# Issue Papers 1-3

# Session 3:  March 16-18, 2016

**Issue 1:**Whether to establish a new standard for the purpose of determining whether a borrower can establish a defense to repayment on a loan based on an act or omission of a school.

**Statutory cite:**§§ 454(a)(6), 455(h) of the Higher Education Act of 1965, as amended

**Regulatory cite:**34 CFR****668.71,****685.206(c), , 685.212, 685.222, 685.300

**Issue 2:**Time period for availability of Borrower Defense to Repayment claims

**Statutory cites:**§455(h) of the Higher Education Act of 1965, as amended, 20 U.S.C. 1087e(h)

**Regulatory cites:**34 CFR 685.206(c), 685.222 

**Issue 3:**Developing a regulatory framework for the process of submitting, reviewing, and determining the veracity of Borrower Defense to Repayment (DTR) claims. 

**Statutory cite:**§455(h) of the Higher Education Act of 1965, as amended

**Regulatory cite:**34 CFR 685.206(c), 685.212, 685.222

**Summary of changes:**

Creates a new regulatory section that establishes for borrower defense to repayment a Federal standard, limitations period, and processes for borrower-initiated claims, claims initiated by the Secretary, investigation and response for institutions, and final determinations. We present two options to amend the Direct Loan Program Participation Agreement requirements to facilitate disclosure of acts or omissions of schools that would result in borrower defenses (see also Issue Paper 5).

**Changes:**See attached regulatory text.  Generally, modified text is shown in redline and changes subsequent to Session II have been highlighted.  However, §685.222 is an entirely new section of the regulations and only changes subsequent to Session II are depicted in redline.

**§668.71 Scope and special definitions.**

* * * * 

(c) The following definitions apply to this subpart:  

*Misrepresentation*: Any false, erroneous, or misleading statement that an eligible institution, one of its representatives, or any ineligible institution, organization, or person with whom the eligible institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, makes directly or indirectly to a student, a prospective student, a member of the public, an accrediting agency, a State agency, or the Secretary.  A misleading statement includes any statement that has the likelihood or tendency to mislead under the circumstances.   A statement is any communication made in writing, visually, orally, or through other means.  Misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.  

Misrepresentation also includes the dissemination of a student endorsement or testimonial that a student gives either under duress or because the institution required the student to make such an endorsement or testimonial to participate in a program.

*Prospective student*: Any individual who has contacted an eligible institution for the purpose of requesting information about enrolling at the institution or who has been contacted directly by the institution or indirectly through advertising about enrolling at the institution.

*Substantial misrepresentation*: Any misrepresentation to a person on which that person could reasonably be expected to rely, or has reasonably relied, to that person's detriment.

**§685.206 Borrower responsibilities and defenses.**

(a) The borrower must give the school the following information as part of the origination process for a Direct Subsidized, Direct Unsubsidized, or Direct PLUS Loan:

(1) A statement, as described in 34 CFR part 668, that the loan will be used for the cost of the student's attendance.

(2) Information demonstrating that the borrower is eligible for the loan.

(3) Information concerning the outstanding FFEL Program and Direct Loan Program loans of the borrower and, for a parent borrower, of the student, including any Federal Consolidation Loan or Direct Consolidation Loan.

(4) A statement authorizing the school to release to the Secretary information relevant to the student's eligibility to borrow or to have a parent borrow on the student's behalf (e.g., the student's enrollment status, financial assistance, and employment records).

(b)(1) The borrower must promptly notify the Secretary of any change of name, address, student status to less than half-time, employer, or employer's address; and

(2) The borrower must promptly notify the school of any change in address during enrollment.

(c) Borrower defenses. (1)  For loans first disbursed prior to July 1, 2017, the borrower may assert as a borrower defense any act or omission of the school attended by the student that relates to the making of the loan or the provision of educational services that would give rise to a cause of action against the school under applicable State law.   A “borrower defense” as used in this section includes one or both of the following: 

(i)  A defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and 

(ii)  A claim to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part.  

(2) (i) To assert a borrower defense, the borrower must follow the procedures in §685.222.  

(ii) (A) For a defaulted Direct Loan, if the borrower asserts both a borrower defense under this section and any other objection to an action of the Secretary with regard to that defaulted Direct Loan, the Secretary notifies the borrower of the order in which the Secretary considers the borrower defense and any other objections.  Except as provided in the notification, the Secretary considers the borrower defense through the completion of the procedures in §685.222 first, if practicable, and then, as needed, any other objections under the procedures applicable to the particular action.  

(B) After a borrower defense claim is made, the Secretary defers any action to report a debt as in default, and defers or suspends any action to collect, in accordance with the applicable procedures under §685.222.

