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The Student Borrower Protection Center (SBPC)—an organization established by former CFPB Student Loan Ombudsman Seth Frotman—recently published an article examining the Department of Education’s oversight of “lead generators.”  Lead generators are outside entities that help for-profit colleges manage “pre-enrollment activities” such as “recruiting and advising students,” “determining eligibility for federal aid,” and “delivering the Title IV funds.”  The article highlights state and FTC enforcement actions against lead generators and suggests that these entities qualify as third-party servicers under Department of Education regulations.

The article characterizes the Department of Education’s current oversight of the industry as “haphazard and wholly inadequate.”  It calls on the Department to (1) treat lead generators as third-party servicers, (2) require that schools disclose contracts with lead generators, and (3) compel lead generators to conduct annual compliance audits.

In addition, the article urges Congress and the Department’s Inspectors General to investigate why the Department has “failed to hold these lead generators and schools” accountable.  Finally, it asks that Congress amend the Higher Education Act to eliminate much of the Department’s discretion with regards to oversight of third-party servicing.

Institutions and third-party servicers are jointly and severally liable for a servicer’s violations of the Higher Education Act.  See 34 C.F.R. § 668.25(c)(3), (d)(2)(ii).  Thus, a decision by the Department of Education or Congress characterizing lead generators as third-party servicers would likely carry a significant compliance burden for both lead generators and contracting schools.

The “borrower defense” final rule (Final Rule) issued by the Dept. of Education in November 2016 took effect at noon yesterday after Judge Randolph D. Moss of the D.C. federal district court refused to grant the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools (CAPPS) seeking to preliminary enjoin the arbitration ban and class action waiver provisions in the Final Rule.  CAPPS had sought to block the provisions from taking effect pending the resolution of the lawsuit filed by CAPPS against the ED and Education Secretary Betsy DeVos to overturn the Final Rule.  Judge Moss found that CAPPS had filed to show that any of its members was likely to suffer an irreparable injury in the absence of an injunction.

Shortly before the Final Rule’s initial July 1, 2017 effective date, CAPPS filed a motion for a preliminary injunction to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019 (Final Rule Delay).

On September 12, 2018, Judge Moss issued an opinion and order in Bauer v. DeVos, another case challenging the Final Rule in which he ruled that the ED’s rationale for issuing the Section 705 stay was arbitrary and capricious and that in issuing the Final Rule Delay, the ED had improperly invoked the good cause exception to the Higher Education Act’s negotiated rulemaking requirement.  The case consolidated two separate lawsuits filed after the ED’s issuance of the Section 705 stay, with one filed by two individual plaintiffs and the other by a coalition of nineteen states and the District of Columbia.  Both lawsuits were subsequently amended to challenge not only the Section 705 stay but also the other actions taken by the ED to delay the Final Rule’s effective date.  While Judge Moss vacated the Section 705 stay, he stayed the vacatur until 5 p.m. on October 12, 2018.

After the ED filed a notice with the court in June 2017 regarding its initial delay of the Final Rule’s effective date until July 1, 2018, CAPPS withdrew its motion for preliminary injunction.  Following the court’s decision in Bauer, CAPPS filed its renewed motion for a preliminary injunction.  In his decision denying CAPPS’ motion, Judge Moss stated that on October 12, the court extended the stay of the vacatur until noon on October 16.

The Final Rule broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It does not apply to private loans.  The Final Rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses, and schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

It would seem that because the Final Rule is now effective, the new federal standard it establishes for evaluating defenses to repayment would be applicable in actions seeking to collect on Direct Loans disbursed on or after July 1, 2017 or to recover amounts previously collected on such loans.  However, because the arbitration ban and class action provisions of the Final Rule are requirements with which a school must comply as a condition of receiving Title IV assistance, the ED presumably could waive such requirements (as well as other provisions subject to ED enforcement such as the actions and events in the Final Rule that can trigger a requirement for a school to provide a letter of credit or other financial protection to the ED to insure against future borrower defense claims and other liabilities to the ED.)

