Appendix — Armstrong v. Accrediting Council for Continuing Education & Training, Inc.

Sa

Washington, D.C., to enroll in its automobile mechanic

training program. With help from the school, Armstrong

obtained a $4,000 GSLP loan from the First Independent Trust

Company of California ("FITCO"). One of the largest sources

of loans for students attending for-profit schools in the late

1980s, FITCO was singled out for its abuse of the Guaranteed

Student Loan Program during the hearings that led to the 1992

revamping of federal student loan policy. See Senate Report

at 21-24, 28.

According to Armstrong, a National Business School

representative prepared her loan application, specified the type

of loan, determined the loan amount, prepared the promissory

note, selected FITCO as the lender, presented the loan

agreement to Armstrong to sign, and forwarded the loan

application and promissory note to FITCO. See Am. Compl.

4€ 22, 24. Printed on standard forms provided by FITCO's

guaranty agency, the promissory note contained a choice of

law clause that subjected the loan contract to the laws of the

state of the lender, in this case California. Like other student

loan promissory notes issued at the time, the note contained no

Holder Rule notice. Armstrong alleges that the school and its

accrediting agency, the Accrediting Council for Continuing

Education & Training, Inc. ("ACCET"), represented that the

school offered a nationally accredited program in 1988; in

fact, she claims, its accreditation had expired a year earlier.

See id. 99 2, 29-34.

Armstrong claims that National Business School failed to

provide the promised training, equipment, and job placement

services, "leaving [her] and other students to repay student

loans for an education that they never received." /d. 42; see

also id. 477. The school closed its doors in 1990 and filed for

bankruptcy. Although the school had charged each student

over $5,000, Armstrong and other former students who filed

9a

claims in the bankruptcy proceedings each recovered only

$900. See Compl. § 26.

Armstrong filed suit in the United States District Court for

the District of Columbia, asserting federal claims based on the

FTC Holder Rule and the Department's school-origination

policy, as well as pendant state law claims based on the

District of Columbia Consumer Credit Protection Act

("CCPA") and common law contract doctrines. The complaint

sought damages, restitution, and declaratory relief against

ACCET and each of the entities that could enforce the loan, all

appellees in this case: Bank of America, N.T. & S.A. (the

current loan holder); California Student Loan Financing

Corporation (a corporation that acquires student loans on the

secondary market and which directed Bank of America to

purchase Armstrong's loan as its trustee); the Secretary of

Education (who assumed the guarantee of Armstrong's loan

after the original guarantor became insolvent); and Educational

Credit Management Corporation (a corporation created by the

Department to manage loan guarantees assumed by the

Secretary). Dismissing her federal claims, the district court

held that no cause of action arises under the Department's

school-origination policy or the FTC Rule. See Armstrong v.

Accrediting Council for Continuing Educ. & Training, Inc.,

832 F. Supp. 419, 432 (D.D.C. 1993) ("Armstrong I").

Armstrong now concedes this point. The district court also

dismissed Armstrong's state law claims except her common

law fraud and misrepresentation claims against ACCET. See

id. at 425-26, 434.

On appeal, this court found that the district court, having

dismissed the federal claims, failed to "expressly exercise its

discretion to maintain or decline jurisdiction over the pendant

claims under 28 U.S.C. § 1367." Armstrong v. Accrediting

Council for Continuing Educ. & Training, Inc., 84 F.3d 1452

EN ee eT ee

10a

(D.C. Cir. 1996) (unpublished table decision), 1996 WL

250412, at *1. We remanded to the district court for further

proceedings.Exercising its discretion, the district court again

dismissed Armstrong's claims as to all defendants except

ACCET (which subsequently settled with Armstrong and is no

longer involved in these proceedings). See Armstrong v.

Accrediting Council for Continuing Educ. & Training, Inc., 980

F. Supp. 53 (D.D.C. 1997) ("Armstrong II"). The district court

held that Armstrong had no claim under the District of

Columbia CCPA because the choice of law clause made

California law applicable. It rejected her argument that the

so-called “public policy exception" in choice of law doctrine

required D.C. courts to override the choice of law clause and

to apply the District's more protective consumer protection

statute instead. See id. at 59-60. As to Armstrong's mistake

and illegality claims, the district court found that the school

had not lost its GSLP eligibility until after she enrolled, and

that at any rate federal Higher Education Act policy preempted

state law defenses based on lack of school accreditation. See

id. at 61-64.

Appealing again, Armstrong reasserts her state law claims,

arguing: (1) that the Holder Rule notice should be implied into

her loan contract; (2) that the school's loss of accreditation

rendered it ineligible to participate in the GSLP program,

making her loan unenforceable on grounds of mistake or

illegality, and (3) that the district court should not have

applied the choice of law clause because it conflicts with D.C.

public policy enacted to protect District citizens. With respect

to the last claim, Armstrong asks us alternatively to certify the

choice of law question to the District of Columbia Court of

Appeals. Our review is de novo. See Systems Council EM-3 v.

AT&T Corp., 159 F.3d 1376, 1378 (D.C. Cir. 1998).

lla

II

We begin with Armstrong's implied contract claim.

Relying on the FTC Holder Rule, she argues that National

Business School had a "referral relationship" or "affiliation"

with FITCO, thus permitting her to treat subsequent lenders as

"standing in the shoes" of the school and to assert the school's

misconduct as a defense against loan repayment. As_ the

government acknowledged at oral argument, had Armstrong

signed her loan contract after the 1992 amendments to the

Higher Education Act, at which point the Secretary

incorporated the Holder Rule notice into the common

promissory note, she might well have a claim. Armstrong's

allegation that the school gave her a loan application preprinted

with FITCO's name as the chosen lender would support a

Holder Rule notice claim because the school "recommend/ed/

that the applicants seek loans" from FITCO, and FITCO either

supplied the preprinted forms itself or "kn[e]w that a loan

applicant was referred by [the] school." Overview, FTC Rule

re ae YF

Acknowledging that her pre-1992 loan agreement

contained no Holder Rule notice, Armstrong argues that the

FTC's Holder Rule nevertheless required the notice's inclusion

and that the court should therefore enforce it as an implied

contractual term. She relies on the common law principle that

contracts incorporate the law in force at the time of the

agreement. See United Van Lines, Inc. v. United States, 448

F.2d 1190, 1195 (D.C. Cir. 1971) ("Because the regulation was

in existence at the time [the party] entered on performance, it

became, in effect, a part of the contract between the parties.");

see also Ballarini v. Schlage Lock Co., 226 P.2d 771, 773-74

(Cal. 1950) ("The settled law of the land at the time a contract

is made becomes a part of it and must be read into it.").

Appellees disagree. They argue that the FTC Holder Rule did

ee ee

12a

not apply to student loans made in 1988 and that even if it did,

its terms cannot be implied into Armstrong's agreement.

We think appellees have the better of this argument.

Although the Truth in Lending Act, the source of the Holder

Rule, originally covered GSLP lending, Congress expressly

exempted student loans from the Act in 1982. At that point the

FTC stopped enforcing the Holder Rule with respect to GSLP

loans. Not until after Armstrong obtained her loan from

FITCO did the FTC again begin enforcing the Holder Rule in

GSLP loans, and not until after that did the Secretary

incorporate the notice into the common promissory note. See

supra at 4, 5. Facing circumstances very much like those

presented in this case, the Seventh Circuit, relying on the 1982

TILA Amendments, expressly held the Holder Rule

inapplicable to guaranteed student loans obtained prior to

renewal of Holder Rule enforcement. See Veal v. First Am.

Sav. Bank, 914 F.2d 909, 914 (7th Cir. 1990).

To be sure, both the FTC and the Secretary have since

suggested that the Holder Rule did in fact apply to guaranteed

student loans during the period when Armstrong obtained her

loan. See FTC Opinion at 2-3 (rejecting its previous "literal

interpretation" exempting GSLP loans from the Holder Rule

and claiming that Congress did not mean to exclude such loans

from the Rule's coverage when it exempted them from TILA);

Overview, FTC Rule at | (concluding that "the FTC Holder

Rule notice must be included in the common

application/promissory note."). In our view, however, these

later developments are insufficient to overcome the clear.

implications of the 1982 TILA Amendments and the FTC's

nonenforcement policy. Moreover, even if there were some

ambiguity as to the Holder Rule's applicability to student loans

during the late 1980s, we would not imply the terms of the

notice into Armstrong's loan for one simple reason: No one

13a

could reasonably argue that in 1988 appellees, the purchasers

and assignees of Armstrong's note (which contained no Holder

Rule notice), should have known that the Holder Rule

nevertheless applied to GSLP loans at that time. Lenders still

operated under a federal program that encouraged them to make

loans for attendance at virtually any accredited school, no

matter how deficient or disreputable. While Congress and the

Department have since changed the rules, we think it would be

unfair tc .pply the new rules to old loans.

Relying on contract-based theories of mistake and

illegality, Armstrong next claims that her loan is void and

unenforceable because National Business School had lost its

accreditation in 1987 and was therefore not an institution

"eligible" for participation in the federal student loan program.

See 20 U.S.C. § 1085(a), (c) (1988). The district court rejected

this claim, holding that schools do not lose their GSLP

eligibility until after a hearing before an administrative law

judge; in this case the hearing did not occur until 1989, a year

after Armstrong received her loan. Armstrong now argues that

the district court mistakenly relied on regulatory instead of

statutory eligibility rules. She points out that under statutory

rules, "the effective date of a loss of eligibility by reason of the

failure of an institution, its location, or its program to satisfy

the applicable definitions continues to be the date on which the

failure first occurred." 55 Fed. Reg. 32,181 (1990) (Secretary's

explanation of the effects of failure to meet statutory

requirements). We need not resolve this dispute to decide this

case, for regardless of when National Business School lost its

GSLP eligibility, we agree with the Secretary that federal

student loan policy preempts Armstrong's claims.

Federal preemption can be express or implied. See

Cippollone v. Liggett Group, Inc., 505 U.S. 504, 516 (1992).

Nothing in the Higher Education Act expressly preempts state

l4a

law claims of the kind raised by Armstrong. Implied

preemption occurs either "where the scheme of federal

regulation is sufficiently comprehensive to make reasonable

the inference that Congress ‘left no room' for supplementary

state regulation” (known as field preemption) or "in those areas

where Congress has not completely displaced state regulation,

.. to the extent [state law] actually conflicts with federal law"

(known as conflict preemption). California Fed. Sav. & Loan

Ass'n v. Guerra, 479 U.S. 272, 281 (1987) (internal quotation

omitted). In Jackson v. Culinary School, we held that federal

education policy regarding GSLP lending is not so extensive as

to occupy the field. See Jackson v. Culinary Sch., 27 F.3d 573,

580-81 (D.C. Cir. 1994), vacated on other grounds, 515 U.S.

1139, on reconsideration, 59 F.3d 354 (D.C. Cir. 1995).

Jackson also recognized that the Higher Education Act

preempts D.C. laws that "actually conflict" with federal law.

Id. at 581 (stating but declining to reach the conflict

preemption issue). Although Jackson was later vacated on

other grounds, we believe that it correctly stated and applied

federal preemption standards.

"Actual conflict" between Armstrong's contract claims and

Higher Education Act regulations is precisely what has

occurred here. If accepted, Armstrong's claim that she may

void her student loan based on the school's alleged GSLP

ineligibility would frustrate specific federal policies regarding

the consequences of losing or falsely certifying accreditation.

For example, it is the Secretary and guaranty agencies—not

students—who enforce statutory and regulatory requirements,

including those concerning accreditation and_ school

misrepresentation. See 20 U.S.C. § 1094(c) (1988); 34 C.F.R.

§§ 668.71-.75, 682.700-.710 (1988). Reinforcing this point,

the preamble to the final rule regarding institutional eligibility

says this:

Bi cma

:

;

lSa

[The Department] considers the loss of institutional

eligibility to affect directly only the liability of the

institutionfor Federal subsidies and reinsurance paid on

those loans.... [T]he borrower retains all the rights with

respect to loan repayment that are contained in the terms

of the loan agreements, and [the Department] does not

suggest that these loans, whether held by the institution or

the lender, are legally unenforceable merely because they

were made after the effective date of the loss of

institutional eligibility.

