Neg Reg Committee Concludes Review of All Agenda Items

By Karen McCarthy, NASFAA Policy & Federal Relations Staff

While the negotiated rulemaking, or “neg reg,” team assigned to primarily propose rules that will govern discharge of Direct Loans in circumstances of school misconduct got off to a slow start earlier this week, their progress improved significantly on the last day of their first of three sessions. During Wednesday’s discussions, the rulemaking committee continued their conversations about “triggers”—or indicators that may raise red flags that an institution is at risk for closure and/or borrower defense claims—and tackled pre-dispute arbitration agreements, and class action waivers. Other topics discussed included internal dispute processes, closed school discharge, false certification, guaranty agency collection fees, and restoration of a borrower’s subsidized usage period when loans are discharged under borrower defense.

Before beginning the day’s discussions, the committee voted to accept Dr. Julianne Malveaux, former president of Bennett College for Women, as an additional member to the financial responsibility subcommittee to represent the interests of minority-serving institutions. In addition to recommending Dr. Malveaux for membership to the subcommittee, Ashley Harrington of the Center for Responsible Lending, also recommended Blake Harden, a former employee at the Department of Education. The committee did not agree to accept Harden as a member of the subcommittee.

The financial responsibility subcommittee, which will meet twice before the full committee’s next meeting in January, will be reviewing the Financial Accounting Standards Board’s (FASB) Accounting Standards Update and making related recommendations for consideration by the full committee. Although the Department of Education (ED) acknowledged requests for a review of financial responsibility composite scores, ED staff reiterated several times that the subcommittee will only be reviewing the FASB update.

The day’s substantive discussion was kicked off by a continued conversation from the previous day about “triggers.” After lengthy discussion of triggers that were included in the 2016 rules, and others, ED clarified that triggers are not a foregone conclusion, and they will consider other ways to identify institutions at risk.

On the issue of pre-dispute arbitration agreements, class action waivers, and internal dispute processes, ED’s legal interpretation of its authority has shifted significantly since the 2016 rules were promulgated.  The 2016 rules prohibited pre-dispute arbitration agreements and class action waivers with the legal justification that the regulations “impose a condition on the participation by a school in this specific Federal program” and that “an institution that chooses not to continue to participate” in Title IV programs “remains free to rely on” pre-dispute arbitration provisions.

ED is now stating the prohibitions on pre-dispute arbitration and class action waivers have been held to violate the Federal Arbitration Act and cites court cases from 2011 and 2012 as supporting this position.

After several non-federal negotiators questioned ED’s legal interpretation of its authority, ED pressed negotiators to offer suggestions for other measures, other than an outright prohibition on the use of pre-dispute arbitration agreements and class action waivers, that they could take to promote the interests of borrowers. Ideas that appeared to have support among negotiators representing different constituencies incorporated increased transparency and required reporting into the arbitration process.

On the issue of closed school discharges, there was general agreement among most non-federal negotiators that the process should be as straightforward and streamlined as possible. Michael McComis, Executive Director of the Accrediting commission of Career Schools and Colleges said that he would support “...Less onerous responsibilities on the student’s part. To the extent that ED can do its own checking, that would be preferable.”

There was some support for an automatic closed school discharge, since ED has records of closed schools and their borrowers, but implementation would be complicated by the fact that borrowers who transfer credits into the same or comparable program at another institution are not eligible for a closed school discharge. One suggestion raised was to incorporate a waiting period before a complete discharge, similar to how total and permanent disability discharges are currently handled.

Current rules for false certification discharge specify certain actions by the school that warrant a discharge. ED asked if there are other circumstances under which a borrower’s student loan would be considered to have been falsely certified that should be added to the regulations. Abby Shafroth, staff attorney for the National Consumer Law Center, recommended the inclusion of two scenarios that were part of the 2016 rules: school certification of eligibility for a borrower who is not a high school graduate and does not meet the alternative to high school graduate requirements, and school falsification of satisfactory academic progress.

In an issue unrelated to borrower defense, negotiators were asked to consider whether ED should allow guaranty agencies to charge collection costs to a defaulted borrower who responds within 60 days to the initial notice sent by the guaranty agency after it acquires the loan from the lender. In GEN-15-14, ED explained the the regulations bar a guaranty agency from charging collection costs in these circumstances, but ED withdrew that DCL in March 2017 due to the lack of notice and opportunity to comment. ED is now revisiting the issue in this negotiated rulemaking session.

Jaye O’Connell, Director of Collections and Compliance for Vermont Student Assistance Corporation, argued that although no guaranty agencies are currently charging collection costs in these situations, the Higher Education Act (HEA), as amended, does give the guaranty agencies the authority to charge them. ED’s interpretation is that the HEA provides ED the authority to put a ban on such collection costs into regulation.

The last issue considered by the committee was whether to recalculate a borrower’s subsidized usage period and interest accrual when the borrower receives a discharge under borrower defense. Discussion on this topic was short, and there were no expressed objections to providing such a borrower benefit.

ED will now consider the committee’s feedback and will draft proposed regulatory language for the committee to negotiate at their next meeting in January.


Publication Date: 11/16/2017

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