departmental Review of Guaranty Agency Denials. Sec. Requires guaranty agency that denies a
682.402(d)(6)(ii)(F) closed school discharge request to
inform borrower of opportunity for
review by the Secretary.
Discharge without Application.................. Sec. Authorizes the Department or a
674.33(g)(3)(iii); Sec. guaranty agency acting with the
682.402(d)(8)(iii); Department's permission to grant a
Sec. 685.214(c)(2) closed school discharge without
borrower application based on
evidence in the Department's or
guaranty agency's possession that the
borrower did not subsequently re-
enroll in a title IV institution
within three years after the school
closed.
----------------------------------------------------------------------------------------------------------------
False Certification Discharge
----------------------------------------------------------------------------------------------------------------
Basis for Discharge............................ Sec. 685.215 Eliminates references to ``ability-to-
benefit'' and establishes as grounds
for a false certification discharge
the certification of eligibility of a
student who is not a high school
graduate or the improper
certification of a borrower's
satisfactory academic progress.
Borrower can also qualify for false
certification discharge if the
borrower failed to meet applicable
State requirements for employment due
to physical or mental condition, age,
criminal record, or other reason
accepted by the Secretary that would
prevent the borrower from obtaining
employment in the field for which the
training program supported by the
loan was intended.
Process........................................ Sec. 685.215(d) Updates procedures and describes
evidence the Department uses to
determine eligibility for a false
certification discharge.
Also requires the Department to:
Explain to the borrower the reasons
for a denial and the evidence the
determination was based on; provide
the borrower with an opportunity to
submit additional evidence; and
notify the borrower if the
determination changes based on the
additional evidence submitted.
[[Page 39390]]
Other Provisions
----------------------------------------------------------------------------------------------------------------
Disclosures and Warnings....................... Sec. 668.41(h) and Requires warning to enrolled and
(i) prospective students by a proprietary
institution that does not qualify for
a low borrowing exemption if its loan
repayment rate is equal to or below
zero percent. Requires disclosure by
an institution from any sector that
is required to provide financial
protection to the Secretary such as
an irrevocable letter of credit or
cash under Sec. 668.175(d) or (f),
or to establish a set-aside under
Sec. 668.175(h). Specifies manner
in which such disclosures must be
made.
Interest Capitalization........................ Sec. 682.202(b)(1); Clarifies that interest capitalization
Sec. 682.410(b)(4); when a guaranty agency sells a
Sec. 682.405 rehabilitated loan is not permitted.
Also clarifies that when a guaranty
agency holds a defaulted FFEL Loan
and the guaranty agency has suspended
collection activity to give the
borrower time to submit a closed
school or false certification
discharge application, capitalization
is not permitted if collection on the
loan resumes because the borrower
does not return the appropriate form
within the allotted timeframe.
150 Percent Direct Subsidized Loan Limit....... Sec. 682.202 Codifies Department's current practice
that a discharge based on school
closure, false certification, unpaid
refund, or defense to repayment will
lead to the elimination (for full
discharge) or recalculation (for
partial discharge) of the subsidized
usage period that is associated with
the loan or loan discharged. If the
discharge results in a remaining
eligibility period greater than zero,
the borrower is no longer responsible
for interest that accrues on a Direct
Subsidized Loan or portion of a
Direct Consolidation Loan that repaid
a Direct Subsidized Loan, unless the
borrower again exceeds the 150
percent limit with additional
borrowing.
Electronic Death Certificate................... Sec. 674.61(a); Sec. Allows death discharges to be based on
682.402(b)(2); Sec. an accurate and complete original or
685.212(a); Sec. certified copy of the death
686.42(a) certificate that is scanned and
submitted electronically or through
verification of the death through an
authoritative Federal or State
electronic database approved by the
Secretary.
Debt Compromise Authority...................... 34 CFR 30.70 Reflects increased debt compromise
authority to $100,000.
Clarifies that generally applicable
limit does not apply to claims
arising under FFEL, Direct Loans, or
Perkins Loan programs and requires
that the Department seek DOJ review
for resolution of such claims over
$1,000,000.
PAYE and REPAYE Clarifications................. Sec. 685.209(a) and For REPAYE, removes language
(c) regarding, and cross-references to,
partial financial hardship.
For REPAYE, makes it clear that no
adjustment is made to a borrower's
monthly payment for a spouse's
eligible loan debt if the spouse's
income is excluded from the
calculation of the borrower's monthly
payment.
For PAYE and REPAYE, makes it clear
that the inclusion of FFEL Loans in
the definition of ``eligible loans''
is to take them into consideration
for certain terms and conditions of
the PAYE and REPAYE plans, but does
not allow FFEL program loans to be
repaid under these plans.
Nurse Faculty Loan, Federal Perkins, or Health Sec. 685.220 Provides that nurse faculty loans made
Professions Student Loan Consolidation. under part E of title VIII of the
Public Health Service Act may be
consolidated into a Direct
Consolidation Loan. Reflects updates
to statutory language.
Revises Sec. 685.220(d)(1)(i) to
allow a borrower to obtain a Direct
Consolidation Loan if the borrower
consolidates at least one eligible
loan under Sec. 685.222(b). This
reflects the Department's long-
standing policy that generally Direct
Program Loans should be given the
same treatment for parallel aspects
of FFEL Loans, unless otherwise
provided for in the HEA or the
Department's regulations.
----------------------------------------------------------------------------------------------------------------
Discussion of Costs and Benefits
The primary potential benefits of the proposed regulations are: (1)
An updated and clarified process and a Federal standard to improve the
borrower defense process and usage of the borrower defense process and
to increase protections for students; (2) increased financial
protections for taxpayers and the Federal government; (3) additional
information to help students, prospective students, and their families
make educated decisions based on information about an institution's
financial soundness and its borrowers' loan repayment outcomes; (4)
improved conduct of schools by holding individual institutions
accountable and thereby deterring misconduct by other schools; (5)
improved awareness and usage, where appropriate, of closed school and
false certification discharges; and (6) technical changes to improve
the administration of the title IV, HEA programs.
We have considered and determined the primary costs and benefits of
the proposed regulations for the following groups or entities that we
expect to be impacted by the proposed regulations:
Students and borrowers
Institutions
Guaranty agencies and loan servicers
Federal, State, and local government
Borrower Defense, Closed School Discharges, and False Certification
Discharges
Students and Borrowers
Borrowers would be the primary beneficiary of the proposed
regulations. The proposed regulations would allow borrowers to navigate
the borrower defense process more efficiently and effectively. A
simplified process may encourage borrowers who may have
[[Page 39391]]
been unaware of the process, or intimidated by the complexity of the
process in the past, to file a claim.
Furthermore, these proposed changes could reduce the number of
borrowers who are struggling to meet their student loan obligations.
During the public comment periods of the negotiated rulemaking
sessions, many public commenters who were borrowers mentioned that they
felt that they had been defrauded by their institutions of higher
education and were unable to pay their student loans or obtain debt
relief under the current regulations. Future borrowers are less likely
to face these misrepresentations, since the financial consequences to
schools would be dire.
Providing an automatic forbearance with an option for the borrower
to decline the temporary relief and continue making payments would
reduce the potential burden on borrowers pursuing borrower defenses.
These borrowers would be able to focus on supplying the information
needed to process their borrower defense claims without the pressure of
continuing to make payments on loans for which they are currently
seeking relief. When claims are successful, there will be a transfer
between the Federal government and affected student borrowers as
balances are forgiven and some past payments are returned. In the
scenarios described in the Net Budget Impacts section of this analysis,
those transfers range from $182 million to $5.8 billion annually.
Borrowers who ultimately have their loans discharged will be
relieved of debts they may not have been able to repay, and that debt
relief can ultimately allow them to become bigger participants in the
economy, possibly buying a home, saving for retirement, or paying for
daycare. They also will be able to return into the higher education
marketplace and pursue credentials they need for career advancement. To
the extent borrowers have subsidized loans, the elimination or
recalculation of the borrowers' subsidized usage period could relieve
them of their responsibility for accrued interest and make them
eligible for additional subsidized loans, which could make returning to
higher education a more acceptable option.
The proposed regulations would also give borrowers more information
with which they can make informed decisions about the institutions they
choose to attend. An institution would be required to disclose the
reasons that it was required to obtain a letter of credit. Recent
events involving closure of several large proprietary institutions have
shown the need for lawmakers, regulatory bodies, State authorizers,
taxpayers, and students to be more broadly aware of circumstances that
could affect the continued existence of an institution. The disclosure
of institutions' status as being required to provide financial
protection would allow borrowers to receive early warning signs that an
institution's financial or accreditation status may be at risk, and
therefore borrowers may be able to withdraw or transfer to an
institution in better standing in lieu of continuing to work towards
earning credentials that may have limited value.
Proprietary institutions would also be required to provide a
warning to prospective and enrolled students if their repayment rate is
equal to or below zero percent. To estimate the effect of the repayment
rate warning on institutions, the Department analyzed College Scorecard
data and found that 493 of 1,174 proprietary institutions with
repayment rates in the data had rates less than or equal to 50 percent,
roughly equivalent to a repayment rate of zero percent or below, which
would trigger the warning requirement under the proposed regulations.
This analysis does not take into account the low borrowing exemption,
and does not include graduate students.
Institutions
Institutions would bear many of the costs of the proposed
regulations, which fall into three categories: Paperwork costs
associated with compliance with the regulations; other compliance costs
that may be incurred as institutions adapt their business practices and
training to ensure compliance with the regulations; and costs
associated with obtaining letters of credit or suitable equivalents if
required by the institution's performance under a variety of triggers.
Additionally, there may be a potentially significant amount of funds
transferred between institutions and the Federal government as
reimbursement for successful claims. Some institutions may close some
or all of their programs if their activities generate large numbers of
borrower defense claims.
A key consideration in evaluating the effect on institutions is the
distribution of the impact. While all institutions participating in
title IV loan programs are subject to the possibility of borrower
defense, closed school, and false certification claims and the
reporting requirements in the proposed regulations, the Department
expects that fewer institutions will engage in conduct that generates
borrower defense claims. Eventually, the proposed regulations can be
expected to reduce the number of schools that would face the most
significant costs to come into compliance, transfers to reimburse the
government for successful claims, costs to obtain required letters of
credit, and disclosure of borrower defense claims against the schools.
In the scenarios described in the Net Budget Impacts section of this
analysis, the annual transfers from institutions to students, via the
Federal government, as reimbursement for successful claims ranges from
$55 million to $3.8 billion. On the other hand, it is possible that
high-quality, compliant institutions, especially in the for-profit
sector, will see benefits if the overall reputation of the sector
improves as a result of (1) more trust that enforcement against bad
actors will be effective, and (2) the removal of bad schools from the
higher education marketplace, freeing up market share for the remaining
schools.
The accountability framework in the proposed regulations requiring
institutions to provide financial protection in response to various
triggers would generate costs for institutions. Some of the triggering
provisions would affect institutions differently depending upon their
type and control, as, for example, only publicly traded institutions
are subject to delisting or SEC suspension of trading, only proprietary
institutions are subject to the 90/10 rule, and public institutions are
not subject to the financial protection requirements. To the extent
data were available, the Department evaluated the financial protection
triggers to analyze the expected impact on institutions. Several of the
triggers are based on existing performance measures and are aimed at
identifying institutions that may face sanctions and experience
difficulty meeting their financial obligations. The triggers and their
potential consequences are discussed in Table 3.
[[Page 39392]]
Table 3--Automatic Triggers
------------------------------------------------------------------------
Trigger Description Impact
------------------------------------------------------------------------
Automatic Triggers (institution found to be not financially responsible
under Sec. 668.171 and must qualify under an alternative standard)
------------------------------------------------------------------------
State or Federal agency actions. If currently or in Since 2010, at
three most least 25
recently institutions have
completed award been investigated
years an or reached
institution has settlements with
to repay a debt State AGs, with
or liability some being
arising from an involved in
investigation by actions by
a State, Federal, multiple States.
or other Federal agencies,
oversight entity, including the
or settles or Department, DOJ,
resolves a suit FTC, CFPB, and
brought by one of the SEC have been
those entities involved in
related to the actions against
making of a at least 20
Federal loan or institutions,
the provision of with multiple
educational actions against
services, or has some schools.
been sued by a Amount of
government agency financial
for such claims, protection
unless that suit calculated as 10
has since been percent or more,
dismissed. as determined by
Material if the Secretary, of
amount exceeds the amount of
the audit Direct Loans
threshold in 2 received by the
CFR part 200, institution in
currently the most recently
$750,000, or 10 completed fiscal
percent of year.
current assets.
For judgments
entered against
the institution
in most recent
fiscal year in
suit by
government
agency, if amount
exceeds
thresholds above.
For suits by
State, Federal,
or other
oversight
entities
unrelated to
Federal loans or
provision of
educational
services, if the
potential damages
exceed 10 percent
of current assets.
For pending qui
tam suits or
suits by private
parties related
to borrower
defense-type
claims if the
suit has survived
a motion for
summary judgment
and the suit
seeks recovery of
10 percent of
current assets or
more.
Repayments to the Secretary..... Currently or at Amount of required
any time in the financial
three most protection
recently calculated as the
completed award greatest annual
years, the loss incurred in
institution was the last three
required to repay completed award
the Secretary for years plus the
any losses from portion of
borrower defense outstanding
claims that claims
exceeded the represented by
lesser of the the ratio of
audit threshold successful
amount in 2 CFR borrower claims
part 200 to total claims
(currently over the three
$750,000) or 10 most recently
percent of completed award
current assets. years.
Accrediting Agency Actions...... If currently or at In the past three
any time in the fiscal years, 52
three most non-public
recently institutions have
completed award lost eligibility
years, the based on
institution's accreditation
primary issues and 54
accrediting were put on
agency required heightened cash
the institution monitoring level
to submit a teach- two.
out plan for
itself or any
additional
branches or
locations or
placed the
institution on
probation, issued
a show-cause
order, or placed
the institution
in a similar
accreditation
status for
failing to meet
one or more of
the agency's
standards, and
the accrediting
agency does not
notify the
Secretary within
six months that
the institution
has come into
compliance.
Loan Agreements and Obligations. If an institution ..................
discloses in a
note in its most
recently audited
financial
statement that it
violated a
provision or
requirement in a
loan agreement
with its largest
secured creditor
or failed to make
a payment for
more than 120
days to its
largest secured
creditor. Also,
the occurrence of
a monetary or
nonmonetary
default or
delinquency
event, as defined
under the terms
of a security or
loan agreement
between the
institution and
the creditor with
the largest
secured extension
of credit to the
institution, or
the occurrence of
any other event
as provided under
such an agreement
that triggers or
provides a
recourse by the
creditor for an
increase in
collateral,
changes in
contractual
obligations, an
increase in
interest rates or
payments, or
imposes some
sanction,
penalty, or fee
upon the
institution.
Non-Title IV Revenue............ If the institution In the most recent
fails the 90/10 90/10 report, 14
revenue test in institutions
the most recently received 90
completed fiscal percent or more
year. Applies to of their revenues
proprietary from title IV
institutions only. funds. The total
title IV funding
for those
institutions in
award year (AY)
2013-14 was $57
million.
Publicly Traded Institutions.... If the ..................
institution's
stock is
involuntarily
delisted from the
exchange on which
it is traded, the
SEC warns the
institution it
will suspend
trading on the
institution's
stock, or the
institution fails
to file a
required annual
or quarterly
report with the
SEC on time, or
the institution
disclosed or was
required to
disclose in a
report filed with
the SEC a
judicial or
administrative
proceeding not
covered under the
triggers listed
above.
[[Page 39393]]
Gainful Employment.............. For institutions The Department
where over 50 found that of
percent of 3,958
students who institutions that
receive title IV reported GE
aid are enrolled programs for 2013-
in GE programs, 14, 1,059
if more than 50 institutions had
percent of those a D/E rate in our
enrolled in GE 2011 GE
programs are in Informational
programs that Rates and over 50
failed or are in percent of their
the zone under enrollment in GE
the D/E rates programs. Of
measure. these, 107 non-
public
institutions had
more than 50
percent of their
GE enrollment in
zone or failing
programs. Title
IV aid received
by these
institutions in
AY2014-15 totaled
$1.02 billion.
The Department
will continue to
monitor this
trigger as more
recent D/E rates
become available.
Withdrawal of Owner's Equity.... For institutions ..................
with a composite
score under 1.5,
any withdrawal of
owner's equity
from the
institution by
any means,
including by
declaring a
dividend.
Cohort Default Rates............ Institution's two From the most
most recent recently released
cohort default official CDR
rates are 30 rates, for AY2012-
percent or 13 and AY2011-12,
greater. Does not 37 of 3,081 non-
apply if public
institution files institutions that
a challenge, had CDR rates in
request for both years were
adjustment, or over 30 percent
appeal with in both years.
respect to its Title IV aid
CDR, and that received by these
action results in institutions in
reducing the CDR AY2014-15 totaled
below 30 percent $27.8 million.
or the
institution not
losing
eligibility or
not being placed
on provisional
certification.
------------------------------------------------------------------------
Discretionary Triggers
------------------------------------------------------------------------
Significant Fluctuation in There are The Department
Direct Loan or Pell Grant significant looked at
Volumes. fluctuations in fluctuations in
Direct Loan or Direct Loan
Pell Grant funds, amounts and found
or a combination that 991 of 3,590
of those funds, non-public
received by the institutions had
institution in an absolute
consecutive award change in Direct
years that cannot Loan volume of 25
be explained by percent or more
changes in the between the 2013-
institutions' 14 and 2014-15
programs. No award years.
specific
threshold is
established.
High Annual Dropout Rates....... High dropout rates The Department
as calculated by analyzed College
the Secretary. No Scorecard data to
specific develop a
threshold is withdrawal rate
established. within six years.
Of 928
proprietary
institutions with
data, 482 had
rates from 0 to
20 percent, 415
from 20 to 40
percent, 30 from
40 to 60 percent,
and 1 from 60 to
80 percent. Of
1,058 private not-
for-profit
institutions with
data, 679 had
rates from 0 to
20 per cent, 328
from 20 to 40
percent, 51 from
40 to 60 percent,
and none above 60
percent. Of 1,476
public
institutions with
data, 857 had
rates from 0 to
20 per cent, 587
from 20 to 40
percent, 32 from
40 to 60 percent,
and none above 60
percent.
State Licensing Agency.......... Institution is ..................
cited by State
licensing or
authorizing
agency for
failing State or
agency
requirements.
Financial Stress Test........... The institution ..................
fails a financial
stress test used
to evaluate
whether the
institution has
sufficient
resources to
absorb losses
that may be
incurred as a
result of adverse
conditions and
continue to meet
its obligations
to students and
to the Secretary.
Credit Rating................... Institution or According to
corporate parent Moody's Investors
has non- Services, it
investment grade rates over 500
bond or credit universities
rating. representing the
majority of debt
in the sector.
This includes
over 230 four-
year public
institutions,
which are exempt
from the
financial
protection
triggers, and
almost 275
private colleges
and universities.
Of these, only 12
were below the
Baa3 rating for
investment grade
as of December
2014, but the
report did note
that downgrades
were more common
than
upgrades.\74\
SEC 8-K Reporting............... If an institution At least eight
reports an publicly traded
adverse event to institutions have
the SEC on a Form reported events
8-K. in Form 8-K
filings, with
most reporting
multiple events
in the past five
years.
------------------------------------------------------------------------
---------------------------------------------------------------------------
\74\ See Moody's Investors Service, The Financial & Strategic
Outlook for Private Colleges, January 5, 2015, available at
www.cic.edu/News-and-Publications/Multimedia-Library/CICConferencePresentations/2015%20Presidents%20Institute/20150105-The%20Financial%20and%20Strategic%20Outlook%20for%20Private%20Colleges%205.pdf.
_____________________________________-
In addition to any resources institutions would devote to training
or changes in business practices to improve compliance with the
proposed regulations, institutions would incur costs associated with
the reporting and disclosure requirements of the proposed regulations.
This additional workload is discussed in more detail under Paperwork
Reduction Act of 1995. In total, the proposed regulations are estimated
to increase burden on institutions participating in the title IV, HEA
programs by 384,293 hours. The monetized cost of this burden on
institutions, using wage data developed using BLS data available at
www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $14,045,915. This cost was
based on an hourly rate of $36.55.
Guaranty Agencies and Loan Servicers
Several provisions may impose a cost on guaranty agencies or
lenders, particularly the limits on interest capitalization. Loan
servicers may have to update their process to accept electronic death
certificates, but
[[Page 39394]]
increased use of electronic documents should be more efficient over the
long term. As indicated in the Paperwork Reduction Act of 1995 section
of this preamble, the proposed regulations are estimated to increase
burden on guaranty agencies and loan servicers by 7,622 hours related
to the mandatory forbearance for FFEL borrowers considering
consolidation for a borrower defense claim and reviews of denied closed
school claims. The monetized cost of this burden on guaranty agencies
and loan servicers, using wage data developed using BLS data available
at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $278,584. This cost was
based on an hourly rate of $36.55.
Federal, State, and Local Governments
In addition to the costs detailed in the Net Budget Impacts section
of this analysis, the proposed regulations would affect the Federal
government's administration of the title IV, HEA programs. The borrower
defense process in the proposed regulations would provide a framework
for handling claims in the event of significant institutional
wrongdoing. The Department may incur some administrative costs or
shifting of resources from other activities if the number of
applications increases significantly and a large number of claims
require hearings. Additionally, to the extent borrower defense claims
are not reimbursed by institutions, Federal government resources that
could have been used for other purposes will be transferred to affected
borrowers. Taxpayers will bear the burden of these unreimbursed claims.
In the scenarios presented in the Net Budget Impacts section of this
analysis, annualized unreimbursed claims range from $64 million to $4.1
billion.
