United States: Department Of Education Issues Guidance On Recent Borrower Defense To Repayment Actions

Without too much fanfare, on November 8, 2023, the U.S. Department of Education published an electronic announcement entitled "Borrower Defense School Notification Process Under the 2016 Regulation." The announcement follows months of the Department providing borrower defense to repayment (BDR) applications to institutions with little to no direction. While most of the information provided is already common knowledge in the sector, the Department did make an effort to address institutional concerns but, unfortunately, left a number of questions unanswered.

As the Department continues to provide relief applications to institutions, we provide a summary of the announcement as well as our analysis of the guidance below. We also offer a step-by-step guide on how to locate the BDR claims, if any, shared with your institution by the Department. We advise that you check the Common Origination and Disbursement (COD) System regularly to be certain that you do not miss the opportunity to respond to claims within the 60-day response window.

The Post-Class Applicant Process, in General

The announcement confirms that the BDR productions are part of the Sweet v. Cardona settlement agreement that requires the Department to adjudicate the applications under the 2016 regulation. It identifies that the Department is providing notice of BDR applications received from June 23, 2022, to November 15, 2022―what are referred to as "post-class applicants." While the Department has previously confirmed that the "2016 regulation" means the federal standard in the 2016 BDR rule, the announcement does not make that distinction. Despite this omission, we have no reason to believe that the Department is applying the state-law standard required in the pre-2016 regulations.

The announcement explains that the Department is "attempting" to batch applications so that schools receive all of their claims in a single notification. This is the process for the schools―over 90 percent of the recipients according to the announcement―that have fewer than 100 applications. For the small number of schools that have over 500 applications, the Department is reaching out to explain how it will pace the number of notifications sent each week.

Regarding response timelines, the Department rightfully states that its policy is to provide schools 60 days to respond. Our analysis notes that no statute or regulation requires that an institution's response be provided within 60 days. Practically speaking, however, the Department has turned off functionality in COD at the expiration of the 60 days. The announcement also explains that the Department "strongly" disfavors extension requests and, consistent with what we have been told by the Department previously, will only grant extensions in "exceptional circumstances." The announcement does not identify what constitutes such circumstances.

The announcement also addresses the affidavit provided to schools with the BDR claims. The Department requests that schools provide an affidavit, if they choose to respond. This is inconsistent with what the Department has previously said.

Over the past few months, representatives of the Department stated that if the school failed to submit an affidavit, then the Department would be forced to compare a sworn borrower application with an unsworn response. The Department concluded that the institutional affidavit permits the fact-finding process to weigh allegations and responses that are both sworn. The announcement appears to indicate that the Department has revised its previous interpretation.

The announcement also provides guidance on other topics. Under the "What kind of information is helpful to send back?" question, the Department encouraged schools to "consider how best to respond, if at all" and stated that "each application is unique" and "will require your review to determine what information would be helpful to provide."

In response to another question, "What should I do if the application is vague or doesn't have a clear allegation against my school?", the announcement counsels schools again to "decide for yourself how to respond, if at all," and if the application is vague, to include that conclusion in the institutional response "should you decide to respond."

The Department intends to provide all post-class applicant claim notifications by approximately April 2024.

The Option to Respond

The Department notes repeatedly that institutions have the option not to respond to the BDR claims that it receives. The Department goes so far as to state, "Under the 2016 Regulation, [the Department] does not draw an adverse inference against a school which does not respond to an application."

In addition, "A nonresponse does not create an inference in favor of the borrower."

Further, the Department notes that if the application is approved and the Department seeks recoupment, "[The school] will be a party to the recoupment process and will have an additional opportunity to respond to the borrower's application."

The statements about the 2016 regulation and second response opportunity are technically accurate; the regulation does not demand that the Department draw an "adverse inference" by an institution's lack of response and the recoupment procedures at 34 CFR 668.87 do provide a second opportunity to reply.

However, as we work with clients on responses, we make several points. First, while a lack of initial response does not strictly prejudice a school under the regulations, it is difficult to conclude that, from a practical perspective, the lack of initial response would have no impact on future recoupment procedures. Indeed, the institution's response may provide information that would compel the Department to outright deny the claim, which would remove risk of a future recoupment claim. Further, if the Department were to seek recoupment, an institution would be better served to have built out a record of individualized claim responses prior to the second opportunity to respond before the hearing official.

Second, even if the Department does not draw "an adverse inference," the school may at some point face a question in a Subpart G hearing regarding why, when given a reasonable opportunity to respond, it neglected to provide an initial response and demurred until granted a second bite at the apple. We have advised institutions to respond to all BDR claims.

