Neg Reg Day 3: Committee Speeds Through Remaining Borrower Defense Issue Papers

By Allie Bidwell, Communications Staff

Committee members worked their way through the remaining issue papers during the third and final negotiated rulemaking — or neg reg — session for a borrower defense to repayment standard, and agreed to come to a tentative agreement on some areas, such as closed school discharges, guaranty agency collection fees, subsidized usage period recalculation, and false certification discharges.

Despite the progress, the committee will still have to revisit the first four issue papers — which focus on establishing a federal standard, a framework for the borrower defense process, financial responsibility, and pre-dispute arbitration agreements, class action waivers, and internal dispute processes  — which Department of Education (ED) officials are re-writing with new language based on discussions from this week. In the end, the committee will also have to take formal votes on each issue paper to reach a consensus on the entire regulatory package. If the committee fails to reach consensus on Thursday, ED will write the regulations on its own — as was the case with the 2016 regulations.

The committee began the day discussing financial responsibility and administrative capability, and heard a report from the financial responsibility subcommittee tasked with writing that portion of the regulations. The committee spent a significant amount of time debating language added in an appendix explaining the ratio methodology for proprietary and private non-profit institutions regarding lease liabilities and long-term lines of credit.

The added language in part read, "If an institution wishes to include the debt obtained through long term lines of credit in total debt obtained for long term purposes, the institution must include a disclosure in the financial statements that the lines of credit exceed twelve months and were used to fund capitalized assets."

Several negotiators said they did not feel comfortable voting on the language in part because they did not understand the reasoning behind it or what it would mean for institutions. Others took issue with the idea that some institutions would use long-term lines of credit to manipulate their financial responsibility composite scores.

In the end, ED agreed to withdraw language "in the interest of meeting consensus," said federal negotiator Annmarie Weisman.

"That said, this is being done for the purposes of this session," she continued. "Meaning, if we do not meet consensus, we certainly do reserve the right to put it back in."

The committee also discussed various factors or events that may trigger an ED review and may lead to an ED determination that the institution is not financially responsible. Some negotiators suggested adding factors to consider, such as multi-state settlements, state attorneys general complaints filed, or final judgments or final resolutions from a state.

The committee also spent some time discussing pre-dispute arbitration agreements, class action waivers, and internal dispute processes. During the last session in January, the committee agreed to require only institutions that use such agreements or waivers to disclose that information to current and prospective students, and to the public. In ED's draft regulatory language, it said the information must be "easily accessible," but did not further elaborate on what exactly that meant.

Some negotiators — including Aaron Lacey, representing general counsels/attorneys and compliance officers — said they felt requiring schools to disclose that information was outside of ED's statutory authority and that it was rather an attempt to regulate the use of such agreements or waivers.

"There's a split out there. The department has made a conclusion, which it has articulated … that it does not have the legal authority to regulate them," Lacey said. "This feels like a very unpopular attempt to split the difference. Dumping more disclosures on people … is not going to be helpful. Students already get way too much paper."

Lacey also argued that because the definitions of class action waivers and pre-dispute arbitration agreements "have no box around them," some institutions could inadvertently be found out of compliance if such an agreement or waiver is used in another context outside of enrollment and educational services, such as for a student athletic center or parking garage.

Linda Rawles, an attorney representing large proprietary institutions, suggested striking the entire issue paper.

"I worry about if we do reach consensus here and this is part of it and there is any kind of legal challenge — what that will do to the rest of our effort here," she said.

In response, William Hubbard, vice president of government affairs for the Student Veterans of America, said striking the entire issue paper "would be absurd." Ultimately, he argued, ED is in a position to determine if a school wants to receive federal funds and use those agreements, how they should be used.

"It's not telling any school whether they can or cannot use them," he said. "But in terms of how it's done if they do accept federal funds."

ED officials are expected to bring back a new draft of the fourth issue paper with revised language taking into consideration Wednesday's discussions.

Moving forward, the committee fairly quickly came to  tentative agreements on the fifth, seventh, and eighth issue papers — which focused on closed school discharges, guaranty agency collection fees, and subsidized usage period recalculation — as those papers were largely unchanged from the previous session, aside from minor adjustments for clarity and accuracy.

Although there was some debate on the sixth issue paper focusing on false certification discharges, ED said it would not insert additional language regarding how or when an institution must verify borrowers have a high school diploma or equivalent. ED officials said it would exceed their statutory authority to go beyond specifying that the borrower did not meet eligibility requirements at the time the loan was disbursed. Weisman added that institutions are expected to have a process in place through verification and student eligibility to determine the validity of high school diplomas.

The committee will reconvene Thursday morning for the final day of negotiations, and will begin by reviewing new regulatory language on the first four issue papers.


Publication Date: 2/15/2018

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