NAICU Washington Update

Negotiated Rule-making Panel Continues Its Review of Borrower Defense Claims: NAICU Seeks Comments

March 02, 2016

The second of three negotiated rule-making sessions, established to consider regulations for borrower defenses to loan repayment, was held February 17-19, 2016. Originally conceived in the wake of the collapse of Corinthian College, the panel was convened to consider new standards by which a borrower can have a federal loan forgiven due to institutional actions or omissions. While the first session, held in January, discussed concepts related to borrower defenses, the second session reviewed possible regulatory language provided by the Department of Education.

The proposed regulations provide an eligibility blueprint for using the borrower defense repayment (BDR) defense, the application processes, and consequences for schools that are found at fault. During the panel, consumer advocate groups pushed to make the borrower defense process open and easy for harmed borrowers. Simultaneously, college and university representatives stressed the need to assure safeguards and due process remain in place for institutions. In addition, the Department has also expressed its need to protect the federal fiscal interest, as well as assure fair treatment of both borrowers and schools, while proposing language that expands the potential for suits and increases penalties for institutions. It will not be easy to develop consensus on the various and complex issues, and achieve acceptable balance among these goals.

Below are several unresolved issues related to borrower defenses and financial responsibility:

  • Misrepresentation: The regulatory proposal presented by the Department would add the phrase “any statement by an institution that omits facts in such a way as to make the statement false, erroneous, or misleading.” to the current definition of misrepresentation. A borrower defense from repayment case can only be made on the basis of substantial misrepresentation (i.e., a misrepresentation on which the borrower relied in making the decision to attend the school).
  • Borrower Defenses: The regulations propose that the current regulatory processes for BDR cases would be used by Direct Loan borrowers suing in regard to loans issued prior to July 1, 2017. Borrowers applying for relief after that date would use the new processes developed. An effort by some negotiators to extend eligibility for the borrower defense to repayment to FFELP borrowers isn’t settled. However, there is a proposed 2-year statute of limitations on BDR cases involving Direct Loans.
  • Grounds for BDR: The Department has proposed three grounds for BDR: 1) a court judgment against the school: 2) a breach of contract by the school; and 3) substantial misrepresentation by the school. A 2-year statute of limitations has been proposed for the last two grounds. There is opposition to both the time-limit and limiting the legal processes strictly to judgments.
  • Loan Discharge Application: An individual Direct Loan borrower (including a PLUS borrower), or a representative of a group of such borrowers, may seek loan discharge under BDR. Depending on the situation, the Secretary may also discharge a class of loans. Borrowers must submit a discharge application, provide relevant material, and indicate whether other compensation was received. Some negotiators expressed concern over the need for borrowers to complete an application form and/or provide information.
  • Discharge Process: In the case of a closed school, the existing process calls for the Secretary to review the situation and make a final decision. It is proposed that when a school is still open, however, a more complex process, including a hearing, would now be used to process borrower defense claims. Some negotiators are concerned that the process for resolving cases involving open schools could become an adversarial process favoring better-resourced institutions. The Department has yet to define the due process that will be afforded institutions.
  • Limits to Relief: Because the relief provided a borrower is based on the amount of the loan, the relief is limited to the cost of attendance. Personal economic loss, such as inconvenience or emotional distress, is not included. Some at the negotiation table want to include such losses, as is done in state consumer cases. The Department asserts it does not have authority to do this.
  • Recovery from the School: In the case of successful BDR cases, the Department may seek recovery from the institution involved, on the grounds of misrepresentation, closed school discharge, false certification, unpaid refunds, aid to an ineligible student, or violation of Federal statute or regulation. The Department proposes using existing procedures for recovery, but will propose additional procedures at the final negotiated rule-making session. (The Department is also considering updating the definition of false certification, which currently states that a borrower could have a loan forgiven if an institution falsely certifies a borrower’s eligibility, or in cases of identity theft.)
  • Financial Responsibility: The general financial responsibility standards would be broadened to include actions and events that signal that a school is likely to have to pay BRD claims, and its ability to pay claims or continue participation in Title IV programs is “compromised.” NAICU is very concerned about the proposed changes to the financial responsibility standards given that existing concerns about the system have not been addressed.
  • New Reliance on Letters of Credit: The proposed regulations also would change some existing financial responsibility requirements into automatic triggers for letters of credit (LOCs). These include a violation of any existing loan agreement, failure to pay existing debt within 120 days and at least one creditor has filed suit to recover funds, and not making required repayments under Title IV. It also makes certain actions by an accrediting agency, such as a show cause order, become triggers. Cohort Default Rates could also become triggers for LOCs.

    There are number of additional mandatory triggers, including some that apply to all institutions (such as poor performance at schools with high percentages of gainful employment students), and others that apply only to for-profit institutions (violations of the 90/10 rule, for example). For each violation, the institution would have to purchase a LOC. The amount of the LOC would depend on the trigger and could be based on the amount of BRD claims over 3 years or 10% of Title IV received the prior year.

    In addition to the mandatory triggers, there are also new discretionary triggers available to the Secretary including: outstanding or pending borrower defense claims, significant fluctuation in Direct Loans or Pell Grant volumes, financial aid problems reported by state licensing or authorizing agencies, or high annual drop-out rates. The Secretary could require a LOC of at least 10% of the institution’s Title IV funds, for each of these or other factors likely to have an adverse financial effect.

    An institution may contest the amount of the LOC if the conditions requiring the LOC no longer exist or are resolved so as to eliminate the financial risk, or the institutions offers alternative financial protection.
  • New Disclosure Requirements: An institution also must disclose to enrolled and prospective students if its federal loan repayment rate (5 years out) is too low, or if it has been required to purchase a LOC. This must be done within 30 days of the Secretary notifying the institution of either. The disclosure information may be hand-delivered or sent by email. If sent by email, the institution must receive acknowledgement that the student has received the notice. If it doesn’t it must try other methods and keep records of its efforts.

The proposed language, as well as background information, and statements submitted by negotiators, can be found on the Department’s Negotiated Rule-making 2016 website. In addition to borrower defenses to repayment, a number of noncontroversial/technical issues are also under consideration and are described on the website.


NAICU would very much appreciate comments on the overall regulatory proposal or specific aspects of it before the final negotiated rule-making session on March 16-18. To comment on the proposed regulation, please email Maureen Budetti at by March 11, 2016.

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