Negotiated Rulemaking Update

Under current regulations, a borrower may assert as a borrower defense 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 that would give rise to a cause of action against the school under applicable State law. The Department proposed establishing a new federal standard for loans first disbursed on or after July 1, 2017, which is the anticipated effective date for the new regulations.  

This anticipated date of enactment is based upon the statutory requirements under the Master Calendar Rule which requires publication of a final regulation on or before November 1st of the preceding year, for the regulations to take effect July 1 of the subsequent year.

Under the proposal, in order to establish a borrower defense, the borrower must show by a preponderance of the evidence 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. 

A violation by the school of an eligibility or compliance requirement in the Higher Education Act or its implementing regulations would not be a basis for a borrower defense unless the violation would otherwise constitute a basis for a borrower defense. A borrower defense to repayment may be evidenced by a:

·Judgment against the school;

·Breach of contract by the school; or

·Substantial misrepresentation by the school.  

Substantial misrepresentation would occur 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. 

With respect to amounts owed on a Direct Loan, a borrower could assert a defense to repayment based on substantial misrepresentation at any time – there would be no statute of limitations. A borrower with a substantial misrepresentation claim who seeks to recover funds previously paid with respect to their Direct Loan would be required to submit the claim not later than four years after the borrower discovers, or reasonably could have discovered, the statement constituting the substantial misrepresentation. The proposal also included language intended to prohibit certain admissions activities that the Department considered to be high-pressure sales tactics.

The proposed changes included the procedures under which borrowers would submit their defense to repayment claims. The rules would create separate procedures for individual claims and group claims. The Department’s intention was that the individual borrower claims process would be a more informal process than the group claims. 

Under the procedures for an individual borrower, the borrower would submit a claim form to the Secretary. A designated Department official would review the claim and any evidence. If the borrower defense is denied in full or in part, the borrower could request that the Secretary reconsider the borrower defense upon the identification of new evidence in support of the borrower’s claim. The Secretary would be able to reopen a borrower defense application at any time to consider evidence that the Secretary did not consider in making the previous decision. The Secretary would also have the authority to initiate a separate proceeding to collect from the school the amount of relief resulting from a borrower defense claim.

The proposed rules would also allow for the Secretary to initiate a process to determine whether a group of borrowers may have a borrower defense when the members of the group present common facts and claims. The members of the group would be identified by the Secretary from individually filed discharge applications or from any other source of information. The group could also include borrowers who did not file an individual claim if the Secretary determined that common facts and claims existed. The proposed rules would also allow a state attorney general, state or federal enforcement agency, or a legal aid representative to submit a written request identifying a group of borrowers for the Secretary to initiate the borrower defense relief process. Group members would be provided with notice to allow the borrower to opt out of the proceeding. For a group of borrowers identified by the Secretary, for which the Secretary determines that there has been a substantial misrepresentation that has been widely-disseminated, and common facts and claims relating to a borrower defense, there would be a rebuttable presumption that each member reasonably relied on the substantial misrepresentation.  

For group discharge claims with respect to students who attended a school that has not closed, a hearing official would review the Department official’s basis for identifying the group. The hearing official would resolve the claim 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 pursuant to hearing procedures established by the Secretary. Those hearing procedures would include procedures for requesting documents, submission of papers, and the presentation of arguments. The hearing official would issue a written decision to the parties. The Secretary would have the authority to reopen a borrower defense application at any time to consider evidence that the Secretary did not consider in making the previous decision, and to collect from the school any liability to the Secretary for any amounts discharged or reimbursed to borrowers. 

The Department official or the hearing official would determine the appropriate relief arising out of the facts underlying the borrower’s claim, and could request additional information as required to determine the appropriate relief for a borrower. The proposed rules included a list of factors that the Department official or hearing officer could consider in determining the amount of borrower relief. The consideration of those factors could result in borrowers obtaining partial rather than full relief for their claims.

The proposal would expand the existing false certification regulations to specify that a borrower may receive a false certification discharge if a school falsified a student’s high school graduation status. The Secretary would consider a student's loan eligibility to have been falsely certified by the school if the school certified the eligibility of a student who reported not having a high school diploma or its equivalent, and the student did not satisfy the alternative to graduation from high school requirements. False certification would also include situations where a school falsified a student’s high school graduation status, or the student’s high school diploma was falsified by the school or a third party with which the school had a referral or affiliation relationship.

The Department proposed significant revisions to the financial responsibility regulations as well as the addition of new disclosure requirements. The proposal included amendments to the general financial responsibility standards to include actions and events that indicate or signal that (1) a school is likely to have to pay borrower defense claims, and (2) a school’s ability to pay claims or continue its participation in the Title IV programs is compromised. 

The following actions and triggering events would require the school to post a letter of credit with the Secretary:

(1) Repayment to the Secretary for losses from borrower defense claims at the present time or at any time during the most recently completed award years, subject to a materiality standard; 

(2) Payment during the three most recently completed award years of a debt or liability arising from an audit, investigation, or similar action initiated by a State, Federal, or other oversight entity, or the school settles or resolves a suit brought against it by that entity that is based on borrower defense claims, or the school is being sued by such entity and the potential liability exceeds 10 percent of its current assets.

