**Date:**February 3, 2016

**To:**U.S. Department of Education

**Cc:** Negotiators on the 2016 Defense to Repayment Rulemaking Committee

**From:**Margaret Reiter, Margaret Thompson, Negotiators for Consumer Advocates; Walter Ochinko and William Hubbard, Negotiators for Veterans Advocates; Christine Lindstrom, Negotiator for Student Borrowers

**Issue:** Issues #1 and #3:   Federal Standard and Process

**Explanation of our Borrower Defense Regulatory Proposal**

I. **Introduction**

As negotiators who represent the interests of student borrowers and those who work on their behalf, we jointly propose the enclosed regulatory language to establish the standards and process for determining borrowers’ eligibility for defenses to repayment of their federal student loans.  This memorandum identifies the important principles that we believe should underlie amendment of the borrower defense regulation and how the enclosed proposal addresses them.  These principles are as follows:

1. Currently available, long-standing consumer protections should not be diminished.

2. All federal student loan borrowers should be able to rely on a fair standard for defending against repayment on the basis of an institution’s illegal, unfair, deceptive, or abusive practices.

3. The federal standard for determining whether an act or omission should constitute a borrower defense under 20 U.S.C. 1087e should be readily administrable and should focus on wrongful acts that are likely to cause harm to borrowers.  

4. A fair process for assessing defenses to repayment should be accessible to borrowers without legal representation and provide reasonable procedural protections

5. There should be an efficient process for determining if a group discharge is appropriate based on wrongful practices that applied to multiple student borrowers.

The enclosed proposal would amend the Direct Loan regulations, and we would propose that the FFEL regulations be amended similarly to clarify the process for defenses to repayment of FFEL loans.

II. **Background on Borrower Defenses**

Forcing a consumer to pay for a misrepresented product or service has long been viewed as unfair.  Laws have therefore been developed to ensure that just because the payment is being collected by a third-party creditor, rather than by the original seller, does not mean that the consumer loses the right to challenge having to pay.  Under these laws, when a seller works with a lender or refers the consumer to a lender, the consumer can defend against having to pay the lender based on the same claims or defenses the consumer could assert against the seller.  Versions of these laws, including the federal FTC Holder Rule, have existed since at least 1976.  

Because borrowers are generally not able to obtain relief from their obligations to repay federal student loans by taking action directly against the school, allowing borrowers to raise school misconduct as a defense to repayment is critical.  And borrowers do have this right: the language of the Master Promissory Notes for both Direct loans and FFEL loans since 1994 explicitly contain language that follows from the FTC Holder Rule and allow student loan borrowers to assert defenses to repayment based on their school’s misconduct.  Furthermore, the Direct loan regulations (since 1994) and FFEL regulations (implicitly at least since 1994 and expressly since 2007) have further clarified that this rule allows borrowers to assert defenses they would have against paying their school to oppose paying their student loan lender.  However, regulations are needed to ensure that all borrowers have reasonable access to this relief and that a fair process is used for assessing such defenses to repayment.

III. **Currently Available, Long-standing Consumer Protections Should not be Diminished**

Under the current regulations and the longstanding terms of the Master Promissory Notes, borrowers are able to defend against repayment based on state consumer protection laws.  The Department should not use this process to eliminate these longstanding rights for new borrowers.  Otherwise, unless a federal standard is adopted that is more borrower-friendly than any of the existing state laws, many borrowers will lose rights through this process.  For example, California has the biggest state population and among the strongest state consumer protection laws; these students’ rights should not be diminished.  Preserving the availability of state-law defenses also respects the important interests of states in protecting students and borrowers, and enables the Department to work more efficiently with state law enforcement when investigating borrower defenses, particularly those that may be supported by state findings. 

For these reasons, our proposal preserves borrowers’ right to assert a defense to repayment based on state law.

Although concerns have been raised that preserving state law defenses is administratively burdensome, eliminating new borrowers’ right to raise state-law based defenses to repayment will not reduce the Department’s need to know and apply state law.  All existing loans since 1994 are subject to the terms of their Master Promissory Notes, which provide borrowers the right to raise state-law based defenses as a defense to repayment.  To assess existing borrowers’ defenses to repayment, the Department will therefore have to consider state law defenses to the extent that such state laws provide existing borrowers more protections than does any new federal standard.  

Thus, the best way to simplify the process and reduce the need to assess claims under state law is not to eliminate state law defenses, but rather to adopt a federal defense standard that is broader and better articulated than most or all state standards.  In this way, the Department would nearly always apply the federal standard (since by its nature it would be more broadly applicable) without interfering with states’ authority to develop regulations to protect students.  In other words, if the federal floor is higher than most state standards, then there will be no reason to apply state standards on top of the federal floor.  Our proposed federal standard, discussed in more detail below, takes this approach. 

IV. **All Federal Student Loan Borrowers Should be Able to Rely on a Fair Standard for Defending Against Repayment**

While state law protections should be preserved, the regulations should also establish a federal standard that identifies the acts or omissions that the Department will consider as a defense to repayment regardless of the borrowers’ state.  All negotiators expressed agreement that it is important to ensure that students in all states are reasonably protected from wrongful conduct.  Our proposal includes a federal standard for what constitutes an act or omission that draws on long-standing state and federal law consumer protection principles.