58 Fed. Reg. 13,337 (1993). Moreover, the Department

expressly permits lenders to rely in good faith on eligibility

representations by students and schools so long as the schools

did not "originate" the loans. See 34 C.F.R. § 682.206(a)(2)

(1988). Allowing mistake and illegality claims based on GSLP

eligibility requirements to void student loan repayment

obligations would "stand{ ] ‘as an obstacle to the

accomplishment and execution of the full purposes and

objectives of Congress.'" Guerra, 479 U.S. at 281 (quoting

Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).

This brings us finally to Armstrong's claim under the

District of Columbia Consumer Credit Protection Act. She

relies on section 28-3809, which provides:

(a) A lender who makes a direct installment loan for

thepurpose of enabling a consumer to purchase goods or

services is subject to all claims and defenses of the

consumer against the seller arising out of the purchase of

the goods or service if such lender acts at the express

request of the seller, and—

(1) the seller participates in the preparation of the loan

instruments....

l6a

D.C. Code Ann. § 28-3809 (1981). Characterizing her

guaranteed student loan as a "direct installment loan,"

Armstrong argues that National Business School's marketing

of FITCO loans through preprinted application forms, along

with its assistance in filling out loan applications, brings her

loan within the CCPA's protection. According to appellees,

the district court properly dismissed Armstrong's CCPA claim

on the ground that the promissory note's choice of law clause

made California law applicable. See Armstrong II, 980 F.

Supp. at 58-60.

We need not determine whether D.C. courts would set

aside the choice of law clause as contrary to D.C. public policy

or whether, alternatively, to certify this question to the D.C.

Court of Appeals, because we again agree with the Secretary

that Armstrong's state law cause of action conflicts with pre-

1992 federal policy governing guaranteed student loans. As we

have noted, pre-1992 federal student loan policy was intended

to make student loans attractive to private lenders by

protecting them from the financial consequences of student

default. Although the Department's school-origination policy

certainly allows students to raise school misconduct defenses

in limited circumstances, the Department expressly warned

that the policy was "not intended to create any other rights for

student borrowers or to suggest that borrowers are excused

from repaying loans" except where there is a school-origination

relationship. 58 Fed. Reg. 13,337 (1993). Allowing student

borrowers to raise CCPA defenses based on school misconduct

against lenders who do no more than _ permit schools to

“participate[ | in the preparation of the loan instruments" at the

schools’ "request," D.C. Code Ann. § 28-3809(a), would extend

lender liability beyond school- origination relationships. In

letter rulings discussing circumstances closely mirroring the

facts of this case, the Secretary assured lenders that they do not

risk falling within the scope of the school-origination policy

17a

merely by "market[ing] GSL_ lending by sending combined

application/promissory note/disclosure forms ... with the

lender's name preprinted thereon, directly to the school," and

allowing schools to assist students in completing loan

applications on those forms. Letter from John E. Dean, Clohan

& Dean, to Larry Oxendine, Director, Division of Policy and

Program Development, U.S. Dep't of Educ. (Dec. 14, 1990);

Letter from Larry Oxendine to John E. Dean (Feb. 20, 1991).

Permitting Armstrong to raise CCPA defenses against

repayment of her pre-1992, pre-common promissory note loan

would subject appellees to risks neither anticipated by them

nor intended by the Guaranteed Student Loan Program.

Nothing in United States v. Griffin, 707 F.2d 1477 (D.C.

Cir. 1983), requires a different result. There, we found no

preemption of state law defenses by a different student loan

program under which the federal government insures GSLP

loans made directly by schools. Because under that program

the student borrowed directly from the school, the Department's

school-origination policy squarely applied, and the asserted

state law claims did not expand lender risk beyond _ that

contemplated by federal policy. Moreover, allowing students

to raise school misconduct defenses against the federal

government could have had no impact on the private lending

that Congress considered so critical to the operation of the

pre-1992 Guaranteed Student Loan Program.

Ii]

We acknowledge that denying relief to Armstrong may

seem unfair. Lenders that permitted schools to abuse the

Guaranteed Student Loan Program and that profited

enormously prior to the 1992 changes are protected by federal

preemption. Owners of schools that profited from student

loans while failing to provide promised training and resources

18a

are protected by bankruptcy laws. Only the students, the very

people the Guaranteed Student Loan Program was intended to

benefit, are left holding the bag.

The 1992 changes in the federal student loan program went

a long way toward eliminating this unfairness for students who

borrowed after 1992. The Secretary has even established loan

discharge procedures for two categories of pre-1992 borrowers:

those whose for-profit schools closed while they were in

attendance, and those whose own GSLP eligibility (not the

school's eligibility) was falsely certified. See 34 C.F.R. §

682.402(d), (e) (1997). These procedures provide no relief for

students like Armstrong, whose schools falsely represented

their accreditation or engaged in other misconduct. We have no

authority to protect such students, but we think the Secretary

does. See 20 U.S.C.A. §§ 1082(a), 1087-0 (Supp. 1998).

So ordered.

19a

KAREN LECRAFT HENDERSON, Circuit Judge, concurring:

[ concur in the result but neither agree with nor deem

appropriate the concluding two paragraphs of the opinion. The

student loan program may have its flaws but there is no basis

to wring our hands over this one, especially when defaulting

student loan borrowers constitute a significant national problem

in the administration of the program.

20a

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 2, 1998 Decided March 23, 1999

No. 97-5316

Vanessa Armstrong,

Appellant

ve

Accrediting Council for Continuing Education and

Training, Inc., et al.,

Appellees

On Petition for Rehearing

Before: Henderson, Randolph and Tatel, Circuit Judges.

ORDER

On consideration of appellant's petition for rehearing, it is

Ordered by the court that the petition be denied and that the

slip opinion filed herein on March 23, 1999 (reported at 168

F.3d 1362) be amended as follows:

On page 4 of the slip opinion (168 F.3d 1364-65), delete the

first two sentences of the paragraph beginning "To further

encourage ..." and replace them with the following:

Congress also excluded GSLP loans from the Truth in

—————

2la

Lending Act ("TILA"), see Pub. L. No. 97-320, sec.

70'(a), § 1603, 96 Stat. 1469, 1538 (1982), and the FTC

stopped enforcing its so-called "Holder Rule" against

GSLP lenders. See Federal Appellee's Br. at 25 ("1982

TILA amendments exempting student loans from TILA

coverage convinced both courts and FTC staff that the

Holder Rule thereafter no longer applied to GSLP loans.").

Adopted by the FTC in 1976...

On page 6 (168 F.3d 1365), in the first full sentence,

replace the phrase stating "together with the FTC's renewed

enforcement policy" with "together with the FTC's decision to

enforce the Rule with respect to guaranteed student loans."

On page 10 (168 F.3d 1368), delete the two sentences

following the sentence stating "We think appellees have the

better of this argument" and replace them with the following:

In 1982, Congress expressly exempted student loans from

the Truth in Lending Act. At that point, because the

Holder Rule incorporated TILA's definitions and was

therefore considered limited to credit transactions covered

by TILA, see 16 C.F.R. s 433.1(d), (e), the FTC stopped

enforcing the Holder Rule with respect to GSLP loans. In

a letter dated April 12, 1990, FTC staff, reiterating advice

given in an earlier letter, described its "current

enforcement position" as "[GSLP] loans would not be

covered by the Holder Rule." Letter from John F.

LeFevre, Program Advisor, Federal Trade Commission, to

Joseph Esposito, Akin, Gump, Strauss, Hauer & Feld (Apr.

12, 1990). Although this advice was later "retracted," see

Letter from John F. LeFevre to Joseph Esposito (June 20,

1990), that retraction related to future enforcement, and

nothing in either it or elsewhere in the record contradicts

the government's statement that the FTC stopped enforcing

22a

the Holder Rule against GSLP lenders after the 1982 TILA

Amendments. Not until after Armstrong obtained her

loan....

On page 11 (168 F.3d 1368), replace the words

"nonenforcement policy" in the second sentence of the full

paragraph with "nonenforcement of the Holder Rule.”

On page 14 (168 F.3d 1370), amend the last sentence on

the page beginning "In letter rulings ..." to read: "In letter

rulings discussing circumstances closely mirroring the facts of

this case, see Maljack Prods., Inc. v. Motion Picture Ass'n of

America, Inc., 52 F.3d 373, 375 (D.C. Cir. 1995) (on motion to

dismiss we accept the facts alleged in the complaint as true),

the Secretary....". In addition, after the citation to "Letter from

Larry Oxendine to John E. Dean (Feb. 20, 1991)" on page 15,

add the following: "; see also 57 Fed. Reg. 60,304 ("The

Secretary has also decided to describe an ‘origination

relationship’ as a special business relationship between a school

and a lender so as to distinguish it from the relationship that

exists between these parties as part of the normal loan

processing and delivery system.")."

Per Curiam

For the Court:

Mark J. Langer, Clerk

By: Deputy Clerk

23a

Filed, September 30, 1997

[980 F. Supp. 53]

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No.: 91-3135 (RCL)

VANESSA ARMSTRONG.

Plaintiff.

Vv.

ACCREDITING COUNCIL FOR

CONTINUING EDUCATION &

TRAINING, INC., ef al.,

Defendants.

MEMORANDUM OPINION

This matter comes before the court on remand from the Court

of Appeals, Armstrong v. Accrediting Council for ( ‘ontinuing

Education and Training, Inc., 318 U.S. App. D.C. 78, 84 F.3d

1452 (D.C. Cir. 1996) (unpublished table decision), and on

defendants’ renewed motions to dismiss plaintiff's remaining

claims pursuant to Fed. R. Civ. P. 12(b)(2) and (6). In the

alternative, defendants seek summary judgment on these claims

For the reasons stated below, defendants Bank of America,

California Student Loan Finance Corporation, Higher Education

Assistance Foundation and the Secretary of Education's motions

to dismiss are granted in full in accordance with this opinion.

I. BACKGROUND

|

A. Factual Background

As this motion comes before the court under Fed. R. Civ. P

12(b)(2) and (6), defendants must prove that there is no set of

facts upon which plaintiff is entitled to relief as a matter of law

Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S Ct.

99 (1957) All allegations set forth in the complaint must be

accepted as true and liberally construed in favor of plaintiff and

all reasonable inferences must be drawn in favor of plaintiff.

Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S.

Ct. 1683 (1974). The complaint should be dismissed only if it

appears beyond doubt that there is no set of facts proffered in

support of plaintiff's claim that would entitle her to relief

Conley, 355 U.S. at 45-46, Haynesworth vy. Miller, 261 U.S.

App. D.C. 66, 820 F.2d 1245, 1254 (D.C. Cir. 1987).

Plaintiff Vanessa Armstrong enrolled in the Washington,

D.C. campus of NBS Automotive School ("NBS"), a for-profit

vocational school, in June 1988. At the time of her enrollment,

NBS informed plaintiff that tuition for the program would

exceed $ 5.000 but that the school could arrange a guaranteed

student loan ("GSL") to pay most of the charges. According to

plaintiff's amended complaint, NBS represented to her that its

program was accredited by the Accrediting Council for

Continuing Education and Training ("ACCET"), approved by

the D.C. Educational Licensure Commission and certified by the

Department of Education ("DOE" or "Department") as an

"eligible institution" under the GSL program and the Higher

Education Act of 1965, 20 U.S.C. §§ 1070 et seq. ("HEA").

Piaintiff Armstrong paid $ 1,317.91 directly to NBS, and NBS

presented her with a loan application and promissory note for a

GSL loan of $ 4,000, representing the balance of the tuition and

fees

25a

According to the amended complaint, NBS "prepared the

loan application and promissory note presented to plaintiff

Armstrong, selected the lender and guarantee agency, specified

the type of loan, determined the loan amount, made disclosures

concerning the terms of the GSL loan, had plaintiff sign the

promissory note, and disbursed the loan proceeds." Plaintiff's

Amended Complaint at 8. The note provided that the loan was

to be issued by First Independent Trust Company of California

("FITCO"), with the Higher Education Assistance Foundation

("HEAF") acting as guarantor. Plaintiff signed the application

and the note on July 19, 1988. NBS certified that plaintiff met

eligibility requirements for the loan, at which time FITCO and

HEAF approved the loan and paid the proceeds to NBS

Bank of America ("BA"), an eligible lender under 20 U.S.C

§ 1085(d), subsequently purchased the plaintiff's GSL as trustee

for the California Student Loan Finance Corporation

("CSLFC"), a corporation which acquires student loans under

the HEA. BA is the current "holder" of the note. See 20 U.S.C

§ 1085(i). FITCO, the original lender, was not named as a

defendant in this action.