(3) If the borrower defense is approved, the Secretary notifies the borrower that the borrower is relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay and, if applicable, reimburses the borrower for amounts paid toward the loan voluntarily or through enforced collection.  The Secretary affords the borrower such further relief as the Secretary determines is appropriate under the circumstances.  Further relief may include, but is not limited to, the following:

(i) Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act.

(ii) Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan.

(4) The Secretary may initiate an appropriate proceeding to require the school whose act or omission resulted in the borrower's successful borrower defense to pay to the Secretary the amount of the Secretary’s losses arising from such borrower defense. 

**§685.212  Discharge of a loan obligation**

(a) * * *

(k) *Borrower defenses.*  If a borrower successfully asserts a borrower defense under § 685.206(c) or §685.222, the Secretary discharges the obligation of the borrower and any endorser to repay all or part of the loan in accordance with the procedures in §§685.206(c) and 685.222, respectively.  In the case of a Direct Consolidation Loan, the Secretary determines the relief available with respect to the loan that was included in the consolidation loan and discharges the appropriate portion of the consolidation loan.

**§685.222 Borrower defenses.**

(a)  General. (1) For loans first disbursed prior to July 1, 2017, a borrower asserts and the Secretary considers a borrower defense in accordance with the provisions of §685.206(c).  

(2) For loans first disbursed on or after July 1, 2017, a borrower asserts and the Secretary  considers a borrower defense in accordance with this section. To establish a borrower defense under this section, the borrower must show by a preponderance of the evidence that the borrower has a borrower defense that relates to the making of the loan or the provision of educational services and meets the requirements under paragraphs (b), (c), or (d) of this section.

(3)  A violation by the school of an eligibility or compliance requirement in the Higher Education Act or its implementing regulations is not a basis for a borrower defense unless the violation would otherwise constitute a basis for a borrower defense under this section.

(4) For the purposes of this section, "borrower" means--

(A)  The borrower; and  

(B)  In the case of a Direct PLUS Loan, the student and any endorsers.

(5)  A “borrower defense” includes one or both of the following: 

(A)  A defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and 

(B)  A claim to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part.  

(b)  Judgment against the school.  The borrower has a borrower defense if the borrower, whether as an individual or as a member of a class, or a governmental agency, has obtained against the school a favorable contested judgment based on State or Federal law in a court of competent jurisdiction.   A borrower may assert a borrower defense under this paragraph (b) at any time. 

(c) Breach of contract by the school.  The borrower has a borrower defense if the school the borrower received a Direct Loan to attend failed to perform its obligations under the terms of a contract with the student.  A borrower may assert a defense to repayment of amounts owed to the Secretary under this paragraph (c) at any time  after the breach by the school of its contract with the student.  A borrower may assert a claim to recover amounts previously collected by the Secretary under this paragraph (c) not later than four years after the breach by the school of its contract with the student. 

(d)  Substantial misrepresentation by the school.  (1)  The borrower has a borrower defense if the school or any of its representatives, or any institution, organization, or person with whom the school has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation in accordance with 34 CFR part 668, subpart F, that the borrower reasonably relied on when the borrower decided to attend, or to continue attending, the school.   A borrower may assert a defense to repayment under this paragraph (d) of amounts owed to the Secretary at any time.  A borrower may assert a claim under this paragraph (d) to recover funds previously collected by the Secretary not later than four years after the borrower discovers, or reasonably could have discovered, the facts constituting the substantial misrepresentation.  

(2)  For the purposes of this section, in determining whether there was a substantial misrepresentation on which the borrower reasonably relied, the Secretary will also consider whether factors such as the following were present: 

(A)  The borrower was faced with an insistent demand that the enrollment- or loan-related decisions be made immediately;

(B)  There was an unreasonable emphasis on unfavorable consequences of delay;

(C)  The use of multiple representatives of the school or any of the other parties described in paragraph (d)(1) against a single borrower; and

 (D)  The making of statements discouraging the borrower from consulting an adviser, a family member, or other resources.

(e)  Procedure for an individual borrower.   

(1)  To assert a borrower defense under this section, an individual borrower must--

(i)  Submit an application to the Secretary, on a form approved by the Secretary--

(A)  Certifying that the borrower received the proceeds of a loan, in whole or in part, to attend a school; 

(B)  Providing material that supports the borrowers defense; and 

(C)  Indicating whether the borrower has made a claim with respect to the facts underlying the borrower defense with any third party, such as the holder of a performance bond or a tuition recovery program, and, if so, the amount of any payment received by the borrower or credited to the borrower's loan obligation;  and

(ii)  Provide any other information or supporting documentation reasonably requested by the Secretary.

