Borrower Defense Rules on Recovery of Funds from Schools Effective Immediately

By Karen McCarthy, Policy & Federal Relations Staff

On the last day before the new administration took office, the Department of Education (ED) released a second borrower defense final rule package. These “procedural rules” govern the process that ED will use to establish liability against an institution and to recover funds from institutions for losses for approved borrower defense claims. The rules are final and effective immediately, with a request for public comments due March 20, 2017.

Requirements in the Higher Education Act and Administrative Procedure Act generally require the following steps in issuing regulations:

  • Negotiated rulemaking;
  • A notice of proposed rules;
  • Opportunity for public comment;
  • Issuance of final rules; and
  • A delayed effective date in accordance with master calendar requirements (final rules must be issued in the Federal Register by November 1 in order to be effective on the following July 1).

ED asserts that these regulations are exempt from negotiated rulemaking and delayed effective date requirements since they make procedural changes only and do not establish substantive policy, therefore meeting the “good cause” exception in the law.

A stated goal of the rules is to ensure that institutions are afforded a full and fair opportunity to defend themselves in proceedings to recover losses stemming from borrower relief.

Since the rules are effective immediately, they will apply when ED seeks to recover for losses for claims approved under the current borrower defense standard based on state cause of action before July 1, 2017. When the new borrower defense rules are implemented on July 1, 2017, ED will use these procedural regulations to:

  • Recover losses, at its discretion, stemming from individual borrower relief claims approved under the new federal standard; and
  • For group claims, both determine the validity of group borrower claims against open schools, and to hold schools liable for losses on those claims. In these cases, the hearing official determines the validity of the borrower claims and correspondingly, whether relief will be granted to borrowers in the group.

The procedural rules for borrower defense recovery proceedings are modeled after the existing regulations governing proceedings to assess a fine, limitation, suspension, or termination against an institution and are included in the same section of the regulations. The new rules also make the following changes to all of the procedural provisions more broadly applicable to all of these proceedings:

  • The hearing as described in the regulations is the school’s sole opportunity for a hearing;
  • ED retains the right to gather information or conduct an examination, audit, program review, etc.;
  • Certain other court proceedings do not delay the hearing;
  • Instead of a designated ED official setting the date for the hearing, the hearing date is set by an official from the Office of Hearings and Appeals.

When ED seeks to recover funds from an institution, the rules dictate the following process:

  1. ED provides the school with notice of its intent to recover funds, determine validity of group claims, and/or demonstrate the validity of claims already approved, as applicable. The notice must include a statement of facts.
  2. The school is afforded 20 days to respond in writing if it believes ED should not recover the funds. If the school wishes to request a hearing, it must do so in its written response. If the school does not respond, ED will proceed with fund recovery.
  3. If the school responds, but does not request a hearing, ED will review the school’s response and inform the school of its decision.
  4. If the school requests a hearing, ED may either withdraw its notice of intent to recover funds, or may forward to the Office of Hearings and Appeals to request a hearing date.

ED bears the burden of proof in any recovery action against a school for all claims that ED asserts.

New rules regarding prehearing conferences and the hearing itself mirror rules already in place for fine, limitation, suspension, and termination processes with changes that officially grant the hearing official significantly more power over the hearing procedures than was explicitly stated in the prior rules. NASFAA’s legal experts are currently reviewing the rules to ensure that they provide proper due process to affected institutions.

Both borrower defense regulatory packages are eligible for consideration for repeal by Congress under the Congressional Review Act. Whether the regulations will survive the U.S. Congress or the new Administration is unknown.

Comments may be submitted through the web site, using docket ID ED-2015-OPE-0103. In addition, please submit any comments to NASFAA at [email protected].


Publication Date: 1/27/2017

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