In or about December 1989, NBS closed its school in the

District of Columbia. At the time of the filing of her amended

complaint, plaintiff had made payments on her GSL loan of over

$1,500. Over the ten year repayment period of the loan, the total

of the monthly payments and interest is $7,565.76

The gravamen of plaintiffs complaint is that she was

defrauded by NBS, that the school was "a sham because it did

not meet the standards for accreditation and failed to provide

the educational training it promised," Plaintiffs Amended

Complaint at 1-2, and that she should not be required to repay

her creditors for an education she never received. She claims

26a

that NBS was falsely accredited, and that she reasonably relied

on NBS's representations concerning its program in deciding to

enroll. Plaintiff initially filed a four-claim complaint, naming as

defendants CSLFC, BA, HEAF, the Secretary of Education

("the Secretary") (as ultimate guarantor of all GSLs) and

ACCET, the agency that granted accreditation to NBS, allowing

the school to qualify for federal funds under the HEA. Plaintiff

filed her amended complaint in October 1993 pursuant to this

court's order in Armstrong v. Accrediting Council for

Continuing Education & Training, Inc., 832 F. Supp. 419, 435

(D.D.C. 1993) ("Armstrong I"), revising her claims against the

Secretary and ACCET. Significantly, NBS has never been a

party to this action.

B. Procedural History

In Armstrong I, this court held first that plaintiff could not

assert a cause of action against defendants CSLFC/BA', HEAF,

or the Secretary on common-law contract grounds of mistake or

illegality. Armstrong I, 832 F. Supp. at 426-27. Second, the

' Because the relationship between Bank of America and

the California Student Loan Finance Corporation make their

interests identical and all motions have been filed jointly, they

will hereinafter be referred to singularly as BA/CSLFC.

2 Armstrong I also addressed claims against ACCET

based on portions of the District of Columbia Consumer

Protection Procedures Act, D.C. Code § 28-3904 (unfair trade

practices) and common-law misrepresentation, with the former

claim being dismissed. Armstrong I, 832 F. Supp. at 423-26.

Cross-motions for summary judgment on the common-law

misrepresentation claim were denied in Armstrong Vv.

ee ee eee

i mR

27a

court dismissed claims asserted under various sections of the

D.C. Code, including §§ 28-3807, 3809 and 3813(f), concluding

that although the HEA does not explicitly or implicitly preempt

all state law, the particular statutory claims asserted by plaintiff

were preempted because it was either impossible for an

individual to abide by both the state law and the HEA, or

enforcement of the D.C. statutory claims would preclude

execution of the purposes and objectives of the HEA. See id. at

427-31. Third, the court dismissed both federal law and D.C.

statutory/regulatory claims purportedly arising under the FTC

Holder Rule, 16 C.F.R. § 433.2. See id. at 431-33. Finally, this

court dismissed plaintiff's claims based on the existence of an

“origination relationship" under 34 C.F.R. § 682.200 between

the school and the initial lender against all defendants except the

Secretary. See id. at 433-34.

On appeal, the D.C. Circuit vacated the above ruling and

remanded the matter for further consideration. Armstrong v.

Accrediting Council for Continuing Education & Training,

Inc., 318 U.S. App. D.C. 78, 84 F.3d 1452 (D.C. Cir. 1996)

("Armstrong II") (unpublished table decision). The Court of

Appeals directed this court to consider first whether, in the

absence of any remaining federal law claims, jurisdiction should

be maintained under 28 U.S.C. § 1367(C)(3). After reviewing

the written submissions and oral arguments of all parties, the

court decided to exercise jurisdiction and reach the merits of

plaintiff's case, and further determined that declaratory relief was

appropriate as to the pendent state claims. Armstrong v.

Accrediting Council for Continuing Education & Training,

Inc., 961 F. Supp. 305 (D.D.C. 1997) ("Armstrong IV"), and

therefore need not be revisited in this opinion.

28a

Accrediting Council for Continuing Education & Training,

Inc., 950 F. Supp. 1 (D.D.C. 1996) ("Armstrong III").

Having decided to exercise its jurisdiction, this court must

now consider the remaining questions presented to it by the

Court of Appeals. Specifically, this court is called upon to

determine applicable state law under contemporary choice of

law principles; 2. consider whether that law is preempted by the

federal Higher Education Act; and, 3. if the state law is not

preempted, review the application of the relevant law to

plaintiff's claims

Second, the Secretary has now moved to dismiss the claims

against him based upon an alleged "origination relationship"

between NBS and FITCO. This court will address that question

pursuant to the Secretary's and HEAF's Renewed Motion to

Dismiss

Finally, in plaintiff's amended complaint, her second claim

for relief alleges a cause of action against the Secretary under 20

U.S.C. §§ 1087(c)(1),(5) which directs the Secretary to

discharge a borrower's liability by repaying the amount owed on

the loan on all GSLs received on or after January 1, 1986 and

report such discharge to credit bureaus if the student's eligibility

under the HEA was falsely certified by the institution or if the

student was unable to complete the program due to closure of

the institution. Plaintiff alleges that she has been injured by the

failure of the Secretary to perform these statutory obligations,

and asks for relief in the form of a declaratory judgment and a

writ of mandamus compelling the Secretary to perform his

duties

.

29a

Il CHOICE OF LAW

In her complaint, plaintiff asserted a number of causes of

action under District of Columbia law, including, iter alia,

D.C. Code §§ 28-3809(a)(1), 28-3904(a),(b),(e),(f),(r), 28-

3807, and 16 DC. Mun. Regs. § 1212.1. However, the

Supplemental Loan for Students (SLS) Application/Promissory

Note signed by plaintiff included the following provision

To the extent not governed by federal law, this note

shall be governed by the laws of the jurisdiction where

the lender is located

The original lender, FITCO, was located in Sacramento,

California, BA/CSLFC are also California based. If the

contractual choice of law provision is held operative and

binding, California law would govern this case, thereby

rendering all of plaintiff's District of Columbia claims invalid,

with the exception of her claims based upon common-law

principles of mistake and illegality, which, as discussed below,

have previously been considered and dismissed by this court

See Armstrong I, 832 F. Supp. at 426-27. Whether a choice of

law clause in a student loan contract 1s enforceable is a matter

of first impression in this jurisdiction

A federal court is directed to apply the choice of law rules

for the forum in which it sits. See A./. 7rade linance, Inc. v

Petra International Banking Corp., 314 U.S. App. D.C. 122, 62

F 3d 1454, 1463-64 (D.C. Cir. 1995) ("In other settings in

which a federal court must rule upon an issue regulated only by

state law, it applies the forum state's choice of law rules ")

See also Klaxon Co. v. Stentor Electric Manufacturing Co., 313

U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941) ("It ts not

for the federal courts to thwart such local policies by enforcing

30a

an independent "general law" of conflict of laws.").

Consequently, this court will apply choice of law doctrine from

the District of Columbia.

Before addressing the applicability of the choice of law

clause in the loan contract, there exists a threshold question as

to which jurisdiction's law would apply absent the clause. To

determine controlling law, the District of Columbia follows an

"interest analysis" approach. The law governing the case is the

law of the jurisdiction with the most "significant relationship" to

the matter at issue. 7rout Unlimited v. United States Dep't of

Agriculture, 944 F. Supp. 13, 19 (D.D.C. 1996) (citing Church

of Scientology Int'l v. Eli Lilly & Co., 848 F. Supp. 1018, 1026

(D.D.C. 1994)); see also Greycoat Hanover F. Street Limited

Partnership v. Liberty Mutual Insurance Co., 657 A.2d 764.

767-68 (D.C. App. 1995) (noting that the fact that an incident

occurred in D.C. is not independently sufficient to require the

application of D.C. law). Plaintiff Armstrong is a Maryland

resident and NBS is a Maryland corporation. The initial lender,

FITCO, was a California corporation that made the loan from

California. Plaintiff's loan payments were mailed to CSLFC in

California; BA, the current holder of the note, is also located in

California. Finally, the NBS branch plaintiff attended was

located in the District of Columbia, and the loan that is the

subject of this action was negotiated and signed by plaintiff at

NBS' facilities in the District of Columbia. Consequently, any of

one of three jurisdictions has a substantial nexus to this

transaction, and an argument could be made under D.C.'s

prevailing "interest analysis" choice of law doctrine that its law

should apply.

As among these three options, this court holds that District

of Columbia law would govern this action absent the choice of

law clause from the loan contract. First, there is authority for the

i

3la

proposition that when a consumer purchases goods and services

in the District, the law of the District governs the contract.

McCrossin v. Hicks Chevrolet, Inc., 248 A.2d 917, 920-21

(D.C. App. 1969). Here, the purchase of the services -- the

signing of the loan agreement -- occurred in D.C. In addition to

being the place of contracting, D.C. was also the place of

performance and the location of the subject matter of the

contract, NBS. These factors tip the balance in favor of

recognizing D.C. law as the relevant law but for the choice of

law clause

District of Columbia choice of law doctrine recognizes the

ability of parties to select the operative law they wish to govern

a transaction as part of their freedom of contract, provided that

the jurisdiction selected has a "substantial relationship" to the

parties or the transaction. Norris v. Norris, 419 A.2d 982, 984

(D.C. App. 1980). A recent enunciation of this "substantial

relation" test, recognizing the validity of a choice of law clause,

is found in Ekstrom v. Value Health Inc., 314 U.S. App. D.C

340, 68 F.3d 1391, 1394 (D.C. Cir. 1995), in which the court

cited Norris and upheld the selection of Connecticut law on

contracts and arbitrability because the surviving entity in a

merger operated principally in Connecticut. See also Gray v.

American Express Co., 240 U.S. App. D.C. 10, 743 F.2d 10, 17

(D.C. Cir. 1984) (applying Maryland choice of law principles in

upholding the contractual selection of New York law because

one of the parties was a New York corporation and the choice

bore some substantial relation to the parties or their transaction);

cf. Milanovich v. Costa Crociere, 293 U.S. App. D.C. 332, 954

F.2d 763, 767 (D.C. Cir. 1992) (noting that under American

law, choice of law provisions are usually honored); Restatement

(Second) of Conflict of Laws § 187 (1971).

