Summary of Proposed Changes to Borrower Defense, Pre-Dispute Arbitration, and Class Action Waiver Regulations

By Jill Desjean, NASFAA Policy & Federal Relations Staff

On Friday, NASFAA submitted comments to the Department of Education (ED) on a package of proposed regulations that was negotiated in late 2021 related to college affordability and student loans. This is the first in a series of three articles that will be published this week to delve into the details of the proposal. Today’s article will focus on borrower defense to repayment (BDR), pre-dispute arbitration, and class action waivers. Next up will be loan discharges for total and permanent disability, closed schools, and false certification, and the final article will focus on Public Service Loan Forgiveness and interest capitalization.

Borrower Defense to Repayment

The borrower defense to repayment regulations have been in place since 1994 and were re-written in 2016 and 2019. The current BDR regulatory landscape is a complex patchwork of conditions based on loan disbursement date, meaning that even an individual borrower who attended only one school and proved that school engaged in misconduct may face different discharge criteria for each of their loans based on when they were borrowed. 

The proposed regulations would establish a single federal standard for borrower defense that would apply to all new claims submitted on or after July 1, 2023, as well as to pending claims filed prior to that date that have not yet been adjudicated. 

The new rule would provide for five grounds under which a BDR claim could be filed:

  • Substantial misrepresentation,  
  • Substantial omission of fact,  
  • Breach of contract,  
  • Aggressive and deceptive recruitment, or  
  • A federal or state judgment or departmental adverse action against an institution that could give rise to a borrower defense claim.  

Misrepresentation would no longer have its own definition in the BDR regulations. BDR claims would instead rely on the definition of misrepresentation that appears in section 668, Subpart F

Aggressive and deceptive recruitment is a new grounds for BDR claims and ED adds a definition in the new Subpart R of section 668 that includes engaging in continued unsolicited contact and pressuring a student to make a decision about borrowing a loan. NASFAA has asked for clarification on the latter as to how ED would distinguish between well-intentioned efforts to advise a student that loans may be their only option to pay for school in order to meet a deadline or be able to attend class from more malicious attempts to force students to make enrollment choices against their best interests.

Many of the provisions of the new rule appear in previous iterations. ED stressed during negotiations and in its preamble to the regulations that one of its guiding principles in drafting the regulations was that no borrower would be left worse off as a result of the new regulations than they would have been had their borrower defense claim been considered under any of the previous rules. As such, when ED borrowed from prior iterations of BDR regulations, it chose the most borrower-friendly provisions.

ED preserves the preponderance of evidence standard from the 2016 and 2019 rules. Under this standard, the burden of proof is met when the borrower filing a BDR claim demonstrates to ED that it is more likely than not that their claim is true. It also includes a presumption of borrower reliance on misrepresentations, meaning that the borrower would not have to explicitly declare that they relied on a misrepresentation by an institution in their decision to borrow a loan. Rather, ED could infer from the information the borrower provides whether the borrower relied upon that misrepresentation. 

There would also be a rebuttable presumption of full relief for borrowers, meaning that the default action for approved claims would be a discharge for the full loan amount, but that there could be some instances where partial relief is offered instead. ED provides examples of when partial relief would be granted, such as in cases where the amount of harm is quantifiable because it related to a specific cost like misstating the cost of a required book. 

The proposed rule allows for a group adjudication process for BDR claims. Groups could be formed by ED on their own or in response to a state requestor. ED proposes to establish limits on the amount of time it can take to adjudicate claims. It would provide for loans to be rendered unenforceable after three years for individuals or two years for group claims. Unenforceable loans do not need to be repaid by the borrower, but are not considered approved BDR claims and institutions would not be subject to recoupment in such cases. 

Individuals would be permitted to request reconsideration of denied BDR claims, as would states on behalf of denied group claims.

ED separates the process of approving BDR claims from recouping funds for approved claims from institutions. Borrowers would no longer have a time limit on when they could file claims, but ED would be limited in when it could seek recoupment from institutions based on the student’s last date of attendance. While ED sought feedback on whether to use five or six years from the students last date of attendance as an appropriate time frame during which it could seek recoupment, NASFAA recommended three years to match the financial aid office records retention requirements for student loan documents. 

The time frame for institutions to provide evidence contrary to that provided by the borrower in support of their BDR claim is extended from 60 days to 90 to match the time institutions may respond to program review findings. Institutions would also be able to provide evidence in their defense during the separate recoupment process. 

While the proposed regulations enhance ED’s recoupment abilities and establish a process by which they would recover funds from institutions for approved BRD claims, they also ensure that institutions would not be subject to recoupment for loans disbursed before July 1, 2023 that would have fallen under old BDR standards unless the approved claim would have also been approved under the rules that were in place at the time of disbursement. ED estimates that it would recoup roughly 20% of approved borrower claims from institutions. 

Pre-Dispute Arbitration/Class Action Waivers

ED proposes to reinstate its ban on the institutional practice of requiring students to agree to pre-dispute arbitration and class action waivers related to the making of federal student loans or the provision of educational services for which the loan was provided and that could form the basis of borrower defense claims.

ED argues that such arrangements are too complex for many borrowers to understand and that arbitration rarely results in favorable outcomes for consumers. They assert that denying borrowers their right to pursue borrower defense claims leads to a higher likelihood of default, the cost of which is passed on to taxpayers when it should rest with institutions. 

Next Steps

Because neither of these topics reached consensus by negotiators, ED is not bound to consensus language; it is free to draft proposed rules as it sees fit. ED will review public comments and revise the proposed regulations over the upcoming months. It is expected that ED will issue final regulations by Nov. 1, 2022, which will make the regulations effective on July 1, 2023.

 

Publication Date: 8/15/2022


Peter G | 8/15/2022 4:36:16 PM

I appreciate NASFAA raising the issue of conflict between these proposed regs and document retention rules.

That same tension comes up in the 'False Certification' section as well, and without digressing too much, I think there are real questions here, not just about what is best for the borrower, but what is good policy, and also the whole other question about the process.

With those, typically the communication we get from the servicer is minimal and they don't share the actual complaint. As a result, responding to what may be a simple complaint involves hours of coordinating, pulling data and scouring for documents that may be irrelevant.

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