Following a remand from the D.C. federal district court, Department of Education (ED) Secretary Betsy DeVos has issued an order restoring the Accrediting Council for Independent Colleges and Schools’ (ACICS) status as a federally recognized accrediting agency.

ACICS accredits for-profit colleges, whose access to federal student loan funds is contingent on becoming, and remaining, accredited by a “nationally recognized accrediting agency,” as determined by ED. Although not the sole basis for his decision, Secretary DeVos’ predecessor, John B. King, had revoked ACICS’ recognition in 2016 after concluding, with reference to schools such as Corinthian and ITT Educational Services, that ACICS lacked sufficient mechanisms to monitor the results of state and federal agency enforcement actions brought against schools and to deny accreditation to those schools found to have been engaged in fraudulent conduct or to have otherwise violated applicable law.

Secretary DeVos’ recent order means that ACICS’ status as a federally recognized accrediting agency is restored effective December 12, 2016 (the date Secretary King terminated ACICS’ recognition) and that ED will conduct a further review of ACICS’ petition for recognition. ACICS-accredited institutions now may have to decide whether to wait for the outcome of ED’s review or continue pursuing their in-process applications with other accreditors.

The review of ACICS’s 2016 petition will include consideration of material that the D.C. federal district court concluded had been improperly omitted during the 2016 proceeding as well as additional, related material ACICS wishes to submit. According to U.S. District Judge Reggie B. Walton’s March 23 opinion, ED had violated the Administrative Procedure Act in 2016 by failing to consider during ACICS’ recognition proceeding: (1) supplemental information, submitted by ACICS at ED’s request, largely concerning ACICS’ standards for “problem schools,” and (2) evidence of ACICS’ placement verification and data integrity programs and procedures.

After ED had terminated ACICS’ recognition in 2016, it directed ACICS-accredited institutions to find a new accrediting agency by June 12, 2018. Under the terms of Provisional Program Participation Agreements they signed with ED, ACICS-accredited institutions were required to submit an application to a new accrediting agency by June 12, 2017 and host a site visit by the new agency by February 28, 2018. ED was authorized to: (1) terminate federal student aid funding for new students if an institution failed to meet either deadline and (2) require a letter of credit or other financial guarantee (equal to at least 10% of the institution’s Title IV volume from the prior completed award year) if an institution failed to meet the second deadline or obtain an extension.

Judge Walton’s March 23rd ruling is another significant win for ACICS, which one year ago convinced the D.C. Circuit to affirm the federal district court’s denial of the CFPB’s petition to enforce a Civil Investigative Demand (CID) issued to ACICS. In that opinion, the D.C. Circuit concluded the CID failed to adequately describe the nature of the unlawful conduct under investigation. It did not reach the broader question of whether the CFPB had jurisdiction to investigate the accreditation process based on the possible connection to ACICS-accredited schools’ lending practices.

The Department of Education has published a request for information in today’s Federal Register seeking comment on the factors used to evaluate claims of undue hardship made by student loan borrowers attempting to discharge student loans through adversary proceedings in bankruptcy court.  Responses to the RFI must be received by May 22, 2018.

Under the federal Bankruptcy Code, a student loan can be discharged in bankruptcy only if necessary to avoid an “undue hardship” on the borrower.  Congress did not define “undue hardship” in the Bankruptcy Code nor did it authorize the ED to do so by regulation.  As a result, the legal standard for a student loan borrower to prove “undue hardship” has been developed through case law, with courts generally using one of two tests to determine if “undue hardship” has been established.  The three-factor Brunner test (named after the case in which the test was first articulated) evaluates the debtor’s standard of living, likely duration of his or her financial difficulties, and the efforts he or she made to continue making loan payments before filing for bankruptcy.  The “Totality of the Circumstances” test looks at the debtor’s financial resources (past, present, and future), his or her reasonably necessary living expenses, and any other relevant factors and circumstances surrounding the debtor’s individual circumstances.