There is little question that California has a substantial

32a

relation to the loan transaction at issue. FITCO, the initial

lender, was a California based corporation (as are BA and

CSLFC) located in Sacramento. The location of one of the two

parties to the loan contract in California creates the critical

nexus between the transaction and the jurisdiction indicated in

the choice of law clause such that this court is compelled to

apply that forum's law. See Gray, 743 F.2d at 17 (holding that

because American Express was a New York corporation, there

was a Sufficient basis to defer to the clause calling for the

application of New York law). Also contributing to California's

"substantial relation" is the fact that the loan was approved by

FITCO in California, and the plaintiff made her payments to

CSLFC in California

Plaintiff's opposition to the validity of the choice of law

clause does not take issue with this application of the

"substantial relation" test. Rather, she seeks to avoid the effects

of the choice of law provision by claiming that the purpose of

the clause was to frustrate the protections afforded by D.C.'s

consumer protection laws. See Plaintiff's Opening Memorandum

on Resolution of the Merits on Remand at 17 ("Plaintiff's

Opening Memorandum"). It ts a general principle of choice of

law doctrine that if a party or parties stipulate to a given forum's

law, that stipulation will not be given effect if it 1s included for

the express purpose of evading otherwise applicable law or ts

contrary to either public policy or a statute enacted for the

protection of that state's citizens. See, e.g., Allen v. Lloyd's of

London, 94 F 3d 923, 928 (4th Cir. 1996) (outlining situations

under which choice of law and choice of forum provisions may

be found unreasonable), 16 Am. Jur. 2d Conflict of Laws § 78

(1979)

However, the GSL loan contract under consideration here

does not present the type of situation in which courts typically

33a

invalidate choice of law provisions. FITCO did not deliberately

or willfully select California law with the nefarious purpose of

avoiding the effect of Distnct of Columbia consumer protection

laws. Nor did FITCO endeavor to select a state with particularly

relaxed consumer protection laws. The forum selection clause

in question is boilerplate language which calls for the application

of "the laws of the jurisdiction where the lender is located.” It

does not specify the selection of any one particular state. Under

this clause, had the lender been a District of Columbia bank, the

loan contract would have called for the application of District of

Columbia law. Had the lender been a Texas bank, the choice of

law clause would have directed this court to apply Texas law. In

the instant case, because the lender was a California bank, the

choice of law clause mandates the application of California law

It may very well be the case that California has a more generous

body of consumer protection law than does the District of

Columbia. The purpose of this clause had nothing to do with

avoiding the District's laws or its public policies. It is both

rational and reasonable for a lender to operate consistently

under laws of its home state, rather than be forced to operate

under 51 different laws depending upon the location of the

‘object of the loan contract," which is the result that plaintiff's

argument would compel

Furthermore, this is not a case, as plaintiff characterizes it,

where a lender seeks to “evade these statutes by making his own

laws applicable." Plaintiff's Opening Memorandum at 17 (citing

A. Ehrenzweig, A Treatise on Conflict of Laws § 204, at 523

(1962)). The choice of law clause was not inserted by FITCO

FITCO was utilizing HEAF's standard form promissory note, as

it was required to do by law. The note in question, with its

boilerplate choice of law clause, was approved by DOE for use

throughout the United States See 34 CFR §

682.401(d)(1)( 1990) ("The guaranty agency shali submit to the

34a

Secretary its application forms, promissory notes and write-off

criteria and procedures. The agency shall not use these materials

until the Secretary approves them."). This is,hardly the

paradigmatic situation in which lenders are trying to “frustrate

Statutes designed to regulate their conduct." Plaintiff's Opening

Memorandum at 18. Rather, FITCO was using the loan form

that federal law directed it to use, and was therefore compelled

to accept both the benefits and the burdens of the law of the

jurisdiction in which it was located -- California. Plaintiff must

similarly accept the benefits and burdens of California law.

This conclusion, though never expressly reached in this

jurisdiction, was hinted at by the D.C. Circuit in Jackson v.

Culinary School of Washington, Ltd., 307 U.S. App. D.C. 123,

27 F.3d $73 (D.C. Cir. 1994) ("Jackson II"). In addressing the

question as to whether students could utilize the District of

Columbia's consumer protection laws to assert defenses against

their lenders, the Court of Appeals, in declining to resolve HEA

preemption issues, wrote, "we find ourselves unable to say with

confidence that D.C. law will apply in any future coercive action

brought by the declaratory judgment defendants." 27 F.3d at

581. In a footnote, the court continued, "To the extent the

record points any direction on choice of law, it points against

appellants, because several of the loan instruments in the case

contain express choice of law provisions identifying other states’

laws as providing the operative rules of decision." /d. at 581

n.14

Because California has a substantial relation to the

transaction, and because the choice of law clause was not

inserted with the express purpose of evading otherwise

applicable local consumer protection laws, this court will give

effect to the choice of law clause in the loan contract.

Consequently, to the extent that state law governs this case,

FA

35a

California law applies. This court is therefore compelled to

dismiss all of plaintiff's claims arising under the both the D.C

Code and D.C. municipal regulations. This conclusion does not,

however, leave plaintiff without any state or local law causes of

action: she is, of course, entitled to whatever protections may be

available under California law, and may seek leave to refile yet

another amended *

Ill. PREEMPTION

The Court of Appeals next directs this court to determine

whether the applicable state law is preempted by the Higher

Education Act. Because the plaintiff has not asserted any

statutory claims under California law, a full exegesis on this

question is not possible, as one cannot determine whether

compliance with state law is either "impossible" or "precludes

execution of the purposes and objectives of the HEA"

Armstrong I, 832 F. Supp. at 429

Under California Federal Savings and Loan Ass'n vy.

Guerra, 479 U.S. 272, 280-81, 93 L. Ed. 2d 613, 107 S. Ct

683 (1987), preemption occurs if: (1) Congress has expressly

declared that state law is preempted; (2) a Congressional intent

to “occupy the field" can be inferred because the scheme of

regulation is so comprehensive as to preclude the application of

state law; (3) state law conflicts with federal law such that

* The fact that plaintiff may elect to assert claims under

California law does not necessarily mean that she is entitled to

the remedies she seeks. She would still need to prove that her

state law claims are not preempted by the HEA, and overcome

whatever other hurdles California law presents in stating a claim

upon which relief may be granted.

36a

compliance with both is either a physical impossibility, or the

state law would stand as an obstacle to the accomplishment of

the purposes and objectives of the federal law

In Armstrong 1, this court concluded that the HEA neither

explicitly nor implicitly preempts all of state law. Armstrong I,

832 F. Supp. at 428 (citing 7ipton v. Secretary of Education,

768 F. Supp. 540 (S.D. W. Va. 1991); see also Jackson v.

(Culinary School of Washington, 788 F. Supp. 1233, 1244-46

(D.D.C. 1992) ("Jackson I")). Subsequent decisions have

reaffirmed this conclusion. See, e.g., Keams v. Tempe Technical

Institute, Inc., 39 F.3d 222, 225 (9th Cir. 1994) (holding that

the HEA does not expressly preempt state common law tort

claims against accreditors), Crawford v. American Institute of

Professional Careers, Inc., 934 F. Supp. 335, 339 (D. Anz

1996). Therefore, possible pre-emption of state law by the HEA

is a consideration only in cases in which it is either impossible

for an individual to abide by both state law and the HEA, or

where state law precludes execution of the purposes and

objectives of the HEA. See Armstrong /, 832 F. Supp. 419 at

429: Keams, 39 F.3d at 226-27, Crawford, 934 F. Supp. at 339-

4]

At this juncture, this court's review of whether the

appropriate statutory law is preempted must come to its end, as

the court is not currently presented with any California statutory

law with which to undertake the necessary analysis. This court

will review the pre-emption questions as directed by the Court

of Appeals if plaintiff elects to amend her complaint by alleging

violations of California consumer protection laws.

37a

IV. PLAINTIFF'S CLAIMS BASED UPON MISTAKE

AND ILLEGALITY

California does recognize the common-law doctrines of

mistake and illegality. See Cal. Civ. Code § 1576-78 (mistake),

1598-99 (illegality) (West 1982). Therefore, these two claims

survive this court's determination that California law applies to

the loan agreement.

As plaintiff states in her Opening Memorandum, "there is no

need to choose between District of Columbia and California law

with respect to plaintiffs claims based on common law

principles, because there is no conflict between the potentially

applicable state laws on these common law issues." Plaintiff's

Opening Memorandum at 16. Because there is little difference

between the District of Columbia and California on these

common-law causes of action, the court's analysis from

Armstrong I will be applied to these claims on remand.

Consequently, this court will again dismiss plaintiff's claims

based upon mistake and illegality.

The essence of plaintiff's mistake and illegality claims against

CSLFC/BA, HEAF and the Secretary is that NBS did not meet

the requirements for an "eligible institution" as defined under 20

U.S.C. § 1085(a) at the time plaintiff received her GSL because

NBS's accreditation had expired on May 31, 1987. See 28

U.S.C. § 1085(c)(4) (addressing accreditation of vocational

schools). As either an illegal contract, or one based on mistake,

it would be voidable by plaintiff. Plaintiff grounds her claim in

the language of 34 C.F.R. § 600.40(a)(1)(i), which states that

an institution loses its eligibility on the date that it fails to meet

any of the Department's eligibility requirements. Plaintiff alleges

that it is the June 1, 1987 date on which the school first failed to

satisfy the financial responsibility requirements of 34 C.F.R. §

38a

668.13 that should be determinative, and, because her

enrollment post-dated that time, the contract is voidable.

In Armstrong I, this court held that plaintiff misconstrued

the manner in which an institution loses its eligibility, explaining

that, under 34 C_F.R. § 668, a school's loss of eligibility cannot

precede requisite procedural due process, including notification

of the offending school, a hearing before an administrative law

judge and even a possible appeal to the Secretary. Armstrong I,

832 F. Supp. 419 at 426. Additionally, 34 C.F.R. § 668.94

("Termination") provides only for prospective changes,

proscribing future acts by the institution such as making new

obligations, or making further guarantee commitments. The

retroactive effect prayed for by plaintiffs was held to be contrary

to the plain language of the regulation. Armstrong /, 832 F

Supp. at 426-27.

Even if this court could be convinced that it had erred on the

question of retroactivity, plaintiff would still be unable to

advance her illegality or mistake claims as a matter of law. The

Department of Education has issued a definitive statement as to

whether student loans may retroactively become invalid upon a

school's loss of accredited status:

ED {the Department] considers the loss of institutional

eligibility to affect directly only the liability of the

institution for Federal subsidies and reinsurance paid on

these loans. In either case, the borrower retains all the

rights with respect to loan repayment that are contained

in the terms of the loan agreements, and ED does not

suggest that these loans, whether held by the institution

or the lender, are legally unenforceable merely because

they were made after the effective date of the loss of

institutional eligibility.

39a

58 Fed. Reg. 13,337 (1993). The concept of retroactivity under

34 C.F.R. 600.40(a) is a matter that impacts only the

relationship between the school and DOE, not the school and

the student, nor the student and DOE. "The regulations [34

C.F.R. §§ 600.40(a), 668.94(b)] are not intended to create any

other nights for student borrowers or to suggest that borrowers

are excused from repaying loans received to attend that

institution." 58 Fed. Reg. 13,337 (1993). If NBS was in fact

accredited at the time plaintiff Armstrong entered into her loan

contract -- and both sides concede that it was -- then the inquiry

as to whether plaintiff's 1oan contract was based upon mistake

or illegality comes to its end. For purposes of determining the

validity of plaintiffs loan, the court is directed to take a snapshot

of the world as it existed at time of plaintiff's enrollment, and, in

this case, the schoo! was accredited by ACCET. If that

accreditation was improvidently granted, that is a matter of

concern between the school and DOE, not between plaintiff and

the lenders and guarantors she has named as defendants

Plaintiff's request that this court again consider its holding

on procedural due process in light of Beth Rochel Seminary v

Bennett, 263 U.S. App. D.C. 341, 825 F.2d 478 (DC. Cir

1987) does not significantly advance her argument. In Beth

Kochel, DOE sought to recover financial aid funds improperly

received by Beth Rochel Seminary because the Department

determined that the school did not qualify for participation in the

federal program. The Court of Appeals held "the regulation

provides that a right to notice and hearing ‘does not apply to a

determination that. . . an institution of higher education fails to

meet the statutory definition set forth in section [] 1201 of

the Higher Education Act.' 34 C.F_R. § 668 -71(c)(1)(1986)."

825 F.2d at 481. Even if plaintiff's claim that procedural due

process is not required to retroactively terminate accredited

status, Beth Rochel still only addresses a school's responsibility

40a

to make restitution to DOE of funds received. Plaintiff's logical

leap from Beth Rochel that, "likewise, under the doctrines of

mistake and illegality, NBS's failure to satisfy this essential

condition of the loan contracts makes plaintiffs contractual

obligations void and unenforceable" is simply too great.

Plaintiff's Opening Memorandum at 32. The fact that the school

in Beth Rochel had to make restitution to the Department does

not ipso facto prove that defendants here must make restitution

to plaintiff, especially in light of the DOE's statement from the

Federal Register set out above. The rights of DOE against a

school is not neatly analogous to the rights of students against

third party lenders and guarantee agencies, as the regulatory

structure and case law make clear

Having dismissed the mistake and illegality claims on the

above grounds in Armstrong 1,* this court originally declined to

address defendant's claim that the HEA preempts these

common-law defenses. The court did state in a footnote,

"Should the court have analyzed the issue, it would have

determined that allowing plaintiff to raise these defenses

certainly would have such a deleterious effect on the GSL

program, as discussed in Part IV B., below, that the court would

have found it necessary to preempt these claims." Armstrong I,

832 F. Supp. at 427 n.17. As the Court of Appeals has

specifically directed the court to consider the extent to which

state law is preempted by the HEA, this court will now address

this issue

* This court also dismissed plaintiff's claims based upon

mistake and illegality because allocation of the risk of mistake

on BA/CSLFC, HEAF and the Secretary was “unwarranted and

unjust." As nothing from the Court of Appeals’ opinion affects

this analysis, there is no need to revisit this territory.

nde tis Pe SRR RE nsidlan whic niy ie etl a

ob Reh eR AMA pA ANS

‘ Te ee PTS

4la

The HEA expressly vests the Secretary of Education with

exclusive authority to determine the existence, scope and

duration of a school's eligibility under HEA programs. 20

U.S.C. § 1099c(a). While the Secretary has the authority to

decide whether a particular accreditor's standards warrant

approval as a reliable indicator of educationa! quality, 20 U.S.C.

