A federal judge has refused to further delay implementation of the 2016 borrower defense rule and related regulations, many times referred to as the BDR regulations of November 1, 2016.  This results in the current final outcome pertaining to that rendition of the regulations, although Secretary of Education Betsy DeVos earlier had twice acted to delay implementation of pertinent sections of the regulations.  The last U.S. Department of Education (ED) action was on February 14, 2018, when it published Final Regulations that authorized a delay of implementation of the BDR regulations until July 1, 2019.  Judge Randolph Moss’ decision overturns ED’s earlier delay.  As a result, the November 1, 2016, regulations are effective immediately.

The abrupt change in the effective date of the November 1, 2016, regulations does cause potential for severe disruption in an institution’s operations and plans.  Even so, every Title IV-eligible institution should begin to make its best documented good faith effort in complying with the BDR regulations.

Brief Review of BDR Highlights

As a reminder, there are a number of the provisions of the BDR regulations.  Some, among others, that have potential direct impact on institutions, stipulate that:

  • There is no statute of limitations on when a borrower may file for relief for amounts still owed on loans.
  • The borrower may claim a breach of contract at any point after the alleged breach of contract.
  • A borrower has six years from the time of discovery of substantial misrepresentation to request repayment of funds they previously repaid to ED.
  • There is no longer a 3-year limit to the time when a claim against a school may be made by ED to recover losses ED may experience due to Borrower Defense Claims.  See 34 CFR 685.305.
  • Misrepresentation has been clarified to be a misleading statement that has the likelihood to mislead under the circumstances in which it is presented.
  • Misrepresentation also includes omissions of information as another aspect of substantial misrepresentation.
  • Schools may not require students to enter a mandatory arbitration agreement with the school.
  • Enrollment agreements must specify that the institution may not stop the student from being a part of a class action lawsuit.
  • Schools must report their loan repayment rate data as reported through the gainful employment (GE) regulations.
  • Schools must provide a “Warning” if it has a majority of recent student loan borrowers at their school are not making payments sufficient enough to pay down at least one dollar of the outstanding balance of each of the borrower’s loans.
  • Loan repayment warnings must be included in all promotional materials in a prominent, clear, and conspicuous manner.
  • Schools are now potentially subject to numerous letter of credit (LOC) triggers.  Many of the triggering events necessitate the school notifying ED within 10 days of the triggering event.  [See 34 CFR 668.171(c).]
  • When a school is subject to a triggering event for an LOC, the school must post a notice of such on its Web site within 30 days of notifying ED.  (ED is still to determine the exact information to be included in the disclosure and the form of the disclosure.)  The notice must also be hand delivered as a separate document to each enrolled and prospective student, or sent to the enrolled/prospective student’s private e-mail address.
  • A school that closes must provide all enrolled students with a closed school discharge application along with a written disclosure explaining the benefits and consequences of a closed school discharge as an alternative to completing their educational program through a teach-out.

 Basic Initial Steps Toward BDR Compliance

Again, this immediate effective date of the BDR regulations does have potential implications for institutions.  While it may be that the regulations will change again as a result of ED’s negotiated rulemaking, at present, the November 1, 2016, BDR regulations are in force.  Institutions should immediately determine their course of action to address the repercussions of the judge’s decision.  Steps may include:

  1. It is recommended that all institutions re-read the pertinent November 1, 2016, regulations, even though they are 164 pages in length.  They are accessible at the Electronic Code of Regulations (e-CFR) site at Amendment(s) published November 1, 2016, in 81 FR 76070, 34 CFR 668.41.  Alternatively, the print PDF version of the November 1, 2016, Federal Register is accessible at https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf#page=145.  [It may also be accessed via the Information for Financial Aid Professionals(IFAP) Web page by selecting “Federal Registers” under the “Laws & Regulations” heading in the bottom right-hand margin of the page; then, select the year of 2016, and finally, the November 1, 2016, Borrower Defense; Final Rule.]
  2. Perhaps develop a committee at your institution to review the various areas to be addressed and assign appropriate responsibilities.
  3. Ensure you review your catalog, Web site, and all promotional/informational pieces related to your institution to ensure they are factual, accurate, and current in the information they contain so as to avoid all potential for claims of misrepresentation.
  4. Appropriately update your institution’s enrollment agreement or contract, etc., to include the requirements of the BDR (e.g., no requirement for arbitration, no prohibition of becoming party to a class action suit, etc.).
  5. Determine the message and method of dissemination of the loan repayment rate information for your institution.
  6. Review all of the possible “triggering events” that may necessitate an LOC to ascertain ways to prevent such events occurring.
  7. Define your plan for guaranteeing you notify ED within 10 days of a triggering event occurring.
  8. Delineate your plan for updating your Web site within 30 days of notifying ED of any applicable triggering event that would necessitate an LOC.  What is the process to ensure the update happens timely?
  9. Although not a desired future to consider, develop the message and the plan that would be used to inform students about closed school discharge opportunities in the event your institution did close.
  10. Consult with your legal counsel and financial expert (CPA, auditor, etc.) regarding their perceptions of the impact of the BDR regulations on your institution, and further steps you may take.

It is obvious that ED must provide more information, including updated loan repayment rate data, more informed guidance, etc.  Yet, in spite of the lack of clear direction from ED on the appropriate actions an institution should take in light of this immediate change of effective dates, institutions must act.

It is now incumbent upon an institution to comply with the BDR regulations.  An institution that takes action on the above possible steps (and documents such efforts), will at least have some grounds upon which to demonstrate a good faith effort to comply with the regulations at present until there is further specific guidance from ED.

Stay tuned and alert to additional guidance as ED shares more information.

Should you have any additional questions regarding this topic, please feel free to contact FAME Customer Service through the Client Solution Center.
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This material is presented for informational and educational purposes only and should not be considered to be giving legal advice.
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Released 10/25/18