Third, with recent rulemakings, substantial misrepresentation findings and BDR recoupment proceedings are no longer limited to simple and contained regulatory processes. Rather, the cross-compliance networks that the Department has created can turn individual instances of alleged noncompliance into major issues. It is important to note that a determination by the Department that a school committed a "substantial misrepresentation" is a finding and could reasonably lead to consequences beyond just recoupment. For example, under the recently published final rule, a determination that a school engaged in a substantial misrepresentation will be an administrative capability finding (new 34 CFR § 668.16(u)) and a reason to apply additional conditions on an institution that is provisionally certified (new 34 CFR § 668.14(e)(9)). Further, the initiation of a recoupment proceeding against an institution to recover BDR discharges is a mandatory trigger under the new financial responsibility regulations (new 34 CFR § 668.171(c)(2)(i)(C)) that will require the posting of a letter of credit of at least 10 percent of Title IV volume.

It is also possible that the Department is minimizing the need for institutions to respond in order to lessen the administrative burden of quickly adjudicating claims. With no institutional response, the Department has an easier pathway to deliver student loan relief, which has become a cornerstone of the Biden administration's platform on higher education. Thorough and legally sound institutional responses to BDR claims necessarily slow down the Department's process and negatively impact the administration's ability to grant pro-forma discharges.

As a result, mindful of the financial and personnel costs associated with responding to claims, we continue to believe that the stakes of not responding to the initial BDR production are too high to pass up the opportunity.

Lack of Initial Review by the Department Results in Significant Institutional Burden

The Department repeatedly states in the announcement that the 2016 regulation requires that the Department notify schools of all applications before they receive a substantive review. The Department does not define what it means by substantive.

What is clear is that the Department is conducting almost no initial review of the BDR applications, contrary to the regulations that the Department cites. The result has been a significant and unnecessary burden on institutions to chase evidence and documentation on claims that far exceed the limitations period and to parse through vague language to determine how to respond to ambiguous claims.

Under 34 CFR § 685.222(e)(3), the 2016 regulations state:

As a result, under the regulatory language, the Department is directed to review the application "to determine whether the application states a basis for a borrower defense" and, only after that initial review, resolve the claim through a fact-finding process.

The Department does not appear to be conducting this initial review to determine whether an application states a basis for BDR relief. If they were, institutions would not be receiving claims that far exceed the statute of limitations or exclusively make claims that are explicitly excluded from BDR relief, such as claims of discrimination or educational quality claims. The Department's inability to perform its regulatory obligation to vet these claims prior to sending them to schools has resulted in a significant burden on institutions to reply to claims that, on their face, do not meet the most basic standards for BDR relief.

Recoupment Proceedings

The announcement states the following regarding the recoupment process:

The Department references future recoupment proceedings a number of times throughout the announcement.

It is important to note that the Department does not necessarily need a BDR-specific recoupment proceeding to collect funds associated with substantial misrepresentation findings. In addition to the regulatory provisions identified above, substantial misrepresentation findings have historically formed the basis for fines and liabilities associated with program reviews, compliance reviews, fines and other adverse actions.

What the Department Did Not Say

The Department's efforts to respond to institutions' questions through an electronic announcement is a welcome development. However, the Department leaves a number of questions unanswered that, hopefully, will be addressed in future additions to the guidance.

For example, the Department only commits to "attempting" to send all BDR claims in a single send unless the school has over 500 claims. The Department did not identify any special processes for schools that have between 101 and 499 claims, which can still be especially burdensome regardless of institutional size or capacity.

In addition, the Department made no representations regarding whether or how institutions would be notified that they have received all of the claims made against them. Therefore, as a practical consequence, institutions are required to behave as if they have more than 500 claims and routinely monitor COD for additional claim submissions. In our experience, the Department has only provided claims on a rolling basis, even for schools that have less than 15 claims. This issue hanging over the heads of schools could easily be avoided if the Department notified schools of the number of claims it has received relative to each school.

Also, the announcement makes no mention of the significant technical issues associated with the response process and how they should be addressed. Many schools have encountered substantial issues with COD when attempting to access the claims and/or submit their responses, including not being able to open links to the claim documents. Further, when attempting to contact the Department about these technical issues, schools have had great difficulty actually receiving a response to their concerns, despite the 60-day response window continuing to tick down. Clarity and a clear pathway for institutions to have their concerns addressed in a timely fashion would be very beneficial to schools subject to this process.

Steps to Determine Whether Your Institution Has Pending BDR Claims

The final section of this Alert provides a step-by-step guide to how your institution can determine whether the Department has provided you BDR applications in the COD system.

1. Select the "School" tab on COD website;
2. Search for and select a school;
3. Click on the link to "Borrower Defense Portal" under "School Information" in the "School" tab.

Upon selecting the new Borrower Defense Portal page, you should arrive on the landing page for borrower defense cases for your school. COD will pull all the cases at a school up to 5,000 records at a time. Finally, we note that the institution will not be able to access the claims on COD or submit responses on COD after the expiration of the 60-day window.

For More Information

If you have any questions about this Alert, please contact Kristina Gill, Jonathan Helwink, any of the attorneys in the Higher Education Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.