To:Negotiated Rulemaking Committee Members

From: Dennis Cariello & Chris Deluca

Date:March 15, 2016

Re:Concern with the Department’s March 11, 2016 Draft Proposal

We appreciate the difficulty faced by the Department of Education (Department) in this negotiated rulemaking process.  The Department must weigh the development of a process for adjudicating borrower defenses and assessing institutional risk to protect taxpayers against ensuring that well-intentioned and generally compliant institutions do not face substantial and potentially catastrophic risks, including closure, which will lead to even greater risks for taxpayers.  We have a number of concerns with the Department’s March 11, 2016 draft of the proposed rule as we believe, it does not effectively strike that balance.  

Given the short time between receipt of the March 11, 2016 draft and our next meeting date, we believe a quick discussion of some of the most concerning points is the most efficient way to address our concerns and lead to a process that achieves consensus.  Moreover, we remain steadfast in our view that the proposed rule will:

· Ensure students that have been harmed receive appropriate redress;

· Achieve fundamental fairness and due process for students and all institutions;

· Rightfully hold proprietary and non-profit schools accountable for wrongful actions taken with knowledge or undertaken recklessly;

· Consistent with past practice, ensure that schools are not faced with drastic penalties or liabilities for what amounts to good faith operational errors that occur despite the best efforts of the school to reduce those errors;

· Greatly reduce the risk of closure faced by schools; and

· Ensure the lasting viability of the Title IV program.

To that end, we raise the following concerns with the March 11, 2016 draft.  We look forward to developing language with the Department at the next negotiated rulemaking session.

ISSUES 1-3

1. Above all else, we have significant concerns that the Secretary is not considering the actual culpability of the school in seeking recoupment. This will result in operational deficiencies due to human error and good faith mistakes in judgment – which happen at every school in the nation – becoming major liabilities for institutions.  We firmly believe there needs to be a way to eliminate or cap liability where the school has not acted intentionally, recklessly or in bad faith.

2. We have concerns about the change from a two year statute of limitations to no statute of limitations for claims seeking discharge of amounts owed.  Currently, as the Department stated, FTC Holder Rule claims and defense to repayment claims under current regulation are subject to state law defenses such as a statute of limitation.  Statutes of limitation for breach of contract range from three to ten years, with nearly half of states with a six year statute of limitation.  Statutes of limitation for fraud range from one to ten years, with most states typically in the two to four year range. Allowing an unlimited time frame for claims will result in significant difficulties for a school in responding to allegations due to a lack of documentary evidence and witnesses and also subjects non-profit and proprietary schools alike to far broader liability than in current law.  

3. Additionally, the elimination of the current three year statute of limitations on claims of recoupment will retroactively subject non-profit and proprietary schools to liability.  This is unfair in terms of the significant potential liability school will face. This unfairness is compounded given the schools will be highly unlikely to have any documents with which to defend themselves.

4. We also have concerns that the proposed causes of action – substantial misrepresentation and breach of contract – are far easier to prove for the Department than they would be in any court in any state.  Indeed, if someone pursued a claim for fraudulent inducement as part of a Holder Rule defense to repayment or under current defense to repayment regulations, in most states, they would need to show the school made a false statement of material fact, that the school knew or should have known the statement was false, that the school intended for the student to rely on the false statement for you to rely on his false statement, and that the student did, in fact, justifiably rely on the false statement to her detriment which caused her damage.  For the most part, this rule does not contain these important elements and would subject non-profit and proprietary schools (and the Department) to much greater economic risk as a result.  Even actual reliance, which the Department has included as part of an individual misrepresentation claim, would be presumed for class claims – cases in which schools face the greatest potential liability.  

5. The breach of contract claim should only be for material breaches of the contract and, as is done in many states, prohibit claims for educational malpractice or claims that concern the academic standards of schools.  Without this prohibition, the Department arguably crosses into academic prerogatives of educational institutions outside its authority. 

6. The Department’s use of factors in substantial misrepresentation claims raise concerns as well.  While any school that would deny someone the opportunity to consult with an advisor (friend, family member, etc.) before enrolling in a school should be rightfully held accountable for such actions, assuming improper intentions for having multiple people meet with prospective students (such as an admissions adviser and a financial aid adviser) would prohibit conduct at most schools that is desirable.  Indeed, it may violate some state laws and codes of conduct to refuse students an opportunity to meet with a financial aid advisor before signing an enrollment agreement.  Also, it is unclear what “an unreasonable emphasis on unfavorable consequences of delay” means. Many schools in all sectors truthfully stress deadlines to students making enrollment decisions.  These factors need to be explained so we can develop language that focuses on truly wrongful behavior.

7. The proposed procedures do not adequately provide schools with meaningful participation in the process.  Schools do not appear to be given the opportunity to access information from the Department in order to prepare a response for any claims.  Also, schools are not provided the consistent opportunity to appeal.  School involvement is relegated to submitting a paper response and other documentation. The Secretary would be better prepared to make an informed determination if non-profit and proprietary schools alike had the opportunity to present its argument with testimony to put on witnesses and fully present a case to support a challenge to the borrower’s claim.  