§ 1099b(a), the Department itself is barred from interfering in an

accrediting agency's assessment regarding individual schools. 20

U.S.C. § 3403(b). This structure for determining whether a

school ts an “eligible institution" for GSL purposes -- involving

a carefully-crafted balance between the role of the Secretary and

the role of the accreditor -- has been affirmatively established by

Congress. Were this court to allow plaintiff to proceed on her

mistake and illegality claims, this court would be placed in the

position of having to determine if, at the time of the signing of

the loan contract, eligibility requirements were inet despite the

fact that NBS was accredited by ACCET. For plaintiff to

prevail, this court would have to substitute its judgment for

ACCET's and conclude that accreditation was improperly

granted. To place the court in this role would be contrary to

clear Congressional intent. The courts would become the

ultimate arbiters of eligibility, called upon to make fact-based

determinations that are best made by experts in the field --

professional accreditors. Because state law claims based upon

mistake and illegality would require the courts to enter the

educational evaluation business, and Congress has by statute

provided that the Secretary via accrediting agencies are to make

these determinations, the state law claims conflict with the

federal claim, and are thereby preempted.”

This preemption analysis may affect plaintiffs open

claim against ACCET. Because one of the elements of common-

law fraud is proof of a false representation, Blake Construction

42a

Plaintiff's common-law claims must also be dismissed on

preemption grounds because the purposes of the HEA would be

frustrated if plaintiff's state law claims of mistake and illegality

were allowed to go forward merely because the school should

not have been accredited at the time of her matriculation. See

Guerra, 479 U.S. at 281. In fact, the effects could be

devastating. Upon graduation and receipt of a diploma from an

Otherwise meritorious institution, a student could review the

school's financial data at the time of enrollment, seize upon a

technical violation of the accreditation rules, and assert a claim

that her loan contract was thereby illegal or mistaken.

For example, under 20 U.S.C. § 1099c(c)(2) & 34 CFR. &

668.15, a school must maintain prescribed asset-to-liability

ratios, operating fund deficits, and the like. Under plaintiff's

theory of mistake and illegality, a student could avoid

subsequent loan payments if that student could successfully

demonstrate to a court of law that the ratio fell below prescribed

levels (or the operating deficit rose too high) at the time the

student's loans were executed even if the deficiency was not

detected at the time by an accrediting agency. Or, theoretically,

a student could try to proceed with a claim of supervening

illegality if a school's accreditation requirements were not

Co. v. C.J. Coakley, Co., 431 A.2d 569, 577, this court or a jury

may find itself in the position of having to determine whether the

school did not meet the requisite accreditation standards during

the period of automatic extensions. This would be the exact

form of second-guessing that a court is to avoid. Conversely,

because proof of fraud also requires "knowledge of falsity,"

preemption may not be an issue; preemption may not eliminate

state law causes of action based on intentional or reckless

deceitful acts.

:

:

:

43a

maintained at any time during the student's enrollment period

This potential result is all the more troubling because many of

the statutory and regulatory criteria governing schools have only

a tangential relationship to educational quality from the

perspective of the student. For example, there are requirements

proscribing a school from having more than 50% of its students

enrolled in correspondence courses, or more than 50% of an

admissions class composed of students who lack high schoo!

diplomas or the recognized equivalent 20 USC &§§

1088(a)(3)(B) & (a)(3)(D). Accreditation requirements, while

developed for the overall benefit of students, are, at their core

a matter between the institution and the DOE and usuaily are

related more to finances than pedagogy. The possibility of

students avoiding their loan obligations through canvassing for

accreditation violations cautions against creating a private right

of action under the HEA, and, in the same vein, disallowing the

same private enforcement through the “back door" route of

common-law causes of action

Were such claims to go forward, it would surely be followed

quickly by the exit of many lenders from the GSL program

Banks and guaranty agencies would likely be far less generous

if they knew their obligations could be cut off via technical

violations of accreditation requirements. This result would

"preclude the execution and purposes and objectives of the

HEA,” which is to make funds widely available for students who

otherwise cannot afford the opportunities higher education

promises. See 20 U.S.C. § 1070(a) ("It is the purpose of this

part, to assist in making available the benefits of postsecondary

education to eligible students in institutions of higher

education"), 1980 U.S. Code Cong. & Admin. News p. 3168.

1976 U.S. Code Cong. & Admin. News p. 4731 (recognizing

the “massive contribution to financing post-secondary

educational opportunities made in the ten years of the operation

44a

of the GSLP") There is a reason why Congress has elected to

not create a private right of action under the HEA, and this

court refuses to disturb that rationale To the extent that a resort

to state law claims would seriously frustrate Congress’ goal of

making loans widely available to students while at the same time

making participation in this program attractive to lenders, such

state law claims must be deemed as preempted. Accord, Morgan

vo Markerdowne Corp., 976 F. Supp. 301, 1997 US. Dist

LEXIS 13665, at 46(DNJ. 1997)

For the above reasons, plaintiff's state law claims based on

the doctrines of mistake and illegality against BA/CSLFC,

HEAF and the Secretary must be dismissed

V. PLAINTIFF'S ORIGINATION CLAIM AGAINST THE

SECRETARY

Having addressed the specific issues posed by the Court of

Appeals, this court will note that plaintiff's claims for relief

against BA/CSLFC and HEAF -- all of which were dismissed in

Armstrong | -- are wholly unaffected by the resolution of the

choice of law or preemption questions. Nonetheless, both

plaintiff and defendants have dedicated substantial portions of

their briefs on remand to issues that were definitively resolved

in 1993, most notably claims arising under the FTC Holder

Rule

In Armstrong | this court concluded, consistent with the

weight of authority, that the FTC Holder Rule, 16 CFR. §

433.2, affords plaintiff with no basis for asserting claims and

defenses against defendants because the requisite notice was not

part of the loan contract. And, even if the Holder Rule's notice

was implied into the contract, there would still be no power to

grant relief because violations of the Holder Rule do not furnish

Oe aa

cone Soc aD MacPinball ne

nS

ee ee

45a

private parties with a cause of action. See Armstrong |, 832 F

Supp. at 431-33 (citing Holloway v. Bristol-Myers Corp., 158

US. App DC 207, 485 F.2d 986 (DC. Cir 1973))

Subsequent decisions have only reinforced this court's resolution

of that question. See Bartels v. Alabama Commercial College,

918 F. Supp. 1565, 1570 (S.D. Ga. 1995) ("Even assuming that

the FTC Holder Rule applies to student loan transactions, a

plaintiff has no nghts under the rule if the notice is omitted from

the contract. Furthermore, there is no private cause of action

under the FTC Holder Rule enforcement of the rule is the

sole province of the Federal Trade Commission ") (citations

omitted); Markerdowne, at 25. ("Notwithstanding the

conclusion that the FTC Holder Rule was applicable to plaintiff's

student loans, the parties agree that violation of the rule does

not give rise to a federal private cause of action")

Furthermore, plaintiff's "orngination" claims allegedly arising

under 34 CFR. § 682.200 against third-party defendants

BA/CSLFC and HEAF and do not need to be reanalyzed in light

of the Court of Appeals’ vacating and remanding of the earlier

judgment. The Secretary's "unofficial policy" of not enforcing

loans which are the product of an origination relationship is not

binding on third parties, see Armstrong /, 832 F.Supp. at 433-

34, and plaintiff therefore cannot assert claims and defenses

against these parties, even if such a relationship could be proven

Again, subsequent holdings of other courts have buttressed this

court's determination that the Secretary's policy of forbearing

enforcement of loans when an origination relationship exists

cannot be used against lenders and guaranty agencies such as

(BA/CSLFC and HEAF) because the APA's rulemaking

procedures were not followed in creating the "policy." See

Bartels, 918 F. Supp. at 1570, Williams v. National Sch. of

Health Tech., 836 F. Supp. 273, 284-85 (E.D. Pa. 1993)

("Although an agency may choose to bind itself in an informal

46a

matter, it cannot regulate third parties other than by utilizing the

mechanisms of the APA established for that purpose.") (citation

omitted)

Consequently, the only origination claim remaining is against

the Secretary. In Armstrong I, the Secretary did not move to

dismiss plaintiff's claims based on an alleged origination

relationship. See Armstrong /, 832 F. Supp. at 433-34. In his

Renewed Motion to Dismiss, the Secretary now seeks to dismiss

the ongination claims. As the D.C. Circuit has now affirmatively

determined that a student does not have a cause of action

against the Secretary based on the Secretary's non-enforcement

"policy," this court will grant the Secretary's motion to dismiss.”

Under 34 C_F.R. § 682.200, an “origination relationship" ts

a relationship between a school and a lender in which the lender

delegates to the school "substantial functions" in the execution

of the loan that are normally performed by the lender

Specifically, this "origination relationship" exists where

(1) A School determines who will receive a loan and the

amount of the loan,

(2) The lender has the school verify the identify of the

borrower or complete forms normally completed by the

lender

* Claims based on the alleged origination relationship

between FITCO and NBS against the Secretary were dismissed

without prejudice by this court's Order of July 25, 1997.

Because this order was vacated by the Court of Appeals in

Armstrong I], this court will again address this claim.

7

+

:

}

:

4

47a

In cases in which an origination relationship exists, the Secretary

has a long-standing policy of abstaining from collection. See,

¢.g., 5S Fed. Reg. 48,327 (1990); Letter from Kenneth D

Whitehead, Acting Assistant Secretary of Education, to Stephen

J. Solarz, House of Representatives (May 19, 1988). Plaintiff

now wishes to convert this policy into a federal cause of action

against the Secretary

In Jackson v. Culinary School of Washington, Lid., 307

U.S. App. D.C. 123, 27 F.3d 573 (DC. Cir. 1994) ("Jackson

II"), fifty-nine former students sought declaratory and injunctive

relief against various lenders, guarantee agencies and the

Secretary for the actions of the defunct and judgement-proof

Culinary School of Washington. Included in plaintiffs’ complaint

was a claim against the Secretary based upon an alleged

origination relationship. The threshold issue considered by the

Court of Appeals was as to whether there was a “federally

grounded right to enforce the Secretary's alleged promise [to

abstain from collections]." 27 F.3d at 583.

In Jackson //, the Department conceded its longstanding

policy to refrain from enforcing student loans in cases where the

lenders and schools were in an origination relationship. /d. at

585 (citing Armstrong /, 832 F. Supp. at 433-35). The court

noted that, in determining whether an agency's "promise" ts

enforceable by third parties, the relevant inquiry is agency intent

See 27 F.3d at 584 (citing National Latino Media Coalition v.

FCC, 259 U.S. App. D.C. 481, 816 F.2d 785, 788 n.2 (D.C

Cir. 1987) ("the ‘binding’ quality of a particular rule or statement

will depend on whether the agency intended to establish a

‘substantive’ rule... .")). Quoting Vietnam Veterans v.

Secretary of the Navy, 269 U.S. App. D.C. 35, 843 F.2d 528,

§37 (D.C. Cir. 1988), the Court of Appeals next stated,

"statements whose language, context and application suggest an

48a

intent to bind agency discretion and private party conduct -- the

sort of statements requiring compliance with [APA] § 553 --

will have that effect if valid, interpretive rules or policy

statements will not, regardless of their validity." /d.