(2)  Upon receipt of a borrower’s application, the Secretary--

(i)  If the borrower is not in default on the loan for which a borrower defense has been asserted, grants forbearance and--

(A)  Notifies the borrower of the option to decline the forbearance and to continue making payments on the loan; and

(B)  Provides the borrower with information about the availability of the income-contingent repayment plans under §685.209 and the income-based repayment plan under §685.221; or

(ii)  If the borrower is in default on the loan for which a borrower defense has been asserted--

(A)  Suspends collection activity on the loan until the Secretary issues a decision on the borrower’s claim;

(B)  Notifies the borrower of the suspension of collection activity and explains that collection activity will resume if the Secretary determines that the borrower does not qualify for a full discharge; and

(C)  Notifies the borrower of the option to continue making payments under a rehabilitation agreement or other repayment agreement on the defaulted loan.

(3)  The Secretary designates a Department official to review the borrower’s application to determine whether the application states a basis for a borrower defense, and resolves the claim through a fact-finding process conducted by the Department official.  As part of the fact-finding process, the Department official considers any additional information, including Department records and any response from the school, and provides the borrower with any official records pertinent to resolution of the claim that the borrower reasonably requests.  The Department official considers any evidence and argument presented by the borrower and issues a written decision as follows:  

(i)  If the Department official approves the borrower defense, the Department official notifies the borrower in writing of that determination and of the relief provided as determined under paragraph (g) of this section; or

(ii)  If the Department official denies the borrower defense in full or in part, the Department official notifies the borrower of the reasons for the denial, the evidence that was relied upon, the portion of the loan that is due and payable to the Secretary, and whether the Secretary will reimburse any amounts previously collected, and informs the borrower that if any balance remains on the loan, the loan will return to its status prior to the borrower’s application.  

(5)  The decision of the Department official is final as to the merits of the claim and any relief that may be warranted on the claim.  Notwithstanding the forgoing –

(i) If the borrower defense is denied in full or in part, the borrower may request that the Secretary reconsider the borrower defense upon the identification of new evidence in support of the borrower’s claim.  “New evidence” is evidence that the borrower did not previously provide and was not reasonably available to the borrower at the time of the fact-finding process;

(ii) The Secretary may reopen a borrower defense application at any time to consider evidence that the Secretary did not consider in making the previous decision.

(6) The Secretary may consolidate applications filed under this paragraph (e) that have common facts and claims, and resolve the borrowers’ borrower defense claims as provided in paragraphs (f), (g), and (h) of this section.

(7)  The Secretary may initiate a proceeding to collect from the school the amount of relief resulting from a borrower defense claim under this paragraph (e).

(f)  Group borrower defense claims, generally.  (1)  Upon consideration of factors including, but not limited to, common facts and claims, fiscal impact, and the promotion of compliance by the school or other title IV, HEA program participants, the Secretary may initiate a process to determine whether a group of borrowers identified by the Secretary has a borrower defense.

(i)  The members of the group may be identified by the Secretary from individually filed discharge applications pursuant to paragraph (e)(6) of this section or from any other source of information, including but not limited to any governmental agencies. 

(ii)  If the Secretary determines that there are common facts and claims that are widespread, the group may include borrowers identified by the Secretary who have not filed an application under paragraph (e) of this section.

(2)  Upon the identification of a group of borrowers under paragraph (f)(1), the Secretary—

(i)  Designates a Department official to present the group’s claim in the fact-finding process described in paragraph (g) or (h) of this section, as applicable; 

(ii) Provides each identified member of the group with notice that allows the borrower to opt out of the proceeding.  

(iii)  Notifies the school, as practicable, of the basis of the group’s borrower defense claim and the initiation of the fact-finding process described in paragraph (g) or (h) of this section.

(3)  For a group of borrowers identified by the Secretary, for which the Secretary determines under paragraph (f)(1)(ii) of this section that there are widespread common facts and claims relating to a borrower defense under paragraph (d) of this section, there is a rebuttable presumption that each member reasonably relied on the substantial misrepresentation .  