ED regulations require guarantors and educational institutions participating in the Federal Family Education Loan Program (FFELP) and Federal Perkins Loan Program (Loan Holders) to evaluate undue hardship claims to determine if requiring repayment of a student loan would constitute undue hardship.  Guidance issued by the ED in 2015 provides that Loan Holders should use a two-step analysis when evaluating undue hardship claims.  First, using the tests established by the federal courts, a Loan Holder should determine whether requiring repayment would impose an undue hardship.  Second, if the Loan Holder determines that requiring repayment would not impose an undue hardship, it must evaluate the costs of undue hardship litigation.  If the costs to litigate the matter in bankruptcy court are estimated to exceed one-third of the loan balance, the Loan Holder is permitted to accept an undue hardship claim.

The 2015 guidance included a discussion of factors that are appropriate for a Loan Holder to consider when evaluating an undue hardship claim and how such factors fit within the tests established by the federal courts.  It also stated that the guidance mirrored the ED’s existing practice for the Direct Loan program and for ED-held FFELP and/or Perkins loans.

The RFI seeks comment on:

  • Factors to be used in evaluating undue hardship claims and the weight to be given to such factors
  • Whether the use of two tests results in inequities among borrowers
  • Circumstances under which a Loan Holder should concede an undue hardship claim
  • Whether and how the 2015 guidance should be amended

 

 

 

The Department of Education, in an issue paper submitted as part of negotiated rulemaking on its final “borrower defense” rule, is proposing to require schools that use pre-dispute arbitration agreements and class action waivers in agreements with students to provide disclosures to students regarding their use of such agreements and waivers.

The ED’s proposed approach represents a reversal of the ED’s position under the Obama Administration.  In its final “borrower defense” rule issued in November 2016, the ED banned the use of pre-dispute arbitration agreements by schools receiving Title IV assistance under the Higher Education Act.  The final rule also prohibited a school from relying on such an agreement to block the assertion of a borrower defense claim in a class action lawsuit.

In November 2017, the ED announced that it was postponing “until further notice” the July 1, 2017 effective date of various provisions of the final rule, including the rule’s provisions banning the use of arbitration agreements and reliance on such agreements to block class claims.  At that time, the ED also announced that it planned to establish two negotiated rulemaking committees, with one committee to develop proposed regulations to revise the “borrower defense” rule and the other to develop proposed revisions to the “gainful employment” rule that became effective in July 2015 and includes requirements for schools to make various disclosures such as graduation rates, earnings of graduates, and student debt amounts. [link to blog]

 

On Monday, January 8, 2018, the United States Department of Justice weighed in with a Statement of Interest under 28 U.S.C. § 517 in a pending state-court action (No. 1784CV02682) brought by the Commonwealth of Massachusetts against the Pennsylvania Higher Education Assistance Agency (PHEAA). The Commonwealth alleges that PHEAA violated state and federal consumer protection laws by engaging in unfair and deceptive student loan servicing practices on loans owned or subsidized by the federal government, including with respect to popular programs such as income-driven repayment plans and so-called TEACH grants.  Section 517 authorizes the Department of Justice to appear in state court “to attend to the interests of the United States.”  In doing so, the Department of Justice, in its Statement, maintained that the Commonwealth’s claims are preempted because (1) PHEAA cannot comply with both the Commonwealth’s interpretation of the relevant statutes and the actual requirements of federal law, (2) the Commonwealth’s claims “stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” as expressed in the Higher Education Act; and (3) the Commonwealth’s requested relief would likely “require PHEAA to violate its contract with the Department.”

PHEAA has moved to dismiss the Commonwealth’s claims on several grounds, including that the Department of Education is a necessary party without whom the case cannot proceed. Oral argument on PHEAA’s motion is currently calendared for January 10, 2018, in Suffolk County Superior Court.  Ballard Spahr LLP represents PHEAA in this matter.

