United States: U.S. Department Of Education Finalizes "Borrower Defense To Repayment" Rules Effective July 1, 2020

Last Updated: October 17 2019
Article by Stephanie J. Gold, Greg Ferenbach and Michelle Tellock

On September 23, 2019, the U.S. Department of Education (ED) published final regulations concerning, among other things, "borrower defense to repayment" claims for federal student loans first disbursed on or after July 1, 2020, certain "triggering events" under ED's financial responsibility rules, disclosures related to predispute arbitration agreements and class action waivers, and closed-school discharges (the 2019 Final Rules). With very limited exceptions (related to optional early implementation of modifications to ED's composite score methodology), the 2019 Final Rules become effective on July 1, 2020 – meaning institutions must continue to comply with ED's 2016 Final Rules, which are now in effect, until that date. (For more information about the 2016 Final Rules currently in effect, including related reporting requirements under the financial responsibility rules, please see our previous alerts.) Like the 2016 Final Rules, the 2019 Final Rules apply to all institutions that participate in the Title IV federal student financial aid programs. Among other things, the 2019 Final Rules:

  • Revise the list of conditions or other "triggering" events that have or may have an adverse, material effect on an institution's financial condition and therefore warrant financial protection.
  • Update the definitions of terms used to calculate an institution's composite score to conform with changes in certain accounting standards, and to account for leases and long-term debt.
  • Establish a new federal standard by which borrower defense claims can be asserted for Direct Loans first disbursed on or after July 1, 2020, which claims must be based on a revised definition of "misrepresentation."
  • Remove prohibitions on predispute arbitration agreements or class action waivers, instead requiring institutions that impose such agreements or waivers as a condition of enrollment to disclose those requirements.
  • Modify ED's regulations related to student eligibility for closed-school discharges of federal loans.

Financial responsibility: triggering events and reporting requirements

The 2019 Final Rules revise the framework established by ED's 2016 Final Rules, which require an institution to report to ED the occurrence of certain "triggering" and related events that ED considers to be early warning signs of financial distress. If ED determines that an institution is not financially responsible because of one or more triggering events, ED may permit the institution to continue to participate in the federal student aid programs if, among other conditions, the institution provides an irrevocable letter of credit equal to at least 10 percent of the total amount of the federal student financial aid funds received by the institution for the past year.

As noted above, ED's 2016 Final Rules and the related reporting requirements remain in effect until July 1, 2020. For the new 2019 Final Rules effective after that date, ED has "recalibrated the triggers from the 2016 final regulation to more narrowly focus on actions or events that have or may have a direct adverse impact and eliminated the triggers from the [2016] final regulation that were speculative or not associated directly with making a financial responsibility determination" (84 Fed. Reg. at 49,862).

To that end, the 2019 Final Rules contain a slimmed-down set of "mandatory" and "discretionary" triggering events. ED will consider an institution unable to meet its financial or administrative obligations under ED's financial responsibility regulations if the institution is subject to one of the following "mandatory" triggering events:

  • The institution incurs a liability from a settlement, final judgment, or final determination arising from an administrative or judicial action or proceeding initiated by a federal or state entity, and as a result of that settlement, judgment, or determination the institution's recalculated composite score is less than 1.0.
  • A proprietary institution with a composite score less than 1.5 is subject to withdrawal of owner's equity (except for certain intercompany transfers), and as a result of that withdrawal the institution's recalculated composite score is less than 1.0.
  • For a publicly traded institution, (1) the Securities and Exchange Commission (SEC) issues an order suspending or revoking the registration of the institution's securities or suspends trading, (2) the relevant exchange finds the institution not in compliance with the exchange's listing requirements and the institution's securities are delisted, or (3) the SEC does not timely receive a required report and did not issue an extension.
  • For any institution, the institution is subject to two or more "discretionary" triggering events described below, unless a triggering event is resolved before a subsequent triggering event occurs.

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