**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; and Christine Lindstrom, Negotiator for Student Borrowers 

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

**Proposed Language for our Borrower Defense Regulatory Proposal**

**Title 34, Subtitle B, Chapter VI, Part 685, Subpart B is amended to include the following new provision:**

**Section 685.222: Borrower Defense.**

**(a) Definitions.**As used in this section, the following terms have the following meanings:

(1) “***Abusive***” refers to any act or omission that: (1) interferes or reasonably could be expected to interfere with the ability of a person to understand a term or condition of an educational product or service or a loan intended to pay for that product or service; or (2) takes advantage of or reasonably could be expected to take advantage of a person’s lack of understanding of the risks, costs, or conditions of the product or service; a person’s inability to protect his or her interests in selecting or using an educational product or service or a loan intended to pay for that product or service; or a person’s reliance on a school to act in his or her interests. 

(2) “***Borrower***” means any person who takes out an eligible loan. As used in this regulation, “borrower” encompasses the singular and plural.

(3) “***Designee***” means an official who operates independently from political, budgetary, and/or debt servicing divisions, officials, and concerns of the Department of Education. This could include an Administrative Law Judge or a Hearing Official pursuant to section 412 of the Department of Education Organization Act in accordance with 5 U.S.C. § 3105 or 20 U.S.C. § 1234(a)(4).

(4) “***Deceptive***” refers to any act or omission that deceives, or is reasonably likely to deceive.

(5) “***Eligible Loan***” means any loan under the Direct Loan Program, including without limitation Parent Plus and Direct Consolidation loans. 

(6) ***“High pressure sales tactics”***include, without limitation, falsely leading a borrower to believe that he or she only had a limited time in which to make a decision about attending such institution, pressuring students to enroll or reenroll with repeated phone calls or texts; and preventing an otherwise enrolled student from attending classes or accessing school resources until financial aid paperwork is completed. 

(7) “***Interested party***” means a borrower or government entity or representative thereof with knowledge of subsection (b) at a school.

(8) “***Misrepresentation***” means any false, erroneous or misleading statement made directly to a student or prospective student or indirectly through a statement made to any member of the public, to an accrediting agency, to a State agency, or to the Secretary. A misleading statement includes any statement that has the likelihood or tendency to deceive or any omission that causes a statement made to have the likelihood or tendency to deceive. A statement is any communication made in writing, visually, orally, or through other means. 

(9) “***Reasonable person***” means an ordinary person acting “***reasonably***” under the circumstances. What is reasonable, or constitutes acting reasonably, under the circumstances is determined from the vantage point of the typical person attending the school.  

(10) “***School***” means an institution, one of its representatives, or any institution, organization, or person with whom the institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services.

(11) “***Significant***” refers to an act or omission that results in, or is reasonably likely to result in, detriment to a borrower.

(12) “***Unfair***” refers to an act or omission that violates established public policy, is oppressive, or is reasonably likely to be injurious to a reasonable person, and no provision of law specifically makes the conduct lawful. An act or omission may be unfair to a borrower regardless of whether the benefit of the act or omission in the aggregate outweighs the cost or harm caused to the public in the aggregate. 

(13) “***Unlawful***” refers to an act or omission that is forbidden by law be it civil or criminal, federal, state or local, statutory, regulatory or court-made.

**(b) Relevant acts or omissions.** A borrower may assert as a defense against repayment any one or more of the following acts or omissions by a school that relate to a borrower’s acceptance of loans, or the educational or career services the loans are intended to pay for, or the borrower’s initial or continued enrollment in the school (or in the case of a Parent Plus borrower, such acts or omissions by a school that relate to the acceptance of loans, the educational or career services the loans are intended to pay for, or the initial or continued enrollment in the school by the person on whose behalf the borrower incurred the debt): a misrepresentation; an unlawful act or omission; an unfair act or omission; a deceptive act or omission; an abusive act or omission; or any act or omission of the school that would give rise to a cause of action against the school under applicable State law.

(c) **Significant act or omission.**If an act or omission described in subsection (b) is significant, the Secretary shall fully discharge a borrower’s loan obligation.