As to whether the Secretary's "rule" was meant to create

substantive rights in third parties, the court first cited the

Secretary's position - as described in Armstrong /| -- that "where

there ts an origination relationship between the school and the

lender, the student's claims and defenses as to the school can be

asserted as defenses to the loan contract " Jackson I], 27

F 3d at 585. However, on the other side of the balance, the

court noted that there had been a proposed regulation on

borrower defenses that would have codified the Secretary's

policy, 5S Fed. Reg. 48,327 (1990), but this proposal was never

adopted by DOE, and, in fact, was explicitly reyected. See 57

Fed Reg. 60,304 (1992) ("the Secretary has decided that it is

not desirable at this time to prescribe in regulations a uniform

Federal rule regarding borrower defenses that would preempt

State law otherwise applicable to FFEL [GSL] programs").’

Balancing the arguments in favor of and against creating a

substantive cause of action based upon an alleged origination

relationship, the Jackson II court concluded, "the Secretary has

” This discussion in the Federal Register does identify

“tour kinds of State laws whose application would not frustrate

FFEL program policies and are therefore not preempted by

federal law." However, since plaintiff has not pleaded any claims

under California law, this court's analysis must presently end

upon determining that there is no federal claim against the

Secretary based upon an origination relationship

49a

not sufficiently communicated an intention to be bound by his

origination policy so as to create a legally enforceable right

grounded in federal law." Jackson I], 27 F.3d at 585

Additionally, the court opined:

The paltry fragments suggesting the Department's intent,

the amorphous language and unrelated context of the

letters, and, finally, the Department's indication in 1992

that it preferred continuation of the regime of state

defenses to the promulgation of a uniform federal rule

all suggest to us the manifest impropnety of deeming the

origination-forbearance policy enforceable by appellants

as a matter of federal law

/d. Other jurisdictions have subsequently been in accord with

Jackson IT's conclusion that there is no federal cause of action

against the Secretary based upon an alleged origination

relationship. In Bartels, 918 F. Supp. at 1572, the court

considered whether the Secretary's informal policy could be

used as a defense to a loan obligation. That court, in accord with

Jackson Il, held, "The Secretary's policy was that the

Department of Education would refrain from trying to enforce

unenforceable loans, not that an origination relationship creates

a private cause of action for breach of contract." /d. at 1573

Similarly, in Williams, 836 F. Supp. at 285, the court concluded

that the Secretary's policy does not afford plaintiff relief against

the Secretary. "The Secretary has not indicated that the

Department of Education would actively discharge loans based

on the existence of an origination relationship but merely that

the Secretary would not seek to enforce such loans."

Consistent with this Circuit's holding in Jackson //, and the

weight of authority from other jurisdictions, plaintiffs federal

claim against the Secretary based upon an_ origination

50a

relationship must be dismissed.

VI. PLAINTIFF'S CLAIM AGAINST THE SECRETARY

TO PERFORM ITS STATUTORY DUTY PURSUANT TO 20

U.S.C. § 1087(c)(1)

In Armstrong 1, this court took note of the seemingly

curious fact that this suit persisted despite Congress's passage of

20 U.S.C. § 1087(c). This statute reads:

If a borrower who received, on or after January 1, 1986,

a loan made, insured, or guaranteed under this part and

the student borrower, or the student on whose behalf a

parent borrowed, in unable to complete the program in

which such student is enrolled due to the closure of the

institution or if such student's eligibility to borrow under

this part was falsely certified by the eligible institution,

then the Secretary shall discharge the borrower's liability

on the loan (including interest and collection fees) by

repaying the amount owed on the ‘oan and shall

subsequently pursue any claim available to such

borrower against the institution and its affiliates and

principals or settle the loan obligation pursuant to the

financial responsibility authority under subpart 3 of part

G.

Plaintiff now, in her amended complaint, asserts that the

Secretary has failed to perform his duty under this statute by not

discharging the loans and by failing to notify local credit bureaus

of such a discharge. Plaintiff asks this court to enter a

declaratory judgment and issue a writ of mandamus compelling

Sla

the Secretary to act in accordance with § 1087(c)(1).*

While plaintiff has identified her proper source of relief due

to the school's failure to deliver on the education it promised,

she has not pursued the proper means for obtaining such relief

Section 1087(c)(1), while enacted for the benefit of students

whose schools close prior to the student's completion of the

course of study, does not create a private cause of action. Bega

v. United States Department of Education, 180 B.R. 642

(Bankr. D. Kan. 1995) (determining that 20 U.S.C. § 1087(c)

does not present an alternative means for a bankruptcy court to

discharge student loan obligations when other means of

discharge are not available).

The proper mechanism for obtaining discharge of a loan

obligation when a student's school closes is administrative -- as

per 34 C_F.R. § 685.213(c). This regulation requires a borrower

to submit to the Secretary a "written and sworn statement"

attesting that the student received the proceeds of the loan and

that the student did not complete the program due to closure of

the school. The student must also list other claims asserted with

respect to the school's closure, and agree to cooperate with and

provide information to the Secretary.

At least one federal court has reached an identical

conclusion as to whether a private right of action could be

implied under 20 U.S.C. § 1087(c)(1) in an action similar to the

instant case. In Williams, the court concluded:

* This claim was initially dismissed as per this court's

order of July 25, 1995, but, pursuant to the Court of Appeals'

vacating of this order in Armstrong //, this court will now

address this claim in greater detail.

S2a

It is uncontested that the loan discharge provisions were

enacted for the benetit of students such as the plaintiff

Phat conclusion alone, however, is not sufficient to

imply a nght of action to enforce the provisions. Where

a statute provides an administrative enforcement

mechanism, it is presumed that Congress did not mean

to create a private right of action

836 F. Supp. at 279 (cited in Bega, 180 BR. at 643.) CF

louche Ross v. Redington, 442 U.S. 560, 61 L. Ed. 2d 82, 99

S. Ct. 2479 (1979) (holding that federal courts should only

create private mghts of action when there exists affirmative

evidence of Congressional int nt to do so)

As plaintit?'s amended complaint demonstrates no evidence

that she has availed herself of her administrative remedies as

outlined above, this court cannot and will not perform the duty

that Congress has expressly delegated to the Secretary -- the

discharge of student loans under 20 U.S.C. § 1087.

VIL CONCLUSION

In their briefing of the issues on remand, plaintiff and

defendants conflict over whether this case centers around

creating a cause of action against third party lenders and

guarantors for “educational malpractice." While this court does

not agree with all of defendants’ assertions that plaintiff 1s,

through this suit, attempting to assert such a claim, it ts

undeniable that plaintiff is trying to obtain rescission of her loan

agreement based upon her dissatisfaction with the quality of the

education she received. As this court concluded in Armstrong /,

if there was any wrongdoing in this case, it was the wrongdoing

of NBS, as NBS is the only party who owed a duty of care to

plaintiff as to receiving a promised education in the field of

Sia

automotive repair. The defendants in this case -- BA/CSLFC,

HEAF and the Secretary -- have acted entirely in accord with

the mandates of law

In the absence of the Guaranteed Student Loan program, the

opportunities available through higher education would be

beyond the reach of many, if not most, students who seek the

chance to better their station in life. To subject lenders to suit

based on acts of the educational institutions would surely lead

lenders to cease their participation in student loan programs

Most, if not all, courts who have considered the types of claims

raised by plaintiff against "the usual suspects", have been

vigilant in protecting the GSL and other student loan programs

This court will not depart from the path it took three years ago,

and has been taken by almost all of those who have embarked

upon this long journey

Accordingly, the motions to dismiss will be granted in full

A separate order shall issue this date.

Royce C. Lamberth

United States District Court

S4a

Filed Sept 30 1997

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

C.A. No. 91-3135 RCL

VANESSA ARMSTRONG,

Plaintiff,

”

ACCREDITING COUNCIL FOR CONTINUING

EDUCATION & TRAINING, INC., ef al,

Defendants.

ORDER

This case comes before the court on the renewed motions to

dismiss of defendants Bank of America, California Student Loan

Finance Corporation, Higher Education Assistance Foundation

and the Secretary of Education. Upon consideration of the

filings of counsel and the relevant law, and for the reasons stated

in the accompanying Memorandum Opinion, it is hereby

ORDERED that:

1. The motion to dismiss filed by defendants Secretary of

Education and Higher Education Assistance Foundation of

January 28, 1997 is GRANTED, the second, third and fourth

claims for relief are DISMISSED as to the HIGHER

EDUCATION ASSISTANCE FOUNDATION and_ the

SECRETARY. The second amended, third amended and fourth

amended claims for relief are DISMISSED as to the

— a

SECRETARY.

2. The motion to dismiss filed by defendants Bank of

America and California Student Loan Finance Corporation of

January 27, 1997 is GRANTED, the second, third, and fourth

claims for relief are DISMISSED as to these defendants.

3. Defendant California Student Loan Finance Corporation's

motion for protective order is DENIED AS MOOT

4. Plaintiff's motion to compel production of documents ts

DENIED AS MOOT

5. Plaintiff's motion to substitute the Educational Credit

Management Corporation as defendant is GRANTED and the

Educational Credit Management Corporation shall hereafter be

substituted for the Higher Education Assistance Foundation as

defendant herein

6. A status call on plaintiff's and class claims against the

Accrediting Council for Continuing Education & Training, Inc

is scheduled for 4:30 p.m. on Wednesday, October 15, 1997

SO ORDERED.

Royce C. Lamberth

United States District Court

Date: 9-30-97

cian ia ill

:

S6a

Filed Oct 31, 1997

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

CA. No. 91-3135 RCL

VANESSA ARMSTRONG,

Plaintiff,

ACCREDITING COUNCIL FOR CONTINUING

EDUCATION & TRAINING, INC, ef al,

Detendants

ORDER

Upon consideration of Plaintiffs Motion to Amend

Judgment and Motion for Entry of Final Judgment Pursuant to

Fed R. Civ. P. 54(b), and the response thereto, the Court finds

that the Memorandum Opinion and Order of September 30,

1997 should be amended as described below, and that there is

no just reason for delay entering final judgment dismissing

plaintiff's claims against defendants Secretary of Education,

Bank of America NT&SA, California Student Loan Finance

Corporation, and Higher Education Assistance Foundation and

Transitional Guaranty Agency. The claims against these

defendants are separable from the fraud claim that remains to be

adjudicated against the Accrediting Council for Continuing

Education and Training, and this Court's decision to dismiss

these claims rests on purely legal issues that can be presented to

ial

57a

the Court of Appeals without interfering with the litigation of

the remaining claim in this Court. Moreover, there is a danger

of hardship if appeal is delayed until the remaining claims are

finally adjudicated because of the penalties and sanctions

imposed for failure to repay contested student loans.

Defendants will not be prejudiced by entry of a final judgment

Thus, both judicial administrative interests and the equities

involved favor entry of a final judgment. Therefore, it is hereby,

this dayof ___, 1997,

ORDERED that plaintiff's motion to amend ts granted,

and it is further

ORDERED that Section VI of the Court's Memorandum

Opinion of September 30, 1997 is hereby withdrawn and the last

sentence of paragraph | of the Court's Order of September 30,

1997 is amended to read: "The third amended and fourth

amended claims for relief are dismissed as to the

SECRETARY .": and it is further

ORDERED that the second sentence of footnote 7 of the

Court's Memorandum Opinion of September 30, 1997 is hereby

amended to read: "However, since plaintiff has not pleaded any

claims under California statutory law, this court's analysis must

presently end upon determining that there is no federal claim

against the Secretary based upon an origination relationship.",

and it is further

ORDERED that the Clerk is directed to enter final

judgment dismissing the Second, Third, and Fourth Claims for

Relief in plaintiff's complaint of December 10, 1991, because

this Court determines that there is no just reason for delay in

entering final judgment with respect to this Court's decision of

September 30, 1997, because the claims that the Court has

58a

dismissed as a matter of law are separable from the claims that

remain to be adjudicated in this action, and there is a danger of

hardship if appeal is delayed until the remaining claims are finally

adjudicated.

10/30/97

Royce C. Lamberth

United States District Court Judge

59a

Truth in Lending Act

15 USC § 1603 Exempted transactions

(as amended by Pub. L. 97-320, title VII, § 701(a), Oct. 15,

1982, 96 Stat. 1538)

This subchapter does not apply to the following:

* * *

(7) Loans made, insured, or guaranteed pursuant to a

program authorized by title IV of the Higher Education Act of

1965 (20 U.S.C. 1070 et seq., 42 U.S.C. 2751 et seq.).