V. **The Federal Standard for Determining Whether an Act or Omission Should Constitute a Borrower Defense under 20 U.S.C. 1087e Should be Readily Administrable and Should Focus on Wrongful Acts Likely to Cause Harm to Borrowers**

There seems to be consensus that the standard for determining whether an act or omission constitutes a borrower defense should be readily administrable and should focus on misconduct by schools likely to cause borrowers harm.  Our proposal addresses these goals in several ways:  

· **Relevant Misconduct is Plainly Defined:** The proposal focuses on misconduct that has been well-defined and commonly used in state and federal consumer protection laws aimed at unfair and deceptive practices, identifying misconduct as “a *misrepresentation*; an *unlawful*act or omission; an *unfair*act or omission; a *deceptive*act or omission; an *abusive*act or omission.”  These terms are well-defined by law and make clear what conduct is permissible and what is not, while still being broad enough to ensure that bad actors are not able to get around them, as they could if the regulation enumerated a set list of bad acts—which could never be sufficiently exhaustive.  It also limits *relevant* misconduct to misconduct that relate to the borrower’s decision to enroll and remain enrolled, acceptance of loans, or the educational and career services the loans were undertaken to pay for. 

· **Only Significant Misconduct Entitles Borrowers to Relief:** The proposed regulation distinguishes between merely “relevant” misconduct and “significant” misconduct to ensure that only misconduct that is likely to cause harm to a borrower, or has caused harm, entitles a borrower to relief.  An action is *relevant*if it is the type of misconduct explained above, but it is only *significant* if it is reasonably likely to cause harm to a borrower.  Only significant acts or omissions entitle borrowers to discharges. This addresses the concern of many negotiators that good but busy schools may make harmless mistakes that should not entitle borrowers to get out of their loans or subject schools to outsized penalties. 

· **Objective Standard is Readily Administrable:**  Like most consumer protection laws, the proposal includes an objective standard that does not require individualized proof of reliance or harm, which greatly simplifies the assessment of whether relief should be granted and is especially important for assessment of group discharges.  Thus the proposal allows the Department to grant relief to borrowers if they were subject to a school’s relevant misconduct that is objectively likely to result in detriment to  borrowers.

· **Defining Misconduct that Is Conclusively or Presumptively Significant:**As circumstances evolve, a context-sensitive factual inquiry may be required to determine whether certain misconduct is likely to result in harm to a borrower.  However, certain types of misconduct are already known to be likely to result in harm—indeed, many are already specifically prohibited by the Department for that reason.  The proposed regulation accounts for this fact by deeming certain types of acts or omissions *conclusively significant* and others *presumptively significant*.  

*Conclusively* significant acts or omissions are those so obviously likely to result in borrower harm that no further inquiry should be required, and the Department and borrowers should not have to expend any more effort to resolve the defense. The proposed regulation includes in this category those acts or omissions that involve certain egregious misrepresentations about job placement and graduation rates. Because these rates involve concrete numbers, it is easy to create a bright line rule for when a certain number is obviously and meaningfully misleading.

*Presumptively*significant acts or omissions are those that are very likely to result in borrower harm but may, in exceptional circumstances, not do so.  The proposal focuses here on acts or omissions towards borrowers that Congress and/or the Department has already prohibited due to their potential harm to borrowers--including violations of regulations concerning gainful employment representations, required disclosures to prospective students, and the like.  Also included are “high pressure sales tactics,” which many borrowers have complained about, noting that they would not have enrolled in fraudulent schools had these tactics not been employed.  As set forth in the proposed regulation, the presumption that misconduct of this type was significant may be rebutted based on the circumstances of the misconduct.

VI. **A Fair Process for Assessing Defenses to Repayment Should be Accessible to Borrowers Without Legal Representation and Provide Reasonable Procedural Protections**

We found general agreement that a fair process for asserting and assessing defenses to repayment should: (1) be  accessible and equitable to borrowers without legal representation; (2) be transparent; and (3) provide reasonable procedural protections, including a neutral decisionmaker that does not have a conflict of interest, written findings, and a way for the borrower to seek reconsideration.  We propose a process that we think best furthers these proposals at each stage:

· **Asserting a Defense:**  Under our proposal, there are three avenues through which the Department can find that a borrower has a defense against repayment: (1) collection proceedings, as is provided for in the current regulation, (2) subject to the Department’s own initiative given evidence in its possession, and (3) in a proceeding triggered by a petition of a borrower, a borrower’s representative, or another interested party with information about misbehavior at a given school (this could include, *e.g.,* a whistleblower, an Attorney General, or a state official).  The petition process makes clear that a borrower need not default first before asserting a defense, and clarifies how other interested parties, such as state attorneys general, can seek action on behalf of borrowers.