(1) Conclusively significant acts or omissions. An act or omission as described in subsection (b) shall be conclusively significant if the act or omission relates to the following circumstances:

(i) The school advertised or represented a job placement/employment rate of its graduates as (A) above a threshold established by applicable state law or the applicable accrediting agency of the school or program, if the accurate job placement/employment rate is below such threshold; **or** (B) ten percent higher than the actual placement rate; 

(ii) The school advertised or represented completion/graduation rates for its programs as (A) above a threshold established by applicable state law or the applicable accrediting agency of the school or program, if the accurate completion/graduation rate is below such threshold; **or** (B) ten percent higher than the actual completion/graduation rate;

(iii) Other circumstances the Secretary may from time to time identify.

(2) Presumptively significant acts or omissions.

(i) An act or omission as described in subsection (b) shall be presumptively significant if the act or omission relates to the following provisions, as applicable: 

(A) Subsections (A), (E), (F)(i), (G), (I), (J), (K), (L), (M), (R), (S) or (U) of 20 U.S.C. § 1092 concerning required disclosures;

(B) Subsections (a), (b)(1), (b)(2), (c)(1), (c)(2), (g), (h), (i), (k), or (n) of 34 C.F.R. § 668.72 concerning misrepresentations about the nature of educational programs;

(C) Subsections (a), (c), (d), or (e) of 34 C.F.R. § 668.73 concerning misrepresentations about the nature of financial charges;

(D) Subsections (a), (b), (c), (d), (e), or (f) of 34 C.F.R. § 668.74 concerning misrepresentations about the nature of employability of graduates;

(E) Subsections (b)(1)(i)-(v) of 34 C.F.R. § 668.6 concerning gainful employment disclosures; 

(F) Subsection (a)(20) of 20 U.S.C. § 1094 and corresponding subsection (22) of 34 C.F.R. § 668.14(22) concerning misrepresentations in general;

(G) Subsection (c) of 20 U.S.C. § 1091 concerning a student’s satisfactory academic progress; 

(H)  A provision of State law that specifies acts or omissions that constitute *per se* violations of state law; 

(I) High pressure sales tactics; or

(J) Any other provisions as the Secretary may from time to time identify.

(ii)**Rebutting the presumption.

(A) The Secretary may rebut the presumption of significance established under subsection (c)(2)(i) that the act or omission was significant by establishing that in the circumstances, a reasonable person would not have been influenced in his or her decision to enroll in the school or program, remain enrolled in the school or program, or take on debt, or that a reasonable person would suffer no detriment as a result of the violation.

(B) The borrower may counter the Secretary’s rebuttal of the presumption established under subsection (c)(2)(i) with evidence that a reasonable person, or the borrower, would have been or was influenced to enroll in or remain enrolled in the school or program, or take on debt, or that a reasonable person or the borrower would suffer detriment or did suffer detriment as a result of the act or omission.

(iii) In determining whether a school’s act or omission was significant, the Secretary shall consider the sources of evidence and information described in subsection (f)(2). 

(d) **Relief to borrower**:  

(1) A significant act or omission entitles the borrower to a full defense to repayment, and the Secretary shall relieve the borrower of any past or present obligation to repay the loan and any accrued charges and collection costs with respect to the loan. The Secretary considers such relief from past or present obligation to repay to constitute a reduction of the loan liability based on a legal infirmity that relates back to the original transaction.  The Secretary shall reimburse the borrower any amounts paid voluntarily or through enforced collection on the loan. The Secretary does not regard a borrower who has defaulted on a loan cancelled under this section as in default on the loan after cancellation, and such a borrower is eligible to receive assistance under programs authorized by title IV of the Act. The Secretary reports the cancellation of the loan to all consumer reporting agencies to which the Secretary previously reported the status of the loan, so as to delete all adverse credit history assigned to the loan.  

(2) The Secretary may provide full, partial or no discharge of a borrower’s loan obligation to a borrower who establishes an act or omission described in subsection (b) that is not established by a preponderance of the evidence to be a significant act or omission.