Higher Education Act of 1965

20 U.S.C. § 1077. Eligibility of student borrowers and

terms of federally insured student loans (1988)

(a) List of requirements. Except as provided in section 1078-3,

a loan by an eligible lender shall be insurable by the Secretary

under the provisions of this part only if--

(1) made to a student who (A) is an eligible student under

section 1091, (B) has agreed to notify promptly the holder

of the loan concerning any change of address, and (C) is

carrying at least one-half the normal full-time academic

workload for the course of study the student is pursuing (as

determined by the institution); and

(2) evidenced by a note or other written agreement which--

(A) is made without security and without

endorsement;

60a

(B) provides for repayment (except as provided in

subsection (c)) of the principal amount of the loan in

installments over a period of not less than 5 years

(unless sooner repaid or unless the student, during the

6 months preceding the start of the repayment period,

specifically requests that repayment be made over a

shorter period) nor more than 10 years beginning 6

months after the month in which the student ceases to

carry at an eligible institution at least one-half the

normal full-time academic workload as determined by

the institution, except--

(i) as provided in subparagraph (C);

(i1) that the note or other written instrument

may contain such reasonable provisions relating to

repayment in the event of default in the payment of

interest or in the payment of the cost of insurance

premiums, or other default by the borrower, as may

be authorized by regulations of the Secretary in

effect at the time the loan is made; and

(iii) that the lender and the student, after the

student ceases to carry at an eligible institution at

least one-half the normal full-time academic

workload as determined by the institution, may

agree to a repayment schedule which begins earlier,

or is of shorter duration, than required by this

subparagraph, but in the event a borrower has

requested and obtained a repayment period of less

than 5 years, the borrower may at any time prior to

the total repayment of the loan, have the repayment

period extended so that the total repayment period

is not less than 5 years; (C) provides that periodic

installments of principal need not be paid, but

MS AaRentie Ae. Ad. 8

6la

interest shall accrue and be paid, during any

period--

(i) during which the borrower--

(1) is pursuing at least a half-time course of

study as determined by an_ cligible

institution; or

(II) is pursuing a course of study pursuant to

a graduate fellowship program approved by

the Secretary, or pursuant to a rehabilitation

training program for individuals with

disabilities approved by the Secretary,

except that no borrower shall be eligible for

a deferment under this clause, or a loan

made under this part (other than a loan

made under 1078-2 or 1078-3), while

serving in a medical internship or residency

program,

(ii) not in excess of 3 years during which the

borrower is seeking and unable to find full-time

employment; or

(iii) not in excess of 3 years for any reason

which the lender determines, in accordance with

regulations prescribed by the Secretary under

section 1085(o0), has caused or will cause the

borrower to have an economic hardship;

and provides that any such period shall not be

included in determining the 10-year period

described in subparagraph (B);

62a

(D) provides for interest on the unpaid principal balance

of the loan at a yearly rate, not exceeding the applicable

maximum rate prescribed in section 1077a, which

interest shall be payable in installments over the period

of the loan except that, if provided in the note or other

written agreement, any interest payable by the student

may be deferred until not later than the date upon which

repayment of the first installment of principal falls due,

in which case interest accrued during that period may

be added on that date to the principal;

(E) provides that the lender will not collect or attempt

to collect from the borrower any portion of the interest

on the note which is payable by the Secretary under this

part and that the lender will enter into such agreements

with the Secretary as may be necessary for the purpose

of section 1087;

(F) entitles the student borrower to accelerate without

penalty repayment of the whole or any part of the loan;

(G) (i) contains a notice of the system, of disclosure of

information concerning such loan to credit bureau

organizations under section 1080a, and (ii) provides

that the lender on request of the borrower will provide

information on the repayment status of the note to such

organizations;

(H) provides that, no more than 6 months prior to the

date on which the borrower's first payment on a loan is

due, the lender shall offer the borrower the option of

repaying the loan in accordance with a graduated or

income-sensitive repayment schedule established by the

lender and in accordance with the regulations of the

Secretary; and

63a

(1) contains such other terms and conditions, consistent

with the provisions of this part and with the regulations

issued by the Secretary pursuant to this part, as may be

agreed upon by the parties to such loan, including, if

agreed upon, a provision requiring the borrower to pay

the lender, in addition to principal and interest, amounts

equal to the insurance premiums payable by the lender

to the Secretary with respect to such loan;

(3) the funds borrowed by a student are disbursed to the

institution by check or other means that is payable to and

requires the endorsement or other certification by such

student, except--

(A) that nothing in this title shall be interpreted--

(i) to allow the Secretary to require checks to be

made copayable to the institution and the borrower,

or (ii) to prohibit the disbursement of loan proceeds

by means other than by check; and

(B) in the case of any student who is studying outside

the United States in a program of study abroad that 1s

approved for credit by the home institution at which

such student is enrolled, the funds shall, at the request

of the borrower, be delivered directly to the student and

the checks may be endorsed, and fund transfers

authorized, pursuant to an authorized

power-of-attorney; and

(4) the funds borrowed by a student are disbursed in

accordance with section 1078-7.

(b) Special rules for multiple disbursement. For the purpose of

subsection (a)(4)--

64a

(1) all loans issued for the same period of enrollment shall

be considered as a single loan; and

(2) the requirements of such subsection shall not apply in

the case of a loan made under section 1078-2 or 1078-3, or

made to a student to cover the cost of attendance at an

eligible institution outside the United States.

(c) Special repayment rules. Except as provided in subsection

(a)(2)(H), the total of the payments by a borrower during any

year of any repayment period with respect to the aggregate

amount of all loans to that borrower which are insured under

this part shall not, unless the borrower and the lender otherwise

agree, be less than $ 600 or the balance of all such loans

(together with interest thereon), whichever amount is less (but

in no instance less than the amount of interest due and payable).

(d) Borrower Information. The lender shall obtain the

borrower's driver's license number, if any, at the time of

application for the loan.

20 U.S.C. § 1078. Federal payments to reduce student

interest costs (1988)

(a) Federal interest subsidies.

(1) Types of loans that qualify. Each student who has

received a loan for study at an eligible institution--

(A) which is insured by the Secretary under this part; or

(B) which is insured under a program of a State or of a

nonprofit private institution or organization which was

contracted for, and paid to the student, within the period

specified in paragraph (5), and which--

65a

(i) in the case of a loan insured prior to July 1,

1967, was made by an eligible lender and is insured

under a program which meets the requirements of

subparagraph (E) of subsection (b)(1) and provides

that repayment of such loan shall be in installments

beginning not earlier than 60 days after the student

ceases to pursue a course of study (as described in

subparagraph (D) of subsection (b)(1)) at an eligible

institution, or

(ii) in the case of a loan insured after June 30, 1967,

was made by an eligible lender and is insured under

a program covered by an agreement made pursuant

to subsection (b), shall be entitled to have paid on

his or her behalf and for his or her account to the

holder of the loan a portion of the interest on such

loan under circumstances described in paragraph

(2).

(2) Additional requirements to receive subsidy.

(A) Each student qualifying for a portion of an interest

payment under paragraph (1) shall--

(i) have provided to the lender a statement from the

eligible institution, at which the student has been

accepted for enrollment, or at which the student is

in attendance, which--

(I) sets forth such student's estimated cost of

attendance (as determined under section 472;

(II) sets forth such student's estimated

financial assistance; and

iene ee is

66a

(III) sets forth a schedule for disbursement of

the proceeds of the loan in_ installments,

consistent with the requirements of section

1078-7;

(ii) meet the requirements of subparagraph (B); and

(iii) have provided to the lender at the time of

application for a loan made, insured, or guaranteed

under this part, the student's driver's number, if any.

(B) For the purpose of clause (ii) of subparagraph (A),

a student shall qualify for a portion of an interest

payment under paragraph (1) if the eligible institution

has provided the lender with a statement evidencing a

determination of need for a loan (as determined under

part F of this title) and the amount of such need, subject

to the provisions of subparagraph (D).

(C) For the purpose of paragraph (1) and this

paragraph--

(i) a student's estimated financial assistance means,

for the period for which the loan is sought, the

amount of assistance such student will receive

under subpart | of part A (as determined in

accordance with section 484(b), subpart 3 of part A,

and parts C and E of this title, and any veterans’

education benefits paid because of enrollment in a

postsecondary education institution, including

veterans’ education benefits (as defined in section

1087vv(c)), plus other scholarship, grant, or loan

assistance.

.

67a

(ii) the determination of need and of the amount of

a loan by an eligible institution under subparagraph

(B) with respect to a student shall be calculated in

accordance with part E.

(D) An eligible institution may not, in carrying out the

provisions of subparagraphs (A) and (B) of this

paragraph, provide a statement which certifies the

eligibility of any student to receive any loan under this

part in excess of the maximum amount applicable to

such loan.

(E) For the purpose of subparagraphs (B) and (C) of

this paragraph, any loan obtained by a student under

section 1078-1 or a parent under section 1078-2 or

under any State-sponsored or private loan program for

an academic year for which the determination is made

may be used to offset the expected family contribution

of the student for that year.

(F) Except as provided in subparagraph (D), an eligible

institution may refuse to certify a statement which

permits a student to receive a loan under this part or to

certify a loan amount that is less than the student's

determination of need (as determined under part E of

this title), if the reason for such action is documented

and provided in written form to each student so

affected.

* * *

6a

District of Columbia Consumer Credit Protection Act

D.C. Code § 28-3809. Lender subject to defenses arising

from sales.

(a) A lender who makes a direct installment loan for the

purpose of enabling a consumer to purchase goods or services

is subject to all claims and defenses of the consumer against the

seller arising out of the purchase of the goods or service if such

lender acts at the express request of the seller, and --

(1) the seller participates in the preparation of the loan

instruments, OF

(2) the lender is a person or organization controlled by or

under common control with the seller, or

(3) the seller receives or will receive a fee, compensation,

or other consideration from the lender for arranging the

loan

(b) The lender's liability under this section may not exceed the

amount of the loan. Rights of the debtor can only be asserted

affirmatively in an action to cancel and void the sale from its

inception, or as a matter of defense to or set-off against a claim

by the lender.

69a

Federal Trade Commission Regulations on Preservation of

Consumers Claims and Defenses, 16 C.F.R. § 433

16 C.F.R. § 433.1 Definitions.

(a) Person. An individual, corporation, or any other business

organization.

(b) Consumer. A natural person who seeks or acquires goods

or services for personal, family, or household use.

(c) Creditor. A person who, in the ordinary course of business,

lends purchase money or finances the sale of goods or services

to consumers on a deferred payment basis; Provided, such

person is not acting, for the purposes of a particular transaction,

in the capacity of a credit card issuer.

(d) Purchase money loan. A cash advance which is received by

a consumer in return for a "Finance Charge" within the

meaning of the Truth in Lending Act and Regulation Z, which

is applied, in whole or substantial part, to a purchase of goods

or services from a seller who (1) refers consumers to the

creditor or (2) is affiliated with the creditor by common control,

contract, or business arrangement.

(ce) Financing a sale. Extending credit to a consumer in

connection with a "Credit Sale" within the meaning of the

Truth in Lending Act and Regulation Z.

(f) Contract. Any oral or written agreement, formal or

informal, between a creditor and a seller, which contemplates

or provides for cooperative or concerted activity in connection

with the sale of goods or services to consumers or the financing

thereof.

70a

(g) Business arrangement. Any understanding, procedure,

course of dealing, or arrangement, formal or informal, between

a creditor and a seller, in connection with the sale of goods or

services to consumers or the financing thereof.

(h) Credit card issuer. A person who extends to cardholders the

right to use a credit card in connection with purchases of goods

or services.

(1) Consumer credit contract. Any instrument which evidences

or embodies a debt arising from a "Purchase Money Loan"

transaction or a "financed sale" as defined in paragraphs (d) and

(e) of this section.

(j) Seller. A person who, in the ordinary course of business,

sells or leases goods or s#: “ces to consumers.

16 C.F.R. 433.2 Preservai:on of consumers’ claims and

defenses, unfair or deceptive acts or practices.

