What s Next for the Department s Borrower Defense Rule?

What s Next for the Department s Borrower Defense Rule? AARON LACEY PARTNER, HIGHER EDUCATION PRACTICE THOMPSON COBURN LLP

Aaron D. Lacey o Partner, Higher Education Practice, Thompson Coburn LLP. Higher Education Practice o Provide regulatory counsel on federal, state, and accrediting agency laws and standards (e.g., Title IV, Title IX, Clery, consumer information). o Assist with postsecondary transactions, contract drafting and negotiation, policy creation, and compliance systems design. o Represent institutions in student and employee litigation, government investigations, administrative proceedings, audits, and reviews.

Prior Experience o Senior Vice President of Regulatory Affairs & Strategic Development for postsecondary institution. Oversaw regulatory, compliance, and government affairs matters for 24 campus locations in Midwest and Southeast United States, as well as for online division. o Attorney in DC Higher Education Practice. Provided regulatory and policy guidance, managed agency proceedings, drafted and negotiated wide variety of agreements.

Overview and Status of BDR Negotiated Rulemaking The BDR Origin Story Changes Introduced by BDR-1 The Federal Standard for BDR-1 Claims The BDR-1 Claims Process TC Resources

Borrower Defense Framework Financial Responsibility Triggers Arbitration Agreements Closed School Discharge False Certification Discharge Misrepresentation Repayment Rates for Prop. Schools

DATE Oct. 2015 Mar. 2016 June 2016 Aug. 1, 2016 Nov. 1, 2016 Jan. 19, 2017 May 24, 2017 June 16, 2017 July 1, 2017 EVENT USED announces BDR-1 negotiated rulemaking Negotiated rulemaking completed for BDR-1 Proposed BDR-1 published BDR-1 comment period closes Publication of Final BDR-1 Rule Publication of supplementary BDR-1 procedures for group claims brought by USED The California Association of Private Postsecondary Schools files a lawsuit challenging BDR-1 USED announces (1) indefinite delay of almost all elements of BDR-1 pending resolution of CAPPS litigation; (2) agency s intent to initiate new rulemaking to overhaul BDR-1 and create BDR-2; (2) public hearings to discuss agenda for BDR-2 rulemaking Original effective date of indefinitely delayed BDR-1 rule

DATE Oct. 24, 2017 EVENT USED (1) releases interim final rule that delays effective date of BDR- 1 until July 1, 2018; and (2) proposes further delay of BDR-1 until July 1, 2019, the date upon which BDR-2 would become effective. Nov. 13-15, 2017 First round of BDR-2 negotiated rulemaking Nov. 24, 2017 Deadline to comment on USED proposal to delay BDR-1 until July 1, 2019 Jan. 8-11, 2018 Feb. 12-15, 2018 May-June 2018 July 1, 2018 Aug.-Sept., 2018 Nov. 1, 2018 July 1, 2019 Second round of BDR-2 negotiated rulemaking Third round of BDR-2 negotiated rulemaking Likely time period for release of BDR-2 proposed rule Current effective date for BDR-1 Likely time period for close of comments on BDR-2 proposed rule Deadline for publication of BDR-2 final rule* Proposed effective date for BDR-1 and target effective date for BDR-2 *Pursuant to Section 482(c) of the HEA, ED must publish final regulations before November 1 of a given year in order for them to take effect on July of the following year.

The purpose of negotiated rulemaking o Process by which USED works to develop a rule in collaboration with representatives of groups who will be affected significantly by the rule. o Done through a series of meetings during which selected negotiators work with USED to achieve consensus.

Determination of issues o USED has an idea of where it wants to go, and typically will present negotiators with particular issues for discussion. o USED also solicits input from public before developing issue lists. o Committee members also may suggest issues to be added, subject to approval of the committee.

Selection of negotiators o USED solicits nominations for negotiators to represent specified groups. o After reviewing nominations, USED selects and announces committee, typically of 15-20 negotiators. o Committee members also may suggest additional negotiators to be added, subject to approval of the committee.