**(e) Availability of borrower defense.**

(1) Collection proceedings:  

(i) In any proceeding or in response to any action taken by or on behalf of the Department to collect on an eligible loan, the borrower may assert as a defense against repayment any relevant act or omission under subsection (b) of this section. These proceedings include, but are not limited to, the following:

(A) Tax refund offset proceedings under 34 CFR 30.33;

(B) Administrative offset proceedings under 34 CFR 30.20;

(C) Wage garnishment proceedings under section 488A of the Act and 31 U.S.C. 3720D, 34 C.F.R. 34.3;

(D) Salary offset proceedings for Federal employees under 34 CFR part 31;

(E) Litigation undertaken to collect on a federal student loan.

(ii) The Secretary shall provide borrowers with notice of their right to, and procedures for, asserting a defense against repayment before undertaking any such collection proceeding, and shall make such notice available in the languages of instruction of all eligible institutions. 

(iii) In evaluating a borrower defense raised in a collection action, the Secretary or his designee shall follow the process set forth in subsection (f). 

(2) By petition: An interested party on may petition the Secretary on their own behalf or on behalf of a group of borrowers for a finding that the conditions specified in subsection (c) are present with regard to one or more borrowers. The Secretary shall consider as a valid petition any communication from a borrower or interested party that provides plausible evidence of a violation of subsection (c). To ease the petitioning process, the Secretary shall develop a uniform petition for this purpose that a borrower or interested party may, but shall not be required to, use. The Secretary shall make the uniform petition and instructions available in the various languages of instruction of all certified institutions.

(3) Relief without a petition or assertion of defense during collection proceedings:  The Secretary or a Designee must provide the relief specified under subsection (d) for one or more borrowers under this section without a petition on behalf of the borrower(s) or assertion of a borrower defense in collection proceedings if by a preponderance of the evidence, based on information in the Secretary’s possession, the borrower qualifies for such relief. 

**(f) Evaluation of petition for borrower defense.**

(1) Upon receiving a petition described in subsection (e)(2), the Secretary shall assign the application to a Designee for review. The Designee shall:

(i) Acknowledge receipt of the petition in writing, along with notice to the borrower describing the review process and borrower rights, and assign a unique case number to the petition;

(ii) Promptly evaluate the petition; 

(iii) Place the loans of all borrowers covered by the petition into administrative forbearance or direct that the relevant servicers place these borrowers’ loans into administrative forbearance, subject to a process by which affected borrowers may opt out of such action; and

(iv) Resolve the petition within 180 days of receipt, unless the borrower requests, and the Secretary or his designee grants for good cause, additional time for the borrower to submit additional evidence or information requested by the Secretary or designee.

(2) In evaluating a petition described in subsection (e)(2), the Designee shall:

(i) Credit the borrower’s sworn statement absent specific evidence contradicting the borrower’s statement unless the Designee finds the statement otherwise not credible. If the Designee discredits the statement as specifically contradicted or otherwise not credible then the Designee must make a written explanation of the evidence that contradicted the borrower’s statement or why the statement was otherwise not credible and allow a borrower to modify the petition;

(ii) Collect, review and consider as corroborating evidence relevant information contained in

(A) Department investigations, audits, and program reviews;

(B) Information reported by the school to the Department, state authorizing agencies, and accrediting agencies; 

(C) Borrower defenses asserted against the school in collection proceedings under subsection (e)(1) and petitions under subsection (e)(2);

(D) Complaints concerning the school submitted through the Department’s Enterprise Complaint System;

(E) Actions, complaints, investigations, audits, or findings against the school by, or submitted to, a state authorizing agency;

(F) Actions, complaints, investigations, audits, or findings against the school by, or submitted to, an accrediting agency;

(G) Actions, complaints, investigations, audits, or findings against the school by, or submitted to, another federal agency;

(H) Findings against the school or against the managers, directors, or officials of the school contained in judgments, settlement agreements, or stipulations in relation to litigation or investigations; or

(I) Evidence gathered by other law enforcement authorities, including state attorneys generals.

(iii) Accept as conclusive evidence of significant acts or omissions any court judgment that is res judicata or would estop the school from disputing the findings in a collateral proceeding or any agency adjudication;

(iv) Consider as highly corroborative evidence of significant acts or omissions:

(A) That the Secretary or Designee has found violations of subsection (c) for the same school for another borrower; 

(B) A Departmental finding that the school has violated 34 C.F.R. § 668.14(22) (incentive compensation); 

(C) A Departmental finding that the school has violated 34 C.F.R. Subpart B, Chapter VI, Pt. 668, Subpart F (Misrepresentation); or

(D) Evidence accumulated by or a finding by a state or local prosecutor or other state or federal agency.

