U.S. Department of Education 2019 Final Rule on Borrower Defense to Repayment Regulations
On August 30, the U.S. Department of Education (ED) released the long-awaited final regulations that update the process for adjudicating borrower defense to repayment (BDR) claims and relevant financial responsibility provisions. AACOM commented on ED’s proposed rule last year, which followed the work of a negotiated rulemaking committee. The final regulations also amend the pre-dispute arbitration and class actions waiver enrollment conditions and notifications, allowing institutions to impose mandatory arbitration agreements and waivers as a condition of enrollment so long as the disclosures of these provisions are stated in plain language. The new regulations revise the standards that ED will use to adjudicate BDR claims and will take effect for all new loans first disbursed on or after July 1, 2020. However, the regulations related to financial responsibility will be available for immediate implementation. Below is a review of key provisions of importance to osteopathic medical education.
The new regulations identify the following elements for a BDR claim:
- The institution made a misrepresentation of material fact “upon which the borrower reasonably relied” in deciding to obtain a student loan;
- the misrepresentation “directly and clearly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made,” and
- the borrower was “financially harmed by the misrepresentation.”
Under the new regulations, the limitations period for all BDR claims is three years from the borrower’s date of departure from the institution. The new regulations keep the 2016 regulation’s preponderance of the evidence standard for all BDR claims.
ED’s definition of “misrepresentation” in the new regulations is largely the same as the 2016 BDR regulations. A misrepresentation is defined as a statement, act, or omission that is false, misleading, or deceptive and is made with knowledge of its falsity or with reckless disregard for the truth that directly and clearly relates to enrollment, continuing enrollment, or the provision of educational services. Importantly, the Department provides in its summary that a borrower must still allege reliance on the misrepresentation in making an enrollment decision and monetary loss to the borrower. As such, institutions who previously complied with the 2016 BDR regulations on misrepresentation will likely continue to do so under the new regulations.
The new regulations provide a few non-inclusive examples of what constitutes as a misrepresentation, which include: misrepresentations about the employability or specific earnings of graduates without evidence; differences in actual licensure passage rates or employment rates from those advertised in marketing materials, online, or other communications; and misrepresentations about whether an institution has certain certifications, accreditation, or approvals for its programs.
The new regulations expand the criteria considered by ED as it relates to determining whether the borrower suffered financial harm, which will be based upon the borrower’s individual earnings and circumstances, as well as considerations of program-level median or mean earnings.
Process for Adjudicating BDR Claim
The new regulations make substantial changes to the notice and process provisions for adjudicating BDR claims. Under the new regulations, a borrower will not be required to go into default or be subject to collections to be eligible to file a claim. However, the new regulations have heightened requirements that must be submitted with a BDR claim. For example, under the new regulations, the borrower must allege that he or she relied on the institution’s misrepresentation and must allege the specific amount of financial harm incurred due to the misrepresentation. When submitting a claim, the borrower must also provide evidence of their allegations and state whether they made related claims with any third parties.
The borrower must sign and submit the application under penalty of perjury, as well as signing a waiver that permits the institution to share relevant information to the BDR claim with the ED from the borrower’s records. ED will notify and provide the institution with the borrower’s application. The institution will have an opportunity to respond to the evidence and submit its own evidence, which will be shared with the borrower.
ED will issue a written decision to the parties with reasons for the final determination, which the parties cannot appeal. The amount of relief ultimately granted may be greater or less than the borrower’s original claim amount but will not exceed the borrower’s full federal student loan liability.
The Department may initiate a proceeding to require the institution whose misrepresentation resulted in the borrower's successful BDR claim to pay discharged amounts to the Department but will not do so later than 5 years after the discharge decision.
Pre-Dispute Arbitration Agreements and Class Action Waivers
Institutions may use pre-dispute arbitration agreements and class action waivers as a condition of enrollment, so long as they provide disclosures to students in plain-language and the disclosures appear on the same pages of their website where admissions, tuitions, and fees information is also presented. Institutions must also include information on their internal dispute and arbitration processes in the borrower’s entrance counseling.
Financial Responsibility – Triggering Events
Similar to the 2016 BDR regulations, the new regulations require institutions to demonstrate to the Secretary that they are “financially responsible” under specific standards. An institution is not financially responsible when it fails to meet financial and administrative obligations due to the occurrence of a mandatory triggering event. In some instances, the Secretary may determine that an institution cannot meet its financial or administrative obligations due to the occurrence of a discretionary triggering event. Unlike the 2016 BDR regulations, the grouping of triggering events as mandatory or discretionary in the new regulations has changed.
Mandatory triggering events now include:
- the liability arising from a judicial final judgment, Federal or State administrative proceeding or determination, or from a settlement;
- withdrawal of an owner’s equity from the institution while the institution has a composite score of less than 1.5, unless the owner’s equity transferred to an affiliated entity used to calculate the institution’s composite score;
- the issuing of certain orders from the SEC related to compliance, revoking of registration, de-listing securities, or suspension of trade; and
- when the institution is subject to two or more discretionary triggering events (discussed below).
The new regulations identify six discretionary triggering events:
- the issuance of a show-cause order from the institution’s accrediting agency that, if unsatisfied, could result in the loss of accreditation;
- violation of a security or loan agreement with a creditor;
- notification from a State licensing or authorizing agency that a requirement has been violated and, if unaddressed, the State agency will withdraw or terminate the institution’s licensure or authorization;
- failure to meet the 90/10 rule;
- high annual dropout rates, as calculated by the Secretary; and
- the institution’s two most recent official cohort default rates are thirty percent or greater, unless there is a successful challenge by the institution.
It should be noted that the new regulations rescind the following triggering events from the 2016 BDR regulations:
- an accreditor requiring an institution to submit a teach-out plan for closing the institution, a branch, or additional location;
- programs one year away from losing their eligibility for Title IV, HEA program funds due to Gainful Employment metrics;
- significant fluctuations in Pell Grant and Direct Loan funds in consecutive award years, or over a period of award years, not due to Title IV program changes;
- an institution’s failure of a financial stress test to be developed or adopted by the Secretary; and
- the Secretary’s prediction of BDR claims as a result of a lawsuit, settlement, judgment, or finding from a State or Federal administrative proceeding.
Financial Responsibility – Financial Protection
The new regulations update terms used to calculate the composite score and amend the composite score methodology in accordance with Financial Accounting Standards Board standards. Moreover, in addition to letters of credit, the Secretary may now accept other types of surety or financial protection, cash for the amount required, or an arrangement where the Secretary offsets the amount of Title IV funds that an institution has earned so that, no later than the end of a six to twelve-month period, the amount offset equals the amount of financial protection the institution is required to provide. Additionally, in instances where the Secretary determines that the institution is liable as a result of a claim resulting in a discharged loan, the institution must repay funds and/or purchase loans.