(3) Certain accrediting agency actions, including being placed on probation or issued a show cause order and failing to demonstrate compliance with six months of the accrediting agency taking such action.

(4) Violating a provision or requirement in a loan agreement with its largest secured creditor or failing to make a payment in accordance with its debt obligations to its largest secured creditor for more than 120 days.

(5) Failing to derive at least 10 percent of its revenue from sources other than Title IV, HEA program funds (i.e. failing the 90/10 Rule).

(6) Publicly traded institutions having their stock suspended from trading or involuntarily delisted, failing to disclose in a report filed with the SEC certain judicial or administrative proceedings; or failing to file timely a required annual or quarterly report with the SEC.

(7) The number of students enrolled in gainful employment programs that are failing or in the zone under the debt-to-earnings rates is more than 50 percent of the total number of students enrolled in all the gainful employment programs at the institution. 

(8) 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 (subject to a limited exception for tax distributions to owners of for-profit schools taxed as pass-through entities).

(9) 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) The institution experiences significant fluctuations between consecutive award years in the amount of Direct Loan or Pell Grant funds, or a combination of those funds, received by the institution;

(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 corporate parent has a non-investment grade bond or credit rating; 

(v) The institution’s two most recent official cohort default rates are 30 percent or greater; 

(vi) The institution has high annual dropout rates; or

(vii) Any event reported to the SEC. 

If the institution is subject to the conditions listed in (1) or (2), above, the school would be required to post a letter of credit based on the amount of borrower defense claims paid and/or its liability for oversight agency actions. Each of the events listed in items (3) through (8) would be an automatic trigger requiring the institution to post a 10% letter of credit. For example, if three of the triggering events apply to a particular institution, then that institution would be required to post a 30% letter of credit. The factors listed under (9) are discretionary triggers, which means that the Secretary has discretion as to whether the existence of such factors would require the institution to post a letter of credit. If a school were unwilling or unable to provide a letter of credit, the Secretary could instead accept cash or agree to a set aside of future Title IV disbursements (i.e. a reserve fund) in lieu of a letter of credit but for an equivalent amount.

The proposed changes to the financial responsibility regulations would require an institution to notify the Secretary of any action or event listed above no later than 10 days after that action or event occurs. The Secretary would have the authority to take an administrative action against the institution for failing to provide timely notice. 

The Department also proposed adding to the reporting and disclosure provisions a requirement that a school would have to warn enrolled and prospective students of any requirement to post a letter of credit to the Department or if it has poor repayment outcomes. Repayment rates would be calculated by evaluating the share of each borrower’s debt that has been paid down over a period of five years and calculating the median rate of those borrowers. The target for the repayment rate was set at zero percent. As described by the Department, a zero percent repayment rate means that after five years, the borrower has not paid any principal amount with respect his or her original loan (i.e., the borrower is in negative amortization).

During the negotiation process, non-federal negotiators representing students and consumer advocates proposed adding a ban to the use of pre-dispute arbitration agreements. This proposal was supported by all the other non-federal negotiators at the meetings except for the negotiators representing for-profit institutions. A group of Democratic Senators submitted a letter to the Department in support of this proposal, and Senator Warren expressed her support of banning the use of student arbitration agreements when she addressed the committee on Wednesday, March 16, 2016.

The final proposal did not expressly ban the use of pre-dispute arbitration clauses or agreements. However, the rules did contain provisions that would require institutions to notify the Department of any arbitration or court actions filed by students that relate to borrower defense claims. Schools would also be prohibited from compelling arbitration of any such claims asserted by students in cases filed in a court on behalf of a class unless and until class certification was denied or the class claims were dismissed. The proposal included other limits on arbitration, including the venue in which the arbitration case could occur, requiring schools to report arbitration and/or court rulings to the Secretary, requiring arbitration proceedings be recorded and open to the public, not allowing any prohibitions against parties speaking about the arbitration, and allowing group arbitration claims in appropriate circumstances.

 

As stated above, the negotiated rulemaking committee did not reach consensus with respect to the proposals submitted by the Department. The Department is not bound by the proposals or discussions that occurred during the negotiated rulemaking committee meetings, and the final rules may be very different from the proposals described above. The descriptions herein of the proposals presented during the negotiated rulemaking committee meetings are intended to provide information about the process and an indication of what the final rules might look like. 

The Department’s goal is to publish final rules by November 1, 2016, which would have an effective date of July 1, 2017. In order to meet this deadline, it is expected that the Department will publish a Notice of Proposed Rulemaking (NPRM) later this Spring, followed by a 30- to 60-day public comment period, and the Department's final rule just before the deadline.

AACS is already taking steps to develop a response to the proposal based upon where the negotiations left off, which will be modified immediately upon receipt of the NPRM.  Upon completion of AACS' response early in the 30- to 60-day comment period, we will be calling upon you, the membership and the broader beauty and wellness industry, to submit responses to this vitally important proposal.