The District of Columbia Department of Insurance, Securities and Banking (DISB) has announced a change to the way it calculates a controversial annual assessment fee on student loan servicer licensees. The change was made on December 26, 2017 through the adoption of revised emergency rules under the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016.

The new rules supersede the emergency rules adopted by the DISB on September 8, 2017. The DISB made only one substantive change: the annual assessment fee due at license renewal has been reduced to $0.50 per borrower residing in the District of Columbia serviced by a servicer. The fee was initially set at $800 plus $6.60 per loan.  As we noted in our summary of the emergency rules in September, that assessment fee schedule effectively would have resulted in the Department of Education paying for DISB administrative expenses (generally speaking, the fee would have been nearly as much as the servicing fee paid by ED to federal student loan servicers). A blackline of the revised emergency rules against the rules adopted in September is online here.

The DISB indicated it is continuing to consider the comments it received in the fall following the publication of its initial emergency rules and noted it is making “appropriate revisions to the rules based upon stakeholder concerns.” We expect the DISB to either adopt further revised emergency rules or publish a notice of final rulemaking by April 25, 2018 (the date the emergency rules are scheduled to expire).

As part of its basis for adopting the revised rules on an emergency basis, the DISB repeated its concerns about student loan borrower protections based on the U.S. Department of Education’s amendment, repeal or suspension of certain student loan regulations and guidance. The DISB added that it sought “continuous regulatory coverage” for the multiple entities that have already been approved for licensure and several others that are pending approval.

In addition to Washington, D.C., licensing requirements and business conduct standards specific to student loan servicers currently exist in Connecticut and California, and a new Illinois law will become effective at the end of this year. In light of the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which might arguably include guaranty agencies, to comply with varying state-specific requirements, two national trade groups representing higher education finance organizations have written letters to the U.S. Department of Education urging it to issue preemption guidance. Meanwhile, a number of other states, including Washington and New York, are actively pursuing legislation to supervise and regulate student loan servicers and create a student loan advocate or ombudsman position in state government. In Washington state, Attorney General Bob Ferguson is working to advance legislation and recently released a report titled, “Borrowers in Crisis: Student Debt in Washington.” In New York, Governor Andrew Cuomo has made student loan borrower protection one of the initiatives of his 2018 agenda.

On January 17, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: What Legal Challenges Will 2018 Bring for Student Loan Originators and Servicers? Click here to register.

The U.S. Court of Appeals for the Federal Circuit has partially lifted a preliminary injunction that prevented the U.S. Department of Education (Department) from placing defaulted student loans with private collection agencies (PCAs).  Following this ruling, the U.S. Court of Federal Claims has ordered the Department to complete its efforts to reevaluate bids associated with a disputed contract procurement process by January 11, 2018.

The appeal to the Federal Circuit challenged a ruling of Judge Susan Braden of the U.S. Court of Federal Claims in consolidated lawsuits brought by several PCAs.  The PCAs challenged the Department’s 2016 award of several large business contracts to collect defaulted student loans.  The Department had stayed the 2016 large business contracts in response to the Government Accountability Office’s recommendation to reopen the contract competition, request and consider amended bids, and make a new award decision.

Despite the government’s self-imposed stay, in May 2017, the Court of Federal Claims issued a preliminary injunction that broadly enjoined the Department from (1) authorizing performance of the 2016 large business contracts, and (2) “transferring work to be performed under the contract at issue in this case to other contracting vehicle to circumvent or moot this bid protest.”  The injunction thus prevented the Department from placing defaulted student loans with PCAs under any other preexisting contracts, including 2014 small business contracts and award term extension (ATE) contracts that rewarded top performers under 2009 contracts.  The Court of Federal Claims asserted the broad injunction was necessary to maintain the status quo.  The court based its injunction ruling on, among other things, an article that stated the CFPB found the value of PCAs to be “highly questionable . . . but unquestionably expensive.”  The Department appealed the injunction ruling.

