To:U.S. Department of Education, Negotiators 

Fr:        Chris Lindstrom

Date: March 15, 2016

Re:Response to Department’s Revised Draft Proposal, Issues 1-3

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I was heartened to read the Department’s most recent draft and to see significant improvement, especially the inclusion of a group relief process that relies on common evidence.   The inclusion of this process in the rule provides a crucial path to relief for defrauded student loan borrowers.

I write to raise four big picture issues with the Department’s most recent revised draft proposal on Issues 1-3.  First, there are too few standards under which borrowers may claim relief.   Second, the nature of the group discharge initiation is fully discretionary.  Third, we still have no answer from the Department as to how borrowers with FFEL loans will be able to obtain relief.   Finally, I would like more clarity regarding the independence of officials assigned to handle the borrower defense claims.

I hope that the Department will continue to engage with negotiators in a more substantive discussion of these items given how important they are to meeting the goal of uniformity, consistency, and fairness to defrauded borrowers.  Getting these pieces right may require more than line edits.  

1) Standards for relief

Many non-federal negotiators do not want the grounds for borrower defense relief to be narrowed during this rulemaking; the Department’s negotiators have said they too want the standards for relief to be as generous as many state laws.  In particular a path to loan discharge should be available to borrowers beginning in 2017 based on the types of unfair, deceptive, or abusive conduct that is illegal under state law, just as that path exists for current borrowers.  Again, the most harmful conduct by recruiters relies not on outright misrepresentations, but on other unfair, high-pressure sales tactics that take advantage of prospective students, especially those new to higher education. This misconduct has been appropriately prohibited by state consumer protection laws.  

The Department’s new draft recognizes the problem of unfair and abusive sales tactics, and incorporates some such tactics in 685.222(d)(2).  However, these items have been included as “factors” that may be considered in determining if there was a “substantial misrepresentation,” so they will not have the intended effect of expanding the grounds for relief beyond misrepresentations.  To ensure that borrowers harmed by unfair and abusive conduct prohibited by state law are able to get relief, this type of unfair and abusive conduct should be a separate standard for relief that does not *also* require proving a substantial misrepresentation. 

Additionally, the best way to ensure that long-standing consumer protections remain in place for borrowers is to continue to allow borrowers with new loans disbursed after 2017 to rely on state law protections for their borrower defenses, to the extent state laws provide protections above the federal floor.  This can be done simply by adding an additional “state law claim” standard as grounds for borrower defense using the same language as applies to loans disbursed prior to 2017.  As the State AGs negotiators have made clear, the Department’s proposal to limit state-law-based relief to borrowers to situations where there has been a court judgment has the effect of *removing* state law as a basis for relief, given the rarity of court judgments.  The Department’s most recent draft, limiting relief further to “contested” judgments, in contrast to “default” judgment like the one against Corinthian, pushes state law out of the picture almost entirely. 

The rule must do more than it currently does to reflect the Department’s own intent to maintain the integrity of state law in the standard.

2) Initiation of the group discharge process

I was pleased to see that the Department’s revised proposal allows for group discharges based on common evidence, without individual borrower applications or individualized proof.  The inclusion of such a process is a huge improvement for beleaguered borrowers.  However, this draft lets the Secretary decide whether to initiate the process of determining whether a group of borrowers has a defense.  This means that the Secretary could choose never to consider or investigate whether a group discharge is appropriate, making the existence of this group process pointless.

Given the importance of the group discharge process, I would like to ensure that the process is meaningfully available to borrowers.  For example, in our February 3 proposal, negotiators representing consumers, veterans, and student borrowers suggested triggers for that process to be enacted, including the Secretary’s receipt of a petition for group relief; receipt of plausible evidence of systemic misconduct; and receipt of petitions from multiple borrowers alleging similar misconduct at the same school and timeframe.  In a letter last week, state attorneys general recommended that when a state agency shares findings of widespread school misconduct with the Department, the findings should trigger an automatic review by the Department regarding whether a group of borrowers has a borrower defense.  

In short, the group discharge process proposed by the Department has the potential to provide much-needed relief to defrauded borrowers, but must be revised to ensure that the process can be invoked and does not just live on paper.

3) Providing relief and guidance for FFEL borrowers

The Department’s newest draft clarifies that borrowers with consolidation loans are eligible for relief; the next step is clarifying that borrowers with FFEL loans are also eligible for relief and setting out the process applicable to their defenses.  The Department has stated its intent to provide equivalent rights to FFEL borrowers and Direct Loan borrowers, and therefore should ensure that all borrowers can access the same group and individual borrower defense procedures. Arbitrary barriers, such as proof of a “referral relationship”, should not limit FFEL borrowers from obtaining the same relief available to Direct Loan borrowers.    

4) Officials handling the process

The Department’s proposal references “Department officials” and “hearing officers” that would have responsibility to investigate borrower defense assertions, make determinations on borrower defenses and relief, and represent groups of borrowers in the group discharge process. Given that the Department has a dual mission, to serve taxpayers as well as to serve borrowers, it is important that these officials be shielded from conflicts of interest and dis-incentives to represent borrower interests effectively.  I would like to discuss what types of officials these might be and what protections there would be to ensure the proper incentives are in place.

All in all, I am encouraged by the progress made on the borrower defense draft so far, and I am hopeful we can engage outside of line-by-line edits on these key pieces.