Possible outcomes o If consensus is achieved, USED uses that regulatory language in the proposed rule. o If consensus is not achieved, USED may elect to terminate the rulemaking, use regulatory language developed during the negotiations, or develop new regulatory language for all or a portion of its proposed rule.

In 1993, Congress created the Direct Loan program. As part of that legislation, Congress directed: [T]he Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part[.] HEA 455(h); 20 USC 1087e(h).

The following year, USED introduced at 34 CFR 685.206(c) the basic framework that still exists today: USED initiates DL collection proceeding Borrower asserts defense against repayment USED considers defense USED forgives loan amount USED has 3 years to initiate separate action to recover forgiven amount from institution

A borrower defense included: [A]ny 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. Former 34 CFR 685.206(c)

In 1995 Notice of Interpretation, USED added that cause of action must directly relate to the loan or to the school s provision of educational services for which the loan was provided. Personal injury tort claims or actions based on allegations of sexual or racial harassment, for example, would be excluded. 60 Fed. Reg. 37768 (Jul. 21, 1995).

With regard to timing: A borrower could assert a defense at any time, without regard to when the underlying act or omission occurred. USED only has three years from borrower s last award year to initiate proceeding to recover lost funds from school. Former 34 CFR 685.206(c)(3).

There was no discussion of the process USED would follow in a recovery action. However, in 1995, USED acknowledged schools entitled to due process in these proceedings. 60 Fed. Reg. 37768 (Jul. 21, 1995).

No collection action required New federal standard for BDR claim New time limitations on asserting claim New time limitations on recovery actions New individual claim process New group claim process New methods for calculating relief Does not require collection action to precede defense claim Judgement, breach of contract, and substantial misrepresentation Few limitations, which vary by nature of claim Time limits tied to statute of limitations and notice of claim No collection proceeding required USED staff reviews claim USED initiates process (no claims required) Hearing official reviews group claim New methods include valuation of institution s education

A borrower defense exists where an act or omission of the school relates to (1) the making of the loan or (2) the educational services for which the loan was provided, and: Was the basis for a judgement against the school; Was the basis for a breach of contract; or Was a substantial misrepresentation upon which the student actually relied. 34 CFR 685.222(a)-(d).

Includes any non-default, favorable contested judgment secured by a borrower or governmental agency based on State or Federal law in a court or administrative tribunal of competent jurisdiction. No limitation on when a claim can be brought. 34 CFR 685.222(b).

Includes any failure to perform under terms of contract with student, without regard to materiality. Contract can include an enrollment agreement and any school catalogs, bulletins, circulars, student handbooks, or school regulations. No limitation on claims to discharge future amounts owed and six-year limitation (from the date of the breach) on claims to discharge amounts already paid. 34 CFR 685.222(c); 81 Fed. Reg. 39341 (June 16, 2016).

Includes any substantial misrepresentation made by the school or any contractual partner. No materiality standard, but borrower must show actual, reasonable reliance to his or her detriment (except in group claims). No limitation on claims to discharge future amounts owed and six-year limitation (from the date of discovery) on claims to discharge amounts already paid. 34 CFR 685.222(d).

Substantial misrepresentation: 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. Neither intent or recklessness required, nor any showing that misrepresentation or detriment was material 34 CFR 668.71(c).

We believe that an institution is responsible for the harm to borrowers caused by its misrepresentations, even if such misrepresentations cannot be attributed to institutional intent or knowledge and are the result of inadvertent or innocent mistakes. Similarly, we believe this is the case even for statements that are true, but misleading. 81 Fed. Reg. 75948 (Nov. 1, 2016).

Finding of reasonable reliance more likely if evidence shows school was: 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 resource; 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 unreasonably pressuring the borrower or taking advantage of the borrower s distress or lack of knowledge or sophistication. 34 CFR 685.222(d)(2).

Should defense claims be brought outside the context of a collection action? Should nexus between act or omission and educational services be stronger? Should contract include catalogs, bulletins, and similar documents? Should rule include a materiality standard for breaches of contract? Should schools be responsible for accidental or inadvertent misrepresentations? Should substantial misrepresentation require material detriment? Should there be a rebuttable presumption of actual reliance in group claims based on misrepresentation? Are the statutes of limitations fair to institutions?