(3) In evaluating a petition described in subsection (e)(2), the Designee may review and consider, subject to subsection (4):

(i) Information and/or documents requested by or provided to the Secretary or Designee from by the petitioner, the school, or any other persons or institutions;

(ii) Statements of witnesses with personal knowledge; or

(iii) Evidence gathered by the Department for investigation of this or other borrower defenses relating to the school, including through site inspections, interviews of witnesses, inspection of documents, and audits of relevant institutional data, including but not limited to job placement rates, completion rates, and graduate salary information.

(4) Prior to relying on specific evidence supplied by a school or individuals related to a school to find against the borrower, the Designee shall disclose such evidence to the borrower and allow the borrower reasonable opportunity to respond to such evidence with an additional sworn statement or other evidence.

(5) The Designee may find that a borrower has established a defense in the absence of corroborating evidence.

(6) The Designee shall resolve a petition under subsection (c)(ii) for borrower defense by written order, to be adopted by the Secretary, setting forth the evidence it searched for and reviewed, findings of fact and applicable law, and a rationale for recognizing or denying the petition with respect to each affected borrower. The written order shall be mailed to the borrower, or a designated advocate.  

(7) Upon receipt of the written order resolving a petition, a borrower shall have the opportunity to request reconsideration of the order through written dispute of its findings of fact and law. A borrower or borrower’s representative must send a written request for reconsideration within 90 days of the Secretary’s mailing of an order resolving the borrower’s petition. However, a borrower shall be permitted to submit a renewed defense to repayment petition at any time.  

**(g) Pattern and practice of acts and omissions by school.**

(1) In the process of evaluating any petition pursuant to subsection (f), the Designee shall investigate and determine whether the alleged acts or omissions constitute a policy, pattern, or practice of the school upon:

(A) Receiving petitions from three or more individual borrowers who attended the same campus within three years of each other alleging similar conduct at that school;

(B) Receiving one or more petition on behalf of a group or groups of three or more borrowers who attended the same campus during any continuous period of time alleging similar conduct at that school;

(C) Receiving one or more petition containing plausible evidence of violations of subsection (c) and requesting such an investigation; or

(D) Receiving or discovering evidence that the alleged misconduct was not isolated or that employees in supervisory or management positions directed, condoned, knew about, or should have known about the misconduct alleged.

(2) The Designee may investigate whether the alleged acts or omissions constitute a policy, pattern, or practice in any other circumstance where justice and/or administrative efficiency so requires.

(3) Upon commencing an investigation, the Designee shall

(i) Notify the school; 

(ii) Place the eligible loans of affected borrowers into forbearance, subject to a procedure by which borrowers may opt out of forbearance;

(iii) Notify all affected borrowers of the investigation and the means by which they can submit information to further the investigation; and

(iv) Require the school to notify all current and prospective students of the petition.

(4) If the Designee determines that a school has or had a policy, pattern, or practice of relevant acts or omissions, then all attendees of the school during the period of such misconduct shall automatically receive full relief under subsection (d).

**(h) Database.**

(1) The Secretary shall gather and index and maintain a data base of all evidence that may be relevant to any future borrower defense including all the items identified in (f)(2) and the documentation considered and the findings and decisions in any borrower defense petition.   The Secretary shall maintain the data base for each school as long as borrowers still have outstanding loans or loans consolidated for attendance at that school.  Any evidence related to principals associated a school shall be maintained for as long as that principal is associated with that or any other eligible institution.

(2) The Secretary shall make available for public review a database, redacted of borrower information, of the evidence the Secretary has gathered under (h)(1), asserted borrower defenses, including the school in question, the time period of the alleged misconduct, and the Secretary’s resolution of the petitions. The Secretary shall conduct annual reviews of this database and shall publish a report summarizing any discrepancies or possibilities for reform.

**(i) Payment to Secretary by school.**The Secretary may initiate an appropriate proceeding to require the school whose act or omission resulted in the borrower's or borrowers’ successful defense against repayment of a Direct Loan to pay to the Secretary the amount of the loan to which the defense applies.

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