The accountability framework and financial protection triggers
would provide some protection for taxpayers as well as potential
direction for the Department and other Federal and State investigatory
agencies to focus their enforcement efforts. The financial protection
triggers may potentially assist the Department as it seeks to identify,
and take action regarding, material actions and events that are likely
to have an adverse impact on the financial condition or operations of
an institution. In addition to the current process where, for the most
part, the Department determines annually whether an institution is
financially responsible based on its audited financial statements,
under these proposed regulations the Department may determine at the
time a material action or event occurs that the institution is not
financially responsible.
Other Provisions
The technical corrections and additional changes in the proposed
regulations should benefit student borrowers and the Federal
government's administration of the title IV, HEA programs. Updates to
the acceptable forms of certification for a death discharge would be
more convenient for borrowers' families or estates and the Department.
The provision for consolidation of Nurse Faculty Loans reflects current
practice and gives those borrowers a way to combine the servicing of
all their loans. Many of these technical corrections and changes
involve relationships between the student borrowers and the Federal
government, such as the clarification in the REPAYE treatment of
spousal income and debt, and they are not expected to significantly
impact institutions.
Net Budget Impacts
The proposed regulations are estimated to have a net budget impact
in costs over the 2017-2026 loan cohorts ranging between $1.997 billion
in the lowest impact scenario to $42.698 billion in the highest impact
scenario. A cohort reflects all loans originated in a given fiscal
year. Consistent with the requirements of the Credit Reform Act of
1990, budget cost estimates for the student loan programs reflect the
estimated net present value of all future non-administrative Federal
costs associated with a cohort of loans.
The provisions most responsible for the costs of the proposed
regulations are those related to the discharge of borrowers' loans,
especially the changes to borrower defense and closed school
discharges. When an institution engages in behavior that could result
in successful borrower defense claims against it, there are several
possible methods borrowers could pursue to obtain relief under the
proposed regulations. If the level of misconduct and resulting
investigations and demands for financial protection lead to the closure
of the institution, borrowers that fall within the applicable
timeframes may choose a closed school discharge. If applicable,
borrowers could also consider a false certification discharge based on
the institution falsely certifying the borrower's high school diploma
or satisfactory academic progress. The cost of these two options is
discussed in the Closed School and False Certification Discharges
discussion of this Net Budget Impacts section. If the institution does
not close, the borrower cannot or does not pursue closed school or
false certification discharges, or the Secretary determines the
borrower's claim is better suited to a borrower defense group process,
the borrower may pursue a borrower defense claim.
Borrower Defense Discharges
The proposed regulations would establish a Federal standard for
borrower defense claims related to loans first disbursed on or after
July 1, 2017, as well as describe the process for the assertion and
resolution of all borrower defense claims--both those made for Direct
Loans first disbursed prior to July 1, 2017, and for those made under
the proposed regulations after that date. As indicated in this
preamble, while regulations governing borrower defense claims have
existed since 1995, those regulations have rarely been used. Therefore,
the Department has used the limited data it has available on borrower
defense claims, especially information about the results of the
collapse of Corinthian, projected loan volumes, Departmental expertise,
the discussions at negotiated rulemaking, and information about past
investigations into the type of institutional acts or omissions that
would give rise to borrower defense claims to develop scenarios that
the Department believes will capture the range of net budget impacts
associated with the borrower defense proposed regulations. The
Department will continue to refine these estimates, welcomes comments
about the assumptions used in developing them, and will consider those
comments as the final regulations are developed.
While there are many factors and details that will determine the
cost of the proposed regulations, ultimately a borrower defense claim
entered into the student loan model (SLM) by risk group, loan type, and
cohort will result in a reduced stream of cash flows compared to what
the Department would have expected from a particular cohort, risk
group, and loan type. The net present value of the difference in those
cash flow streams generates the expected cost of the proposed
regulations. In order to generate an expected level of claims for
processing in the SLM, the Department used President's Budget 2017
(PB2017) loan volume estimates to identify the maximum potential
exposure to borrower defense claims for each cohort, loan type, and
sector. While all of the PB2017 projected Direct Loan volume for the
2017 to 2026 cohorts of over $1 trillion is subject to the proposed
regulations, the Department expects only a fraction of that amount to
be affected by institutional behavior that
[[Page 39395]]
results in a borrower defense claim (labeled as ``Misrep Scenario'' in
Table 4). Additionally, while FFEL, Perkins, and certain other Federal
student loan borrowers are able to claim relief under the Direct Loan
process by consolidating into a Direct Loan, borrowers may choose not
to consolidate because they may lose some benefits in doing so or
because they have determined that their chances of success under the
borrower defense process may not warrant the step of consolidation. As
a result, the percentage of that volume that consolidates will also
affect the estimated net budget impact. The budget impact would be
further affected by the percentage of potentially eligible borrowers
who successfully pursue a claim (labeled as ``Borr Claim Pct'' in Table
4) and the level of recoveries the Department is able to receive from
institutions subject to borrower defense claims (labeled as ``Recovery
Pct'' in Table 4). The scenarios presented in this budget estimate
involve assumptions about these factors as shown in Table 4. The
Department also faced a challenge in establishing the appropriate
baseline against which to compare the costs of the regulation. Due to
the limited history of borrower defense claims, existing budget
estimates contain no data from which to devise a baseline. While many
borrowers who will pursue a claim through the new process would have
been able to do so under the existing standard, the Department is
attributing their claims to the proposed regulations. That is, while
the costs we are describing here are the actual projected costs of
borrower defense discharges, not all of them are attributable to the
new standard proposed in this regulation. Another factor that could
mitigate the costs to the Federal government of the proposed
regulations (and change the nature of the costs experienced by affected
institutions) is that elimination or modification of the practices
giving rise to borrower defense claims could improve outcomes for
student borrowers. In the scenarios, we assume that 4-year institutions
may be able to implement training or practice changes faster than some
smaller 2-year institutions, resulting in a lower upper end of the
range for the Misrep Scenario 2. To avoid underestimating the potential
cost of the proposed regulations, the Department did not explicitly
adjust its estimates for this factor.
Table 4--Assumptions for Budget Scenarios
--------------------------------------------------------------------------------------------------------------------------------------------------------
Misrep Misrep Borr claim Borr claim Recovery pct Recovery pct
Sector scenario 1 (% scenario 2 (% pct A (% of pct B (% of 1 (% of 2 (% of
of volume) of volume) volume) volume) claim) claim)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2yr or less public...................................... 0.5 2 10 75 30 65
2yr or less private not-for-profit...................... 0.5 2 10 75 30 65
2yr or less private for profit.......................... 5 25 10 75 30 65
4yr public.............................................. 0.5 1 10 75 30 65
4yr private not-for-profit.............................. 0.5 1 10 75 30 65
4yr private for profit.................................. 5 20 10 75 30 65
--------------------------------------------------------------------------------------------------------------------------------------------------------
The combined application of these assumptions created the eight (=
two Misrep Scenarios x two Borr Claim Pct x two Recovery Pct) scenarios
evaluated in the SLM as an increase in the claims rate. Scenario 1A2,
the lowest Federal budget impact scenario, assumes that institutional
misconduct is not widespread, but instead limited to actors
representing a small share of loan volume. It also assumes that the
increased information about the availability of borrower defense relief
does not lead to a significant increase in the percentage of borrowers
making a claim, and that the Department recovers a substantial portion
of successful claims from institutions. As shown in Table 4, the other
end of the range is represented by Scenario 2B1, in which a high
percentage of borrowers from institutions representing a significant
percent of loan volume make successful claims and the Department is
unable to recover a significant amount from institutions. The
Department also estimated the impact if the Department received no
recoveries from institutions for each combination of misrepresentation
and borrower claim percentage scenario, the results of which are
discussed after Table 5.
The Department does not specify how many institutions are
represented in each scenario, as the scenario could represent a
substantial number of institutions engaging in acts giving rise to
borrower defense claims or could represent a small number of
institutions with significant loan volume subject to a large number of
claims. According to Federal Student Aid data center loan volume
reports,\75\ the five largest proprietary institutions in loan volume
received 26 percent of Direct Loans disbursed in the proprietary sector
in award year 2014-15 and the 50 largest represent 69 percent. The
Department has not assigned specific probabilities to any of the
scenarios and the results in Table 5 and the likelihood of any one
scenario will depend on how institutions conduct their activities to
ensure compliance, how much borrowers' awareness of their options
increases, and the extent of the deterrent effect that the Department's
and other agencies' efforts to uncover and sanction misconduct through
investigations and enforcement may have on the industry.
---------------------------------------------------------------------------
\75\ Federal Student Aid, Student Aid Data: Title IV Program
Volume by School, available at https://studentaid.ed.gov/sa/about/data-center/student/title-iv.
Table 5--Budget Estimates for Borrower Defense Scenarios
----------------------------------------------------------------------------------------------------------------
Estimated Annualized Annualized
costs for cost to cost to
Scenario cohorts 2017- Federal Gov't Federal Gov't
2026 ($mns) (3% (7%
discounting) discounting)
----------------------------------------------------------------------------------------------------------------
1A1:............................................................ $1,297 $128 $127
1A2:............................................................ 646 64 63
[[Page 39396]]
1B1:............................................................ 10,174 1,007 993
1B2:............................................................ 5,072 502 446
2A1:............................................................ 5,498 544 537
2A2:............................................................ 2,752 272 269
2B1:............................................................ 41,347 4,092 4,039
2B2:............................................................ 20,674 2,046 2,020
----------------------------------------------------------------------------------------------------------------
The transfers among the Federal government and affected borrowers
and institutions associated with each scenario above are included in
Table 6, with the difference in amounts transferred to borrowers and
received from institutions generating the budget impact in Table 5. In
the absence of any recovery from institutions, taxpayers would bear the
full cost of successful claims from affected borrowers. At a 3 percent
discount rate, the annualized costs with no recovery are approximately
$184 million for Misrep_Scenario_1 and Borr Claim_Pct_A, $1.44 billion
for Misrep_Scenario_1 and Borr Claim_Pct_B, $778 million for
Misrep_Scenario_2 and Borr Claim_Pct_A, and $5.85 billion for
Misrep_Scenario_2 and Borr Claim_Pct_B. At a 7 percent discount rate,
the annualized costs with no recovery are approximately $180 million
for Misrep_Scenario_1 and Borr Claim_Pct_A, $1.42 billion for
Misrep_Scenario_1 and Borr Claim_Pct_B, $768 million for
Misrep_Scenario_2 and Borr Claim_Pct_A, and $5.77 billion for
Misrep_Scenario_2 and Borr Claim_Pct_B. This potential increase in
costs demonstrates the significant effect that recoveries from
institutions have on the net budget impact of the borrower defense
provisions.
Closed School Discharge and False Certification Discharges
In addition to the provisions previously discussed, the proposed
regulations also would make changes to the closed school discharge
process, which are estimated to cost $1.351 billion for cohorts 2017-
2026. The proposed regulations include requirements to inform students
of the consequences, benefits, requirements, and procedures of the
closed school discharge option, including providing students with an
application form, and establishes a Secretary-led discharge process for
borrowers who qualify but do not apply and, according to the
Department's information, did not subsequently re-enroll in any title
IV-eligible institution within three years from the date the school
closed. The increased information about and automatic application of
the closed school discharge option and possible increase in school
closures related to the institutional accountability provisions in the
proposed regulations are likely to increase closed school claims. Chart
1 provides the history of closed schools, which totals 12,040 schools
through April 2016.
[GRAPHIC] [TIFF OMITTED] TP16JN16.000
In order to estimate the effect of the proposed changes to the
discharge process that would grant relief without an application after
a three-year period, the Department looked at all Direct Loan borrowers
at schools that closed from 2008-2011 to see what percentage of them
had not received a closed school discharge and had no record of title-
IV aided enrollment in the three years following their school's
closure. Of 2,287 borrowers in the file, 47 percent
[[Page 39397]]
had no record of a discharge or subsequent title IV aid. This does not
necessarily mean they did not re-enroll at a title IV institution, so
this assumption may overstate the potential effect of the three-year
discharge provision. The Department used this information and the high
end of closed school claims in recent years to estimate the effect of
the proposed regulations related to closed school discharges. The
resulting estimated cost to the Federal government of the closed school
provisions is $1.351 billion over the 2017 to 2026 loan cohorts.
The proposed regulations would also change the false certification
discharge process to include instances in which schools certified the
eligibility of a borrower who is not a high school graduate (and does
not meet applicable alternative to high school graduate requirements)
where the borrower would 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. Under
existing regulations, false certification discharges represent a very
low share of discharges granted to borrowers. The proposed regulations
would replace the explicit reference to ability to benefit requirements
in the false certification discharge regulations with a more general
reference to requirements for admission without a high school diploma
as applicable when the individual was admitted, and specify how an
institution's certification of the eligibility of a borrower who is not
a high school graduate (and does not meet applicable alternative to
high school graduate requirements) could give rise to a false
certification discharge claim. However, the Department does not expect
an increase in false certification discharge claims to result in a
significant budget impact from this change. We believe that schools
that comply with the current ability to benefit assessment requirement
and that honor the current high school graduation requirements will
continue to comply in the manner they now do, and we have no basis to
believe that changing the terminology or adding false certification of
SAP as an example of a reason the Secretary may grant a false
certification discharge without an application will lead to an increase
in claims that will result in a significant net budget impact. The
Department will continue to evaluate the changes to the false
certification discharge regulations and welcomes comments to consider
as the final analysis of the proposed regulations is developed.
Other Provisions
In addition to the provisions previously discussed, the proposed
regulations would also make a number of technical changes related to
the PAYE and REPAYE repayment plans and the consolidation of Nurse
Faculty Loans, update the regulations describing the Department's
authority to compromise debt, and update the acceptable forms of
verification of death for discharge of title IV loans or TEACH Grant
obligations. The technical changes to the REPAYE and PAYE plans were
already reflected in the Department's budget estimates for those
regulations, so no additional budget effects are included here. While
some borrowers may be eligible for additional subsidized loans and no
longer be responsible for accrued interest on their subsidized loans as
a result of their subsidized usage period being eliminated or
recalculated because of a closed school, false certification, unpaid
refund, or defense to repayment discharge, the institutions primarily
affected by the 150 percent subsidized usage regulation are not those
expected to generate many of the applicable discharges, so this
reflection of current practice is not expected to have a significant
budget impact. Allowing death discharges based on death certificates
submitted or verified through additional means is convenient for
borrowers, but is not estimated to substantially change the amount of
death discharges. The proposed updates to the debt compromise limits
reflect statutory changes and the Secretary's existing authority to
compromise debt, so we do not estimate a significant change in current
practices. Revising the regulations to expressly permit the
consolidation of Nurse Faculty Loans is not expected to have a
significant budget impact, as this technical change reflects current
practices. According to Department of Health and Human Services budget
documents, approximately $26.5 million in grants are available annually
for schools to make Nurse Faculty Loans, and borrowers would lose
access to generous forgiveness terms if they choose to consolidate
those loans. Therefore, we would expect the volume of consolidation to
be very small, and do not estimate any significant budget impact from
this provision.
Assumptions, Limitations, and Data Sources
In developing these estimates, a wide range of data sources were
used, including data from the National Student Loan Data System;
operational and financial data from Department systems; and data from a
range of surveys conducted by the National Center for Education
Statistics such as the 2012 National Postsecondary Student Aid Survey.
Data from other sources, such as the U.S. Census Bureau, were also
used.
Accounting Statement
As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf), in the
following table, we have prepared an accounting statement showing the
classification of the expenditures associated with the provisions of
these regulations. This table provides our best estimate of the changes
in annual monetized costs and transfers as a result of these proposed
regulations. Expenditures are classified as transfers from the Federal
Government to affected student loan borrowers or from affected
institutions to students (via the Federal government), as noted.
Table 6--Accounting Statement: Classification of Estimated Expenditures
(in millions) With Discount Rates of Three Percent and Seven Percent
------------------------------------------------------------------------
------------------------------------------------------------------------
Category Benefits
------------------------------------------------------------------------
Updated and clarified borrower defense
process and Federal standard to
increase protection for student
borrowers and taxpayers................ not quantified
Improved awareness and usage of closed
school and false certification
discharges............................. not quantified
Improved consumer information about
institutions' performance and practices not quantified
------------------------------------------------------------------------
[[Page 39398]]
Category Costs
------------------------------------------------------------------------
3% 7%
-------------------------------
Costs of obtaining Letters of credit or
equivalents............................ not quantified
-------------------------------
Costs of compliance with paperwork 14.95 14.91
requirements...........................
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
3% 7%
-------------------------------
Borrower Defense claims from the Federal
government to affected borrowers
(partially borne by affected
institutions, via reimbursements):
SC1A1............................... 184 181
SC1A2............................... 182 180
SC1B1............................... 1,438 1,419
SC1B2............................... 1,434 1,415
SC2A1............................... 777 767
SC2A2............................... 778 768
SC2B1............................... 5,846 5,770
SC2B2............................... 5,846 5,770
Reimbursements of borrower defense
claims from affected institutions to
affected student borrowers, via the
Federal government:
SC1A1............................... 55 54
SC1A2............................... 119 117
SC1B1............................... 431 426
SC1B2............................... 932 920
SC2A1............................... 233 230
SC2A2............................... 506 499
SC2B1............................... 1,754 1,731
SC2B2............................... 3,800 3,751
Closed school discharges from the 135 135
Federal government to affected students
------------------------------------------------------------------------
Alternatives Considered
In the interest of promoting good governance and ensuring that
these proposed regulations produce the best possible outcome, the
Department reviewed and considered various proposals from internal
sources as well as from non-Federal negotiators and the public. We
summarize below the major proposals that we considered but which we
ultimately declined to implement in these proposed regulations.
Areas of significant discussion between the Department and the non-
Federal negotiators included the group discharge process for borrower
defense claims, the limitation periods, the appropriate procedure for
considering borrower defense claims including the role of State AGs,
legal assistance organizations, the Department, borrowers, and
institutions, and the continued use of or adoption of certain State
standards for borrower defense claims and the process of the
Department's recovery from schools for any liabilities to the
Department for borrower defense claims. The extensive discussion of
these issues is summarized in the preamble sections related to each
topic. In developing the proposed regulations, the Department
considered the budgetary impact, administrative burden, and
effectiveness of the options it considered.
Clarity of the Regulations
Executive Order 12866 and the Presidential memorandum ``Plain
Language in Government Writing'' require each agency to write
regulations that are easy to understand.
The Secretary invites comments on how to make these proposed
regulations easier to understand, including answers to questions such
as the following:
Are the requirements in the proposed regulations clearly
stated?
Do the proposed regulations contain technical terms or
other wording that interferes with their clarity?
Does the format of the proposed regulations (grouping and
order of sections, use of headings, paragraphing, etc.) aid or reduce
their clarity?
Would the proposed regulations be easier to understand if
we divided them into more (but shorter) sections? (A ``section'' is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 668.16.)
Could the description of the proposed regulations in the
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in
making the proposed regulations easier to understand? If so, how?
What else could we do to make the proposed regulations
easier to understand?
To send any comments that concern how the Department could make
these proposed regulations easier to understand, see the instructions
in the ADDRESSES section.
Initial Regulatory Flexibility Analysis
Description of the Reasons That Action by the Agency Is Being
Considered
The Secretary is proposing to amend the regulations governing the
Direct Loan Program to establish a new Federal standard, limitation
periods, and a process for determining whether a borrower has a
borrower defense based on an act or omission of a school. We also
propose to amend the Student Assistance General Provisions regulations
to revise the financial responsibility standards and add disclosure
requirements for schools. Finally, we propose to amend the discharge
provisions in the Perkins Loan, Direct Loan, FFEL Program, and TEACH
Grant programs. The proposed changes would provide transparency,
clarity, and ease of administration to current and new regulations and
protect students, the Federal government, and taxpayers against
potential school
[[Page 39399]]
liabilities resulting from borrower defenses.
The U.S. Small Business Administration Size Standards define ``for-
profit institutions'' as ``small businesses'' if they are independently
owned and operated and not dominant in their field of operation with
total annual revenue below $7,000,000. The standards define ``non-
profit institutions'' as ``small organizations'' if they are
independently owned and operated and not dominant in their field of
operation, or as ``small entities'' if they are institutions controlled
by governmental entities with populations below 50,000. Under these
definitions, an estimated 4,365 institutions of higher education
subject to the paperwork compliance provisions of the proposed
regulations are small entities. Accordingly, we have prepared this
initial regulatory flexibility analysis to present an estimate of the
effect of the proposed regulations on small entities. The Department
welcomes comments on this analysis and requests additional information
to refine it.
Succinct Statement of the Objectives of, and Legal Basis for, the
Proposed Regulations
Section 455(h) of the HEA authorizes the Secretary to specify in
regulation which acts or omissions of an institution of higher
education a borrower may assert as a defense to repayment of a Direct
Loan. Current regulations in Sec. 685.206(c) governing defenses to
repayment have been in place since 1995, but rarely used. Those
regulations specify that a borrower may assert as a defense to
repayment any ``act or omission of the school attended by the student
that would give rise to a cause of action against the school under
applicable State law.'' In response to the collapse of Corinthian, the
Secretary announced in June of 2015 that the Department would develop
new regulations to clarify and streamline the borrower defense process,
in a manner that would protect borrowers and allow the Department to
hold schools accountable for actions that result in loan discharges.
Description of and, Where Feasible, an Estimate of the Number of Small
Entities to Which the Regulations Will Apply
These proposed regulations would affect institutions of higher
education that participate in the Federal Direct Loan Program and
borrowers. Approximately 60 percent of IHEs qualify as small entities,
even though the range of revenues at the non-profit institutions varies
greatly. Using data from the Integrated Postsecondary Education Data
System, the Department estimates that approximately 4,365 IHEs qualify
as small entities--1,891 are not-for-profit institutions, 2,196 are
for-profit institutions with programs of two years or less, and 278 are
for-profit institutions with four-year programs.
Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Regulations, Including an Estimate of
the Classes of Small Entities That Will Be Subject to the Requirement
and the Type of Professional Skills Necessary for Preparation of the
Report or Record
Table 7 relates the estimated burden of each information collection
requirement to the hours and costs estimated in the Paperwork Reduction
Act of 1995 section of the preamble. This additional workload is
discussed in more detail under the Paperwork Reduction Act of 1995
section of the preamble. Additional workload would normally be expected
to result in estimated costs associated with either the hiring of
additional employees or opportunity costs related to the reassignment
of existing staff from other activities. In total, these changes are
estimated to increase burden on small entities participating in the
title IV, HEA programs by 171,250 hours. The monetized cost of this
additional burden on institutions, using wage data developed using BLS
data available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $6,259,193.
This cost was based on an hourly rate of $36.55.
Table 7--Paperwork Reduction Act for Small Entities
----------------------------------------------------------------------------------------------------------------
Reg section OMB Control No. Hours Cost
----------------------------------------------------------------------------------------------------------------
Program Participation Agreement-- 668.14 OMB 1845-0022 939 $34,308
requires school to provide
enrolled students a closed school
discharge application and written
disclosure of the benefits of
consequences of the discharge as
an alternative to completing their
educational program through a
teach-out.
Reporting and Disclosure of 668.41 OMB 1845-0004 64,084 2,342,270
repayment rate outcomes and
letters of credit to enrolled and
prospective students.
Financial Responsibility--reporting 668.171 OMB 1845-0022 1,617 59,094
of actions or triggering events in
668.171(c) no later than 10 days
after action or event occurs.
Alternative Standards and 668.175 OMB 1845-0022 32,336 1,181,881
Requirements--ties amount of
letter of credit to action or
triggering event in 668.171(c).
Borrower defense process--provides 685.222 OMB 1845-NEW 530 19,372
a framework for the borrower
defense process. Institutions
could engage in fact-finding,
provide evidence related to claims
and appeal decisions.
Agreements between an eligible 685.300 OMB 1845-NEW2 71,745 2,622,268
school and the Secretary for
participation in the Direct Loan
Program--prohibits pre-dispute
arbitration agreements for
borrower defense claims, specifies
required agreement and
notification language, and
requires schools to provide copies
of arbitral and judicial filings
to the Secretary.
----------------------------------------------------------------------------------------------------------------
Identification, to the Extent Practicable, of All Relevant Federal
Regulations That May Duplicate, Overlap, or Conflict With the
Regulations
The proposed regulations are unlikely to conflict with or duplicate
existing Federal regulations.
Alternatives Considered
As described above, the Department participated in negotiated
rulemaking when developing the proposed regulations, and considered a
number of options for some of the provisions. Issues considered include
the group discharge process for borrower defense claims, the limitation
periods, the appropriate procedure for considering borrower defense
claims including the role of State AGs, the Department, borrowers, and
institutions, and the continued use of State standards for borrower
defense claims. While no alternatives were aimed specifically at
[[Page 39400]]
small entities, limiting repayment rate warnings to affected
proprietary institutions will reduce the burden on the private not-for-
profit institutions that are a significant portion of small entities
that would be affected by the proposed regulations.
Paperwork Reduction Act of 1995
As part of its continuing effort to reduce paperwork and respondent
burden, the Department provides the general public and Federal agencies
with an opportunity to comment on proposed and continuing collections
of information in accordance with the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The public
understands the Department's collection instructions, respondents can
provide the requested data in the desired format, reporting burden
(time and financial resources) is minimized, collection instruments are
clearly understood, and the Department can properly assess the impact
of collection requirements on respondents.
Sections 668.14, 668.41, 668.171, 668.175, 682.211, 682.402,
685.222, and 685.300 contain information collection requirements. Under
the PRA, the Department has submitted a copy of these sections and an
Information Collections Request to OMB for its review.
A Federal agency may not conduct or sponsor a collection of
information unless OMB approves the collection under the PRA and the
corresponding information collection instrument displays a currently
valid OMB control number. Notwithstanding any other provision of law,
no person is required to comply with, or is subject to penalty for
failure to comply with, a collection of information if the collection
instrument does not display a currently valid OMB control number.
In the final regulations, we will display the control numbers
assigned by OMB to any information collection requirements proposed in
this NPRM and adopted in the final regulations.
Discussion
Section Sec. 668.14--Program Participation Agreement
Requirements
Proposed Sec. 668.14(b)(32) would require, as part of the program
participation agreement, a school to provide to all enrolled students a
closed school discharge application and a written disclosure,
describing the benefits and the consequences of a closed school
discharge as an alternative to completing their educational program
through a teach-out plan after the Department initiates any action to
terminate the participation of the school in any title IV, HEA program
or after the occurrence of any of the events specified in Sec.
668.14(b)(31) that would require the institution to submit a teach-out
plan.
Burden Calculation
From AY 2011-12 to 2014-15 there were 182 institutions that closed
(30 private, 150 proprietary, and 2 public). The number of students who
were enrolled at the institutions at the time of the closure was 43,299
(5,322 at the private institutions, 37,959 at the proprietary
institutions, and 18 at the public institutions). With these figures as
a base, we estimate that there could be 46 schools closing in a given
award year (182 institutions divided by 4 = 45.5) with an average 238
students per institution (43,299 divided by 182 = 237.9).
We estimate that an institution will require two hours to prepare
and process the required written disclosure with a copy of the closed
school discharge application and the necessary mailing list for
currently enrolled students. We anticipate that most schools will
provide this information electronically to their students, thus
decreasing burden and cost.
On average, we estimate that it will take the estimated 8 private
institutions that will close a total of 324 hours (1,904 students x .17
(10 minutes)) to prepare and process the required written disclosure
with a copy of the closed school discharge application and the
necessary mailing list for the estimated 1,904 enrolled students.
On average, we estimate that it will take the estimated 38
proprietary institutions that will close a total of 1,537 hours (9,044
students x .17 (10 minutes)) to prepare and process the required
written disclosure with a copy of the closed school discharge
application and the necessary mailing list for the estimated 9,044
enrolled students.
For Sec. 668.14, the total increase in burden will be 1,861 hours
under OMB Control Number 1845-0022.
Section Sec. 668.41--Reporting and Disclosure of Information
Requirements
Proposed Sec. 668.41(h) would expand the reporting and disclosure
requirements under Sec. 668.41 to provide that, for any fiscal year in
which a proprietary institution's loan repayment rate is equal to or
less than zero, the institution must deliver a warning about its
repayment outcomes to enrolled and prospective students. Institutions
with fewer than 10 borrowers, or that meet the threshold for a low
borrowing rate exemption, would not be required to make the disclosure.
The process through which a proprietary institution would be
informed of its repayment rate, and provided the opportunity to
challenge that rate, is included in proposed Sec. 668.41(h)(5).
Initially, the Department provides to each institution a list composed
of students selected in accordance with the methodology in proposed
Sec. 668.41(h)(3) and discussed above, as well as the draft repayment
rate and the underlying data used to make the calculation. A period of
45 days is allowed for institution to make corrections to the
underlying data. The institution has 45 days following the date it
receives notification of its draft loan repayment rate to challenge the
accuracy of the information used by the Department to calculate the
draft rate. After considering any challenges to its draft loan
repayment rate, the Department notifies the institution of its final
repayment rate.
Under proposed Sec. 668.41(i), institutions that are required to
provide financial protection, including an irrevocable letter of credit
or cash under proposed Sec. 668.175(d), or set-aside under proposed
Sec. 668.175(h), would have to disclose information about that
requirement to both enrolled and prospective students until released
from the letter of credit, or obligation to provide alternative
financial protection, by the Department.
The loan repayment warning under proposed Sec. 668.41(h) and the
financial protection disclosure under proposed Sec. 668.41(i) must be
provided to both enrolled (Sec. 668.41(h)(7)(ii)) and prospective
students (Sec. 668.41(h)(7)(iii)) by hand delivery as part of a
separate document to the student individually or as part of a group
presentation. Alternatively, the warning or disclosure may be sent to
the primary email address or other electronic communication method used
by the institution for communicating with the student. In all cases,
the institution must ensure that the warning or disclosure is the only
substantive content in the message unless the Secretary specifies
additional, contextual language to be included in the message.
Prospective students must be provided with the warning or disclosure
before the student enrolls, registers, or enters into a financial
obligation with the institution.
Under proposed Sec. 668.41(h)(8), all promotional materials made
available by or on behalf of an institution to
[[Page 39401]]
prospective students must prominently include the loan repayment
warning. All promotional materials, including printed materials, about
an institution must be accurate and current at the time they are
published, approved by a State agency or broadcast.
Burden Calculation
There will be burden on schools to review the list identified in
Sec. 668.41(h)(5)(i)(A) and to submit challenges to the accuracy of
the information used to calculate the draft loan repayment rate, as
provided in Sec. 668.41(h)(5)(iii). Based on an analysis of College
Scorecard repayment rate data for 1,174 proprietary institutions, we
estimate that 493 proprietary institutions would not meet the zero
percent or less threshold for the loan repayment rate calculations.
We estimate that it will take institutional staff 20 hours to
review the listing of students included in the initial loan repayment
rate calculations. We estimate that it will take institutional staff
another 35 hours to review the draft loan repayment rate produced by
the Secretary when challenging the accuracy of the information used to
calculate that draft rate. We are estimating a total of 55 hours burden
per institution for institutional activities under proposed Sec.
668.41(h)(5).
We estimate that it will take proprietary institutions a total of
27,115 hours (493 institutions x 55 hours) for an initial review and
subsequent challenge to information used in the calculation of the
institution's repayment rate.
For Sec. 668.41(h)(5), the total increase in burden related to the
calculation, issuance, and challenges of the loan repayment rate will
be 27,115 hours under OMB Control Number 1845-0004.
There will be burden on schools to deliver the loan repayment
warning and the financial repayment disclosure to enrolled and
prospective students under this proposed regulation.
For the loan repayment warning, under proposed Sec.
668.41(h)(7)(i), the Department commits to consumer test the language
of the warning, which the Secretary will publish in a Federal Register
notice. We anticipate that it will take proprietary institutions a
total of 32,045 hours (493 institutions x 65 hours) to produce and
provide the loan repayment warnings to current and prospective
students, ensure that promotional materials include the warning, and
update the institution's Web site.
For Sec. 668.41(h)(7), the total increase in burden related to the
production and dissemination of the loan repayment warnings is 32,045
hours under OMB Control Number 1845-0004.
For the financial protection disclosure, we estimate that it will
take institutions an additional 50 hours to produce and provide the
required financial protection disclosures to current and prospective
students and update the institution's Web site. We estimate that 169
private institutions may have 2 events requiring such reporting for a
total burden of 16,900 hours (169 institutions x 2 events x 50 hours).
We estimate that 392 proprietary institutions may have 3 events
requiring such reporting for a total burden of 58,800 hours (392
institutions x 3 events x 50).
For Sec. 668.41(i), the total increase in burden related to the
production and dissemination of the financial protection disclosures is
75,700 hours under OMB Control Number 1845-0004.
The combined total increase in burden under OMB Control Number
1845-0004 for proposed Sec. 668.41 will be 134,860 hours.
Financial Responsibility
General (34 CFR 668.171)
Requirements
Under proposed Sec. 668.171(d), in accordance with procedures to
be established by the Secretary, an institution would notify the
Secretary of any action or triggering event described in proposed Sec.
668.171(c) no later than 10 days after that action or event occurs.
In that notice, the institution may show that certain actions or
events are not material or that those actions are resolved.
Specifically:
The institution may explain why a judicial or
administrative proceeding the institution disclosed to the SEC does not
constitute a material event.
The institution may demonstrate that a withdrawal of
owner's equity was used solely to meet tax liabilities of the
institution or its owners. Or, where the composite score is calculated
based on the consolidated financial statements of a group of
institutions, the amount withdrawn from one institution in the group
was transferred to another entity within that group.
The institution may show that the creditor waived a
violation of a loan agreement. If the creditor imposes additional
constraints or requirements as a condition of waiving the violation and
continuing with the loan, the institution must identify and describe
those constraints or requirements. In addition, if a default or
delinquency event occurs or other events occur that trigger, or enable
the creditor to require or impose, additional constraints or penalties
on the institution, the institution would be permitted to show why
these actions would not have an adverse financial impact on the
institution.
Burden Calculation
There will be burden on schools to provide the notice to the
Secretary when one of the actions or triggering events identified in
Sec. 668.171(c) occurs. We estimate that an institution will take two
hours per action or triggering event to prepare the appropriate notice
and provide it to the Secretary. We estimate that 169 private
institutions may have 2 events annually to report for a total burden of
676 hours (169 institutions x 2 events x 2 hours). We estimate that 392
proprietary institutions may have 3 events annually to report for total
burden of 2,352 hours (392 institutions x 3 events x 2 hours). We
estimate that 91 public institutions may have 1 event annually to
report for a total burden of 182 hours (91 institutions x 1 event x 2
hours). This total burden of 3,210 hours will be assessed under OMB
Control Number 1845-0022.
Alternative Standards and Requirements (34 CFR 668.175)
Requirements
Under the provisional certification alternative in Sec. 668.175,
we propose to add a new paragraph (f)(4) that ties the amount of the
financial protection that an institution must submit to the Secretary
to an action or triggering event described in proposed Sec.
668.171(c). Specifically, under this alternative, an institution would
be required to provide the Secretary financial protection, such as an
irrevocable letter of credit, for an amount that is:
For a State or Federal action under proposed Sec.
668.171(c)(1)(i)(A) or (B), 10 percent or more, as determined by the
Secretary, of the amount of Direct Loan program funds received by the
institution during its most recently completed fiscal year; and
For repayments to the Secretary for losses from borrower
defense claims under proposed Sec. 668.171(c)(2), the greatest annual
loss incurred by the Secretary during the three most recently completed
award years to resolve those claims or the amount of losses incurred by
the Secretary during the most recently completed award year, whichever
is greater, plus a portion of the amount of any outstanding or pending
claims based on the ratio of the total value of claims resolved in
favor of borrowers during the three most recently completed award years
to the
[[Page 39402]]
total value of claims adjudicated during the three most completed award
years;
For any other action or triggering event described in
proposed Sec. 668.171(c), if the institution's composite score is less
than 1.0, or the institution no longer qualifies under the zone
alternative, 10 percent or more, as determined by the Secretary, of the
total amount of title IV, HEA program funds received by the institution
during its most recently completed fiscal year.
Burden Calculation
There will be burden on schools to provide the required financial
protection, such as a letter of credit, to the Secretary to utilize the
provisional certification alternative. We estimate that an institution
will take 40 hours per action or triggering event to obtain the
required financial protections and provide it to the Secretary. We
estimate that 169 private not-for-profit institutions may have 2 events
annually to report for a total burden of 13,520 hours (169 institutions
x 2 events x 40 hours). We estimate that 392 proprietary institutions
may have 3 events annually to report for total burden of 47,040 hours
(392 institutions x 3 events x 40 hours). We estimate that 91 public
institutions may have 1 event annually to report for a total burden of
3,640 hours (91 institutions x 1 event x 40 hours). This total burden
of 64,200 hours will be assessed under OMB Control Number 1845-0022.
The combined total increase in burden under OMB Control Number
1845-0004 for proposed Sec. 668.41 will be 134,860 (27,115 + 32,045 +
75,700) hours.
The combined total increase in burden under OMB Control Number
1845-0022 for proposed Sec. 668.14, Sec. 668.171, and Sec. 668.175
will be 69,271 (1,861 + 3,210 + 64,200) hours.
Mandatory Administrative Forbearance for FFEL Program Borrowers (Sec.
682.211)
Requirements
Under proposed Sec. 682.211(i)(7), a lender would be required to
grant a mandatory administrative forbearance to a borrower upon being
notified by the Secretary that the borrower has submitted an
application for a borrower defense discharge related to a FFEL Loan
that the borrower intends to pay off through a Direct Loan Program
Consolidation Loan for the purpose of obtaining relief under proposed
Sec. 685.212(k). The administrative forbearance would remain in effect
until the Secretary notifies the lender that a determination has been
made as to the borrower's eligibility for a borrower defense discharge.
If the Secretary notifies the borrower that the borrower would qualify
for a borrower defense discharge if the borrower were to consolidate,
the borrower would then be able to consolidate the loan(s) to which the
defense applies and, if the borrower were to do so, the Secretary would
recognize the defense and discharge that portion of the Consolidation
Loan that paid off the FFEL Loan in question.
Burden Calculation
There will be burden for the current 1,446 FFEL lenders to track
the required mandatory administrative forbearance when they are
notified by the Secretary of the borrower's intention to enter their
FFEL Loans into a Direct Consolidation Loan to obtain a borrower
defense discharge. We estimate that it will take each lender
approximately four hours to develop and program the needed tracking
into their current systems. There will be an estimated burden of 5,480
hours on the 1,370 for-profit lenders (1,370 x 4 = 5,480 hours). There
will be an estimated burden of 304 hours on the 76 not-for-profit
lenders (76 x 4 = 304 hours). The total burden of 5,784 hours will be
assessed under OMB Control Number 1845-0020.
Closed School Discharges--Sec. 682.402
Requirements
Proposed Sec. 682.402(d)(6)(ii)(F) would provide a second level of
Departmental review for denied closed school discharge claims in the
FFEL Program. The proposed regulations would require a guaranty agency
that denies a closed school discharge request to inform the borrower of
the opportunity for a review of the guaranty agency's decision by the
Secretary, and an explanation of how the borrower may request such a
review.
Proposed Sec. 682.402(d)(6)(ii)(I) would require the guaranty
agency or the Department, upon resuming collection, to provide a FFEL
borrower with another closed school discharge application, and an
explanation of the requirements and procedures for obtaining the
discharge.
Proposed Sec. 682.402(d)(6)(ii)(K) would describe the
responsibilities of the guaranty agency if the borrower requests such a
review.
Proposed Sec. 682.402(d)(8)(iii) would authorize the Department,
or a guaranty agency with the Department's permission, to grant a
closed school discharge to a FFEL borrower without a borrower
application based on information in the Department's or guaranty
agency's possession that the borrower did not subsequently re-enroll in
any title IV-eligible institution within a period of three years after
the school closed.
Burden Calculation
There will be burden on guaranty agencies to provide information to
borrowers denied closed school discharge regarding the opportunity for
further review of the discharge request by the Secretary. We estimate
that it will take the 27 guaranty agencies 4 hours to update their
notifications and establish a process for forwarding any requests for
escalated reviews to the Secretary. There will be an estimated burden
of 68 hours on the 17 public guaranty agencies (17 x 4 hours = 68
hours). There will be an estimated burden of 40 hours on the 10 not-
for-profit guaranty agencies (10 x 4 hours = 40 hours). The total
burden of 108 hours will be assessed under OMB Control Number 1845-
0020.
There will be burden on guaranty agencies to, upon receipt of the
request for escalated review from the borrower, forward to the
Secretary the discharge form and any relevant documents. For the period
between 2011 and 2015 there were 43,268 students attending closed
schools, of which 9,606 students received a closed school discharge. It
is estimated that 5 percent of the 43,268, or 2,163, closed school
applications were denied. We estimate that 10 percent or 216 of those
borrowers whose application was denied will request escalated review by
the Secretary. We estimate that the process to forward the discharge
request and any relevant documentation to the Secretary will take .5
hours (30 minutes) per request. There will be an estimated burden of 58
hours on the 17 public guaranty agencies based on an estimated 116
requests (116 x .5 hours = 58 hours). There will be an estimated burden
of 50 hours on the 10 not-for-profit guaranty agencies (100 x .5 hours
= 50 hours). The total burden of 108 hours will be assessed under OMB
Control Number 1845-0020.
The guaranty agencies will have burden assessed based on these
proposed regulations to provide another discharge application to a
borrower upon resuming collection activities with explanation of
process and requirements for obtaining a discharge. We estimate that
for the 2,163 closed school applications that were denied, it will take
the guaranty agencies .5 hours (30 minutes) to provide the borrower
with another discharge application and instructions for filing the
application again. There will be an estimated burden of 582 hours on
the 17 public guaranty agencies based on an estimated 1,163 borrowers
(1,163 x .5 hours = 582
[[Page 39403]]
hours). There will be an estimated burden of 500 hours on the 10 not-
for-profit guaranty agencies (1,000 x .5 hours = 500 hours). The total
burden of 1,082 will be assessed under OMB Control Number 1845-0020.
There will be burden assessed the guaranty agencies to determine
the eligibility of a borrower for a closed school discharge without the
borrower submitting such an application. This requires a review of
those borrowers who attended a closed school but did not apply for a
closed school discharge to determine if the borrower re-enrolled in any
other institution within three years of the school closure. We estimate
that there will be 20 hours of programming to allow for a guaranty
agency to establish a process to review its records for borrowers who
attended a closed school and to determine if any of those borrowers
reenrolled in a title IV-eligible institution within three years. There
will be an estimated burden of 340 hours on the 17 public guaranty
agencies for this programming (17 x 20 hours = 340 hours rounded up).
There will be an estimated burden of 200 hours on the not-for-profit
guaranty agencies for this programming (10 x 20 hours = 200 hours). The
total burden of 540 hours will be assessed under OMB Control Number
1845-0020.
The total burden of 1,838 hours for Sec. 682.402 will be assessed
under OMB Control Number 1845-0020.
The combined total increase in burden under OMB Control Number
1845-0020 for proposed Sec. 682.211 and Sec. 682.402 will be 7,622
hours (5,784 + 108 + 540 + 108 + 1,082).
Process for Individual Borrowers (34 CFR 685.222(e))
Requirements
Proposed Sec. 685.222(e)(1) would describe the steps an individual
borrower must take to initiate a borrower defense claim. First, an
individual borrower would submit an application to the Secretary, on a
form approved by the Secretary. In the application, the borrower would
certify that he or she received the proceeds of a loan to attend a
school; may provide evidence that supports the borrower defense; and
would indicate whether he or she has made a claim with respect to the
information underlying the borrower defense with any third party, and,
if so, the amount of any payment received by the borrower or credited
to the borrower's loan obligation. The borrower would also be required
to provide any other information or supporting documentation reasonably
requested by the Secretary.