8. The proposed opt-out class action procedure unintentionally threatens the very existence of schools in too many cases.  Indeed, one new hire could – despite all the training and counseling provided – misquote job placement rates to a number of students and give rise to a school-threatening class matter.  Moreover, the class action process presumes that all students heard the misrepresentation and relied on it, thus compounding the variance between the elements of state law causes of action and those of the new federal standard.  Lastly, by giving relief to all students proactively, the Secretary will soon be put in the position of having to respond to every suit filed against a school by assessing whether to provide borrower relief to every student to whom the suit allegedly relates.  

9. We have grave concerns about how much this proposal will cost – both in borrower defense claims granted and in the resulting closed school discharges that will accompany successful class claims. At no point have the negotiators been given an understanding of the budget implications of the proposal.  We respectfully request that the Department provide information on how much the proposal will cost and what are the drivers of the cost over the baseline that exists today.

10. We also believe that the Department would in fact save money in averted closed school discharges if it developed a process that focused recoupment on behavior for which the institution was truly culpable.  Moreover, developing a more accessible way of making good on claims of recoupment – whether through payment plans or the use of surety bonds from highly ranked insurance carriers – will also produce real cost savings for the taxpayer rather than any imaginary cost savings associated with draconian impositions of recoupment liability.

FINANCIAL RESPONSIBILITY

1. The Department’s proposal is a re-write of the financial responsibility criteria and is outside the scope of the current negotiated rulemaking session for which the Department provided notice in the Federal Register.  This topic is also largely outside the expertise of the current negotiators.  We agree with the other negotiators and members of the public who have suggested that the Department should postpone this task to another rulemaking for which the Department solicits and appoints those with greater expertise about these complex rules (such as accountants, university business officers and chief financial officers).

2. Despite this objection, and in an attempt to negotiate in good faith, we respectfully ask that the Department provide information, from July 1, 2012 to the present about the following:

a.How many institutions would have failed the new financial responsibility requirements since that time?

b.How many institutions are expected to trip the triggers in 668.171(c) each year, and what does the Department think the expected cost will be to provide the letters of credit under that action?  

c.How many institutions does ED expect will be affected by these new regulations and what does the Department presume the effect will be?

3.Given that, for a number of institutions, $100,000 represents a fraction of 1% of Title IV disbursements, what is the rationale for the repayment bar set at “the lesser of $100,000 or 10% of current assets”? What is the connection to requiring such relatively large letters of credit in such circumstances?

4.Has the Department considered allowing institutions to provide other means of protecting the Department from risk associated with borrower defense claims, such as insurance policies, surety bonds and pools of funds created by industry participants for the purpose of satisfying the contributor’s claims?

5.We have concerns about the effect of some of the specific “actions and triggering events” used in financial responsibility.  While we will discuss this more fully at the table, some concerns include:

a.Declaring any publicly traded school not financial responsible by reason of reporting any litigation in an SEC filing.  Given the benefits of disclosing as much as possible in SEC filings, it is not uncommon for schools to err on the side of disclosure.  It would be wrong for the Department to provide a disincentive for disclosing this information to the public.  Indeed, given this preference towards disclosure and how often large organizations are sure – whether proprietary or non-profit – this rule would effectively render every publicly traded school not financial responsible, irrespective of the school’s composite score or other metrics.  

b.While violations of loan agreements can no doubt be serious, in many cases the violations do not result in any harm to either party or any economic impact or are non-material violations.  This is particularly true given the requirements for schools to provide information on various regulatory compliance factors.  A failure to provide such information in a timely fashion could be a violation, but would not subject the school to any harm.  The Department should change this to a violation resulting in material economic harm to the school.

REPAYMENT RATE

1.Given the multitude of repayment rate calculations advanced in the past six years, what does the Department hope to gain from this one that the others do not provide?

2.The rate excludes anyone who was enrolled at another institution during the 5 year measuring period.  Does the Department intend to count those students in a repayment metric?  Does this not remove higher wage earners (those with more education) from the metric?  Has the Department considered ways to address this situation?

3.What is the expected impact on medical and osteopathic schools given that those graduates enter repayment and typically enter forbearance while in residency?

4.What is the expected impact on schools?  How many will fall below the threshold?  Does the Department include in those projections the impact of various income-base repayment options that could lead to negative amortization?

ARBITRATION

1. This proposal is outside the notice of issues to be considered at the negotiated rulemaking and is outside of the scope of this rulemaking.

2. We are also concerned that the committee does not have sufficient data about the ways schools use arbitration clauses, class action waivers, or limitations on liability.

3. We have concerns with how the proposed choices fit within *AT&T Mobility LLC v. Concepcion* and other Supreme Court decisions on arbitration  

DISCLOSURE OF CLOSED SCHOOL DISCHARGE

1. We do not believe the Department should locate this provision in 34 CFR 668.14 and the program participation agreement (PPA).  Placing this provision in the PPA raises concerns about additional false claims act liability centered around disputes of fact that cannot be resolved absent undergoing discovery in a court proceeding.  We believe 34 CFR 668.26, which concerns school closures, is the proper location.

2. Because we believe providing this disclosure is important to students, we believe the Department would be best able to provide the disclosure.  As other negotiators mentioned, schools actually closing are unlikely to have the staff to provide this disclosure.  The disclosure is too important and should be handled by the Department.

1