To: Negotiated Rulemaking Committee Members From: Dennis Cariello & Chris Deluca Date: March 2, 2016 Re: Proposed Revisions to Department s Issue Papers 1-3 We wish to thank the Department of Education for the opportunity to submit this proposal. We have very much attempted to take into account all of the goals the Department has expressed for this rulemaking and believe this proposal faithfully achieves these goals. This document presents proposed regulatory language and, where appropriate, certain explanations for our recommended approach. So that to the extent possible our input reflects a broad perspective, we continue to dialog with members from our respective communities of interest. As such, we may have additions (or deletions) to this proposal based upon our review of the draft regulations presented to the negotiators prior to the final session. We offer these proposals in the interest of collaboration with the Department but note that offering such proposals is not meant to express agreement on whether the Department has the authority to enact any proposal, or part of a proposal, currently under consideration. We continue to raise serious objections regarding the Department's authority to regulate in this area many of which have been addressed at the negotiating table. While we wish to negotiate in good faith to develop the best rule possible, we do wish to mention these express reservations. Lastly, this proposal is offered as an entire package (together with the proposal for Issue paper 5) and each section has been calibrated to operate with each of the other sections. As such, we may not support a proposal that incorporates only any singular idea or ideas presented here. For ease of reading, we have accepted all of the Department s proposed changes in the issue draft discussed at the February rulemaking session, and imposed our proposed changes on top of the Department s language. 668.71 Scope and special definitions. * * * * (c) The following definitions apply to this subpart: Misrepresentation: Any false, erroneous, or misleading statement that an eligible institution, one of its representatives, or any ineligible institution, organization, or person with whom the eligible institution 1
has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, makes directly or indirectly to a student, a prospective student, a member of the public, an accrediting agency, a State agency, or the Secretary. A misleading statement 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 includes any statement that omits facts in such a way as to make the statement false, erroneous, or that has the likelihood or tendency to deceivemisleading. 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. Prospective student: Any individual who has contacted an eligible institution for the purpose of requesting information about enrolling at the institution or who has been contacted directly by the institution or indirectly through advertising about enrolling at the institution. Substantial misrepresentation: Any misrepresentation to a person on which that person could reasonably be expected to rely, or has reasonably relied, to that person's detriment. 685.206 Borrower responsibilities and defenses. (a) The borrower must give the schoolinstitution the following information as part of the origination process for a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan: (1) A statement, as described in 34 CFR part 668, that the loan will be used for the cost of the student's attendance. (2) Information demonstrating that the borrower is eligible for the loan. 2
(3) Information concerning the outstanding FFEL Program and Direct Loan Program loans of the borrower and, for a parent borrower, of the student, including any Federal Consolidation Loan or Direct Consolidation Loan. (4) A statement authorizing the schoolinstitution to release to the Secretary information relevant to the student's eligibility to borrow or to have a parent borrow on the student's behalf (e.g., the student's enrollment status, financial assistance, and employment records). (b)(1) The borrower must promptly notify the Secretary of any change of name, address, student status to less than half-time, employer, or employer's address; and (2) The borrower must promptly notify the schoolinstitution of any change in address during enrollment. (c) Borrower defenses. (1) For loans first disbursed prior to July 1, 2017, the borrower may assert as a defense to repayment, any act or omission of the schoolinstitution 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 schoolinstitution under applicable State law. (2) (i) To assert a defense to repayment of a Direct Loan, the borrower must follow the procedures in 685.222. (ii)(a) For a defaulted Direct Loan, if the borrower asserts both a defense to repayment under this section and any other objection to an action of the Secretary with regard to that defaulted Direct Loan, the Secretary notifies the borrower of the order in which the Secretary considers the defense to repayment and any other objections. Except as provided in the notification, the Secretary considers the defense to repayment through the completion of the procedures in 685.222 first and then, as needed, any other objections under the procedures applicable to the particular action. (B) The Secretary defers any action to report a debt as in default, and defers or suspends any action to collect in accordance with 685.222(e)(3)(i). 3