While the decision of the Department official would be final as to
the merits of the claim and any relief that may be warranted on the
claim, if the borrower defense is denied in full or in part, the
borrower would be permitted to request that the Secretary reconsider
the borrower defense upon the identification of new evidence in support
of the borrower's claim. ``New evidence'' would be defined as relevant
evidence that the borrower did not previously provide and that was not
identified by the Department official as evidence that was relied upon
for the final decision.
Burden Calculation
There will be burden associated with the filing of the Departmental
form by the borrower asserting a borrower defense claim. We are
conducting a separate information collection review process for the
proposed form to provide for public comment on the form as well as the
estimated burden. A separate information collection review package will
be published in the Federal Register and available through
Regulations.gov for review and comment.
Additionally there will be burden on any borrower whose borrower
defense claim is denied, if they elect to request reconsideration from
the Secretary based on new evidence in support of the borrower's claim.
We estimate that two percent of borrower defense claims received would
be denied and those borrowers would then request reconsideration by
presenting new evidence to support their claim. As of April 27, 2016,
18,688 borrower defense claims had been received. Of that number, we
estimate that 467 borrowers, including those that opt out of a
successful borrower defense group relief, would require .5 hours (30
minutes) to submit the request for reconsideration to the Secretary for
a total of 234 burden hours (467 x .5 hours). This burden will be
assessed under OMB Control Number 1845-NEW.
Group Process for Borrower Defenses--General (34 CFR 685.222(f))
Requirements
Proposed Sec. 685.222(f) would provide a framework for the
borrower defense group process, including descriptions of the
circumstances under which group borrower defense claims could be
considered, and the process the Department would follow for borrower
defenses for a group.
Once a group of borrowers with common facts and claims has been
identified, the Secretary would designate a Department official to
present the group's common borrower defense in the fact-finding
process, and would provide each identified member of the group with
notice that allows the borrower to opt out of the proceeding.
Burden Calculation
There will be burden on any borrower who elects to opt out of the
group process after the Secretary has identified them as a member of a
group for purposes of borrower defense. We estimate that one percent of
borrowers who are identified as part of a group process for borrower
defense claims would opt out of the group claim process. As of April
27, 2016, 18,688 borrower defense claims had been received. Of that
number, we estimate that 187 borrowers would require .08 hours (5
minutes) to submit the request to opt out of the group process to the
Secretary for a total of 15 burden hours (187 x .08 hours). This burden
will be assessed under OMB Control Number 1845-NEW.
Group Process for Borrower Defense--Closed School (34 CFR 685.222(g))
Requirements
Section 685.222(g) of the proposed regulations would establish a
process for review and determination of a borrower defense for groups
identified by the Secretary for which the borrower defense is made with
respect to Direct Loans to attend a school that has closed and has
provided no financial protection currently available to the Secretary
from which to recover any losses based on borrower defense claims, and
for which there is no appropriate entity from which the Secretary can
otherwise practicably recover such losses.
Under proposed Sec. 685.222(g)(1), a hearing official would review
the Department official's basis for identifying the group and resolve
the claim through a fact-finding process. As part of that process, the
hearing official would consider any evidence and argument presented by
the Department official on behalf of the group and on behalf of
individual members of the group. The hearing official would consider
any additional information the Department official considers necessary,
including any Department records or response from the school or a
person affiliated with the school as described Sec. 668.174(b) as
reported to the Department or as recorded in the Department's records
if practicable.
[[Page 39404]]
Burden Calculation
There will be burden on any school which elects to provide records
or response to the hearing official's fact finding. We anticipate that
each group would represent a single institution. We estimate that there
will be four potential groups involving closed schools. We estimate
that the fact-finding process would require 50 hours from 1 private
closed school or persons affiliated with that closed school (1 private
institution x 50 hours). We estimate that the fact-finding process
would require 150 hours from 3 proprietary closed schools or persons
affiliated with that closed school (3 proprietary institutions x 50
hours). We estimate the burden to be 200 hours (4 institutions x 50
hours). This burden will be assessed under OMB Control Number 1845-NEW.
Group Process for Borrower Defense--Open School (34 CFR 685.222(h))
Requirements
Proposed Sec. 685.222(h) would establish the process for groups
identified by the Secretary for which the borrower defense is asserted
with respect to Direct Loans to attend an open school.
A hearing official would resolve the borrower defense and determine
any liability of the school through a fact-finding process. As part of
the process, the hearing official would consider any evidence and
argument presented by the school and the Department official on behalf
of the group and, as necessary, evidence presented on behalf of
individual group members.
The hearing official would issue a written decision. If the hearing
official approves the borrower defense, that decision would describe
the basis for the determination, notify the members of the group of the
relief provided on the basis of the borrower defense, and notify the
school of any liability to the Secretary for the amounts discharged and
reimbursed.
If the hearing official denies the borrower defense in full or in
part, the written decision would state the reasons for the denial, the
evidence that was relied upon, the portion of the loans that are due
and payable to the Secretary, and whether reimbursement of amounts
previously collected is granted, and would inform the borrowers that
their loans will return to their statuses prior to the group borrower
defense process. It also would notify the school of any liability to
the Secretary for any amounts discharged. The Secretary would provide
copies of the written decision to the members of the group, the
Department official and the school.
The hearing official's decision would become final as to the merits
of the group borrower defense claim and any relief that may be granted
within 30 days after the decision is issued and received by the
Department official and the school unless, within that 30-day period,
the school or the Department official appeals the decision to the
Secretary. A decision of the hearing official would not take effect
pending the appeal. The Secretary would render a final decision
following consideration of any appeal.
After a final decision has been issued, if relief for the group has
been denied in full or in part, a borrower may file an individual claim
for relief for amounts not discharged in the group process. In
addition, the Secretary may reopen a borrower defense application at
any time to consider new evidence, as discussed above.
Burden Calculation
There will be burden on any school that provides evidence and
responds to any argument made to the hearing official's fact finding
and if the school elects to appeal the final decision of the hearing
official regarding the group claim. We anticipate that each group would
represent claims from a single institution. We estimate that there will
be six potential groups involving open schools. We estimate that the
fact-finding process would require 150 hours from the 3 open private
institutions or persons affiliated with that school (3 institutions x
50 hours). We estimate that the fact-finding process would require 150
hours from the 3 open proprietary institutions or persons affiliated
with that school (3 institutions x 50 hours). We estimate the burden to
be 300 hours (6 institutions x 50 hours).
We further estimate that the appeal process would require 150 hours
from the 3 open private institutions or persons affiliated with that
school (3 institutions x 50 hours). We estimate that the appeal process
would require 150 hours from the 3 open proprietary institutions or
persons affiliated with that school (3 institutions x 50 hours). We
estimate the burden to be 300 hours (6 institutions x 50 hours). The
total estimated burden for this section will be 600 hours assessed
under OMB Control Number 1845-NEW.
Additionally, any borrower whose borrower defense claim is denied
under the group claim may request reconsideration based on new evidence
to support the individual claim. We believe that the estimate for the
total universe of denied claims in Sec. 685.222(e) includes these
borrowers.
The combined total increase in burden under OMB Control Number
1845-NEW for proposed Sec. 685.222 will be 1,049 hours (234 + 15 + 200
+ 600).
Section 685.300 Agreements Between an Eligible School and the Secretary
for Participation in the Direct Loan Program
Requirements
Proposed Sec. 685.300(e) requires institutions that, after the
effective date of the proposed regulations, incorporate pre-dispute
arbitration or any other pre-dispute agreement addressing class actions
in any agreements with Direct Loan Program borrowers to include
specific language regarding a borrower's right to file or be a member
of a class action suit against the institution when the class action
concerns acts or omissions surrounding the making of the Direct Loan or
provision of educational services purchased with the Direct Loan.
Additionally, in the case of institutions that, prior to the effective
date of the proposed regulations, incorporated pre-dispute arbitration
or any other pre-dispute agreement addressing class actions in any
agreements with Direct Loan Program borrowers, the proposed regulations
would require institutions to provide to borrowers agreements or
notices with specific language regarding a borrower's right to file or
be a member of a class action suit against the institution when the
class action concerns acts or omissions surrounding the making of the
Direct Loan or provision of educational services purchased with the
Direct Loan. Institutions would be required to provide such notices or
agreements to such borrowers no later than at the time of the loan exit
counseling for current students or the date the school files an initial
response to an arbitration demand or complaint suit from a student who
hasn't received such agreement or notice.
Proposed Sec. 685.300(f) would require institutions that, after
the effective date of the proposed regulations, incorporate pre-dispute
arbitration agreements with Direct Loan Program borrowers to include
specific language regarding a borrower's right to file a lawsuit
against the institution when it concerns acts or omissions surrounding
the making of the Direct Loan or provision of educational services
purchased with the Direct Loan. Additionally, in the case of
institutions that, prior to the effective date of the proposed
regulations, incorporated pre-dispute arbitration agreements with
Direct Loan Program borrowers, the proposed regulations would require
institutions to provide to
[[Page 39405]]
borrowers agreements or notices with specific language regarding a
borrower's right to file a lawsuit against the institution when the
class action concerns acts or omissions surrounding the making of the
Direct Loan or provision of educational services purchased with the
Direct Loan. Institutions would be required to provide such agreements
or notices to such borrowers no later than at the time of the loan exit
counseling for current students or the date the school files an initial
response to an arbitration demand or complaint suit from a student who
hasn't received such agreement or notice.
Burden Calculation
There will be burden on any school that meets the conditions for
supplying students with the changes to any agreements. Based on the AY
2014-2015 Direct Loan information available, there were 1,528,714
Unsubsidized Direct Loan recipients at proprietary institutions.
Assuming 66 percent of these students would continue to be enrolled at
the time these regulations become effective there would be 1,008,951
students who would be required to receive the agreements or notices
required by proposed Sec. 685.300(e) or (f). We anticipate that it
will take proprietary institutions .17 hours (10 minutes) per student
to research who is required to receive these agreements or notices,
prepare them, and forward the information accordingly for a total
burden of 171,522 hours (1,008,951 students x .17 hours) assessed under
OMB Control Number 1845-NEW2.
Requirements
Proposed Sec. 685.300(g) requires institutions to provide to the
Secretary copies of specified records connected to a claim filed in
arbitration by or against the school regarding a borrower defense
claim. The school must submit any records within 60 days of the filing
by the school of such records to an arbitrator or upon receipt by the
school of such records that were filed by someone other than the
school, such as an arbitrator or student regarding a claim.
Proposed Sec. 685.300(h) requires institutions to provide to the
Secretary copies of specified records connected to a claim filed in a
lawsuit by the school, a student, or any party against the school
regarding a borrower defense claim. The school must submit any records
within 30 days of the filing or receipt of the complaint by the school
or upon receipt by the school of rulings on a dipositive motion or
final judgement.
Burden Calculation
There will be burden on any school that must provide to the
Secretary copies of specified records connected to a claim filed in
arbitration by or against the school regarding a borrower defense
claim. We estimate that 5 percent of the 1,959 proprietary schools, or
98 schools, would be required to submit documentation to the Secretary
to comply with the proposed regulations. We anticipate that each of the
98 schools would have an average of 4 filings, with an average of four
submissions for each filing. Because these are copies of documents
required to be submitted to other parties we anticipate 5 burden hours
to produce the copies and submit to the Secretary for a total of 7,840
hours (98 institutions x 4 filings x 4 submissions/filing x 5 hours)
assessed under OMB Control Number 1845-NEW2.
The combined total increase in burden under OMB Control Number
1845-NEW2 for proposed Sec. 685.300 will be 179,362 hours (171,522 +
7,840).
Consistent with the discussion above, the following chart describes
the sections of the proposed regulations involving information
collections, the information being collected, and the collections that
the Department will submit to OMB for approval and public comment under
the PRA, and the estimated costs associated with the information
collections. The monetized net costs of the increased burden on
institutions, lenders, guaranty agencies, and borrowers, using wage
data developed using BLS data, available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $14,328,558 as shown in the chart below. This cost was
based on an hourly rate of $36.55 for institutions, lenders, and
guaranty agencies and $16.30 for borrowers.
Collection of Information
----------------------------------------------------------------------------------------------------------------
OMB Control No. and
Regulatory section Information collection estimated burden Estimated
[change in burden] costs
----------------------------------------------------------------------------------------------------------------
Sec. 668.14 Program The proposed regulation would 1845-0022............... $68,025
participation agreement. require, as part of the program This would be a revised
participation agreement, a school collection. We estimate
to provide to all enrolled burden would increase
students with a closed school by 1,861 hours.
discharge application and a
written disclosure, describing the
benefits and the consequences of a
closed school discharge as an
alternative to completing their
educational program through a
teach-out plan after the
Department initiates any action to
terminate the participation of the
school in any title IV, HEA
program or after the occurrence of
any of the events specified in
Sec. 668.14(b)(31) that would
require the institution to submit
a teach-out plan.
Sec. 668.41 Reporting and The proposed regulation would 1845-0004............... 4,929,133
disclosure of information. provide that, for any fiscal year This would be a revised
in which a proprietary collection. We estimate
institution's loan repayment rate burden would increase
is zero percent or less, the by 134,860 hours.
institution must provide a warning
to enrolled and prospective
students about that institution's
repayment outcomes. If an
institution is required to provide
financial protection to the
Secretary, such as an irrevocable
letter of credit or cash under
Sec. 668.175(d) or (f), or to
establish a set-aside under Sec.
668.175(h), the institution must
disclose that protection to
enrolled and prospective students.
Sec. 668.171 Financial The proposed regulations add a new 1845-0022............... 117,326
responsibility--General. paragraph (d) under which, in This would be a revised
accordance with procedures to be collection. We estimate
established by the Secretary, an burden would increase
institution would notify the by 3,210 hours.
Secretary of any action or
triggering event described in Sec.
668.171(c) no later than 10 days
after that action or event occurs.
[[Page 39406]]
Sec. 668.175 Alternative The proposed regulations would add 1845-0022............... 2,346,510
standards and requirements. a new paragraph (f)(4) that ties This would be a revised
the amount of the letter of credit collection. We estimate
that an institution must submit to burden would increase
the Secretary to an action or by 64,200 hours.
triggering event described in Sec.
668.171(c).
Sec. 682.211 Forbearance....... The proposed regulations would add 1845-0020............... 211,405
a new paragraph Sec. This would be a revised
682.211(i)(7) that requires a collection. We estimate
lender to grant a mandatory burden would increase
administrative forbearance to a by 5,784 hours.
borrower upon being notified by
the Secretary that the borrower
has submitted an application for a
borrower defense discharge related
to a FFEL Loan that the borrower
intends to pay off through a
Direct Loan Program Consolidation
Loan for the purpose of obtaining
relief under proposed Sec.
685.212(k).
Sec. 682.402 Death, disability, The proposed regulations would 1845-0020............... 67,179
closed school, false provide a second level of This would be a revised
certification, unpaid refunds, Departmental review for denied collection. We estimate
and bankruptcy payments. closed school discharge claims in burden would increase
the FFEL Program. The proposed by 1,838 hours.
language would require a guaranty
agency that denies a closed school
discharge request to inform the
borrower of the opportunity for a
review of the guaranty agency's
decision by the Department, and an
explanation of how the borrower
may request such a review. The
proposed regulations would require
the guaranty agency or the
Department, upon resuming
collection, to provide a FFEL
borrower with another closed
school discharge application, and
an explanation of the requirements
and procedures for obtaining the
discharge. The proposed
regulations would describe the
responsibilities of the guaranty
agency if the borrower requests
such a review. The proposed
regulations would authorize the
Department, or a guaranty agency
with the Department's permission,
to grant a closed school discharge
to a FFEL borrower without a
borrower application based on
information in the Department's or
guaranty agency's possession that
the borrower did not subsequently
re-enroll in any title IV-eligible
institution within a period of
three years after the school
closed.
Sec. 685.222 Borrower defenses. The proposed regulation would 1845-NEW................ 33,299
describe the steps an individual This would be a new
borrower must take to initiate a collection. We estimate
borrower defense claim. The burden would increase
proposed regulations also would by 1,049 hours.
provide a framework for the
borrower defense group process,
including descriptions of the
circumstances under which group
borrower defense claims could be
considered, and the process the
Department would follow for
borrower defenses for a group. The
proposed regulations would
establish a process for review and
determination of a borrower
defense for groups identified by
the Secretary for which the
borrower defense is made with
respect to Direct Loans to attend
a school that has closed and has
provided no financial protection
currently available to the
Secretary from which to recover
any losses based on borrower
defense claims, and for which
there is no appropriate entity
from which the Secretary can
otherwise practicably recover such
losses. The proposed regulation
would establish the process for
groups identified by the Secretary
for which the borrower defense is
asserted with respect to Direct
Loans to attend an open school.
685.300 Agreements between an The proposed regulations would 1845-NEW2............... 6,555,681
eligible school and the require institutions, following This would be a new
Secretary for participation in the effective date of the collection. We estimate
the Direct Loan Program. regulations, to incorporate burden would increase
language into agreements allowing by 179,362 hours.
participation by Direct Loan
students in class action lawsuits
as well as pre-dispute arbitration
agreements. There is required
agreement and notification
language to be provided to
affected students. Additionally,
the proposed regulations would
require institutions to submit to
the Secretary copies of arbitral
records and judicial records
within specified timeframes when
the actions concern a borrower
defense claim.
----------------------------------------------------------------------------------------------------------------
[[Page 39407]]
The total burden hours and change in burden hours associated with
each OMB Control number affected by the proposed regulations follows:
------------------------------------------------------------------------
Total Proposed
proposed change in
Control No. burden burden
hours hours
------------------------------------------------------------------------
1845-0004..................................... 153,530 134,860
1845-0020..................................... 8,249,520 +7,622
1845-0022..................................... 2,285,241 +69,271
1845-NEW...................................... 1,049 +1,049
1845-NEW2..................................... 179,362 +179,362
Total....................................... 10,868,702 +392,164
------------------------------------------------------------------------
We have prepared Information Collection Requests for these
information collection requirements. If you want to review and comment
on the Information Collection Requests, please follow the instructions
in the ADDRESSES section of this NPRM.
Note: The Office of Information and Regulatory Affairs in OMB
and the Department review all comments posted at
www.regulations.gov.
In preparing your comments, you may want to review the Information
Collection Requests, including the supporting materials, in
www.regulations.gov by using the Docket ID number specified in this
NPRM. These proposed collections are identified as proposed collections
1845-0004, 1845-0020, 1845-0022, 1845-NEW, and 1845-NEW2.
We consider your comments on these proposed collections of
information in--
Deciding whether the proposed collections are necessary
for the proper performance of our functions, including whether the
information will have practical use;
Evaluating the accuracy of our estimate of the burden of
the proposed collections, including the validity of our methodology and
assumptions;
Enhancing the quality, usefulness, and clarity of the
information we collect; and
Minimizing the burden on those who must respond. This
includes exploring the use of appropriate automated, electronic,
mechanical, or other technological collection techniques.
Between 30 and 60 days after publication of this document in the
Federal Register, OMB is required to make a decision concerning the
collections of information contained in these proposed regulations.
Therefore, to ensure that OMB gives your comments full consideration,
it is important that OMB receives your comments on these Information
Collection Requests by July 18, 2016. This does not affect the deadline
for your comments to us on the proposed regulations.
If your comments relate to the Information Collection Requests for
these proposed regulations, please specify the Docket ID number and
indicate ``Information Collection Comments'' on the top of your
comments.
Intergovernmental Review
These programs are not subject to Executive Order 12372 and the
regulations in 34 CFR part 79.
Assessment of Educational Impact
In accordance with section 411 of the General Education Provisions
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on
whether these proposed regulations would require transmission of
information that any other agency or authority of the United States
gathers or makes available.
Accessible Format: Individuals with disabilities can obtain this
document in an accessible format (e.g., braille, large print,
audiotape, or compact disc) on request to one of the persons listed
under FOR FURTHER INFORMATION CONTACT.
Electronic Access to This Document: The official version of this
document is the document published in the Federal Register. Free
Internet access to the official edition of the Federal Register and the
Code of Federal Regulations is available via the Federal Digital System
at: www.thefederalregister.org/fdsys. At this site you can view this document, as well
as all other documents of this Department published in the Federal
Register, in text or PDF. To use PDF you must have Adobe Acrobat
Reader, which is available free at the site.
You may also access documents of the Department published in the
Federal Register by using the article search feature at:
www.federalregister.gov. Specifically, through the advanced search
feature at this site, you can limit your search to documents published
by the Department.
(Catalog of Federal Domestic Assistance Number does not apply.)
List of Subjects
34 CFR Part 30
Claims, Income taxes.
34 CFR Part 668
Administrative practice and procedure, Colleges and universities,
Consumer protection, Grant programs--education, Loan programs--
education, Reporting and recordkeeping requirements, Selective Service
System, Student aid, Vocational education.
34 CFR Part 674
Loan programs--education, Reporting and recordkeeping, Student aid.
34 CFR Parts 682 and 685
Administrative practice and procedure, Colleges and universities,
Loan programs--education, Reporting and recordkeeping requirements,
Student aid, Vocational education.
34 CFR Part 686
Administrative practice and procedure, Colleges and universities,
Education, Elementary and secondary education, Grant programs--
education, Reporting and recordkeeping requirements, Student aid.
Dated: June 9, 2016.
John B. King, Jr.,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary of
Education proposes to amend parts 30, 668, 674, 682, 685, and 686 of
title 34 of the Code of Federal Regulations as follows:
PART 30--DEBT COLLECTION
0
1. The authority citation for part 30 continues to read as follows:
Authority: 20 U.S.C. 1221e-3(a)(1), and 1226a-1, 31 U.S.C.
3711(e), 31 U.S.C. 3716(b) and 3720A, unless otherwise noted.
0
2. Section 30.70 is revised to read as follows:
Sec. 30.70 How does the Secretary exercise discretion to compromise a
debt or to suspend or terminate collection of a debt?
(a)(1) The Secretary uses the standards in the FCCS, 31 CFR part
902, to determine whether compromise of a debt is appropriate if the
debt arises under a program administered by the Department, unless
compromise of the debt is subject to paragraph (b) of this section.