Borrower submits claim application and evidence to USED USED grants forbearance/suspends collection activity USED designates staff to review and resolve claim Staff notifies school of claim Staff reviews evidence, USED records, and any school submission Upon request, staff provides to borrower evidence USED deems relevant Staff issues written decision and notifies borrower In accordance with time limitations, USED initiates a separate action against school to establish liability and recover amounts owed pursuant to 34 CFR 668.87 34 CFR 685.222(e).

A borrower may request reconsideration at any time based on new evidence, which is relevant evidence (1) not previously provided and (2) not identified in the final decision as evidence relied upon. USED may reopen a claim at any time to consider new evidence. 34 CFR 685.222(e)(5).

USED may initiate a recovery action against a school: At any time for claims based on judgments against a school. For six years where claims are based on breach of contract or substantial misrepresentation. At any time if the school had notice of the claim before the noted periods expire. 34 CFR 685.222(e)(7).

A school has notice if it has received: o Actual notice from the borrower, a borrower rep, or from ED; o A class action complaint that may include the borrower; or o Written notice, including a civil investigative demand or other written demand for information, from a Federal or State agency that has power to initiate an investigation into conduct of the school relating to specific programs, periods, or practices that may have affected the borrower. 34 CFR 685.206(c)(3)-(4).

Should students and schools be able to first attempt resolution internally? Should an ALJ be involved in the discharge determination? Should USED be required to supply relevant evidence to a school upon request? Should schools be guaranteed a right to respond and a timeframe to do so? Should USED be required to provide schools with the written determination? Should a school or USED be able to reopen the matter at any time based on new evidence? What is the precedential value of the staff decision? What is the standard of proof in an individual BDR claim? Does the notice standard represent a reasonable risk allocation?

USED initiates claim on behalf of borrower group USED designates staff to represent group and notifies borrowers ALJ notifies school of claim, proceeding, and procedural rights ALJ considers evidence and argument from USED staff and school consistent with process outlined at 34 CFR 668.87. ALJ can elect to split claim and relief determinations Institution can request a hearing, request a pre-hearing conference, and/or file motion for summary disposition ALJ issues written decision on claim and relief USED Staff or School may appeal decision to Secretary Secretary issues final decision (or remands) and initiates collection activity, as applicable 34 CFR 668.87, 685.222(f) and (h).

If relief for the group has been denied in full or in part, a borrower may still file an individual claim based on the same underlying act or omission. USED may reopen a claim at any time to consider new evidence. 34 CFR 685.222(h).

USED may initiate a recovery action against a school: At any time for claims based on judgments against a school. For six years where claims are based on breach of contract or substantial misrepresentation. At any time if the school had notice of the claim before the noted periods expire. 34 CFR 685.222(h)(5).

Should USED be able to initiate a group claim absent individual claims? Should schools have the opportunity to cross-examine borrowers? Should ALJ be required to identify and provide to school evidence ALJ considers relevant? Should USED be able to reopen the matter at any time based on new evidence? Should a school also have a right to request a new review based on new evidence? What is the precedential value of the ALJ s decision? What is the standard of proof in a group BDR claim? Does the notice standard represent a reasonable risk allocation?

Webinar series on final borrower defense rule. Available free and on demand at: www.thompsoncoburn.com/tcle

Our higher education law blog, REGucation.

Aaron D. Lacey, Esq. Partner, Higher Education Practice Thompson Coburn LLP alacey@thompsoncoburn.com 314-552-6405

Please note that the purpose of this presentation is to provide news and information on legal issues and all content provided is for informational purposes only and should not be considered legal advice. The transmission of information from this presentation does not establish an attorneyclient relationship with the participant. The participant should not act on the information contained in this presentation or any accompanying materials without first consulting retained legal counsel. If you desire legal advice for a particular situation, you should consult an attorney. 47