(g)  Procedures for group discharge borrower defense claims with respect to loans made to attend a closed school.  For groups identified by the Secretary under paragraph (f) of this section, for which the borrower defense claim is made with respect to a Direct Loan to attend a school that has closed and has provided no financial protection currently available to the Secretary from which to recover any losses based on borrower defense claims made under this section, and for which there is not appropriate entity from which the Secretary can otherwise recover such losses

(1)  A hearing official reviews the Department official’s basis for identifying the group and resolves the claim through a fact-finding process.   As part of the fact-finding process, the hearing official considers any evidence and argument presented by the Department official on behalf of the group and, as necessary to determine any claims at issue, on behalf of individual members of the group, and considers any additional information the Department official considers necessary, including any Department records or response from the school, if practicable.  The hearing official issues a written decision as follows:  

(i)  If the hearing official approves the borrower defense, the written decision notifies the members of the group in writing of that determination and of the relief provided on the basis of that claim as determined under paragraph (i) of this section; or

(ii)  If the hearing official denies the borrower defense in full or in part, the written decision states the reasons for the denial, the evidence that was relied upon, the portion of the loans that are due and payable to the Secretary, and whether reimbursement of amounts previously collected is warranted, and informs the borrowers that if any balance remains on the loan, the loan will return to its status prior to the group claim process.  

(iii)  The Secretary provides copies of the written decision to the members of the group and, as practicable, to the school.

(2)  The decision of the hearing official is final as to the merits of the group claim and any relief that may be warranted on the group claim.  However, if relief for the group has been denied in full or in part pursuant to paragraph (i)(1)(ii) of this section, an individual borrower may request that the Secretary reconsider the borrower defense upon the identification of new evidence in support of the borrower’s individual borrower defense claim as described in paragraph (e)(5) of this section.

  (h) Procedures for group discharge borrower defense claims with respect to loans made to attend an open school.  For groups identified by the Secretary under paragraph (f) of this section, for which the borrower defense claim is made with respect to a Direct Loan to attend an open school or a school that is not otherwise covered by paragraph (f)(2) of this section, the claim is resolved in accordance with the procedures in this paragraph (h).

(1)  A hearing official reviews the Department official’s basis for identifying the group and resolves the claim and determines any liability of the school through a fact-finding process.  As part of the process, the hearing official considers any evidence and argument presented by the school and the Department official on behalf of the group and issues a written decision as follows:  

(i)  If the hearing official approves the borrower defense, the written decision establishes the basis for the determination and notifies the members of the group of the relief provided on the basis of that claim as determined under paragraph (h) of this section and notifies the school of any liability to the Secretary for the amounts discharged and reimbursed.

(ii)  If the hearing official denies the borrower defense for the group in full or in part, the written decision states the reasons for the denial, the evidence that was relied upon, the portion of the loans that are due and payable to the Secretary, and whether reimbursement of amounts previously collected is warranted, and informs the borrowers that the loan will return to its status prior to the group claim process.  The decision notifies the school of any liability to the Secretary for any amounts discharged or reimbursed.

(iii)  The Secretary provides copies of the written decision to the members of the group and to the school.

(2)  The decision of the hearing official becomes final as to the merits of the group claim and any relief that may be warranted on the group claim within 30 days after the decision is issued and received by the Department official and the school unless, within that 30-day period, the school or the Department official appeals the decision to the Secretary.  

(i) The decision of the hearing official imposing liability on the school or granting a group borrower defense does not take effect pending the appeal.

(ii) The Secretary renders a final decision. 

(3) After a final decision has been issued under paragraph (h), if relief for the group has been denied in full or in part pursuant to paragraph (i)(1)(ii) of this section, an individual borrower may file a claim for relief pursuant to paragraph (e)(5) of this section. 

 (4) The Secretary may reopen a borrower defense application at any time to consider evidence that the Secretary did not consider in making the previous decision.

(5) The Secretary collects from the school any liability to the Secretary for any amounts discharged or reimbursed to borrowers under this paragraph (g).  

(i) Relief*.*  If the borrower's borrower defense claim is approved under the procedures in paragraphs (e)(g) or (h) of this section—

(1)  The Department official or the hearing official, as applicable, determines the appropriate relief arising out of the facts underlying the borrower’s claim  and may request additional information as required to determine the appropriate relief for a borrower, including a borrower in a group.  The borrower’s relief may be calculated based on one or more of the methods described in Appendix [A] to this section, or such other method as the Secretary may determine.

(2)  The Secretary notifies the borrower --

(i)  Of the relief determination;  

(ii) Of the potential there may be tax implications; and 

(iii) Provides the borrower an opportunity to opt out of the group relief.

(3)  Consistent with the determination of relief under paragraph (i)(1) of this section, the Secretary discharges the borrower’s obligation to repay all or part of the loan and associated costs and fees that the borrower would otherwise be obligated to pay and, if applicable, reimburses the borrower for amounts paid toward the loan voluntarily or through enforced collection.  