(2) If the amount of the debt is more than $100,000, or such higher
amount as the Department of Justice may prescribe, the Secretary refers
a proposed compromise of the debt to the Department of Justice for
approval, unless the compromise is subject to paragraph (b) of this
section or the debt is one described in paragraph (e) of this section.
(b) Under the provisions in 34 CFR 81.36, the Secretary may enter
into certain compromises of debts arising because a recipient of a
grant or cooperative agreement under an applicable Department program
has spent some of these funds in a manner that is not allowable. For
purposes of this section, neither a program authorized under the Higher
Education
[[Page 39408]]
Act of 1965, as amended (HEA), nor the Impact Aid Program is an
applicable Department program.
(c)(1) The Secretary uses the standards in the FCCS, 31 CFR part
903, to determine whether suspension or termination of collection
action on a debt is appropriate.
(2) Except as provided in paragraph (e), the Secretary--
(i) Refers the debt to the Department of Justice to decide whether
to suspend or terminate collection action if the amount of the debt
outstanding at the time of the referral is more than $100,000 or such
higher amount as the Department of Justice may prescribe; or
(ii) May suspend or terminate collection action if the amount of
the debt outstanding at the time of the Secretary's determination that
suspension or termination is warranted is less than or equal to
$100,000 or such higher amount as the Department of Justice may
prescribe.
(d) In determining the amount of a debt under paragraph (a), (b),
or (c) of this section, the Secretary deducts any partial payments or
recoveries already received, and excludes interest, penalties, and
administrative costs.
(e)(1) Subject to paragraph (e)(2) of this section, under the
provisions of 31 CFR part 902 or 903, the Secretary may compromise a
debt in any amount, or suspend or terminate collection of a debt in any
amount, if the debt arises under the Federal Family Education Loan
Program authorized under title IV, part B, of the HEA, the William D.
Ford Federal Direct Loan Program authorized under title IV, part D of
the HEA, or the Perkins Loan Program authorized under title IV, part E,
of the HEA.
(2) The Secretary refers a proposed compromise, or suspension or
termination of collection, of a debt that exceeds $1,000,000 and that
arises under a loan program described in paragraph (e)(1) of this
section to the Department of Justice for review. The Secretary does not
compromise, or suspend or terminate collection of, a debt referred to
the Department of Justice for review until the Department of Justice
has provided a response to that request.
(f) The Secretary refers a proposed resolution of a debt to the
Government Accountability Office (GAO) for review and approval before
referring the debt to the Department of Justice if--
(1) The debt arose from an audit exception taken by GAO to a
payment made by the Department; and
(2) The GAO has not granted an exception from the GAO referral
requirement.
(g) Nothing in this section precludes--
(1) A contracting officer from exercising his authority under
applicable statutes, regulations, or common law to settle disputed
claims relating to a contract; or
(2) The Secretary from redetermining a claim.
(h) Nothing in this section authorizes the Secretary to compromise,
or suspend or terminate collection of, a debt--
(1) Based in whole or in part on conduct in violation of the
antitrust laws; or
(2) Involving fraud, the presentation of a false claim, or
misrepresentation on the part of the debtor or any party having an
interest in the claim.
(Authority: 20 U.S.C. 1082(a)(5) and (6), 1087a, 1087hh, 1221e-
3(a)(1), 1226a-1, and 1234a, 31 U.S.C. 3711)
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
0
3. The authority citation for part 668 is revised to read as follows:
Authority: 20 U.S.C. 1001-1003, 1070g, 1085, 1088, 1091, 1092,
1094, 1099c, 1099c-1, 1221-3, and 1231a, unless otherwise noted.
0
4. Section 668.14 is amended by:
0
A. In paragraph (b)(30)(ii)(C), removing the word ``and''.
0
B. In paragraph (b)(31)(v), removing the period and adding, in its
place, the punctuation and word ``; and''.
0
C. Adding a new paragraph (b)(32).
The addition reads as follows:
Sec. 668.14 Program participation agreement.
* * * * *
(b) * * *
(32) The institution will provide all enrolled students with a
closed school discharge application and a written disclosure,
describing the benefits and consequences of a closed school discharge
as an alternative to completing their educational program through a
teach-out agreement, as defined in 34 CFR 602.3, immediately upon
submitting a teach-out plan after the occurrence of any of the
following events:
(i) The initiation by the Secretary of an action to terminate the
participation of an institution in any title IV, HEA program under 34
CFR 600.41 or subpart G of this part or the initiation of an emergency
action under Sec. 668.83; or
(ii) The occurrence of any of the events in paragraph (b)(31)(ii)-
(v) of this section.
* * * * *
0
5. Section 668.41 is amended by:
0
A. Adding new paragraphs (h) and (i).
0
B. Revising the authority citation.
The additions and revision read as follows:
Sec. Sec. 668.41 Reporting and disclosure of information.
* * * * *
(h) Loan repayment warning for proprietary institutions--(1)
General. For any fiscal year in which a proprietary institution's loan
repayment rate is equal to or less than zero, the institution must
deliver a warning to enrolled and prospective students in the manner
described in paragraphs (h)(7) and (8) of this section.
(2) Definitions. For purposes of this section, the term--
(i) ``Fiscal year'' means the 12-month period beginning on October
1 and ending on the following September 30 that is identified by the
calendar year in which it ends;
(ii) ``Original outstanding balance'' (OOB) means the amount of the
outstanding balance, including accrued interest, on the Direct Loans
owed by a student for enrollment at the institution on the date the
loans first entered repayment. The OOB does not include PLUS loans made
to parent borrowers or TEACH Grant-related loans. For consolidation
loans, the OOB includes only those loans attributable to the borrower's
enrollment at the institution;
(iii) ``Current outstanding balance'' (COB) means the amount of the
outstanding balance, including capitalized and uncapitalized interest,
on the Direct Loans owed by the student at the end of the most recently
completed fiscal year; and
(iv) ``Measurement period'' is the period of time between the date
that a borrower's loan enters repayment and the end of the fiscal year
for which the COB of that loan is determined.
(3) Methodology. For each fiscal year, the Secretary calculates an
institution's loan repayment rate for the cohort of borrowers whose
Direct Loans entered repayment at any time during the fifth fiscal year
prior to the most recently completed fiscal year by--
(i) Determining the OOB of the loans for each of those borrowers;
(ii) Determining the COB of the loans for each of those borrowers;
(iii) Calculating the difference between the OOB and the COB of the
loans for each of those borrowers and expressing that difference as a
percentage reduction of, or an increase in, the OOB;
(iv) Using zero as the value for any loan on which the borrower
defaulted for which there is a percentage reduction of the OOB; and
[[Page 39409]]
(v) On a scale where percentage reductions in principal are
positive values and percentage increases in principal are negative
values, determining the median value. The median value is the loan
repayment rate for that fiscal year.
(4) Exclusions. The Secretary excludes a borrower from the
calculation of the loan repayment rate if--
(i) One or more of the borrower's loans were in a military-related
deferment status during the last fiscal year of the measurement period;
(ii) One or more of the borrower's loans are either under
consideration by the Secretary, or have been approved, for a discharge
on the basis of the borrower's total and permanent disability, under
Sec. 685.213;
(iii) The borrower was enrolled in an eligible institution during
the last fiscal year of the measurement period; or
(iv) The borrower died.
(5) Issuing and correcting loan repayment rates. In accordance with
procedures established by the Secretary--
(i) Before issuing a final loan repayment rate for a fiscal year,
the Secretary--
(A) Provides to the institution a list of the students in the
cohort described in paragraph (h)(3) of this section, the draft
repayment rate for that cohort, and the information used to calculate
the draft rate; and
(B) Allows 45 days for the institution to challenge the accuracy of
the information that the Secretary used to calculate the draft rate;
and
(ii) After considering any challenges to the draft loan repayment
rate, the Secretary notifies the institution of its final repayment
rate.
(iii) If an institution's final loan repayment rate is equal to or
less than zero--
(A) Using the calculation described in paragraph (h)(6)(ii) of this
section, the institution may submit an appeal to the Secretary within
15 days of receiving notification of its final repayment rate; and
(B) The Secretary will notify the institution if the appeal is
accepted and the institution qualifies for an exemption from the
warning requirement under paragraph (h)(7) of this section.
(6) Privacy and low borrowing considerations. An institution is not
required to deliver a warning under paragraph (h)(7) of this section
based on a final repayment rate for that fiscal year if the institution
demonstrates to the Secretary's satisfaction that--
(i) That rate is based on fewer than 10 borrowers in the cohort
described in paragraph (h)(3) of this section; or
(ii) The institution's participation rate index is less than or
equal to 0.0625. An institution calculates its participation rate index
as if its cohort default rate were 30 percent, using the formula
described in Sec. 668.214(b)(1).
(7) Student warnings -- (i) General. An institution must deliver
the warning required under this section to enrolled and prospective
students in a form and manner prescribed by the Secretary in a notice
published in the Federal Register. Before publishing that notice, the
Secretary will conduct consumer testing to help ensure that the warning
is meaningful and helpful to students.
(ii) Delivery to enrolled students. An institution must deliver the
warning required under this section by notifying each enrolled student
in writing no later than 30 days after the Secretary informs the
institution of its final loan repayment rate by--
(A)(1) Hand-delivering the warning as a separate document to the
student individually or as part of a group presentation; or
(2) Sending the warning to the student's primary email address or
delivering the warning through the electronic method used by the
institution for communicating with the student about institutional
matters; and
(B) Ensuring that the warning is the only substantive content in
the message sent to the student under this paragraph unless the
Secretary specifies additional, contextual language to be included in
the message.
(iii) Delivery to prospective students. An institution must provide
the warning required under this paragraph (h) to a prospective student
before that student enrolls, registers, or enters into a financial
obligation with the institution by--
(A)(1) Hand-delivering the warning as a separate document to the
student individually, or as part of a group presentation; or
(2) Sending the warning to the student's primary email address or
delivering the warning through the electronic method used by the
institution for communicating with prospective students about
institutional matters; and
(B) Ensuring that the warning is the only substantive content in
the message sent to the student under this paragraph unless the
Secretary specifies additional, contextual language to be included in
the message.
(8) Promotional materials. (i) If an institution is required to
deliver a warning under paragraph (h)(1) of this section, it must, in
all promotional materials that are made available to prospective or
enrolled students by or on behalf of the institution, include the
warning under paragraph (h)(7) of this section, in a prominent manner.
(ii) Promotional materials include, but are not limited to, an
institution's Web site, catalogs, invitations, flyers, billboards, and
advertising on or through radio, television, print media, social media,
or the Internet.
(iii) The institution must ensure that all promotional materials,
including printed materials, about the institution are accurate and
current at the time they are published, approved by a State agency, or
broadcast.
(9) Institutional Web site. (i) An institution must prominently
provide the warning required in this section in a simple and meaningful
manner on the home page of the institution's Web site.
(ii) The warning must be posted to the institution's Web site no
later than 30 days after the date the Secretary informs the institution
of its final loan repayment rate, and remain posted to that Web site
for the 12-month period following the date on which the Secretary
informs the institution of its final loan repayment rate.
(i) Financial protection disclosures. If an institution is required
to provide financial protection to the Secretary, such as an
irrevocable letter of credit or cash under Sec. 668.175(d) or (f), or
to establish a set-aside under Sec. 668.175(h), the institution must--
(1) Disclose information about that financial protection to
enrolled and prospective students in the manner described in paragraph
(h)(7) of this section;
(2) Post the disclosure on the home page of the institution's Web
site in the manner described in paragraph (h)(9) of this section no
later than 30 days after the date the Secretary informs the institution
of the need for the institution to provide financial protection, until
such time as the Secretary releases the institution from the
requirement that it provide financial protection; and
(3) Identify and explain clearly in that disclosure the reason or
reasons that the institution was required to provide that financial
protection.
(Authority: 20 U.S.C. 1092, 1094, 1099c)
Sec. 668.71 [Amended]
0
6. Section 668.71 is amended by:
0
A. In the second sentence of the definition of ``Misrepresentation'' in
paragraph (c), removing the word ``deceive'' and adding in its place
the words ``mislead under the circumstances''.
[[Page 39410]]
0
B. In the definition of ``Misrepresentation'' in paragraph (c), adding
a new fourth sentence, ``Misrepresentation includes any statement that
omits information in such a way as to make the statement false,
erroneous, or misleading.''
0
7. Section 668.90 is amended by revising paragraph (a)(3) to read as
follows:
Sec. 668.90 Initial and final decisions.
(a) * * *
(3) Notwithstanding the provisions of paragraph (a)(2) of this
section--
(i) If, in a termination action against an institution, the hearing
official finds that the institution has violated the provisions of
Sec. 668.14(b)(18), the hearing official also finds that termination
of the institution's participation is warranted;
(ii) If, in a termination action against a third-party servicer,
the hearing official finds that the servicer has violated the
provisions of Sec. 668.82(d)(1), the hearing official also finds that
termination of the institution's participation or servicer's
eligibility, as applicable, is warranted;
(iii) In an action brought against an institution or third-party
servicer that involves its failure to provide a letter of credit or
other financial protection in the amount specified by the Secretary
under Sec. 668.15 or subpart L of part 668, the hearing official finds
that the amount of the letter of credit or other financial protection
established by the Secretary is appropriate, unless the institution can
demonstrate that the amount was not warranted because--
(A) The events or conditions identified by the Secretary as the
grounds on which the protection is required no longer exist or have
been resolved in a manner that eliminates the risk they posed to the
institution's ability to meet its financial obligations; or
(B) The institution has proffered alternative financial protection
that provides students and the Department adequate protection against
losses resulting from the risks identified by the Secretary. Adequate
protection consists of one or both of the following--
(1) A deposit with the Secretary of cash in the amount of financial
protection demanded by the Secretary to be held by the Secretary in
escrow; or
(2) An agreement with the Secretary that a portion of the funds
earned by the institution under a reimbursement funding arrangement
will be temporarily withheld in such amounts as will meet, by the end
of a nine-month period, the amount of the required financial protection
demanded;
(iv) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer
failed to comply with the requirements of Sec. 668.23(c)(3), if the
hearing official finds that the institution or servicer failed to meet
those requirements, the hearing official finds that the termination is
warranted;
(v)(A) In a termination action against an institution based on the
grounds that the institution is not financially responsible under Sec.
668.15(c)(1), the hearing official finds that the termination is
warranted unless the institution demonstrates that all applicable
conditions described in Sec. 668.15(d)(4) have been met; and
(B) In a termination or limitation action against an institution
based on the grounds that the institution is not financially
responsible--
(1) Upon proof of the conditions in Sec. 668.174(a), the hearing
official finds that the limitation or termination is warranted unless
the institution demonstrates that all the conditions in Sec.
668.175(f) have been met; and
(2) Upon proof of the conditions in Sec. 668.174(b)(1), the
hearing official finds that the limitation or termination is warranted
unless the institution demonstrates that all applicable conditions
described in Sec. 668.174(b)(2) or Sec. 668.175(g) have been met.
* * * * *
0
8. Section 668.93 is amended by redesignating paragraphs (h) and (i) as
paragraphs (i) and (j), respectively, and adding a new paragraph (h),
to read as follows:
Sec. 668.93 Limitation.
* * * * *
(h) A change in the participation status of the institution from
fully certified to participate to provisionally certified to
participate under Sec. 668.13(c).
* * * * *
0
9. Section 668.171 is revised to read as follows:
Sec. 668.171 General.
(a) Purpose. To begin and to continue to participate in any title
IV, HEA program, an institution must demonstrate to the Secretary that
it is financially responsible under the standards established in this
subpart. As provided under section 498(c)(1) of the HEA, the Secretary
determines whether an institution is financially responsible based on
the institution's ability to--
(1) Provide the services described in its official publications and
statements;
(2) Meet all of its financial obligations; and
(3) Provide the administrative resources necessary to comply with
title IV, HEA program requirements.
(b) General standards of financial responsibility. Except as
provided under paragraphs (c) and (d) of this section, the Secretary
considers an institution to be financially responsible if the Secretary
determines that--
(1) The institution's Equity, Primary Reserve, and Net Income
ratios yield a composite score of at least 1.5, as provided under Sec.
668.172 and appendices A and B to this subpart;
(2) The institution has sufficient cash reserves to make required
returns of unearned title IV, HEA program funds, as provided under
Sec. 668.173;
(3) The institution is able to meet all of its financial
obligations and otherwise provide the administrative resources
necessary to comply with title IV, HEA program requirements; and
(4) The institution or persons affiliated with the institution are
not subject to a condition of past performance under Sec. 668.174(a)
or (b).
(c) Actions and triggering events. An institution is not able to
meet its financial or administrative obligations under paragraph (b)(3)
of this section if it is subject to one or more of the following
actions or triggering events.
(1) Lawsuits and other actions. (i)(A) Currently or at any time
during the three most recently completed award years, the institution
is or was required to pay a debt or incurs a liability arising from an
audit, investigation, or similar action initiated by a State, Federal,
or other oversight entity, or settles or resolves a suit brought
against it by that entity, that is based on claims related to the
making of a Federal loan or the provision of educational services, for
an amount that, for one or more of those years, exceeds the lesser of
the threshold amount for which an audit is required under 2 CFR part
200 or 10 percent of its current assets; or
(B) The institution is currently being sued by a State, Federal, or
other oversight entity based on claims related to the making of a
Federal loan or the provision of educational services for an amount
that exceeds the lesser of the threshold amount for which an audit is
required under 2 CFR part 200 or 10 percent of its current assets;
(ii) The institution is currently being sued by one or more State,
Federal, or other oversight entities based on claims of any kind that
are not described in paragraph (c)(1)(i)(B) of this section, and the
potential monetary sanctions or damages from that suit or suits are in
an amount that exceeds 10 percent of its current assets;
[[Page 39411]]
(iii) The institution is currently being sued in a lawsuit filed
under the False Claims Act, 31 U.S.C. 3729 et seq., or by one or more
private parties for claims that relate to the making of loans to
students for the purpose of enrollment or the institution's provision
of educational services, if that suit--
(A) Has survived a motion for summary judgment by the institution
and has not been dismissed; and
(B) Seeks relief in an amount that exceeds 10 percent of the
institution's current assets; or
(iv) For a suit described in paragraph (c)(1)(ii) or (iii) of this
section, during a fiscal year for which the institution has not
submitted its audited financial statements to the Secretary, the
institution entered into a settlement, had judgment entered against it,
incurred a liability, or otherwise resolved that suit for an amount
that exceeds 10 percent of its current assets.
(v) In determining whether a suit or action under this paragraph
exceeds the audit or percentage thresholds, the institution must--
(A) Except for private party suits under paragraph (c)(1)(iii) of
this section, for a suit or action that does not demand a specific
amount as relief, calculate that amount by totaling the tuition and
fees the institution received from every student who was enrolled at
the institution during the period for which the relief is sought, or if
no period is stated, the three award years preceding the date the suit
or action was filed or initiated; and
(B) Use the amount of current assets reported in its most recent
audited financial statements submitted to the Secretary.
(2) Repayments to the Secretary. During the current award year or
any of the three most recently completed award years, the institution
is or was required to repay the Secretary for losses from borrower
defense claims in an amount that, for one or more of those years,
exceeds the lesser of the threshold amount for which an audit is
required under 2 CFR part 200 or 10 percent of its current assets, as
reported in its most recent audited financial statements submitted to
the Secretary.
(3) Accrediting agency actions. Currently or any time during the
three most recently completed award years, the institution is or was--
(i) Required by its accrediting agency to submit a teach-out plan,
for a reason described in Sec. 602.24(c)(1), that covers the
institution or any of its branches or additional locations; or
(ii) Placed on probation or issued a show-cause order, or placed on
an accreditation status that poses an equivalent or greater risk to its
accreditation, by its accrediting agency for failing to meet one or
more of the agency's standards, and the accrediting agency does not
notify the Secretary within six months of taking that action that it
has withdrawn that action because the institution has come into
compliance with the agency's standards.
(4) Loan agreements and obligations. As disclosed in a note to its
audited financial statements or audit opinion, or reported by the
institution under paragraph (d) of this section--
(i) The institution violated a provision or requirement in a loan
agreement with the creditor with the largest secured extension of
credit to the institution;
(ii) The institution failed to make a payment for more than 120
days in accordance with its debt obligations owed to the creditor with
the largest secured extension of credit to the institution; or
(iii) As provided under the terms of a security or loan agreement
between the institution and the creditor with the largest secured
extension of credit to the institution, a monetary or nonmonetary
default or delinquency event occurs, or other events occur that
trigger, or enable the creditor to require or impose on the
institution, an increase in collateral, a change in contractual
obligations, an increase in interest rates or payments, or other
sanctions, penalties, or fees.
(5) Non-title IV revenue. For its most recently completed fiscal
year, a proprietary institution did not derive at least 10 percent of
its revenue from sources other than title IV, HEA program funds, as
provided under Sec. 668.28(c).
(6) Publicly traded institutions. As reported by the institution
under paragraph (d) of this section, or identified by the Secretary--
(i) The Securities and Exchange Commission (SEC) warns the
institution that it may suspend trading on the institution's stock, or
the institution's stock is delisted involuntarily from the exchange on
which the stock was traded;
(ii) The institution disclosed or was required to disclose in a
report filed with the SEC a judicial or administrative proceeding
stemming from a complaint filed by a person or entity that is not part
of a State or Federal action under paragraph (c)(1) of this section;
(iii) The institution failed to file timely a required annual or
quarterly report with the SEC; or
(iv) The exchange on which the institution's stock is traded
notifies the institution that it is not in compliance with exchange
requirements.
(7) Gainful employment. As determined annually by the Secretary,
the number of students who receive title IV, HEA program funds enrolled
in gainful employment programs that are failing or in the zone under
the D/E rates measure in Sec. 668.403(c) is more than 50 percent of
the total number of students who received title IV program funds who
are enrolled in all the gainful employment programs at the institution.
An institution is exempt from this provision if less than 50 percent of
all the students enrolled at the institution who receive title IV, HEA
program funds are enrolled in gainful employment programs.