(3) If the borrower's defense to repayment is successful, the Secretary notifies the borrower that the borrower is relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay. The Secretary affords the borrower such further relief as the Secretary determines is appropriate under the circumstances. Further relief may include, but is not limited to, the following: (i) Reimbursing the borrower for amounts paid toward the loan voluntarily or through enforced collection. (ii) Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act. (iii) Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan. (4) The Secretary may initiate an appropriate proceeding to require the schoolinstitution whose act or omission resulted in the borrower's successful defense to repayment of a Direct Loan to pay to the Secretary the amount of the loan to which the defense applies in accordance with 685.222(l). However, the Secretary does not initiate such a proceeding after the period for the retention of records described in 685.309(c) unless the institution received actual notice of the claim during that period. 685.222 Borrower defense to repayment. (a) General. (1) For loans first disbursed prior to July 1, 2017, the Secretary discharges the borrower s obligation to repay a Direct Loan in accordance with the provisions of 685.206(c). (2) For loans first disbursed on or after July 1, 2017, the Secretary discharges the borrower s obligation to repay a Direct Loan in accordance with the provisions of this section if a preponderance of the there is sufficient evidence demonstrating demonstrates that the borrower has a defense to repayment that 4
relates to the making of the loan or the provision of educational services and meets the requirements under paragraphs (b), (c), or (d) of this section. (3) An act or omission of an institution that violates A violation by the school of an eligibility or compliance requirement in the Higher Education Act or its implementing regulations is not a basis for a borrower defense to repayment claim unless the violation act or omission would otherwise constitute a basis for a borrower defense to repayment claim under this section. (4) For the purposes of this section, "borrower" means-- (A) The borrower; and (B) In the case of a Direct PLUS Loan, the student and any endorsers. (b) Judgment against the schoolinstitution. The borrower has a defense to repayment under this section if the borrower, whether as an individual or as a member of a class, has obtained, or a governmental agency has obtained for the borrower s benefit, a favorable judgment in a court of competent jurisdiction against the schoolinstitution. A borrower may assert a defense to repayment under this paragraph (b) at any timewithin ten years of obtaining the judgment. (c) Breach of contract by the schoolinstitution. The borrower has a defense to repayment under this section if the schoolinstitution 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 under this paragraph (c) not later than two three years after the breach by the schoolinstitution of its contract with the student. (d) Substantial misrepresentation by the schoolinstitution. The borrower has a defense to repayment under this section if the schoolinstitution or any of its representatives, or any institution, organization, or person with whom the schoolinstitution has an agreement to provide 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 relied on when the borrower decided 5
to attend, or to continue attending, the schoolinstitution. A borrower may assert a defense to repayment under this paragraph (d) within two three years after the borrower discovers, or reasonably could have discovered, the facts constituting the substantial misrepresentation. (e) Discharge application. (1) To obtain a discharge of a loan under this section, a borrower must-- (i) Submit a discharge 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 schoolinstitution; (B) Providing material that supports the borrower s defense to repayment; and (C) Indicating whether the borrower has made a claim with respect to the schoolinstitution's actions 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 requested by the Secretary. (2) The application for discharge may be filed or pursued as applicable by an individual borrower, a representative on the behalf of a group of individually identified borrowers with common facts and claims, or the Secretary on behalf of a group of borrowers identified by the Secretary who apply for discharge, under procedures to be determined by the Secretary. (3) Upon receipt of a borrower s discharge application, the Secretary (i) Unless the borrower is in default on the loan for which a defense to repayment 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 685.209 and the income-based repayment plan under 685.221. (ii) If the borrower is in default on the loan for which a defense to repayment has been asserted 6