(4)  The Secretary or the hearing official, as applicable, affords the borrower such further relief as the Secretary or the hearing official determines is appropriate under the circumstances.  Such further relief includes, but is not limited to, one or both of the following:

(i)  Determining that the borrower is not in default on the loan and is eligible to receive assistance under title IV of the Act.

(ii)  Updating reports to consumer reporting agencies to which the Secretary previously made adverse credit reports with regard to the borrower's Direct Loan.

(5)  The total amount of the relief granted with respect to a borrower the defense cannot exceed the amount of the loan and any associated costs and fees and will be reduced by the amount of any refund, reimbursement, indemnification, restitution, compensatory damages, settlement, debt forgiveness, discharge, cancellation, compromise, or any other benefit received by, or on behalf of, the borrower that was related to the borrower defense claim.

(j)  Cooperation by the borrower*.*To obtain relief under this section, a borrower must reasonably cooperate with the Secretary in any proceeding under paragraph (e), (g), or (h) of this section.  The Secretary may revoke any relief granted to a borrower who fails to satisfy his or her obligations under this paragraph (j).

(k)  Transfer to the Secretary of the borrower's right of recovery against third parties*.* (1)  Upon the granting of any relief under this section, the borrower is deemed to have assigned to, and relinquished in favor of, the Secretary any right to a loan refund (up to the amount discharged) that the borrower may have by contract or applicable law with respect to the loan or the contract for educational services for which the loan was received, against the school, its principals, its affiliates, and their successors, its sureties, and any private fund, including the portion of a public fund that represents funds received from a private party.

(2)  The provisions of this paragraph (k) apply notwithstanding any provision of State law that would otherwise restrict transfer of those rights by the borrower, limit or prevent a transferee from exercising those rights, or establish procedures or a scheme of distribution that would prejudice the Secretary's ability to recover on those rights.

(3)  Nothing in this paragraph (k) limits or forecloses the borrower's right to pursue legal and equitable relief against a party described in this paragraph (k) for recovery of any portion of a claim exceeding that assigned to the Secretary or any other claims arising from matters unrelated to the claim on which the loan is discharged.

**§ 685.308 Remedial actions.**

(a)  The Secretary requires the school to pay the Secretary the amount of losses the Secretary incurs on loans that the Secretary determines under §§685.206, 685.214, 685.215(a)(1)(i), (ii), or (iii), 685.216, or 685.222 or that were disbursed

(1)  To an individual, because of an act or omission of the school, in amounts that the individual was not eligible to receive; or 

(2)  Because of the school's violation of a Federal statute or regulation

(b)  In requiring a school to repay funds to the Secretary for losses identified in an audit or program review, the Secretary follows the procedures described in 34 CFR part 668, subpart H.  For other losses, the Secretary follows the procedures applicable to the determination of those losses.

(c)  The Secretary may impose a fine or take an emergency action against a school or limit, suspend, or terminate a school's participation in the Direct Loan Program in accordance with 34 CFR part 668, subpart G.

**Appendix A**

The hearing official or the Department official, as appropriate, may consider a number of factors in light of each borrower’s unique circumstances in determining the amount of a borrower’s injury where complete relief is not warranted, including but not limited to:   

(A) The difference in tuition between the program attended by the student and the average tuition for a comparable pool of programs, as determined by the official;

(B)  The difference between the amount of financial charges the student could have reasonably believed the school was charging, and the actual amount of financial charges made by the school;

(C) The difference between (i) the student’s earnings one year after leaving the program or school, and (ii) the average salary publicized by the school as being earned by graduates of the program in the previous year or, if such data are not available, the expected salary for the program’s designated occupation(s) or field, as determined by the U.S. Bureau of Labor Statistics, using the lowest decile of earnings for that occupation as reported in the U.S. Bureau of Labor Statistics; 

(D)  The total amount of the student's economic loss, less the value of the benefit, if any, of the education obtained by the student.  Economic loss, for the purposes of this section, may be no greater than the amount of the borrower’s Direct Loan.   Economic loss also includes the amount the institution collected and failed to pay to third parties on behalf of the student for license fees or any other purpose.   Economic loss does not include non-pecuniary damages such as inconvenience, aggravation, emotional distress, or punitive damages.  The value of the benefit of the education, for the purposes of this paragraph, may include transferable credits obtained by the student; and for gainful employment programs, qualifying placement in an occupation within the Standard Occupational Classification (SOC) code for which the training was provided, provided the student’s earnings meet the expected salary for the program’s designated occupation(s) or field, as determined in accordance with paragraph (C); and

(E) Such other factors as determined by the Secretary.  

**§ 685.300 Remedial actions.**

*See Issue Paper 5 for Options A and B.*

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