(8) Withdrawal of owner's equity. For an institution whose
composite score is less than 1.5, any withdrawal of owner's equity from
the institution by any means, including by declaring a dividend.
(9) Cohort default rates. The institution's two most recent
official cohort default rates are 30 percent or greater, as determined
under subpart N of this part, unless--
(i) The institution files a challenge, request for adjustment, or
appeal under that subpart with respect to its rates for one or both of
those fiscal years; and
(ii) That challenge, request, or appeal remains pending, results in
reducing below 30 percent the official cohort default rate for either
or both years, or precludes the rates from either or both years from
resulting in a loss of eligibility or provisional certification.
(10) Other events or conditions. The Secretary determines that
there is an event or condition that is reasonably likely to have a
material adverse effect on the financial condition, business, or
results of operations of the institution, including but not limited to
whether--
(i) There is a significant fluctuation between consecutive award
years, or a period of award years, in the amount of Direct Loan or Pell
Grant funds, or a combination of those funds, received by the
institution that cannot be accounted for by changes in those programs;
(ii) The institution is cited by a State licensing or authorizing
agency for failing State or agency requirements;
(iii) The institution fails a financial stress test developed or
adopted by the Secretary to evaluate whether the institution has
sufficient capital to absorb losses that may be incurred as a result of
adverse conditions and continue to meet its financial obligations to
the Secretary and students;
(iv) The institution or its corporate parent has a non-investment
grade bond or credit rating;
[[Page 39412]]
(v) As calculated by the Secretary, the institution has high annual
dropout rates; or
(vii) Any adverse event reported by the institution on a Form 8-K
filed with the SEC.
(d) Reporting requirements. In accordance with procedures
established by the Secretary, an institution must notify the Secretary
of any action or event identified in paragraph (c) of this section no
later than 10 days after that action or event occurs. The Secretary may
take an administrative action under paragraph (g) of this section
against the institution if it fails to provide timely notice under this
paragraph. In its notice to the Secretary, the institution may
demonstrate that--
(1) The reported disclosure of a judicial or administrative
proceeding under paragraph (c)(6)(ii) of this section does not
constitute a material event;
(2) The reported withdrawal of owner's equity under paragraph
(c)(8) of this section was used exclusively to meet tax liabilities of
the institution or its owners for income derived from the institution,
or, in the case where the composite score is calculated based on the
consolidated financial statements of a group of institutions, the
amount withdrawn from one institution in the group was transferred to
another entity within that group; or
(3) The reported violation of a provision or requirement in a loan
agreement under paragraph (c)(4) of this section was waived by the
creditor. However, if the creditor imposes additional constraints or
requirements as a condition of waiving the violation, or imposes
penalties or requirements under paragraph (c)(4)(iii) of this section,
the institution must identify and describe those penalties,
constraints, or requirements and demonstrate that complying with those
actions will not adversely affect the institution's ability to meet its
current and future financial obligations.
(e) Public institutions. (1) The Secretary considers a domestic
public institution to be financially responsible if the institution--
(i)(A) Notifies the Secretary that it is designated as a public
institution by the State, local, or municipal government entity, tribal
authority, or other government entity that has the legal authority to
make that designation; and
(B) Provides a letter from an official of that State or other
government entity confirming that the institution is a public
institution; and
(ii) Is not subject to a condition of past performance under Sec.
668.174.
(2) The Secretary considers a foreign public institution to be
financially responsible if the institution--
(i)(A) Notifies the Secretary that it is designated as a public
institution by the country or other government entity that has the
legal authority to make that designation; and
(B) Provides documentation from an official of that country or
other government entity confirming that the institution is a public
institution and is backed by the full faith and credit of the country
or other government entity; and
(ii) Is not subject to a condition of past performance under Sec.
668.174.
(f) Audit opinions. Even if an institution satisfies all of the
general standards of financial responsibility under paragraph (b) of
this section, the Secretary does not consider the institution to be
financially responsible if, in the institution's audited financial
statements, the opinion expressed by the auditor was an adverse,
qualified, or disclaimed opinion, or the auditor expressed doubt about
the continued existence of the institution as a going concern, unless
the Secretary determines that a qualified or disclaimed opinion does
not significantly bear on the institution's financial condition.
(g) Administrative actions. If the Secretary determines that an
institution is not financially responsible under the standards and
provisions of this section or under an alternative standard in Sec.
668.175, or the institution does not submit its financial and
compliance audits by the date and in the manner required under Sec.
668.23, the Secretary may--
(1) Initiate an action under subpart G of this part to fine the
institution, or limit, suspend, or terminate the institution's
participation in the title IV, HEA programs; or
(2) For an institution that is provisionally certified, take an
action against the institution under the procedures established in
Sec. 668.13(d).
(Authority: 20 U.S.C. 1094 and 1099c and section 4 of Pub. L. 95-
452, 92 Stat. 1101-1109)
0
10. Section 668.175 is amended by:
0
A. Revising paragraphs (d) and (f).
0
B. Removing and reserving paragraph (e).
0
C. Adding paragraph (h).
0
D. Revising the authority citation.
The revisions and addition read as follows:
Sec. 668.175 Alternative standards and requirements.
* * * * *
(d) Zone alternative. (1) A participating institution that is not
financially responsible solely because the Secretary determines that
its composite score is less than 1.5 may participate in the title IV,
HEA programs as a financially responsible institution for no more than
three consecutive years, beginning with the year in which the Secretary
determines that the institution qualifies under this alternative.
(i)(A) An institution qualifies initially under this alternative
if, based on the institution's audited financial statement for its most
recently completed fiscal year, the Secretary determines that its
composite score is in the range from 1.0 to 1.4; and
(B) An institution continues to qualify under this alternative if,
based on the institution's audited financial statement for each of its
subsequent two fiscal years, the Secretary determines that the
institution's composite score is in the range from 1.0 to 1.4.
(ii) An institution that qualified under this alternative for three
consecutive years, or for one of those years, may not seek to qualify
again under this alternative until the year after the institution
achieves a composite score of at least 1.5, as determined by the
Secretary.
(2) Under the zone alternative, the Secretary--
(i) Requires the institution to make disbursements to eligible
students and parents, and to otherwise comply with the provisions,
under either the heightened cash monitoring or reimbursement payment
method described in Sec. 668.162;
(ii) Requires the institution to provide timely information
regarding any of the following oversight and financial events--
(A) Any event that causes the institution, or related entity as
defined in Accounting Standards Codification (ASC) 850, to realize any
liability that was noted as a contingent liability in the institution's
or related entity's most recent audited financial statement; or
(B) Any losses that are unusual in nature or infrequently occur or
both, as defined in accordance with Accounting Standards Update (ASU)
No. 2015-01 and ASC 225;
(iii) May require the institution to submit its financial statement
and compliance audits earlier than the time specified under Sec.
668.23(a)(4); and
(iv) May require the institution to provide information about its
current operations and future plans.
(3) Under the zone alternative, the institution must--
(i) For any oversight or financial event described in paragraph
(d)(2)(ii) of this section for which the institution is
[[Page 39413]]
required to provide information, in accordance with procedures
established by the Secretary, notify the Secretary no later than 10
days after that event occurs; and
(ii) As part of its compliance audit, require its auditor to
express an opinion on the institution's compliance with the
requirements under the zone alternative, including the institution's
administration of the payment method under which the institution
received and disbursed title IV, HEA program funds.
(4) If an institution fails to comply with the requirements under
paragraphs (d)(2) or (3) of this section, the Secretary may determine
that the institution no longer qualifies under this alternative.
(e) [Reserved]
(f) Provisional certification alternative. (1) The Secretary may
permit an institution that is not financially responsible to
participate in the title IV, HEA programs under a provisional
certification for no more than three consecutive years if--
(i) The institution is not financially responsible because it does
not satisfy the general standards under Sec. 668.171(b)(1), is subject
to an action or triggering event under Sec. 668.171(c), or because of
an audit opinion described in Sec. 668.171(f); or
(ii) The institution is not financially responsible because of a
condition of past performance, as provided under Sec. 668.174(a), and
the institution demonstrates to the Secretary that it has satisfied or
resolved that condition.
(2) Under this alternative, the institution must--
(i) Provide to the Secretary an irrevocable letter of credit that
is acceptable and payable to the Secretary, provide cash, or agree to a
set-aside under paragraph (h) of this section, for an amount determined
by the Secretary under paragraph (f)(4) of this section, except that
this requirement does not apply to a public institution; and
(ii) Comply with the provisions under the zone alternative, as
provided under paragraph (d)(2) and (3) of this section.
(3) If at the end of the period for which the Secretary
provisionally certified the institution, the institution is still not
financially responsible, the Secretary may again permit the institution
to participate under a provisional certification, but the Secretary--
(i) May require the institution, or one or more persons or entities
that exercise substantial control over the institution, as determined
under Sec. 668.174(b)(1) and (c), or both, to provide to the Secretary
financial protection for an amount determined by the Secretary to be
sufficient to satisfy any potential liabilities that may arise from the
institution's participation in the title IV, HEA programs; and
(ii) May require one or more of the persons or entities that
exercise substantial control over the institution, as determined under
Sec. 668.174(b)(1) and (c), to be jointly or severally liable for any
liabilities that may arise from the institution's participation in the
title IV, HEA programs.
(4) The institution must provide to the Secretary an irrevocable
letter of credit for an amount that is--
(i) For a State or Federal action under Sec. 668.171(c)(1)(i)(A)
or (B), 10 percent or more, as determined by the Secretary, of the
amount of Direct Loan Program funds received by the institution during
its most recently completed fiscal year;
(ii) For repayments to the Secretary for losses from borrower
defense claims under Sec. 668.171(c)(2), equal to the greatest annual
loss incurred by the Secretary during the three most recently completed
award years to resolve those claims or the amount of losses incurred by
the Secretary during the current award year, whichever is greater, plus
a portion of the amount of any outstanding or pending claims based on
the ratio of the total value of claims resolved in favor of borrowers
during the three most recently completed award years to the total value
of claims resolved during the three most recently completed award
years; and
(iii) For any other action or triggering event described in Sec.
668.171(c), or if the institution's composite score is less than 1.0 or
the institution no longer qualifies under the zone alternative, 10
percent or more, as determined by the Secretary, of the total amount of
title IV, HEA program funds received by the institution during its most
recently completed fiscal year.
* * * * *
(h) Set-aside. If an institution does not provide cash or the
letter of credit for the amount required under paragraph (d) or (f) of
this section within 30 days of the Secretary's request, the Secretary
offsets the amount of title IV, HEA program funds that an institution
has earned in a manner that ensures that, by the end of a nine-month
period, the total amount offset equals the amount of cash or the letter
of credit the institution would otherwise provide. The Secretary
maintains the amount of funds offset in a temporary escrow account,
uses the funds to satisfy the debt and liabilities owed to the
Secretary not otherwise paid directly by the institution, and provides
to the institution any funds not used for this purpose during the
period for which the cash or letter of credit was required.
(Authority: 20 U.S.C. 1094 and 1099c)
0
11. Section 668.176 is added to subpart L to read as follows:
Sec. 668.176 Severability.
If any provision of this subpart or its application to any person,
act, or practice is held invalid, the remainder of the subpart or the
application of its provisions to any person, act, or practice shall not
be affected thereby.
(Authority: 20 U.S.C. 1094, 1099c)
PART 674--FEDERAL PERKINS LOAN PROGRAM
0
12. The authority citation for part 674 continues to read as follows:
Authority: 20 U.S.C. 1070g, 1087aa--1087hh, unless otherwise
noted.
0
13. Section 674.33 is amended by:
0
A. In paragraph (g)(3) introductory text, removing the words ``may
discharge'' and adding, in their place, the word ``discharges''.
0
B. In paragraph (g)(3)(i), removing the word ``or''.
0
C. In paragraph (g)(3)(ii), removing the period and adding, in its
place, the punctuation and word ``; or''.
0
D. Adding paragraph (g)(3)(iii).
0
E. Redesignating paragraphs (g)(8)(vi), (vii), (viii), and (ix) as
paragraphs (g)(8)(vii), (viii), (ix), and (x), respectively.
0
F. Adding a new paragraph (g)(8)(vi).
The additions read as follows:
Sec. 674.33 Repayment.
* * * * *
(g) * * *
(3) * * *
(iii) Based on information in the Secretary's possession, the
borrower did not subsequently re-enroll in any title IV-eligible
institution within a period of three years from the date the school
closed.
* * * * *
(8) * * *
(vi) Upon resuming collection on any affected loan, the Secretary
provides the borrower another discharge application and an explanation
of the requirements and procedures for obtaining a discharge.
* * * * *
0
14. Section 674.61 is amended by revising paragraph (a) to read as
follows:
Sec. 674.61 Discharge for death or disability.
(a) Death. (1) An institution must discharge the unpaid balance of
a borrower's Defense, NDSL, or Federal Perkins loan, including
interest, if the borrower dies. The institution must discharge the loan
on the basis of--
[[Page 39414]]
(i) An original or certified copy of the death certificate;
(ii) An accurate and complete photocopy of the original or
certified copy of the death certificate;
(iii) An accurate and complete original or certified copy of the
death certificate that is scanned and submitted electronically or sent
by facsimile transmission; or
(iv) Verification of the borrower's death through an authoritative
Federal or State electronic database approved for use by the Secretary.
(2) Under exceptional circumstances and on a case-by-case basis,
the chief financial officer of the institution may approve a discharge
based upon other reliable documentation of the borrower's death.
* * * * *
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
0
15. The authority citation for part 682 continues to read as follows:
Authority: 20 U.S.C. 1071-1087-4, unless otherwise noted.
Sec. 682.202 [Amended]
0
16. Section 682.202 is amended in paragraph (b)(1) by removing the
words ``A lender'' and adding, in their place, ``Except as provided in
Sec. 682.405(b)(4), a lender''.
0
17. Section 682.211 is amended by adding paragraph (i)(7) to read as
follows:
Sec. 682.211 Forbearance.
* * * * *
(i) * * *
(7) The lender must grant a mandatory administrative forbearance to
a borrower upon being notified by the Secretary that the borrower has
made a borrower defense claim related to a loan that the borrower
intends to consolidate into the Direct Loan Program for the purpose of
seeking relief in accordance with Sec. 685.212(k). The mandatory
administrative forbearance shall remain in effect until the lender is
notified by the Secretary that the Secretary has made a determination
as to the borrower's eligibility for a borrower defense discharge.
* * * * *
0
18. Section 682.402 is amended by:
0
A. Revising paragraphs (b)(2), (d)(6)(ii)(F) introductory text and
(d)(6)(ii)(H).
0
B. Redesignating paragraph (d)(6)(ii)(I) as paragraph (d)(6)(ii)(J).
0
C. Adding new paragraphs (d)(6)(ii)(I) and (d)(6)(ii)(K).
0
D. In paragraph (d)(8) introductory text, removing the words ``may be''
and adding in their place the word ``is''.
0
E. In paragraph (d)(8)(i), removing the word ``or''.
0
F. In paragraph (d)(8)(ii), removing the period and adding in its place
the punctuation and word ``; or''.
0
G. Adding paragraph (d)(8)(iii).
0
H. In paragraph (e)(6)(iii), removing the last sentence.
The revisions and additions read as follows:
Sec. 682.402 Death, disability, closed school, false certification,
unpaid refunds, and bankruptcy payments.
* * * * *
(b) * * *
(2)(i) A discharge of a loan based on the death of the borrower (or
student in the case of a PLUS loan) must be based on--
(A) An original or certified copy of the death certificate;
(B) An accurate and complete photocopy of the original or certified
copy of the death certificate;
(C) An accurate and complete original or certified copy of the
death certificate that is scanned and submitted electronically or sent
by facsimile transmission; or
(D) Verification of the borrower's or student's death through an
authoritative Federal or State electronic database approved for use by
the Secretary.
(ii) Under exceptional circumstances and on a case-by-case basis,
the chief executive officer of the guaranty agency may approve a
discharge based upon other reliable documentation of the borrower's or
student's death.
* * * * *
(d) * * *
(6) * * *
(ii) * * *
(F) If the guaranty agency determines that a borrower identified in
paragraph (d)(6)(ii)(C) or (D) of this section does not qualify for a
discharge, the agency shall notify the borrower in writing of that
determination, the opportunity for review by the Secretary, and an
explanation of the manner in which to request such a review within 30
days after the date the agency--
* * * * *
(H) If a borrower described in paragraph (d)(6)(ii)(E) or (F) fails
to submit the completed application within 60 days of being notified of
that option, the lender or guaranty agency shall resume collection and
shall be deemed to have exercised forbearance of payment of principal
and interest from the date it suspended collection activity. The lender
may capitalize, in accordance with Sec. 682.202(b), any interest
accrued and not paid during that period.
(I) Upon resuming collection on any affected loan, the lender or
guaranty agency provides the borrower another discharge application and
an explanation of the requirements and procedures for obtaining a
discharge.
* * * * *
(K)(1) Within 30 days after receiving the borrower's request for
review under paragraph (d)(6)(ii)(F) of this section, the agency shall
forward the borrower's discharge request and all relevant documentation
to the Secretary for review.
(2) The Secretary notifies the agency and the borrower of the
determination upon review. If the Secretary determines that the
borrower is not eligible for a discharge under paragraph (d) of this
section, within 30 days after being so informed, the agency shall take
the actions described in paragraph (d)(6)(ii)(H) or (d)(6)(ii)(I) of
this section, as applicable.
(3) If the Secretary determines that the borrower meets the
requirements for a discharge under paragraph (d) of this section, the
agency shall, within 30 days after being so informed, take actions
required under paragraph (d)(6) and (d)(7) of this section, as
applicable.
* * * * *
(8) * * *
(iii) The Secretary or guaranty agency determines, based on
information in their possession, that the borrower did not subsequently
re-enroll in any title IV-eligible institution within a period of three
years after the school closed.
* * * * *
0
19. Section 682.405 is amended by:
0
A. Redesignating paragraph (b)(4) as paragraph (b)(4)(i).
0
B. Adding a new paragraph (b)(4)(ii).
The addition reads as follows:
Sec. 682.405 Loan rehabilitation agreement.
* * * * *
(b) * * *
(4) * * *
(ii) The lender must not consider the purchase of a rehabilitated
loan as entry into repayment or resumption of repayment for the
purposes of interest capitalization under Sec. 682.202(b).
* * * * *
Sec. 682.410 [Amended]
0
20. Section 682.410 is amended in paragraph (b)(4) by adding, after the
words ``to the lender'', the words and punctuation ``, but shall not
capitalize any unpaid interest thereafter''.
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
0
21. The authority citation for part 685 continues to read as follows:
Authority: 20 U.S.C. 1070g, 1087a, et seq., unless otherwise
noted.
[[Page 39415]]
0
22. Section 685.200 is amended by:
0
A. Adding paragraph (f)(3)(v).
0
B. Adding paragraph (f)(4)(iii).
The additions read as follows:
Sec. 685.200 Borrower eligibility.
* * * * *
(f) * * *
(3) * * *
(v) A borrower who receives a closed school, false certification,
unpaid refund, or defense to repayment discharge that results in a
remaining eligibility period greater than zero is no longer responsible
for the interest that accrues on a Direct Subsidized Loan or on the
portion of a Direct Consolidation Loan that repaid a Direct Subsidized
Loan unless the borrower once again becomes responsible for the
interest that accrues on a previously received Direct Subsidized Loan
or on the portion of a Direct Consolidation Loan that repaid a Direct
Subsidized Loan, for the life of the loan, as described in paragraph
(f)(3)(i) of this section.
(4) * * *
(iii) For a first-time borrower who receives a closed school, false
certification, unpaid refund, or defense to repayment discharge on a
Direct Subsidized Loan or a portion of a Direct Consolidation Loan that
is attributable to a Direct Subsidized Loan, the Subsidized Usage
Period is reduced. If the Direct Subsidized Loan or a portion of a
Direct Consolidation Loan that is attributable to a Direct Subsidized
Loan is discharged in full, the Subsidized Usage Period is zero years.
If the Direct Subsidized Loan or a portion of a Direct Consolidation
Loan that is attributable to a Direct Subsidized Loan is discharged in
part, the Subsidized Usage Period may be reduced if the discharge
results in the inapplicability of paragraph (f)(4)(i) of this section.
* * * * *
0
23. Section 685.205 is amended by revising paragraph (b)(6) to read as
follows:
Sec. 685.205 Forbearance.
* * * * *
(b) * * *
(6) Periods necessary for the Secretary to determine the borrower's
eligibility for discharge--
(i) Under Sec. 685.206(c);
(ii) Under Sec. 685.214;
(iii) Under Sec. 685.215;
(iv) Under Sec. 685.216;
(v) Under Sec. 685.217;
(vi) Under Sec. 685.222; or
(vii) Due to the borrower's or endorser's (if applicable)
bankruptcy;
* * * * *
0
24. Section 685.206 is amended by revising paragraph (c) to read as
follows:
Sec. 685.206 Borrower responsibilities and defenses.
* * * * *
(c) Borrower defenses. (1) For loans first disbursed prior to July
1, 2017, the borrower may assert a borrower defense under this
paragraph (c). A ``borrower defense'' refers to any act or omission of
the school attended by the student that relates to the making of the
loan or the provision of educational services for which the loan was
provided that would give rise to a cause of action against the school
under applicable State law, and includes one or both of the following:
(i) A defense to repayment of amounts owed to the Secretary on a
Direct Loan, in whole or in part.
(ii) A claim to recover amounts previously collected by the
Secretary on the Direct Loan, in whole or in part.
(2) The order of objections for defaulted Direct Loans are as
described in Sec. 685.222(a)(1) to (6). A borrower defense claim under
this section must be asserted, and will be resolved, under the
procedures in Sec. 685.222(e) to (k).
(3) For an approved borrower defense under this section, the
Secretary may initiate an appropriate proceeding to collect from the
school whose act or omission resulted in the borrower defense the
amount of relief arising from the borrower defense.
