NAICU Washington Update

Department of Education Creates Financial Responsibility Subcommittee

August 30, 2017

The Department of Education has heeded NAICU’s call and announced that it will create a subcommittee to address modification of the financial responsibility ratios. This move is as part of a broader effort to renegotiate the borrower defenses to repayment regulations.
The Financial Responsibility Subcommittee will be empowered to make recommendations to the larger borrower defenses to repayment committee, which will then attempt to incorporate those recommendations into a final negotiated package.
This summer, NAICU offered public testimony and written comments, urging the Department to create a panel devoted solely to fixing the flawed financial responsibility ratios. Given changing reporting requirements from the Financial Accounting Standards Board (FASB), and the consistent misclassification and/or misapplication of generally accepted accounting principles at the Department of Education related to the financial responsibility ratios, NAICU argued that it was essential that the Department revisit its methodologies.
The establishment of the advisory subcommittee is welcome news nearly five years after NAICU published its 2012 Report of the NAICU Financial Responsibility Task Force, which highlighted the many accounting flaws in the Department’s implementation of the current accounting standards. Scores of NAICU members have been caught up in “false negative” financial assessments because of these mistakes, often forcing them to purchase unneeded letters of credit to cover a federal financial risk that doesn’t exist. 
In general, the subcommittee is tasked with considering how recent changes to FASB requirements necessitate modifications to the Department’s financial responsibility regulations. Specifically, the subcommittee will review the calculation of the Primary Reserve Ratio, the Equity Ratio, and the Net Income Ratio that are used to calculate an institution’s composite score. Additionally, the subcommittee will consider whether clarifications of terms used in the Primary Reserve, Equity, and Net Income ratio calculations are needed as a result of changes in the financial accounting standards. 
The advisory subcommittee on financial responsibility will meet separately from the broader borrower defenses to repayment negotiated rulemaking panel. Given the complex subject matter, the Department will not only be seeking nominations for individuals to serve on the broader borrower defenses to repayment negotiated rulemaking panel, but also seeks nominations for individuals with accounting subject matter expertise to serve on the subcommittee. Therefore, the Financial Responsibility Subcommittee may be comprised of some borrower defenses to repayment negotiators, as well as individuals who are not committee members, but who have expertise that will be helpful in developing proposed regulations.
NAICU will be nominating interested parties to each panel. Meetings are currently scheduled to convene in Washington, DC in November 2017, and January 2018. 

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