Borrower Defense Regulations

1. Session 16 Borrower Defense Regulations Barbara Hoblitzell and Annmarie Weisman | Nov-Dec. 2016 U.S. Department of Education 2016 FSA Training Conference for Financial Aid Professionals

2. ABOUT US Agenda • Existing Direct Loan BD Regulation • New Direct Loan BD Regulation: • Federal Standard • Individual and Group Claims Processes • Financial Responsibility • Disclosure Requirements • Other Regulatory Changes

3. Existing Direct Loan BD Regulation: 685.206(c) 3

4. Existing DL BD Regulation • Publishedin 1994 • Included in Promissory Notes

5. Existing DL BD Regulation In any proceeding to collect on a Direct Loan, a borrower may assert as a defense against repayment an act or omission of the school that gives rise to a cause of action against the school under applicable State law.

6. Existing DL BD Regulation If a claim is successful, the borrower is relieved of the obligation to repay: • all or part of the loan • associated costs and fees Further relief is possible

7. Existing DL BD Regulation Examples of possible further relief include: • Reimbursing the borrower for amounts paid toward the loan • Determining that the borrower is not in default on the loan and reinstating Title IV aid eligibility • Updating adverse credit bureau reports

8. Existing DL BD Regulation Recovery: ED may initiate a proceeding to require the school to repay ED the amount of a discharged loan(s) when the school’s act or omission resulted in asuccessful BD claim • ED does not initiate such a proceeding after the record retention period ends unless the school received actual notice of the claim during that period See 34 CFR 685.206 (c)

9. New Direct Loan BD Regulations: 685.222 9

10. New DL BD Regulations • Easier to understand • More accessible; provides access to BD for all Federal student loan borrowers • Facilitates collection and review of evidence for resolving claims • Promotes more efficient, transparent, and fair claims processing

11. New DL BD Regulations • Access to BD relief for FFEL and Perkins borrowers through Direct Consolidation Loans • FFEL borrowers given the same access to administrative forbearance as DL borrowers during BD claim evaluation • Forbearance and GA stop collection provisions designated for early implementation on Nov. 1, 2016

12. New DL BD Regulations • Establishes a new Federal standard • Creates processes for individual and group claims • Establishes statutes of limitation for BD claims

13. New DL BD Regulations • Federal Standard • Favorable, contested judgment based on State or Federal law • Breach of contract • Substantial misrepresentation

14. New DL BD Regulations • Statutes of Limitation, Generally • For claims for relief from loan balances still owed: • None • For claims for recovery of amounts already paid: • Six years

15. New DL BD Regulations • Group Discharges • Easier path to relief for borrowers in cases of widespread misrepresentation or other cases affecting multiple borrowers • ED can identify groups of borrowers from individually filed applications or from any other source of information • Can include borrowers who did not file an application when common facts and claims exist

16. New DL BD Regulations • Schools may not enter into pre-dispute arbitration agreements • Schools may not forbid class actions for borrower defense-type claims. • Schools may not require students to first pursue an internal process before contacting accreditors and regulators about potential violations of the law. • Schools must notify the Secretary when arbitration and judicial claims are filed and the decisions and awards issued in arbitration and in court proceedings.

17. Regulatory Clarification: Pell Grant Reinstatement 17

18. Pell Grant Reinstatement • Lifetime Eligibility Used (LEU) • ED restoring semesters of Pell Grant eligibility for students at schools that closed before they completed their program • ED exploring the operational changes required to implement this, but will not require an application

19. Financial Responsibility 19

20. Financial Responsibility • Triggers & Early Warnings • Establishes triggering and early-warning events • When significant enough to cause the school to have a failing financial responsibility composite score, automatically requires schools to provide financial protection to ED • Protects taxpayers from shouldering the costs of the school’s liabilities

21. Financial Responsibility

22. Financial Responsibility • Financial Protections • Funds from LOCs could be used to cover the costs of closed school discharges and/or BD claims • Triggers tied to the school’s failing composite score standards or past performance

23. Financial Responsibility • Triggering Events: Automatic • Debts and borrower defense-related lawsuits • Other litigation • Accrediting agency actions • Cohort default rates • Gainful employment • Withdrawal of owner’s equity • 90/10 • SEC actions, SEC reports, Exchange actions

24. Financial Responsibility • Triggering Events: Discretionary • Any event or condition that is reasonably likely to have a material adverse effect on the institution’s financial condition, business, or results of operations, including but not limited to certain specified discretionary triggers.

25. Financial Responsibility • Triggering Events: Discretionary • Failing State of agency licensing requirements • Failing financial stress test • High annual drop-out rate • Actions that pose risk to accreditation status • Violation of a loan agreement • Pending BD claims • Anticipated BD claims as a result of a lawsuit, settlement, judgment, or finding from a State or Federal administrative proceeding

26. Disclosure Requirements 26

27. Disclosure Requirements • Disclosures of Triggering Events for Financial Protection • ED will consumer test which events, and what form of disclosure, are most relevant and useful to students • Affected schools must provide the disclosure to prospective and enrolled students

28. Disclosure Requirements • Repayment Rate Warnings for Students • Proprietary institutions with poor loan repayment outcomes must include a warning in their advertising and marketing materials • Repayment rates will be based on GE data • ED will consumer test warning language to ensure it is relevant to students

29. Other Regulatory Changes 29

30. Closed School Discharges • Borrowers will receive accurate and complete information regarding their eligibility for a closed school discharge earlier in the process • Borrowers may receive automatic discharges if they do not re-enroll at another school within three years

31. False Certification • False Certification • Provides for a false certification discharge if the school: • falsified the borrower’s high school graduation status • falsified the borrower’s high school diploma • referred the borrower to a third party to obtain a falsified high school diploma • ED may also discharge without an application when it has evidence that a school falsified a student’s SAP

32. Resources 32

33. BD Regulations: Resources • Borrower Defenses to Repayment Rulemaking website: http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html • DCL-GEN-16**

34. QUESTIONS?

35. Contact Information Barbara Hoblitzell – Management & Program Analyst Office of Postsecondary Education barbara.hoblitzell@ed.gov 202-453-7583 Annmarie Weisman - Director, Policy Coordination Group Office of Postsecondary Education annmarie.weisman@ed.gov 202-453-6712