(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 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. (f) Process for review of a discharge application. (1)(a) Initial review. Upon receipt of a borrower s discharge application, the Secretary reviews the application to determine whether the application states a basis for which the Secretary can grant a discharge of a loan. In furtherance of that review, the Secretary; may seek and consider any additional information relating to the application; and provides the borrower any official records pertinent to resolution of the claim that the borrower reasonably requests. (b) If, after the Secretary s initial review, the Secretary deniesdetermines the borrower s defense to repayment claim does not assert a basis upon which the Secretary may discharge a loan, the Secretary notifies the borrower in writing of that decision and notes the portion of the loan that is due and payable to the Secretary, and informs the borrower that the loan will return to its status prior to the borrower s discharge application. (c) If, after review of the application and the information obtained by the Secretary, the Secretary determines the borrower s claim asserts a basis upon which the Secretary may discharge a loan, A the borrower s claim for defense to repayment is then resolved in accordance with the following procedures. (2) Discharge applications with respect to loans made to attend a closed schoolinstitution. For a discharge application made with respect to a Direct Loan to attend an schoolinstitution that has closed and has provided no financial protection currently available to the Secretary from which to recover any losses from a loan discharged under this section, or from which the Secretary cannot otherwise recover 7
such losses, the Secretary shall, in addition to considering any information provided by the borrower and other sources, attempt to obtain information from the institution to the extent possible. After a review of all the available evidence-- (i) If, after the Secretary s initial review, the Secretary approves the borrower s defense to repayment claim, the Secretary notifies the borrower in writing of that decision and the relief is provided on the basis of that claim as determined under paragraph (g) of this section; or (ii) If, after the Secretary s initial review, the Secretary denies the borrower s defense to repayment claim, the Secretary notifies the borrower in writing of that decision and notes the portion of the loan that is due and payable to the Secretary, and informs the borrower that the loan will return to its the status it held prior to the borrower s discharge application. (3) Discharge applications with respect to loans made to attend an open schoolinstitution. For a discharge application made with respect to a Direct Loan to attend an open schoolinstitution or an schoolinstitution that is not otherwise covered by paragraph (f)(2) of this section, the borrower s claim for defense to repayment is resolved in accordance with the procedures in this paragraph (f)(3). (i) If, after the Secretary s initial review, the Secretary permits the borrower s defense to repayment claim, the Secretary notifies the borrower and the relevant institution in writing of that decision and initiates the The claim will be resolved through a fact-finding process established by the Secretary in which both the schoolinstitution and the borrower will be given the opportunity to participate. (ii) A hearing official will decide the claim and issue a written decision on the claim. (A) For claims based on (b) and (c) of this section involving three or fewer borrowers and for less than $25,000, the hearing official shall be a [ ] assigned from the Office of Federal Student Aid s [ ] Division. 8
(B) For claims based on (d) of this section, and claims involving more than three borrowers or for more than $25,000, the hearing official shall be an administrative judge assigned through the Office of Hearings and Appeals. (iii) At the Secretary s discretion and with the borrower s consent, the Secretary may designate a department official to present the borrower's claim in the process described in paragraph (f)(3)(i) of this section. (iiiiv) At the Secretary s discretion and with the borrowers' consent, the Secretary may consolidate borrowers claims involving common questions of law or fact for the purposes of the process established under paragraph (f)(3)(i) of this section. (iv) The Secretary shall afford the borrower and the institution with an opportunity to review and receive copies of any materials relevant to the borrower s defense in the Secretary s possession. (vi) At any point prior to the rendering of a decision by the hearing official, the institution may resolve the matter with the borrower and repay all or part of the borrower s loan, on terms acceptable to the parties and the hearing officer. An institution that voluntarily resolves a borrower defense claim may make any payment to repay the loan without incurring any penalties described in 34 CFR 668 subpart L or negatively affecting the institution s cohort default rate, as per 34 CFR 668.183(c)(iii). (vii) If a borrower s defense to repayment is approved under the procedures in paragraph (f)(3) of this section, the Secretary notifies the borrower in writing of that decision and the relief provided on the basis of that claim as determined under paragraph (g) of this section. (viii) If a borrower s defense to repayment is not approved under the procedures in paragraph (f)(3) of this section, the Secretary notifies the borrower in writing of that decision and notes the portion of the loan that is due and payable to the Secretary, and that the loan will return to its status prior to the borrower s discharge application. 9