On August 21, 2017, the CFBP filed an amicus brief in the appeal.  Disagreeing with the Court of Federal Claims—and siding with the Trump Administration—the CFPB asserted that enjoining the Department from placing defaulted loans with PCAs harmed the public.  According to the CFPB, PCAs were a point of contact for borrowers to set up plans to rehabilitate default and, without such rehabilitation, borrowers were not eligible for other federal programs and interest would continue to accrue on loans during the collection delays caused by the injunction.  According to the CFPB “borrowers in default will be better off if they have access to [the Department’s] debt-collection contractors during the pendency of this litigation than if they do not.”

On December 8, 2017, the appellate court lifted the part of the preliminary injunction that barred the Department from “transferring work to be performed under the contract at issue in this case to other contracting vehicles to circumvent or moot this bid protest.”  Thus, the Department can continue to place defaulted loans with PCAs under its preexisting small business and ATE contracts. The appellate court’s ruling still prohibits the Department from authorizing performance of the disputed 2016 contracts.

The case continues to proceed in the district court before Judge Thomas C. Wheeler.  (Judge Braden transferred the case to Judge Wheeler on November 20, 2017 for “the efficient administration of justice.”)  On December 12, 2017, Judge Wheeler held a status conference to discuss allocation of the Department’s backlog of accounts in light of the ongoing injunction, as well as the status of the Department’s corrective action to reevaluate amended bids for the 2016 large business contracts.  The Department had previously advised that it intended to complete its corrective action by August 24, 2017—a deadline that expired more than three months ago.  At the status conference, the government’s counsel declined to provide the court with a new date certain for completion.  Instead, he reported that the Education Department was in the “final stages,” with the Source Selection Authority “in the process of determining which offerors will and will not receive final awards.”

Following the conference, Judge Wheeler noted his displeasure with the pace of the Department’s corrective action.  He ordered the Source Selection Authority to make its final award decisions and complete the corrective action by January 11, 2018.

The Department of Education (ED) has apparently declined a request by 39 members of Congress to reinstate the Memoranda of Understanding (MOUs) between ED and the CFPB.  The members of Congress, including Elizabeth Warren, Bernie Sanders, and Senate Health, Education, Labor and Pensions ranking Democratic member Patty Murray, penned a September 14th letter just one week after CFPB Director Richard Cordray made a similar request. ED had based the termination of the MOUs on the Bureau’s failure to forward Title IV federal student loan complaints and its issuance of guidance that conflicted with ED directives.

ED’s November 13th response, addressed to Senator Murray and signed by Acting Undersecretary James Manning, emphasized that the only statutory authority explicitly referencing the CFPB’s oversight of federal student loans pertains to ED’s coordination of complaint handling with the Bureau’s Private Education Loan Ombudsman. ED’s response further echoed its termination letter by reiterating that the rescission of the MOUs was warranted by the CFPB’s failure to direct nearly 13,000 federal student loan complaints to ED for resolution or to share servicers’ responses to such complaints. In particular, ED noted that the Bureau’s handling of complaints was the cause of “unnecessary confusion for borrowers” regarding the rules governing their loans.

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray has responded to the letter from the Department of Education (ED) terminating the Memoranda of Understanding (MOUs) between the agencies. ED’s August 31st letter—signed only by Kathleen Smith of the Office of Postsecondary Education and Dr. A. Wayne Johnson of Federal Student Aid—provided 30 days’ notice of the termination of two MOUs: a 2011 agreement providing collaboration to resolve student loan complaints and a 2014 agreement encouraging coordination of supervisory activities.

