Negotiators Clash Over Borrower Defense Standard of Evidence in Second Neg Reg Session
Higher education stakeholders gathered Monday to begin debating the merits and drawbacks of a draft regulation put forth by the Department of Education (ED) that would outline under which circumstances a borrower could have his or her loans discharged as a result of misrepresentation or school closure.
During the first day of the second session of negotiated rulemaking, or neg reg, the committee members spent a substantial amount of time questioning the wording of particular provisions within the draft regulation. For example, many negotiators took issue with the fact that the proposed regulatory language contained a higher standard of proofthan the 2016 regulation.
Borrowers would have to provide “clear and convincing” evidence that the institution “acted with an intent to deceive, knowledge of the falsity of a misrepresentation, or a reckless disregard for the truth” in giving information on which the borrower “reasonably relied” in deciding to take out federal loans.
To many consumer advocate representatives in the room, that burden would be too high for students, many of whom are first-generation college students, come from low-income backgrounds, and otherwise do not have the means to hire a lawyer to assist in the process.
Brian Siegel, deputy assistant general counsel and acting assistant general counsel for ED, said the draft regulation raised the standard because the 2016 preponderance of evidence standard “does not protect the interests of the schools sufficiently or the interest of the taxpayer.”
Joseline Garcia, president of the United States Students Association, said changing the standard “does the exact opposite for students — it doesn’t protect them at all.”
Abby Shafroth of the National Consumer Law Center said in many cases, borrowers would not have solid evidence to meet that standard, claiming most students would not take notes during meetings with recruiters or other representatives, nor would they video or audio record any phone calls.
“They don’t do any of these things because at the time … they’re believing they’re at the beginning of a fresh start and a new life,” she said. “They don’t think they’re being scammed. They’re just excited that someone is telling them they have a great opportunity awaiting them.”
Other negotiators argued that the higher standard would be necessary to protect schools in case borrowers filed false claims.
Linda Rawles, an attorney representing for-profit institutions with enrollments of 451 or more, and Mike Busada, the general counsel and vice president of Ayers Career College, noted that for some smaller schools, for example, having to repay $10,000 would be particularly burdensome.
Still, other negotiators contended that raising the bar would make it more difficult for borrowers to file a claim at all.
Ashley Harrington of the Center for Responsible Lending said the proposed regulatory language is not “instructions for students on how to make a claim — it’s instructions for institutions on how to avoid a claim.”
Likewise, William Hubbard, vice president of government affairs at the Student Veterans of America, cast doubt on the idea that large numbers of students would file false claims.
“When was the last time students committed widespread, systematic fraud?” he said. “I think that’s something to take into consideration.”
In the following days, ED officials will provide negotiators with definitions of what they believe preponderance of evidence and clear and convincing evidence to mean and how they would be applied to borrower defense claims. With those interpretations in hand, the negotiators will again discuss which standard to use.
In the afternoon, negotiators spent most of their time discussing whether to include a “reasonability clause” in the regulation. Currently, the draft regulation defines a misrepresentation as a “statement, act, or omission by an institution that would mislead a reasonable person regarding the nature” of the program, cost, employability of graduates, and other crucial pieces of information.
Consumer advocate and legal aid representatives claimed that including that qualifier would not accurately capture the wide range of students sometimes targeted by predatory institutions. Additionally, Shafroth argued, the regulation earlier on would require borrowers to provide clear and convincing evidence that the institution knowingly made a misrepresentation “upon which the borrower reasonably relied” when deciding to borrow. That earlier distinction, she said, would both protect institutions and borrowers, while including the “reasonable person” term might not capture the unique circumstances of individual borrowers.
Rawles and Aaron Lacey — representing general counsels/attorneys and compliance officers — said those circumstances, such as an institution targeting someone with a mental incapacity, would be covered through other pathways to discharge, such as false certification.
Other negotiators maintained the term should be removed because borrowers might not be aware of other remedies.
Negotiators also took issue with an example of evidence of misrepresentation regarding the availability of financial aid. As written, the draft regulation said evidence could include “a representation regarding the availability, amount, or nature of any financial assistance available to students from the institution or any other entity to pay the costs of attendance at the institution that is not fulfilled following the enrollment of the borrower.”
Some negotiators representing financial aid offices and institutions worried that the wording of that example could lead to unintended consequences, such as when there are changes to certain types of aid that are out of the control of the financial aid office. They then discussed whether there should be a “materiality standard” to further define the degree of difference necessary to constitute a misrepresentation. Ultimately, the negotiators agreed to revisit the matter the following day.
Moving forward, the committee members will on Tuesday continue their discussion on the first of eight “issue papers” outlining the draft regulation.