* * * * *
Sec. 685.209 [Amended]
0
25. Section 685.209 is amended by:
0
A. In paragraph (a)(1)(ii), adding the punctuation and words ``, for
purposes of determining whether a borrower has a partial financial
hardship in accordance with paragraph (a)(1)(v) of this section or
adjusting a borrower's monthly payment amount in accordance with
paragraph (a)(2)(ii) of this section,'' immediately after the words
``Eligible loan''.
0
B. In paragraph (c)(1)(ii), adding the punctuation and words ``, for
purposes of adjusting a borrower's monthly payment amount in accordance
with paragraph (c)(2)(ii) of this section,'' immediately after the
words ``Eligible loan''.
0
C. In paragraph (c)(2)(ii)(B) introductory text, removing the word
``Both'' and adding, in its place, the words ``Except in the case of a
married borrower filing separately whose spouse's income is excluded in
accordance with paragraph (c)(1)(i)(A) or (B) of this section, both''.
0
D. In paragraph (c)(2)(v), removing the words ``or the Secretary
determines the borrower does not have a partial financial hardship''.
0
E. In paragraph (c)(4)(iii)(B), removing the citations ``(c)(2)(iv),
(c)(4)(v), and (c)(4)(vi)'' and adding, in their place, the citations
``(c)(2)(iv) and (c)(4)(v)''.
0
26. Section 685.212 is amended by:
0
A. Revising paragraphs (a)(1) and (a)(2).
0
B. Adding paragraph (k).
The revision and addition read as follows:
Sec. 685.212 Discharge of a loan obligation.
(a) Death. (1) If a borrower (or a student on whose behalf a parent
borrowed a Direct PLUS Loan) dies, the Secretary discharges the
obligation of the borrower and any endorser to make any further
payments on the loan based on--
(i) An original or certified copy of the death certificate;
(ii) An accurate and complete photocopy of the original or
certified copy of the death certificate;
(iii) An accurate and complete original or certified copy of the
death certificate that is scanned and submitted electronically or sent
by facsimile transmission; or
(iv) Verification of the borrower's or student's death through an
authoritative Federal or State electronic database approved for use by
the Secretary.
(2) Under exceptional circumstances and on a case-by-case basis,
the Secretary discharges a loan based upon other reliable documentation
of the borrower's or student's death that is acceptable to the
Secretary.
* * * * *
(k) Borrower defenses. (1) If a borrower defense is approved under
Sec. 685.206(c) or Sec. 685.222--
(i) The Secretary discharges the obligation of the borrower in
whole or in part in accordance with the procedures in Sec. Sec.
685.206(c) and 685.222, respectively; and
(ii) The Secretary returns to the borrower payments made by the
borrower or otherwise recovered on the loan that exceed the amount owed
on that portion of the loan not discharged, if the borrower asserted
the claim not later than--
(A) For a claim subject to Sec. 685.206(c), the limitation period
under applicable law to the claim on which relief was granted; or
(B) For a claim subject to Sec. 685.222, the limitation period in
Sec. 685.222(b), (c), or (d), as applicable.
(2) In the case of a Direct Consolidation Loan, a borrower may
assert a borrower defense under Sec. 685.206(c) or Sec. 685.222 with
respect to a Direct Loan, a FFEL Program Loan, a Federal Perkins Loan,
Health Professions Student Loan, Loan for Disadvantaged Students under
subpart II of part A of title VII of the Public
[[Page 39416]]
Health Service Act, Health Education Assistance Loan, or Nursing Loan
made under subpart II of part B of the Public Health Service Act that
was repaid by the Direct Consolidation Loan.
(i) The Secretary considers a borrower defense claim asserted on a
Direct Consolidation Loan by determining--
(A) Whether the act or omission of the school with regard to the
loan described in paragraph (k)(2) of this section other than a Direct
Subsidized, Unsubsidized, or PLUS Loan, constitutes a borrower defense
under Sec. 685.206(c), for a Direct Consolidation Loan made before
July 1, 2017, or under Sec. 685.222, for a Direct Consolidation Loan
made on or after July 1, 2017; or
(B) Whether the act or omission of the school with regard to a
Direct Subsidized, Unsubsidized, or PLUS Loan made on after July 1,
2017 that was paid off by the Direct Consolidation Loan, constitutes a
borrower defense under Sec. 685.222.
(ii) If the borrower defense is approved, the Secretary discharges
the appropriate portion of the Direct Consolidation Loan.
(iii) The Secretary returns to the borrower payments made by the
borrower or otherwise recovered on the Direct Consolidation Loan that
exceed the amount owed on that portion of the Direct Consolidation Loan
not discharged, if the borrower asserted the claim not later than--
(A) For a claim asserted under Sec. 685.206(c), the limitation
period under applicable law to the claim on which relief was granted;
or
(B) For a claim asserted under Sec. 685.222, the limitation period
in Sec. 685.222(b), (c), or (d), as applicable.
(iv) The Secretary returns to the borrower a payment made by the
borrower or otherwise recovered on the loan described in paragraph
(k)(2) of this section only if--
(A) The payment was made directly to the Secretary on the loan; and
(B) The borrower proves that the loan to which the payment was
credited was not legally enforceable under applicable law in the amount
for which that payment was applied.
* * * * *
0
27. Section 685.214 is amended by:
0
A. Revising paragraph (c)(2).
0
B. Revising paragraph (f)(4).
0
C. Redesignating paragraphs (f)(5) and (6) as paragraphs (f)(6) and
(7), respectively.
0
D. Adding a new paragraph (f)(5).
The revisions and addition read as follows:
Sec. 685.214 Closed school discharge.
* * * * *
(c) * * *
(2) The Secretary discharges a loan under this section without an
application from the borrower if the Secretary determines, based on
information in the Secretary's possession, that--
(i) The borrower qualifies for the discharge; and
(ii) The borrower did not subsequently re-enroll in any title IV-
eligible institution within a period of three years from the date the
school closed.
* * * * *
(f) * * *
(4) If a borrower fails to submit the application described in
paragraph (c) of this section within 60 days of the Secretary's
providing the discharge application, the Secretary resumes collection
and grants forbearance of principal and interest for the period in
which collection activity was suspended. The Secretary may capitalize
any interest accrued and not paid during that period.
(5) Upon resuming collection on any affected loan, the Secretary
provides the borrower another discharge application and an explanation
of the requirements and procedures for obtaining a discharge.
* * * * *
0
28. Section 685.215 is amended by:
0
A. Revising paragraph (a)(1).
0
B. Revising paragraph (c) introductory text.
0
C. Revising paragraph (c)(1).
0
D. Redesignating paragraphs (c)(2) through (7) as paragraphs (c)(3)
through (8), respectively.
0
E. Adding a new paragraph (c)(2).
0
F. Revising redesignated paragraph (c)(8).
0
G. Revising paragraph (d).
The revisions and addition read as follows:
Sec. 685.215 Discharge for false certification of student eligibility
or unauthorized payment.
(a) Basis for discharge--(1) False certification. The Secretary
discharges a borrower's (and any endorser's) obligation to repay a
Direct Loan in accordance with the provisions of this section if a
school falsely certifies the eligibility of the borrower (or the
student on whose behalf a parent borrowed) to receive the proceeds of a
Direct Loan. The Secretary considers a student's eligibility to borrow
to have been falsely certified by the school if the school--
(i) Certified the eligibility of a student who
(A) Reported not having a high school diploma or its equivalent;
and
(B) Did not satisfy the alternative to graduation from high school
requirements under section 484(d) of the Act that were in effect at the
time of certification;
(ii) Certified the eligibility of a student who is not a high
school graduate based on--
(A) A high school graduation status falsified by the school; or
(B) A high school diploma falsified by the school or a third party
to which the school referred the borrower;
(iii) Signed the borrower's name on the loan application or
promissory note without the borrower's authorization;
(iv) Certified the eligibility of a student who, because of a
physical or mental condition, age, criminal record, or other reason
accepted by the Secretary, would not meet State requirements for
employment (in the student's State of residence when the loan was
originated) in the occupation for which the training program supported
by the loan was intended; or
(v) Certified the eligibility of a student for a Direct Loan as a
result of the crime of identity theft committed against the individual,
as that crime is defined in paragraph (c)(5)(ii) of this section.
* * * * *
(c) Borrower qualification for discharge. To qualify for discharge
under this section, the borrower must submit to the Secretary an
application for discharge on a form approved by the Secretary. The
application need not be notarized but must be made by the borrower
under penalty of perjury; and in the application, the borrower's
responses must demonstrate to the satisfaction of the Secretary that
the requirements in paragraph (c)(1) through (7) of this section have
been met. If the Secretary determines the application does not meet the
requirements, the Secretary notifies the applicant and explains why the
application does not meet the requirements.
(1) High school diploma or equivalent. In the case of a borrower
requesting a discharge based on not having had a high school diploma
and not having met the alternative to graduation from high school
eligibility requirements under section 484(d) of the Act applicable at
the time the loan was originated, and the school or a third party to
which the school referred the borrower falsified the student's high
school diploma, the borrower must state in the application that that
the borrower (or the student on whose behalf a parent received a PLUS
loan)--
(i) Did not have a valid high school diploma at the time the loan
was certified; and
[[Page 39417]]
(ii) Did not satisfy the alternative to graduation from high school
statutory or regulatory eligibility requirements identified on the
application form and applicable at the time the institution certified
the loan.
(2) Disqualifying condition. In the case of a borrower requesting a
discharge based on a condition that would disqualify the borrower from
employment in the occupation that the training program for which the
borrower received the loan was intended, the borrower must state in the
application that the borrower (or student for whom a parent received a
PLUS loan) did not meet State requirements for employment (in the
student's State of residence) in the occupation that the training
program for which the borrower received the loan was intended because
of a physical or mental condition, age, criminal record, or other
reason accepted by the Secretary.
* * * * *
(8) Discharge without an application. The Secretary discharges all
or part of a loan as appropriate under this section without an
application from the borrower if the Secretary determines, based on
information in the Secretary's possession, that the borrower qualifies
for a discharge. Such information includes, but is not limited to,
evidence that the school has falsified the Satisfactory Academic
Progress of its students, as described in Sec. 668.34.
(d) Discharge procedures. (1) If the Secretary determines that a
borrower's Direct Loan may be eligible for a discharge under this
section, the Secretary provides the borrower an application and an
explanation of the qualifications and procedures for obtaining a
discharge. The Secretary also promptly suspends any efforts to collect
from the borrower on any affected loan. The Secretary may continue to
receive borrower payments.
(2) If the borrower fails to submit the application described in
paragraph (c) of this section within 60 days of the Secretary's
providing the application, the Secretary resumes collection and grants
forbearance of principal and interest for the period in which
collection activity was suspended. The Secretary may capitalize any
interest accrued and not paid during that period.
(3) If the borrower submits the application described in paragraph
(c) of this section, the Secretary determines whether the available
evidence supports the claim for discharge. Available evidence includes
evidence provided by the borrower and any other relevant information
from the Secretary's records and gathered by the Secretary from other
sources, including guaranty agencies, State authorities, test
publishers, independent test administrators, school records, and
cognizant accrediting associations. The Secretary issues a decision
that explains the reasons for any adverse determination on the
application, describes the evidence on which the decision was made, and
provides the borrower, upon request, copies of the evidence, and
considers any response from the borrower and any additional information
from the borrower, and notifies the borrower whether the determination
is changed.
(4) If the Secretary determines that the borrower meets the
applicable requirements for a discharge under paragraph (c) of this
section, the Secretary notifies the borrower in writing of that
determination.
(5) If the Secretary determines that the borrower does not qualify
for a discharge, the Secretary notifies the borrower in writing of that
determination and the reasons for the determination.
* * * * *
Sec. 685.220 [Amended]
0
29. Section 685.220 is amended by:
0
A. Removing the words ``subpart II of part B'' from paragraph (b)(21)
and adding, in their place, the words ``part E''.
0
B. Removing paragraph (d)(1)(i).
0
C. Redesignating paragraph (d)(1)(ii) as (d)(1)(i), and paragraph
(d)(1)(iii) as (d)(1)(ii).
0
30. Section 685.222 is added to subpart B to read as follows:
Sec. 685.222 Borrower defenses.
(a) General. (1) For loans first disbursed prior to July 1, 2017, a
borrower asserts and the Secretary considers a borrower defense in
accordance with the provisions of Sec. 685.206(c), unless otherwise
noted in Sec. 685.206(c).
(2) For loans first disbursed on or after July 1, 2017, a borrower
asserts and the Secretary considers a borrower defense in accordance
with this section. To establish a borrower defense under this section,
a preponderance of the evidence must show that the borrower has a
borrower defense that meets the requirements of this section.
(3) A violation by the school of an eligibility or compliance
requirement in the Act or its implementing regulations is not a basis
for a borrower defense under either this section or Sec. 685.206(c)
unless the violation would otherwise constitute a basis for a borrower
defense under this section.
(4) For the purposes of this section or Sec. 685.206(c),
``borrower'' means--
(i) The borrower; and
(ii) In the case of a Direct PLUS Loan, the student and any
endorsers.
(5) For the purposes of this section or Sec. 685.206(c), a
``borrower defense'' refers to an act or omission of the school
attended by the student that relates to the making of a Direct Loan for
enrollment at the school or the provision of educational services for
which the loan was provided and that meets the requirements under
paragraphs (b), (c), or (d), and includes one or both of the following:
(i) A defense to repayment of amounts owed to the Secretary on a
Direct Loan, in whole or in part; and
(ii) A right to recover amounts previously collected by the
Secretary on the Direct Loan, in whole or in part.
(6) If the borrower asserts both a borrower defense and any other
objection to an action of the Secretary with regard to that Direct
Loan, the Secretary notifies the borrower of the order in which the
Secretary considers the borrower defense and any other objections. The
order in which the Secretary will consider objections, including a
borrower defense, will be determined by the Secretary as appropriate
under the circumstances.
(b) Judgment against the school. (1) The borrower has a borrower
defense if the borrower, whether as an individual or as a member of a
class, or a governmental agency, has obtained against the school a
nondefault, favorable contested judgment based on State or Federal law
in a court or administrative tribunal of competent jurisdiction.
(2) A borrower may assert a borrower defense under this paragraph
at any time.
(c) Breach of contract by the school. The borrower has a borrower
defense if the school the borrower received a Direct Loan to attend
failed to perform its obligations under the terms of a contract with
the student. A borrower may assert a defense to repayment of amounts
owed to the Secretary under this paragraph at any time after the breach
by the school of its contract with the student. A borrower may assert a
right to recover amounts previously collected by the Secretary under
this paragraph not later than six years after the breach by the school
of its contract with the student.
(d) Substantial misrepresentation by the school. (1) A borrower has
a borrower defense if the school or any of its representatives, or any
institution, organization, or person with whom the school has an
agreement to provide
[[Page 39418]]
educational programs, or to provide marketing, advertising, recruiting,
or admissions services, made a substantial misrepresentation in
accordance with 34 CFR part 668, subpart F, that the borrower
reasonably relied on when the borrower decided to attend, or to
continue attending, the school. A borrower may assert, at any time, a
defense to repayment under this paragraph (d) of amounts owed to the
Secretary. A borrower may assert a claim under this paragraph (d) to
recover funds previously collected by the Secretary not later than six
years after the borrower discovers, or reasonably could have
discovered, the information constituting the substantial
misrepresentation.
(2) For the purposes of this section, a designated Department
official pursuant to paragraph (e) of this section or a hearing
official pursuant to paragraphs (f), (g), or (h) may consider, as
evidence supporting the reasonableness of a borrower's reliance on a
misrepresentation, whether the school or any of the other parties
described in paragraph (d)(1) engaged in conduct such as, but not
limited to:
(i) Demanding that the borrower make enrollment or loan-related
decisions immediately;
(ii) Placing an unreasonable emphasis on unfavorable consequences
of delay;
(iii) Discouraging the borrower from consulting an adviser, a
family member, or other resource;
(iv) Failing to respond to the borrower's requests for more
information, including about the cost of the program and the nature of
any financial aid; or
(v) Otherwise unreasonably pressuring the borrower or taking
advantage of the borrower's distress or lack of knowledge or
sophistication.
(e) Procedure for an individual borrower. (1) To assert a borrower
defense under this section, an individual borrower must--
(i) Submit an application to the Secretary, on a form approved by
the Secretary--
(A) Certifying that the borrower received the proceeds of a loan,
in whole or in part, to attend a named school;
(B) Providing evidence that supports the borrower defense; and
(C) Indicating whether the borrower has made a claim with respect
to the information underlying the borrower defense with any third
party, such as the holder of a performance bond or a tuition recovery
program, and, if so, the amount of any payment received by the borrower
or credited to the borrower's loan obligation; and
(ii) Provide any other information or supporting documentation
reasonably requested by the Secretary.
(2) Upon receipt of a borrower's application, the Secretary--
(i) If the borrower is not in default on the loan for which a
borrower defense has been asserted, grants forbearance and--
(A) Notifies the borrower of the option to decline the forbearance
and to continue making payments on the loan; and
(B) Provides the borrower with information about the availability
of the income-contingent repayment plans under Sec. 685.209 and the
income-based repayment plan under Sec. 685.221; or
(ii) If the borrower is in default on the loan for which a borrower
defense has been asserted--
(A) Suspends collection activity on the loan until the Secretary
issues a decision on the borrower's claim;
(B) Notifies the borrower of the suspension of collection activity
and explains that collection activity will resume if the Secretary
determines that the borrower does not qualify for a full discharge; and
(C) Notifies the borrower of the option to continue making payments
under a rehabilitation agreement or other repayment agreement on the
defaulted loan.
(3) The Secretary designates a Department official to review the
borrower's application to determine whether the application states a
basis for a borrower defense, and resolves the claim through a fact-
finding process conducted by the Department official.
(i) As part of the fact-finding process, the Department official
notifies the school of the borrower defense and considers any evidence
or argument presented by the borrower and also any additional
information, including--
(A) Department records;
(B) Any response or submissions from the school; and
(C) Any additional information or argument that may be obtained by
the Department official.
(ii) The Department official identifies to the borrower and may
identify to the school the records he or she considers relevant to the
borrower defense. The Secretary provides to the borrower or the school
any of the identified records upon reasonable request.
(4) At the conclusion of the fact-finding process, the Department
official issues a written decision as follows:
(i) If the Department official approves the borrower defense in
full or in part, the Department official notifies the borrower in
writing of that determination and of the relief provided as described
in paragraph (i) of this section.
(ii) If the Department official denies the borrower defense in full
or in part, the Department official notifies the borrower of the
reasons for the denial, the evidence that was relied upon, any portion
of the loan that is due and payable to the Secretary, and whether the
Secretary will reimburse any amounts previously collected, and informs
the borrower that if any balance remains on the loan, the loan will
return to its status prior to the borrower's submission of the
application. The Department official also informs the borrower of the
opportunity to request reconsideration of the claim based on new
evidence pursuant to paragraph (e)(5)(i) of this section.
(5) The decision of the Department official is final as to the
merits of the claim and any relief that may be granted on the claim.
Notwithstanding the foregoing--
(i) If the borrower defense is denied in full or in part, the
borrower may request that the Secretary reconsider the borrower defense
upon the identification of new evidence in support of the borrower's
claim. ``New evidence'' is relevant evidence that the borrower did not
previously provide and that was not identified in the final decision as
evidence that was relied upon for the final decision; and
(ii) The Secretary may reopen a borrower defense application at any
time to consider evidence that was not considered in making the
previous decision.
(6) The Secretary may consolidate applications filed under this
paragraph (e) that have common facts and claims, and resolve the
borrowers' borrower defense claims as provided in paragraphs (f), (g),
and (h) of this section.
(7) The Secretary may initiate a separate proceeding to collect
from the school the amount of relief resulting from a borrower defense
under this paragraph.
(f) Group process for borrower defense, generally. (1) Upon
consideration of factors including, but not limited to, common facts
and claims, fiscal impact, and the promotion of compliance by the
school or other title IV, HEA program participants, the Secretary may
initiate a process to determine whether a group of borrowers,
identified by the Secretary, has a borrower defense.
(i) The members of the group may be identified by the Secretary
from individually filed applications pursuant to paragraph (e)(6) of
this section or from any other source.
[[Page 39419]]
(ii) If the Secretary determines that there are common facts and
claims that apply to borrowers who have not filed an application under
paragraph (e) of this section, the Secretary may identify such
borrowers as members of a group.
(2) Upon the identification of a group of borrowers under paragraph
(f)(1) of this section, the Secretary--
(i) Designates a Department official to present the group's claim
in the fact-finding process described in paragraph (g) or (h) of this
section, as applicable;
(ii) Provides each identified member of the group with notice that
allows the borrower to opt out of the proceeding; and
(iii) Notifies the school, as practicable, of the basis of the
group's borrower defense, the initiation of the fact-finding process
described in paragraph (g) or (h) of this section, and of any procedure
by which to request records and respond.
(3) For a group of borrowers identified by the Secretary, for which
the Secretary determines that there may be a borrower defense under
paragraph (d) based upon a substantial misrepresentation that has been
widely disseminated, there is a rebuttable presumption that each member
reasonably relied on the misrepresentation.
(g) Procedures for group process for borrower defenses with respect
to loans made to attend a closed school. For groups identified by the
Secretary under paragraph (f) of this section, for which the borrower
defense is asserted with respect to a Direct Loan to attend a school
that has closed and has provided no financial protection currently
available to the Secretary from which to recover any losses arising
from borrower defenses, and for which there is no appropriate entity
from which the Secretary can otherwise practicably recover such
losses--
(1) A hearing official resolves the borrower defense through a
fact-finding process. As part of the fact-finding process, the hearing
official considers any evidence and argument presented by the
Department official on behalf of the group and, as necessary to
determine any claims at issue, on behalf of individual members of the
group. The hearing official also considers any additional information
the Department official considers necessary, including any Department
records or response from the school or a person affiliated with the
school as described in Sec. 668.174(b), if practicable. The hearing
official issues a written decision as follows:
(i) If the hearing official approves the borrower defense in full
or in part, the written decision notifies the members of the group in
writing of that determination and of the relief provided on the basis
of that claim as determined under paragraph (i) of this section.