Director Cordray’s September 7th letter—addressed directly to Secretary Betsy DeVos—states that ED “appears to misunderstand” the scope of the CFPB’s authority.  In particular, Director Cordray asserts that the Higher Education Act does not supersede the federal consumer financial laws that the CFPB enforces under Title X of the Dodd-Frank Act (Dodd-Frank). In addition, Director Cordray emphasizes that Dodd-Frank required the Bureau to establish a consumer complaint unit and gave the Bureau authority with respect to institutions responsible for “servicing loans” and “collecting debt related to any consumer financial product or service.”

However, in advancing these arguments, Director Cordray seems to have conceded that even under his analysis some collecting and servicing of federal student loans could occur outside of the purview of the CFPB.  The discussion of servicing and collecting is circumscribed by the CFPB’s apparent admission that institutions collecting and servicing federal student loans are subject to its authority only insofar as they are covered by the “larger participant rules” for debt collectors and student loan servicers.  Moreover, Title IV of the Higher Education Act does supersede at least one federal consumer financial law, the Truth in Lending Act, which has no application to loans made, insured, or guaranteed under Title IV.

Cordray’s letter goes on to address other points made by ED.  As justification for the split, ED accused the CFPB of “violating the intent” of the agreements by failing to forward Title IV federal student loan complaints within ten days of receipt and handling complaints itself.  Director Cordray dismisses this concern by noting that ED had never expressed any concerns about the MOU or the handling of federal student loan complaints prior to its letter and that the CFPB shares its complaint information in “near real-time” by providing ED access through its Government Portal. Director Cordray also cites to Section 1035 of Dodd Frank, which provides that the CFPB student loan ombudsman is to establish an MOU with the ED student loan ombudsman to “ensure coordination in providing assistance to and serving borrowers seeking to resolve complaints related to their private education or Federal student loans.”

It’s unlikely that ED will find these arguments persuasive.  Director Cordray does not articulate how the CFPB can require ED to constantly monitor the Government Portal as a substitute for the direct forwarding of complaints contemplated by the MOU. He also overlooks the fact that Section 1035 of Dodd Frank can be interpreted to require the CFPB to forward complaints about federal student loans to ED but to coordinate in the limited instance when a complaint addresses conduct affecting both private student loans handled by the CFPB ombudsman and federal student loans handled by the ED ombudsman.

With respect to enforcement coordination, Director Cordray rejects the accusation that the CFPB had overstepped its bounds. He states that “the Bureau has never knowingly taken any actions in conflict with the Department’s regulations or instructions to servicers” and that all of its actions were consistent with ED’s directives.  Director Cordray also defends the CFPB’s use of information requests before conducting on-site examinations and maintains that the CFPB took the necessary steps to preserve confidentiality with respect to actions involving student loan servicers.

Again, ED is unlikely to be convinced.  The letter makes no mention of any outreach efforts on the part of the CFPB to determine ED’s intentions.  More tellingly, the letter does not explain how the CFPB is able to serve as the arbiter of what ED’s regulations, instructions, and directives require.  The perfunctory statements about preserving confidentiality are no more compelling.

Director Cordray lauds the Bureau’s complaint handling as providing an “efficient means” to obtain consumer relief, but stops short of saying that ED is incapable of independently handling all federal student loan complaints. He also notes that the CFPB began accepting complaints “without any objections” in February 2016. However, he says nothing that would indicate that the CFPB discussed the expansion of the complaint portal with ED ahead of time.  He also fails to provide any insight as to why the Bureau started accepting federal student loan complaints more than four years after signing the MOU.

Ultimately, Director Cordray’s letter serves as an olive branch. The letter requests a “constructive conversation” about future cooperation and notes that the CFPB “stand[s] ready to meet with you or your colleagues, hear your concerns, and explore constructive solutions to help us all better serve students and borrowers.”  Director Cordray does not include any explicit incentives for ED’s cooperation and, perhaps as a concession, suggests that the CFPB is willing to negotiate cooperation on a smaller scale or under more restrictive terms. As he states in the letter, the CFPB “stand[s] ready to work toward new MOUs between the Bureau and the Department.”