Borrower Defense Neg Reg Day 2: Committee Discusses Partial Relief, Institutional Liability, Statute of Limitations
Committee members on Tuesday dove into substantial issues in developing a new borrower defense to repayment regulation, including the idea of partial relief, institutional liability, statutes of limitations for borrowers to file claims and for the Department of Education (ED) to initiate recovery proceedings from schools, and administrative forbearance.
The negotiators gathered for the second day in the second session of negotiated rulemaking, or neg reg, for borrower defense. After spending the majority of the first day debating the wording of two particular provisions, the committee made slow progress on Tuesday as it continues to work through eight separate “issue papers” dealing with different topics to consider in rewriting the federal regulation.
The committee began discussing draft regulatory language outlining how a borrower would show he or she suffered financial harm as a result of an institutional misrepresentation. Although the regulatory language did not specifically mention partial relief, many negotiators discussed the draft in the context of partial relief due to ED’s recent decision to create a tiered relief system for current borrower defense claims.
Many negotiators took issue with the types of evidence ED provided in the draft language as examples of what borrowers could use to show financial harm, which included documenting things such as a “significant difference” between the borrower’s earnings after completing the program and earnings listed for that program of study in marketing materials, a significant difference between the borrower’s earnings after completing the program and earnings “for similar borrowers employed in the program’s intended occupational field,” among other things.
The draft language also stated that financial harm is “monetary loss that is not predominantly due to intervening local, regional, or national economic or labor market conditions.”
Valerie Sharp, director of financial aid at Evangel University, questioned how ED would determine whether it was the degree that did not serve the borrower well, or if the market changed. Many negotiators expressed concern with the potential complexity for measuring those concepts.
Abby Shafroth of the National Consumer Law Center said that question “is just an example of how difficult it would be to come up with any calculation method for awarding only partial relief to borrowers who have been taken advantage of … that would in some true way capture the true harm to them.”
A better way, some said, would be to move forward with the idea of full relief or no relief for borrowers. Some also noted that the provision added to what they saw as an already burdensome process for students.
“There are several layers to go through to demonstrate misrepresentation,” said Michale McComis, executive director of the Accrediting Commission of Career Schools and Colleges. “Then once you clear that hurdle you’ve got the additional hurdle — and you have to demonstrate financial harm. Financial harm could squarely be having taken out a loan at an institution that was found to have committed misrepresentation as defined in this section.”
Still, other negotiators said the situation is complicated, and thus calls for a more complex or sophisticated method to decide whether relief is warranted and the amount of relief.
Mike Busada, general counsel and vice president for Ayers Career College said he felt the staffers at ED have the ability to make “reasonable, rational decisions.”
“We can make this real black or white but the world’s not black or white,” he said. “There’s no simple solution to a complex problem.”
Aaron Lacey, an attorney representing general counsels/attorneys and compliance officers, said the idea of showing harm is very common in other consumer statutes. The point of including a provision establishing harm, he said, is to show that there is a connection between the misrepresentation and the harm the borrower incurred.
Negotiators also moved on to discussion about a new provision that would give ED the authority to deny a claim based on evidence that rebutted the borrower’s claim, including evidence the institution provided showing “its representative or agent” made a misrepresentation that was “inconsistent with or prohibited by the institution’s policies, procedures and training at the time it was made.”
Some negotiators saw the wording of that provision as a potential “get out of jail free” card for bad actors, while others said some form of that provision is necessary to encourage good behavior, and to protect honest institutions from being penalized for a one-off mistake.
Other negotiators, including some representing institutions, said the provision might be better suited in a section referencing recovery actions against institutions, rather than under a section relating to the basis for borrower defense claims.
The committee then in the afternoon moved on to discussion on a proposed statute of limitations. In ED’s draft regulatory language, a borrower would be required to file a claim “within three years of the date the borrower discovered, or reasonably should have discovered, the misrepresentation.”
Some consumer advocates felt that any statute of limitation would be too harsh against borrowers, while other negotiators suggested changing the wording. For example, Lacey suggested that the three-year time period start upon a student’s graduation or withdrawal date. Consumer advocate representatives countered that many borrowers would not be aware of the misrepresentation until many years later, potentially after a larger action from a state agency had taken place.
Negotiators also discussed the details of how and when borrowers should be placed into administrative forbearance after filing a claim, what would happen with accrued interest during that time if the borrower defense claim is ultimately denied, and for how long after a successful loan discharge ED could seek to recoup funds from an institution.
On Wednesday the committee will continue with its discussion of the second issue paper, which focuses on the framework for processing borrower defense claims.