October 18, 2018

Court Rulings Reinstate Obama Administration’s Borrower Defense to Repayment and Financial Responsibility Regulations

Through a series of opinions and orders on September 12 and 17, and October 12, 2018, the U.S. District Court for the District of Columbia held that procedural delays by the U.S. Department of Education (ED) to Borrower Defense to Repayment and Financial Responsibility regulations (the “2016 BDR Rules”) promulgated by ED under the Obama administration in late 2016 were improper, and that the 2016 BDR Rules would be reinstated as of 12 p.m. Eastern Time on October 16, 2018. In a separate but related action yesterday, the court rejected arguments by the California Association of Private Postsecondary Schools to preliminarily enjoin substantial parts of the 2016 BDR Rules.

As a result of these federal court actions, the 2016 BDR Rules are now reinstated. While the higher education community awaits further guidance from ED as to the applicability of the regulations to the period between July 1, 2017 (the original effective date), and yesterday, institutions should carefully review all of the requirements of the 2016 BDR Rules – as related to borrower defense claims, financial responsibility requirements, letter of credit triggers, closed school discharges, and student enrollment agreements, among other topics – and consider such requirements as immediately enforceable by ED. Below is a high-level overview of the most significant provisions:

  • Borrower defense claims may be grounded on favorable contested judgments against institutions, breaches of contract, or substantial misrepresentations. Additionally, a misrepresentation includes any statement that “misleads under the circumstances” or which “omits information in such a way as to make the statement false, erroneous, or misleading.”
  • Negligent or unintentional misrepresentations can give rise to borrower defense claims, even if they are the result of inadvertent or innocent mistakes by the institution or its representatives.
  • Borrower defense claims may be submitted and considered on a group basis, not solely at the individual borrower level. Additionally, ED may identify and aggregate members of a group for borrower defense relief even where no individual claim is filed.
  • There is no statute of limitations for borrower defense claims based on favorable contested judgments, or for claims tied to loan payments still owed where the borrower claims a breach of contract or substantial misrepresentation. For loan amounts already repaid, a claim based on breach of contract or substantial misrepresentation must be made within six years of the pertinent occurrence.
  • Borrower defense claims will generally be adjudicated under a “preponderance of the evidence” standard.
  • Financial responsibility standards include several “automatic” and “discretionary” triggers for ED requiring an institution to post a letter of credit. Additionally, the rules require reporting to ED of various events so that it can determine any potential impact on the institution, and retroactively recalculate the most recent year-end composite score, to account for such events.
  • Closed school discharges are available to individuals and to groups. ED will send closed school discharge applications to all affected students at the time of an institution’s closure (including the closure of an individual campus location). Additionally, if a former student of a closed school has not re-enrolled at another Title IV-eligible institution within three years, ED will automatically discharge that student’s loans, and may similarly do so for the entire group of affected students.
  • Student enrollment agreements may not include class action waivers or mandatory arbitration clauses. Additionally, existing enrollment agreements or similar contracts must be amended, and students must be provided with notice that those provisions are not enforceable.

This brief summary should not be construed to constitute legal advice with respect to the borrower defense or financial responsibility regulations, or any other education regulatory matters. Given the significance of this reinstatement of the 2016 BDR Rules, institutions are encouraged to discuss the requirements and potential consequences with their legal counsel and financial accounting firms. Drinker Biddle’s Education Team will continue to monitor developments on these and other postsecondary educational regulatory matters.

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