· **Official “Designee”:** After a petition process is triggered, it is presided over by a “Designee,” an official who must be institutionally independent from the Department’s political and debt collection incentives.  For obvious reasons, it would be inappropriate for the decisionmaker to have his or her decision influenced or appear to the public to be potentially influenced by the amount of money the Department would forego by granting meritorious relief.  The regulation gives the Department flexibility in determining exactly which sort of official is most appropriate to place in this position.  Administrative law has several different models that the Department can draw from. 

· **Assessment Process:** If the petition concerns only one or two borrowers and the investigation triggered by the petition does not reveal evidence indicating the existence of systemic wrongdoing, the Designee may limit their inquiry to the borrower(s) named in the petition.  

In this individual version of the process, the Designee reviews the evidence presented by the petition in light of other evidence in possession of or provided to the Department and may conduct hearings, request evidence from the school that is the subject of the acts or omissions described in the petition, and consider other evidence submitted.  As student borrowers with meritorious defenses will often only be able to provide their own sworn statements in support of their defense, the proposed regulation states that if the Designee discredits the borrower’s sworn statement, it must provide a written explanation of the evidence that contradicted the statement or why the statement was otherwise not credible. 

Two elements are central to this individual-based proceeding. First, once clearly unmeritorious petitions are weeded out, nearly all of the fact development and evidence collection is in the hands of a Department official. This division of labor is best both in terms of efficiency and justice. The Department already collects much information about schools, has subpoena powers, and employs experts in the relevant law. Borrowers, especially individual borrowers who are unlikely to be represented, are unlikely to be able to provide evidence of any facts beyond their personal knowledge. They may not even have the relevant documents, since often schools refuse to turn them over. It simply makes sense for the Department to fill in the gaps.  Second, as the process should be equitable to unrepresented borrowers, it provides them the chance to correct and/or add to their petition once they learn more about which facts do and do not matter. Additionally, because the process does not involve adversarial proceedings, it adds more transparency to have multiple points at which the Department notifies the borrower of how things are going.

Notably, *the school’s liability is not at issue in this process*, the only determination the Designee is making is whether to relieve the borrower from his or her obligation to repay challenged loans.   

· **Written Findings and Appeal:**  If the Designee determines that the evidence weighs in favor of the borrower(s), they produce a written order saying so and trigger the process for relief.  If the Designee determines there is not sufficient evidence weighing in favor of a defense against repayment, they give the borrower(s) an opportunity submit further evidence and/or to rebut evidence submitted by the school.  If the Designee then determines that the borrower does not have a defense, he or she produces a written order saying so.  A written order forces the Designee to justify their conclusion and develops the law, providing predictability for schools and advocates alike.  The borrower(s) then have an opportunity to appeal the finding.

· **Public Database -- Transparency, Information, and Accountability:**  The proposal calls for a public database, without private borrower information, reflecting the content and resolution of defenses, and other important information.  This provides transparency, accountability, and useful information for Congress, other enforcement agencies, and other interested parties.

VII. **There Should be an Efficient Process for Determining if a Group Discharge is Appropriate Based on Wrongful Practices that Applied to Multiple Student Borrowers**

Because some types of harmful misconduct are likely to apply to many borrowers entering a given program at a given time, there should be an efficient process for assessing whether groups of borrowers should be provided relief without necessitating each individual borrower to file an individual defense, and without requiring the Department to make individualized determinations.  Our proposal includes such a process.

Under our proposal, the Designee must begin an investigation into whether group relief is warranted due to systemic misconduct under enumerated triggering circumstances that indicate misconduct may have been systemic. This systemic misconduct is captured in the phrase “policy, pattern, or practice.”  None of these triggering events have to be present for the Designee to begin a group-based investigation--it always has the option to do so. We believe group-based investigations will be the means of relief for the great majority of wronged borrowers who might otherwise be unaware of their rights or of the evidence that would substantiate their defense.

The scope of any given group-based investigation will depend on the facts about how widespread the misconduct seemed to be, and a Designee should have flexibility to determine the appropriate scope based on their investigation.  However broad the scope, all borrowers within it must be notified of the investigation and have the option to put their loans into forbearance. Notifying borrowers informs them of important information about their student loan status and provides the opportunity to make elections regarding forbearance.  It also provides significant opportunity for borrowers to submit and the Department to collect relevant evidence to determine whether wrongdoing was present, and if so when and how broadly it existed.  In addition, the school being investigated should be required to notify all current and prospective students of the ongoing investigation so that students can do further research and make their own informed decisions regarding their enrollment.  We have heard from multiple borrowers that had they known their school was under investigation they would have done further research on the claims being made to them. Thus, requiring notice helps borrowers to help themselves before taking out initial loans or additional loans.

VIII. **Conclusion**

Defrauded borrowers are suffering and have begun to lose faith in the government’s ability to protect them from bad actors. They have waited long enough for relief. The Department has an opportunity to create  a robust federal standard for defense to repayment paired with an effective process to implement it. We believe the regulatory language we propose best takes advantage of this opportunity.

� We recommend that forbearance be optional because it is not the best option for all borrowers, and particularly borrowers in income-driven repayment plans may wish to remain in repayment.

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