(g) Relief pursuant to discharge. If the borrower's defense to repayment claim is approved under the procedures in paragraph (f) of this section (1) As part of the procedures in paragraph (f), Tthe Secretary or the hearing official, as applicable, determines the each borrower s injury caused byarising out of the facts underlying the borrower s Commented [A1]: I m not sure I understand why in one instance it is the Secretary or a hearing official. I d like clarification here on this point. defense to repayment. The borrower s injury may be calculated based on one or more of the methods described in Appendix [A] to this section. (2) 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. In determining the amount of the discharge, the Secretary or the hearing official, as applicable, considers the borrower s injury as determined under paragraph (g)(1) of this section. (3) The Secretary or the hearing official, as applicable, shall 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 more of the following (as applicable): (i) Reimbursing the borrower for amounts paid toward the loan voluntarily or through enforced collection through a payment made directly to the borrower (and not through an intermediary). (ii) Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act. (iii) Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan. (iv) In cases where the Secretary discharges at least half of the borrower s loans from an institution, the Secretary shall also reinstitute the borrower s eligibility for Pell Grants in an amount equal to the amount of Pell Grants received while at the institution for which the loans were discharged. (4) The total amount of the relief granted with respect to the defense to repayment cannot exceed the amount of the loan and any associated costs and fees and will be reduced by the amount of any refund, 10
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 s defense to repayment claim. (5) The decision of the Secretary or the hearing official, as applicable, is final as to the merits of the claim and any relief that may be warranted on the claim. (h) Cooperation by the borrower. To obtain a discharge under this section, a borrower must cooperate with the Secretary in any proceeding under paragraph (f) of this section. The Secretary may revoke any discharge granted to a borrower who fails to satisfy his or her obligations under this paragraph (h). (i) Transfer to the Secretary of the borrower's right of recovery against third parties. (1) Upon any discharge 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 schoolinstitution, its principals, its affiliates, and their successors, its sureties, and any private fund, including the portion of a public fund that represents funds received from a private party. (2) The provisions of this paragraph (i) 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 (i) limits or forecloses the borrower's right to pursue legal and equitable relief against a party described in this paragraph (i) 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. 11
(j) Discharge procedures initiated by the Secretary. The Secretary may, after determining that there may be a basis for a defense to repayment under any of paragraphs (b), (c), or (d) of this section, identify and contact any other Direct Loan borrower who may have a claim for a loan discharge on the same basis. (k) Recovery by the Secretary. (1) The Secretary collects from the schoolinstitution the amount of relief resulting from a successful defense to repayment claim, as provided in 34 CFR 685.308(b). (2) Any amounts paid by the Secretary under this section to discharge loans from any schoolinstitution shall constitute a debt owed solely by the institution to the Secretary. (3) In order to satisfy any amounts owed to the Secretary under this part, and in the absence of another payment plan acceptable to the Secretary, the institution may elect to have the Secretary collect the amount owed as an offset from any Title IV payments received by the institution from the Secretary. Such offset shall be at a percentage (based on the prior year s Title IV disbursements) determined to retire the debt owed within five (5) years. The maximum amount of such off-set, however shall be five percent (5%) of the total Title IV funds requested. If the debt is not paid off within five years, the eligible institution shall continue to have Title IV usage off set until it is repaid. Such offset shall come out of funds to be paid to the institution and shall not affect amounts payable to eligible students, including any amounts owed for any credit balances payable to students. (4) An eligible institution may, at any time, make additional payments to the Secretary to retire any debt owned under this section. 685.308 Remedial actions. (a) In general, Tthe Secretary requires the schoolinstitution to pay the Secretary the amount of losses the Secretary incurs on loans that the Secretary determines to be unenforceable (in whole or in part) because of an act or omission of the schoolinstitution or dischargeable under 685.214, 685.215(a)(1)(i), (ii), or (iii), or 685.216 or that were disbursed 12