(ii) If the hearing official denies the borrower defense in full or
in part, the written decision states the reasons for the denial, the
evidence that was relied upon, the portion of the loans that are due
and payable to the Secretary, and whether reimbursement of amounts
previously collected is granted, and informs the borrowers that if any
balance remains on the loan, the loan will return to its status prior
to the group claim process.
(iii) The Secretary provides copies of the written decision to the
members of the group and, as practicable, to the school.
(2) The decision of the hearing official is final as to the merits
of the group borrower defense and any relief that may be granted on the
group claim.
(3) After a final decision has been issued, if relief for the group
has been denied in full or in part pursuant to paragraph (g)(1)(ii) of
this section, an individual borrower may file a claim for relief
pursuant to paragraph (e)(5)(i) of this section.
(4) The Secretary may reopen a borrower defense application at any
time to consider evidence that was not considered in making the
previous decision.
(h) Procedures for group process for borrower defenses with respect
to loans made to attend an open school. For groups identified by the
Secretary under paragraph (f) of this section, for which the borrower
defense is asserted with respect to Direct Loans to attend an open
school or a school that is not otherwise covered by paragraph (g) of
this section, the claim is resolved in accordance with the procedures
in this paragraph (h).
(1) A hearing official resolves the borrower defense and determines
any liability of the school through a fact-finding process. As part of
the process, the hearing official considers any evidence and argument
presented by the school and the Department official on behalf of the
group and, as necessary to determine any claims at issue, on behalf of
individual members of the group. The hearing official issues a written
decision as follows:
(i) If the hearing official approves the borrower defense in full
or in part, the written decision establishes the basis for the
determination, notifies the members of the group of the relief as
described in paragraph (i) of this section, and notifies the school of
any liability to the Secretary for the amounts discharged and
reimbursed.
(ii) If the hearing official denies the borrower defense for the
group in full or in part, the written decision states the reasons for
the denial, the evidence that was relied upon, the portion of the loans
that are due and payable to the Secretary, and whether reimbursement of
amounts previously collected is granted, and informs the borrowers that
their loans will return to their statuses prior to the group borrower
defense process. The decision notifies the school of any liability to
the Secretary for any amounts discharged or reimbursed.
(iii) The Secretary provides copies of the written decision to the
members of the group, the Department official, and the school.
(2) The decision of the hearing official becomes final as to the
merits of the group borrower defense and any relief that may be granted
on the group borrower defense within 30 days after the decision is
issued and received by the Department official and the school unless,
within that 30-day period, the school or the Department official
appeals the decision to the Secretary. In the case of an appeal--
(i) The decision of the hearing official does not take effect
pending the appeal; and
(ii) The Secretary renders a final decision.
(3) After a final decision has been issued, if relief for the group
has been denied in full or in part pursuant to paragraph (h)(1)(ii) of
this section, an individual borrower may file a claim for relief
pursuant to paragraph (e)(5)(i) of this section.
(4) The Secretary may reopen a borrower defense application at any
time to consider evidence that was not considered in making the
previous decision.
(5) The Secretary collects from the school any liability to the
Secretary for any amounts discharged or reimbursed to borrowers under
this paragraph (h).
(i) Relief. If a borrower defense is approved under the procedures
in paragraphs (e), (g), or (h) of this section--
(1) The Department official or the hearing official, as applicable,
determines the appropriate method for calculating, and the amount of,
relief arising out of the facts underlying an individual or group
borrower defense, based on information then available to the official
or which the official may request; and determines the amount of relief
to award the borrower, which may be a discharge of all amounts owed to
the Secretary on the loan at issue and may include the recovery of
amounts previously collected by the Secretary on the loan, or some
lesser amount. In
[[Page 39420]]
determining the appropriate method for calculating relief, the
Department official or the hearing official, as applicable--
(i) Will consider the availability of information required for a
method of calculation;
(ii) When calculating relief for a group of borrowers, may consider
information derived from a sample of borrowers from the group; and
(iii) May use one or more of the methods described in Appendix A to
this subpart, or such other method determined by the official;
(2) In the written decision described in paragraphs (e), (g), and
(h) of this section, the designated Department official or hearing
official, as applicable, notifies the borrower of the relief provided
and--
(i) Specifies the relief determination;
(ii) Advises that there may be tax implications; and
(iii) Provides the borrower an opportunity to opt out of group
relief, if applicable;
(3) Consistent with the determination of relief under paragraph
(i)(1) of this section, the Secretary discharges the borrower's
obligation to repay all or part of the loan and associated costs and
fees that the borrower would otherwise be obligated to pay and, if
applicable, reimburses the borrower for amounts paid toward the loan
voluntarily or through enforced collection;
(4) The Secretary or the hearing official, as applicable, affords
the borrower such further relief as the Secretary or the hearing
official determines is appropriate under the circumstances. Such
further relief includes, but is not limited to, one or both of the
following:
(i) Determining that the borrower is not in default on the loan and
is eligible to receive assistance under title IV of the Act.
(ii) Updating reports to consumer reporting agencies to which the
Secretary previously made adverse credit reports with regard to the
borrower's Direct Loan; and
(5) The total amount of relief granted with respect to a borrower
defense cannot exceed the amount of the loan and any associated costs
and fees and will be reduced by the amount of any refund,
reimbursement, indemnification, restitution, compensatory damages,
settlement, debt forgiveness, discharge, cancellation, compromise, or
any other benefit received by, or on behalf of, the borrower that was
related to the borrower defense. The relief to the borrower may not
include non-pecuniary damages such as inconvenience, aggravation,
emotional distress, or punitive damages.
(j) Cooperation by the borrower. To obtain relief under this
section, a borrower must reasonably cooperate with the Secretary in any
proceeding under paragraph (e), (g), or (h) of this section. The
Secretary may revoke any relief granted to a borrower who fails to
satisfy his or her obligations under this paragraph (j).
(k) Transfer to the Secretary of the borrower's right of recovery
against third parties. (1) Upon the granting of any relief under this
section, the borrower is deemed to have assigned to, and relinquished
in favor of, the Secretary any right to a loan refund (up to the amount
discharged) that the borrower may have by contract or applicable law
with respect to the loan or the contract for educational services for
which the loan was received, against the school, its principals, its
affiliates, and their successors, its sureties, and any private fund.
If the borrower asserts a claim to, and recovers from, a public fund,
the Secretary may reinstate the borrower's obligation to repay on the
loan an amount based on the amount recovered from the public fund, if
the Secretary determines that the borrower's recovery from the public
fund was based on the same borrower defense and for the same loan for
which the discharge was granted under this section.
(2) The provisions of this paragraph (k) apply notwithstanding any
provision of State law that would otherwise restrict transfer of those
rights by the borrower, limit or prevent a transferee from exercising
those rights, or establish procedures or a scheme of distribution that
would prejudice the Secretary's ability to recover on those rights.
(3) Nothing in this paragraph (k) limits or forecloses the
borrower's right to pursue legal and equitable relief against a party
described in this paragraph (k) for recovery of any portion of a claim
exceeding that assigned to the Secretary or any other claims arising
from matters unrelated to the claim on which the loan is discharged.
0
31. Section 685.223 is added to subpart B to read as follows:
Sec. 685.223 Severability.
If any provision of this subpart or its application to any person,
act, or practice is held invalid, the remainder of the subpart or the
application of its provisions to any person, act, or practice shall not
be affected thereby.
(Authority: 20 U.S.C. 1087a et seq.)
0
32. Appendix A to subpart B of part 685 is added to read as follows:
Appendix A to Subpart B of Part 685--Calculating Borrower Relief
The Department official or the hearing official, as applicable,
determines the amount of relief to award the borrower, which may be
a discharge of all amounts owed to the Secretary on the loan at
issue and may include the recovery of amounts previously collected
by the Secretary on the loan, or some lesser amount. A borrower's
relief may be calculated using one or more of the following methods
or such other method as the Secretary may determine.
(A) The difference between what the borrower paid, and what a
reasonable borrower would have paid had the school made an accurate
representation as to the issue that was the subject of the
substantial misrepresentation underlying the borrower defense claim.
(B) The difference between the amount of financial charges the
borrower could have reasonably believed the school was charging, and
the actual amount of financial charges made by the school, for
claims regarding the cost of a borrower's program of study.
(C) The total amount of the borrower's economic loss, less the
value of the benefit, if any, of the education obtained by the
student. Economic loss, for the purposes of this section, may be no
greater than the cost of attendance. The value of the benefit of the
education may include transferable credits obtained and used by the
borrower; and for gainful employment programs, qualifying placement
in an occupation within the Standard Occupational Classification
(SOC) code for which the training was provided, provided the
borrower's earnings meet the expected salary for the program's
designated occupations or field, as determined using an earnings
benchmark for that occupation. The Department official or hearing
official will consider any evidence indicating that no identifiable
benefit of the education was received by the student.
0
33. Section 685.300 is amended by:
0
A. Redesignating paragraph (b)(11) as paragraph (b)(12).
0
B. Adding a new paragraph (b)(11).
0
C. Adding new paragraphs (d) through (i).
The additions read as follows:
Sec. 685.300 Agreements between an eligible school and the Secretary
for participation in the Direct Loan Program.
* * * * *
(b) * * *
(11) Comply with the provisions of paragraphs (d) through (i)
regarding student claims and disputes.
* * * * *
(d) Borrower defense claims in an internal dispute process. The
school will not compel any student to pursue a complaint based on a
borrower defense claim through an internal institutional process before
the student presents the complaint to an accrediting agency or
government agency authorized to hear the complaint.
[[Page 39421]]
(e) Class action bans. (1) The school shall not seek to rely in any
way on a pre-dispute arbitration agreement, nor on any other pre-
dispute agreement, with a student, with respect to any aspect of a
class action that is related to a borrower defense claim including to
seek a stay or dismissal of particular claims or the entire action,
unless and until the presiding court has ruled that the case may not
proceed as a class action and, if that ruling may be subject to
appellate review on an interlocutory basis, the time to seek such
review has elapsed or the review has been resolved.
(2) Reliance on a pre-dispute arbitration agreement, or on any
other pre-dispute agreement, with a student, with respect to any aspect
of a class action includes, but is not limited to, any of the
following:
(i) Seeking dismissal, deferral, or stay of any aspect of a class
action;
(ii) Seeking to exclude a person or persons from a class in a class
action;
(iii) Objecting to or seeking a protective order intended to avoid
responding to discovery in a class action;
(iv) Filing a claim in arbitration against a student who has filed
a claim on the same issue in a class action;
(v) Filing a claim in arbitration against a student who has filed a
claim on the same issue in a class action after the trial court has
denied a motion to certify the class but before an appellate court has
ruled on an interlocutory appeal of that motion, if the time to seek
such an appeal has not elapsed or the appeal has not been resolved; and
(vi) Filing a claim in arbitration against a student who has filed
a claim on the same issue in a class action after the trial court in
that class action has granted a motion to dismiss the claim and, in
doing so, the court noted that the consumer has leave to refile the
claim on a class basis, if the time to refile the claim has not
elapsed.
(3) Required provisions and notices. (i) The school must include
the following provision in any agreements with a student recipient of a
Direct Loan for attendance at the school, or, with respect to a Parent
PLUS Loan, a student for whom the PLUS loan was obtained, that include
any agreement regarding pre-dispute arbitration or any other pre-
dispute agreement addressing class actions and that are entered into
after effective date of this regulation:
``We agree that neither we nor anyone else will use this
agreement to stop you from being part of a class action lawsuit in
court. You may file a class action lawsuit in court or you may be a
member of a class action lawsuit even if you do not file it. This
provision applies only to class action claims concerning our acts or
omissions regarding the making of the Direct Loan or the provision
by us of educational services for which the Direct Loan was
obtained.''
(ii) When a pre-dispute arbitration agreement or any other pre-
dispute agreement addressing class actions has been entered into before
the effective date of this regulation that did not contain a provision
described in paragraph (e)(3)(i) of this section, the school must
either ensure the agreement is amended to contain the provision
specified in paragraph (e)(3)(iii)(A) of this section or provide the
student to whom the agreement applies with the written notice specified
in paragraph (e)(3)(iii)(B) of this section.
(iii) The school must ensure the agreement described in paragraph
(e)(3)(ii) of this section is amended to contain the provision
specified in paragraph (e)(3)(iii)(A) or must provide the notice
specified in paragraph (e)(3)(iii)(B) to students no later than the
exit counseling required under Sec. 685.304(b), or the date on which
the school files its initial response to a demand for arbitration or
service of a complaint from a student who has not already been sent a
notice or amendment.
(A) Agreement provision.
``We agree that neither we nor anyone else who later becomes a
party to this agreement will use it to stop you from being part of a
class action lawsuit in court. You may file a class action lawsuit
in court or you may be a member of a class action lawsuit even if
you do not file it. This provision applies only to class action
claims concerning our acts or omissions regarding the making of the
Direct Loan or the provision by us of educational services for which
the Direct Loan was obtained.''
(B) Notice provision.
``We agree not to use any pre-dispute agreement to stop you from
being part of a class action lawsuit in court. You may file a class
action lawsuit in court or you may be a member of a class action
lawsuit even if you do not file it. This provision applies only to
class action claims concerning our acts or omissions regarding the
making of the Direct Loan or the provision by us of educational
services for which the Direct Loan was obtained.''
(f) Pre-dispute arbitration agreements. (1) The school will not
compel a student to enter into a pre-dispute agreement to arbitrate a
borrower defense claim, or rely in any way on a mandatory pre-dispute
arbitration agreement with respect to any aspect of a borrower defense
claim.
(2) Reliance on a mandatory pre-dispute arbitration agreement with
respect to any aspect of a borrower defense claim includes, but is not
limited to, any of the following:
(i) Seeking dismissal, deferral, or stay of any aspect of a
judicial action filed by the student;
(ii) Objecting to or seeking a protective order intended to avoid
responding to discovery in a judicial action filed by the student; and
(iii) Filing a claim in arbitration against a student who has filed
a suit on the same claim.
(3) Required provisions and notices. (i) The school must include
the following provision in any mandatory pre-dispute arbitration
agreements with a student recipient of a Direct Loan for attendance at
the school, or, with respect to a Parent PLUS Loan, a student for whom
the PLUS loan was obtained, that include any agreement regarding
arbitration and that are entered into after effective date of this
regulation:
``We agree that neither we nor anyone else will use this
agreement to stop you from bringing a lawsuit regarding our acts or
omissions regarding the making of the Direct Loan or the provision
by us of educational services for which the Direct Loan was
obtained. You may file a lawsuit for such a claim or you may be a
member of a class action lawsuit for such a claim even if you do not
file it. This provision does not apply to lawsuits concerning other
claims.''
(ii) When a mandatory pre-dispute arbitration agreement has been
entered into before the effective date of this regulation that did not
contain a provision described in paragraph (f)(3)(i), the school shall
either ensure the agreement is amended to contain the provision
specified in paragraph (f)(3)(iii)(A) of this section or provide the
student to whom the agreement applies with the written notice specified
in paragraph (f)(3)(iii)(B) of this section.
(iii) The school shall ensure the agreement described in paragraph
(f)(3)(ii) of this section is amended to contain the provision
specified in paragraph (f)(3)(iii)(A) or shall provide the notice
specified in paragraph (f)(3)(iii)(B) to students no later than the
exit counseling required under Sec. 685.304(b), or the date on which
the school files its initial response to a demand for arbitration or
service of a complaint from a student who has not already been sent a
notice or amendment.
(A) Agreement provision.
``We agree that neither we nor anyone else who later becomes a
party to this pre-dispute arbitration agreement will use it to stop
you from bringing a lawsuit regarding our acts or omissions
regarding the making of the Direct Loan or the provision by us of
educational services for which the Direct Loan was obtained. You may
file a lawsuit for such a claim or you may be a member of a class
action lawsuit for such a claim even if you
[[Page 39422]]
do not file it. This provision does not apply to other claims.''
(B) Notice provision.
``We agree not to use any pre-dispute arbitration agreement to
stop you from bringing a lawsuit regarding our acts or omissions
regarding the making of the Direct Loan or the provision by us of
educational services for which the Direct Loan was obtained. You may
file a lawsuit regarding such a claim or you may be a member of a
class action lawsuit regarding such a claim even if you do not file
it. This provision does not apply to any other claims.''
(g) Submission of arbitral records. (1) A school shall submit a
copy of the following records to the Secretary, in the form and manner
specified by the Secretary, in connection with any claim filed in
arbitration by or against the school concerning a borrower defense
claim:
(i) The initial claim and any counterclaim;
(ii) The pre-dispute arbitration agreement filed with the
arbitrator or arbitration administrator;
(iii) The judgment or award, if any, issued by the arbitrator or
arbitration administrator;
(iv) If an arbitrator or arbitration administrator refuses to
administer or dismisses a claim due to the school's failure to pay
required filing or administrative fees, any communication the school
receives from the arbitrator or an arbitration administrator related to
such a refusal; and
(v) Any communication the school receives from an arbitrator or an
arbitration administrator related to a determination that a pre-dispute
arbitration agreement regarding educational services provided by the
school does not comply with the administrator's fairness principles,
rules, or similar requirements, if such a determination occurs.
(2) Deadline for submission. A school shall submit any record
required pursuant to paragraph (g)(1) of this section within 60 days of
filing by the school of any such record with the arbitrator or
arbitration administrator and within 60 days of receipt by the school
of any such record filed or sent by someone other than the school, such
as the arbitration administrator or the student.
(h) Submission of judicial records. (1) A school shall submit a
copy of the following records to the Secretary, in the form and manner
specified by the Secretary, in connection with any claim filed in a
lawsuit by the school against the student, or by any party, including a
government agency, against the school concerning a borrower defense
claim:
(i) The complaint and any counterclaim;
(ii) Any dispositive motion filed by a party to the suit; and
(iii) The ruling on any dispositive motion and the judgment issued
by the court.
(2) Deadline for submission. A school shall submit any record
required pursuant to paragraph (h)(1) of this section within 30 days of
filing or receipt, as applicable, of the complaint, answer, or
dispositive motion, and within 30 days of receipt of any ruling on a
dispositive motion or a final judgment.
(i) Definitions. For the purposes of paragraphs (d) through (h) of
this section, the term--
(1) ``Borrower defense claim'' means a claim that is or could be
asserted as a defense to repayment under Sec. 685.206(c) or Sec.
685.222;
(2) ``Class action'' means a lawsuit in which one or more parties
seek class treatment pursuant to Federal Rule of Civil Procedure 23 or
any State process analogous to Federal Rule of Civil Procedure 23;
(3) ``Dispositive motion'' means a motion asking for a court order
that entirely disposes of one or more claims in favor of the party who
files the motion without need for further court proceedings;
(4) ``Pre-dispute arbitration agreement'' means an agreement
between a school and a student providing for arbitration of any future
dispute between the parties; and
(5) ``Mandatory pre-dispute arbitration agreement'' means a pre-
dispute arbitration agreement included in an enrollment agreement or
other document that must be executed by the student as a condition for
enrollment at the school.
* * * * *
0
34. Section 685.308 is amended by revising paragraph (a) to read as
follows:
Sec. 685.308 Remedial actions.
(a) The Secretary collects from the school the amount of the losses
the Secretary incurs and determines that the institution is liable to
repay under Sec. Sec. 685.206, 685.214, 685.215(a)(1)(i), (ii), or
(iii), 685.216, or 685.222 or that were disbursed--
(1) To an individual, because of an act or omission of the school,
in amounts that the individual was not eligible to receive; or
(2) Because of the school's violation of a Federal statute or
regulation.
* * * * *
0
35. Section 685.310 is added to subpart C to read as follows:
Sec. 685.310 Severability.
If any provision of this subpart or its application to any person,
act, or practice is held invalid, the remainder of the subpart or the
application of its provisions to any person, act, or practice shall not
be affected thereby.
(Authority: 20 U.S.C. 1087a et seq.)
PART 686--TEACHER EDUCATION ASSISTANCE FOR COLLEGE AND HIGHER
EDUCATION (TEACH) GRANT PROGRAM
0
36. The authority citation for part 686 continues to read as follows:
Authority: 20 U.S.C. 1070g, et seq., unless otherwise noted.
0
37. Section 686.42 is amended by revising paragraph (a) to read as
follows:
Sec. 686.42 Discharge of an agreement to serve.
(a) Death. (1) If a grant recipient dies, the Secretary discharges
the obligation to complete the agreement to serve based on--
(i) An original or certified copy of the death certificate;
(ii) An accurate and complete photocopy of the original or
certified copy of the death certificate;
(iii) An accurate and complete original or certified copy of the
death certificate that is scanned and submitted electronically or sent
by facsimile transmission; or
(iv) Verification of the grant recipient's death through an
authoritative Federal or State electronic database approved for use by
the Secretary.
(2) Under exceptional circumstances and on a case-by-case basis,
the Secretary discharges the obligation to complete the agreement to
serve based on other reliable documentation of the grant recipient's
death that is acceptable to the Secretary.
* * * * *
[FR Doc. 2016-14052 Filed 6-13-16; 11:15 am]
BILLING CODE P
Office of the Federal Register, National Archives and Records Administration
Section
Proposed Rules
Action
Notice of proposed rulemaking.
Dates
We must receive your comments on or before August 1, 2016.
Contact
For further information related to borrower defenses, Barbara Hoblitzell at (202) 453-7583 or by email at: [email protected] For further information related to false certification and closed school loan discharges, Brian Smith at (202) 453-7440 or by email at: [email protected] For further information regarding institutional accountability, John Kolotos or Greg Martin at (202) 453-7646 or (202) 453-7535 or by email at: [email protected] or [email protected]
Claims; Income Taxes; Administrative Practice and Procedure; Colleges and Universities; Consumer Protection; Grant Programs-Education; Loan Programs-Education; Reporting and Recordkeeping Requirements; Selective Service System; Student Aid; Vocational Education; Reporting and Recordkeeping; Education
and
Elementary and Secondary Education