Legal Alert: Department of Education Issues Guidance on Implementation of 2016 Borrower Defense to Repayment Final Regulations
The U.S. Department of Education (“Department”) has issued guidance on the 2016 Borrower Defense to Repayment (“BDR”) final regulations, which took effect following unsuccessful litigation by the Department to delay their implementation. Given changes that may have occurred at institutions between the original implementation date (July 1, 2017) and the effective date by court order (October 16, 2018), the guidance is meant to provide institutions direction on how to comply with the 2016 BDR final regulations. In reviewing the issued guidance and 2016 BDR final regulations, institutions will want to pay particular attention to the following timeframes and requirements:
Under the 2016 BDR final regulations, an institution must demonstrate to the Secretary that it is financially responsible under certain established standards. An institution is financially responsible if it maintains a composite score of at least 1.5, holds sufficient cash reserves, can meet all of its financial and administrative obligations, and is not subject to a condition of past performance. An institution fails to meet its financial and administrative obligations, and thereby is not financially responsible, if there is a “triggering event,” for example, if it derived at least 10% of its revenue from sources other than Title IV program funds (“90/10 requirement”), if its two most recent official cohort default rates were at 30% or greater, or if there were other events or conditions as determined by the Secretary’s discretion.
Triggering events under the 2016 BDR final regulations include:
- Debt or liability arising from a judicial or administrative final judgment or settlement;
- Lawsuits pending for 120 days and brought by a federal or state authority for financial relief on claims related to the institution making Direct Loans for student enrollment;
- Any other litigation brought on or after July 1, 2017 that is close to or past the summary judgment or pretrial conference stage;
- An accrediting agency’s requirement that the institution submit a teach-out plan;
- Insufficient debt-to-earning rates for gainful employment programs that would make the programs ineligible for the next award year; and
- Withdrawal of an owner’s equity from the institution when the institution has a composite score of less than 1.5, unless the withdrawal transferred to an affiliated entity used to calculate the institution’s composite score.
Recognizing that some institutions may have had a triggering event, condition, or occurrence since the original implementation date and the present, institutions are to provide notification to the Department within 60 days of March 15, 2019 by emailing FSAFRN@ed.gov. Specific to lawsuits, institutions should only notify the Department of lawsuits that are still pending as of March 15, 2019. For violations of the 90/10 requirement, an institution must notify the Department 45 days after the end of the institution’s first fiscal year beginning on or after July 1, 2017. For future triggering events, conditions, or occurrences that affect an institution’s financial responsibility, institutions must notify the Secretary within 10 days.
Student Claims and Disputes
Under the 2016 BDR final regulations, institutions are prohibited from compelling students to pursue BDR claims through an internal dispute process before pursuing a complaint with a government or accrediting agency. Moreover, institutions are prohibited from relying on predispute arbitration agreements or class action bans. The guidance provides that institutions can have and enforce mandatory predispute arbitration requirement or class action bans for claims unrelated to BDR or for claims brought by students who are not Direct Loan borrowers (e.g., tort claims or sexual or racial harassment claims). Additionally, the guidance makes clear that students may still enter into post-dispute arbitration agreements after raising grievances with their institution.
Institutions continue to have obligations under the 2016 BDR final regulations to submit arbitral and judicial records to the Department in connection to a BDR claim. The issued guidance directs institutions to send arbitral and judicial records for BDR claims that are pending as of July 1, 2017 to firstname.lastname@example.org.
Institutions who have entered into mandatory predispute arbitration agreements or who have relied on predispute arbitration agreements or class action bans since the original implementation date of the 2016 BDR final regulations have two options: (1) amend the mandatory predispute arbitration agreement within 60 days of March 15, 2019 to contain the language provided in the final regulations; or (2) comply with notice requirements within 60 days of March 15, 2019 as outlined in the final regulations. It is also important to note—institutions must provide students in ongoing arbitration with the same notice as described in option (2) within 10 days of March 15, 2019.
Loan Repayment and Financial Protection Disclosures to Students
Under the 2016 BDR final regulations, institutions are required to notify the Secretary when students have failed to repay loans at sufficient rates or when certain triggering events have occurred. Institutions are also required to notify enrolled and prospective students within 30 days of these occurrences and must use the warning language provided in the final regulations to do so. However, pursuant to the issued guidance, institutions will be informed in an upcoming Federal Register notice of when and how they must provide repayment rate warnings to students in the future and of any changes to the content of the warning. Moreover, while the Department engages in consumer testing to determine which triggering events and what kinds of disclosures will be meaningful and helpful to students, institutions do not need to disclose students of certain triggering events until further notice from the Department.
During a Negotiated Rulemaking session on Accreditation and Innovation earlier this year and at FSA’s Training Conference in November of 2018, Department officials indicated that the Department planned to issue a new notice of proposed rulemaking for BDR. What remains unclear is when the Department will issue the new proposed rules, and what, if any, significant changes will be made.
Should you have any questions or concerns about the implications of this guidance or the 2016 BDR final regulations, please contact HMBR’s Higher Education Group at 312-946-1800.
 A publicly-traded institution fails to meet its financial and administrative obligations and thereby is not financially responsible if it fails to file required annual or quarterly SEC reports, if it receives certain warnings from the SEC, if it is receives certain notifications from the exchange on which its stock is traded, or if its stock is de-listed.