(i) to an individual, because of an act or omission of the schoolinstitution, in amounts that the individual was not eligible to receive or (ii) because of the schoolinstitution's violation of a Federal statute or regulation. (b) An institution may request a hearing before an administrative judge to contest the assertion of any claims for recoupment by the Secretary under 34 CFR 685.222(k). In such a hearing, the institution may assert an affirmative defense to any claims of recoupment represented by the Secretary, including but not limited to any of the following: (1) that the institution has a licensure exam pass rate associated with the program attended by the borrower(s) of at least the average pass rate in the relevant state (or otherwise complies with standards of its institutional or programmatic accreditor on this issue, if any); (2) that the borrower in question passed the relevant licensure exam, or has obtained a license related to the education provided by the eligible institution; (3) the institution can show that any substantial misrepresentation that forms the basis of a borrower defense claim was not the result of an act or omission that was intentional or taken with reckless disregard for the truth of the matter; (4) the institution can show that the misrepresentation was subsequently corrected by the institution; (5) the institution can show that the institution had policies, procedures or training in place that attempts to prevent the misrepresentation giving rise to the borrower defense; or (6) the institution can show it has offered to pay for a licensure exam prepatory course for the student or that it provides courses to students to assist students that have failed a licensure exam; or (7) the institution can show that a financial exigency or other economic hardship occasion the inability to provide a good or service that has given rise to the claim for breach of contract. 13
(c) In requiring an schoolinstitution to repay funds to the Secretary for losses identified in an audit or program review, the Secretary follows the procedures described in 34 CFR part 668, subpart H. For other losses, the Secretary follows the procedures applicable to the determination of those losses. (dc) The Secretary may impose a fine or take an emergency action against an schoolinstitution or limit, suspend, or terminate an schoolinstitution's participation in the Direct Loan Program in accordance with 34 CFR part 668, subpart G. 14
Appendix A The Secretary or the hearing official, as appropriate, may consider a number of factors in light of each borrower s unique circumstances in determining the amount of a borrower s injury where complete relief is not warranted, including but not limited to: (A) The difference between the actual in tuition paid by the student in the program between the program attended by the student and the average tuition for a comparable pool of programs, as determined by the Secretary, to which the student reasonably would have obtained entry; (B) The difference between the amount of financial charges the student could have reasonably believed the schoolinstitution was charging, and the actual amount of financial charges made by the schoolinstitution; (C) The difference between the student s earnings (i) one year after leaving the program or schoolinstitution, and (ii) the average salary publicized by the schoolinstitution as being earned by its graduates in the previous year or, if such data is not available, the expected salary for the program s designated occupation(s) or field, as determined by the U.S. Bureau of Labor Statistics, using the lowest decile of earnings for that occupation as reported in the U.S. Bureau of Labor Statistics for the county in which the institution is located; (D) The total amount of the student'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. Economic loss also includes the amount the institution collected and failed to pay to third parties on behalf of the student for license fees or any other purpose. Economic loss does not include transportation, application fees, or non-pecuniary damages such as inconvenience, aggravation, emotional distress, or punitive damages. The value of the benefit of the education, for the purposes of this section, may include transferable credits obtained by the student; and for gainful 15
employment programs, qualifying placement in an occupation within the Standard Occupational Classification (SOC) code for which the training was provided, provided the student s earnings meet the expected salary for the program s designated occupation(s) or field, as determined in accordance with paragraph (c)(2)(c); and (E) Whether the institution corrected any misrepresentation giving rise to the borrower defense during the term of the student s enrollment or provided factually correct disclosures to the student addressing the asserted misrepresentation; and (F) Such other factors as determined by the Secretary. 16