In connection with any sale or lease of goods or services to

consumers, in or affecting commerce as "commerce" is defined

in the Federal Trade Commission Act, it is an unfair or

deceptive act or practice within the meaning of section 5 of that

Act for a seller, directly or indirectly, to:

(a) Take or receive a consumer credit contract which fails to

contain the following provision in at least ten point, bold face,

type:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT

CONTRACT IS SUBJECT TO ALL CLAIMS AND

DEFENSES WHICH THE DEBTOR COULD

pie alicia

7la

ASSERT AGAINST THE SELLER OF GOODS OR

SERVICES OBTAINED PURSUANT HERETO OR

WITH THE PROCEEDS HEREOF. RECOVERY

HEREUNDER BY THE DEBTOR SHALL NOT

EXCEED AMOUNTS PAID BY THE DEBTOR

HEREUNDER.

or,

(b) Accept, as full or partial payment for such sale or lease, the

proceeds of any purchase money loan (as purchase money loan

is defined herein), unless any consumer credit contract made in

connection with such purchase money loan contains the

following provision in at least ten point, bold face, type:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT

CONTRACT IS SUBJECT TO ALL CLAIMS AND

DEFENSES WHICH THE DEBTOR COULD

ASSERT AGAINST THE SELLER OF GOODS OR

SERVICES OBTAINED WITH THE PROCEEDS

HEREOF. RECOVERY HEREUNDER BY THE

DEBTOR SHALL NOT EXCEED AMOUNTS PAID

BY THE DEBTOR HEREUNDER.

72a

Department of Education

Guaranteed Student Loan Program Regulations

(adopted, 51 Fed Reg. 40889 (Nov. 10, 1986);

superseded, 57 Fed Reg. 60279 (Dec. 18, 1992))

34 C.F.R. § 682.200 Definitions

(b) The following definitions also apply to this part:

+ * .

Origination: A special relationship between a school and a

lender, in which the lender delegates to the school, or to an

entity or individual affiliated with the school, substantial

functions or responsibilities normally performed by lenders

before making loans. In this situation, the school is considered

to have “originated’ a loan made by the lender. The Secretary

determines that "origination’ exists if, for example --

(1) A school determines who will receive a loan and the

amount of the loan; and

(2) The lender has the school verify the identity of the

borrower or complete forms normally completed by the

lender.

34 C.F.R. § 682.206(a) Due diligence in making a loan.

(a) General.

(1) The loan-making process includes processing the loan

application and other required forms, approving the

borrower for a loan, determining the loan amount,

explaining to the borrower his or her responsibilities under

the loan, completing and having the borrower sign the

promissory note, and disbursing the loan proceeds.

73a

(2) Except as may be authorized by the Secretary, a lender

may not delegate its loan-making functions to a school

unless the school has an origination relationship with the

lender. If that relationship exists, the lender may rely in

good faith upon statements of the borrower contained in the

loan application, but may not rely upon statements made by

the school in the application. A non-school lender that does

not have an origination relationship may rely in good faith

upon statements of both the borrower and the school that

are contained in the application. Except as provided in Part

668, Subpart E, a school lender may rely in good faith upon

statements made by the borrower in the loan application.

‘(b) Processing forms. Before disbursing a loan, a lender must

determine that all required forms have been accurately

completed by the borrower, the student, the school, and the

lender. A lender may not ask the borrower to sign any loan

form before all the information requested from the borrower on

: that form has been supplied.

(c) Approval of borrower and determination of loan amount.

(1) A lender may make a loan only to an eligible borrower.

To the extent authorized by paragraph (a)(2) of this section,

the lender may determine the borrower's eligibility based on

the information provided on the application by the school,

the borrower, and, if the borrower is a parent, the student on

whose behalf the loan is sought.

(2) In determining the amount of the loan to be made,

within the limitations of § 682.204, the lender shall review

the data on the student's cost of attendance and estimated

financial assistance that is provided on the application

form. In no case may the loan amount exceed the student's

estimated cost of attendance, less estimated financial

74a

assistance, for the academic period for which the loan is

intended.

(d) Promissory note.

(1) The lender shal! obtain from the borrower an executed

legally enforceable promissory note for each loan as proof

of the borrowers’ indebtedness.

(2) A lender may not add any clauses to, or modify any

provisions of, the most current promissory note provided by

the guarantor without the guarantor's prior approval.

(3) The lender shall give the borrower a copy of each

executed note.

(e) Security, endorsement, and comakers.

(1) A FISLP or Federal PLUS Program loan shall be made

without security or endorsement.

(2) A Federal PLUS Program loan may be made to two

eligible parents who agree to be jointly liable for repayment

of the loan as co-makers.

(f) Loan disbursement. A lender shall disburse funds as

required by § 682.207.

75a

DEPARTMENT OF HEALTH, EDUCATION,

AND WELFARE

OFFICE OF EDUCATION

WASHINGTON, DC 20302

June 28, 1996

TO ALL LENDERS AND EDUCATIONAL INSTITUTIONS

SUBJECT: Federal Trade Commission Trade Regulation

Concerning Preservation of Consumers’ Claims

and Defenses

The Federal Trade Commission (FTC) published a Trade

Regulation Rule in the Federal Register of November 18, 1975

(40 FR 53506) concerning the Preservation of Consumers’

Claims and Defenses. The Rule became effective May 14,

1976.

In adopting this rule, the Federal Trade Commission

determined that it constitutes an unfair and deceptive practice

within the meaning of Section 5 of the Federal Trade

Commission Act (15 U.S.C. 45) for a seller, in the course of

financing a consumer purchase of goods or services, to employ

procedures which make the consumer's duty to pay independent

of the seller's duty to fulfill his obligations.

Effect of the Rule

The Rule is designed to insure that consumer credit contracts

used in financing the retail purchase of consumer goods or

services specifically preserve the consumers’ claim and

defenses. To achieve this result, it requires a seller to include

a prescribed notice in the text of any consumer credit contract

which it executes with a buyer. In addition, if a seller arranges

76a

loan financing for his customers from a third party creditor, the

Rule prohibits the seller from accepting the proceeds of the

loan as payment for the sale, unless the loan contract signed by

the buyer contains the prescribed notice.

Applicability of the Rule to the Guaranteed Student Loan

Program

In order to determine to what extent this Rule affects the

Guaranteed Student Loan Program, the Office of Guaranteed

Student Loans has communicated with the staff attorneys of the

Federal Trade Commission responsible for drafting the Rule.

This bulletin provides preliminary guidance to participants in

the Guaranteed Student Loan Program and has been reviewed

by these attorneys.

The Rule is applicable to "sellers" when they finance or arrange

financing for the sale of consumer goods and services. It

appears that all for-profit educational institutions fall within the

Rule's definition of "seller" and are covered. It appears that the

Rule does not apply to public institutions.

A question arises, however, with respect to private non-profit

institutions. The Rule, by its terms, would cover such

institutions, but it does not appear that they fall within the

FTC's jurisdiction. In addition, the FTC has not attempted to

exercise jurisdiction over non-profit educational institutions

that are genuinely not for profit.

For those institutions which are "sellers" under the Rule, the

Rule requires inclusion of a notice (set out below) in the loan

contract if the institution itself finances the sale of its services.

This means that those school lenders within the Rule's coverage

are required to include the notice in their student loan notes.

77a

The Rule is also applicable to any covered school which:

(1) "refers" students to a "creditor," or

(2) is affiliated with the creditor by common

control, contract, or business arrangement

In these situations, the school is forbidden to accept the

proceeds of the loan unless the lender has included the required

notice in the loan contract. The definitions of "business

arrangement" and "creditor" are set out below.

The FTC's Staff Guidelines on the Rule discuss what is meant

by referral in this context as follows:

The word "refers" is intended to reach those situations

where a seller, in the ordinary course of the ordinary

course of business, is sending his buyers to a particular

loan outlet, or to particular outlets, for credit which is to

be used in the seller's establishment...

No specific number of referrals is specified in the Rule.

The key distinction is between those instances where a

seller is merely passing along information about places

where his buyers may obtain credit and those where a

seller is acting as a conduit for financing and

channeling buyer-borrowers to a particular lender or

limited group of lenders...

Finally, the test is whether the seller routinely

{emphasis added] refers his customers to a lender or

lenders. [t is not whether a particular buyer was

referred. This means that once a seller is referring his

customers to a lender, all loan contracts between that

lender and borrowers from that lender must contain the

78a

Notice...Conversely, it means that an occasional referral

which is not part of a business routine of the seller does

not trigger the Rule.

Selected Definitions from the Rule:

Business arrangement: Any understanding, procedure, course

of dealing, or arrangement, formal or informal, between a

creditor and a seller, in connection with the sale of goods or

services to consumers or the financing thereof.

Creditor: A person who, in the ordinary course of business,

lends purchase money or finances the sale of goods or services

to consumers on a deferred payment basis; Provided, such

person is not acting, for the purposes of a particular transaction,

in the capacity of a credit card issuer.

(Note: it appears that a State agency is not included within this

definition.)

Person: An individual, corporation, or any other business

organization.

Seller: A person who, in the ordinary course of business, sells

or leases goods or services to consumers.

Required Notice When Seller Provides Credit:

ANY HOLDER OF THIS CONSUMER CREDIT

CONTRACT IS SUBJECT TO ALL CLAIMS AND

DEFENSES WHICH THE DEBTOR COULD ASSERT

AGAINST THE SELLER OF GOODS OR SERVICES

OBTAINED PURSUANT HERETO OR WITH THE

PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE

DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE

DEBTOR HEREUNDER.

79a

Required Notice When Creditor Provides Credit as a Result of

Business Arrangement Between Seller and Creditor:

ANY HOLDER OF THIS CONSUMER CREDIT

CONTRACT IS SUBJECT TO ALL CLAIMS AND

DEFENSES WHICH THE DEBTOR COULD ASSERT

AGAINST THE SELLER OF GOODS OR SERVICES

OBTAINED WITH THE PROCEEDS HEREOF. RECOVERY

HEREUNDER BY THE DEBTOR SHALL NOT EXCEED

AMOUNTS PAID BY THE DEBTOR HEREUNDER.

K.A. Kohl

Associate Commissioner

Office of Guaranteed Student Loans

80a

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, DC 20580

January 9, 1989

Joseph Esposito, Esquire

Heron, Burchette, Ruckert, and Rothwell

1025 Thomas Jefferson Street, N.W.

Washington, D.C. 20007

Dear Mr. Esposito:

Please find enclosed the materials you requested

respecting the Federal Trade Commission's Trade Regulation

Rule concerning Preservation of Consumer Claims and

Defenses ("Holder Rule"), 16 C.F.R. Part 433.

After considering your question about the applicability

of the Holder Rule to loans for vocational education, I have

reached the conclusion that such loans are typically not subject

to the Holder Rule. The Holder Rule is limited in its

application to credit transactions as defined in the Truth in

Lending Act and Regulation Z. Regulation Z exempts from its

coverage many student loan programs. 15 U.S.C. § 266.2 (f).

Whether the student loan program with which your client is

connected is subject to this exemption, however, is not fully

determinable from the facts you have provided.

If you have additional questions on this matter, please

do not hesitate to contact me.

Sincerely,

Richard C. Sauer, Attorney

Division of Credit Practices

8la

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, DC 20580

April 12, 1990

Joseph Esposito, Esquire

Akin, Gump, Strauss, Hauer & Feild

1333 New Hampshire Avenue, N.W.

Washington, D.C. 20036

Dear Mr. Esposito:

In order to expedite our reply to your recent inquiry

concerning the "Holder Rule," Mr. Keller referred your letter to

me.

You ask about the applicability of the "Holder Rule," 16

C.F.R. Part 433, to loans for vocational education. As Mr.

Sauer indicated in his letter of January 9, the Rule applies only

to credit transactions as defined in the Truth in Lending Act and

Regulation Z. Regulation Z exempts from its coverage student

loans for vocational education including those provided under

the Guaranteed Student Loan Program, Part B of Title IV of the

1965 Higher Education Act. Therefore, it is the Commission

staff's opinion that such loans would not be covered by the

Holder Rule.

Please be advised that this is merely the opinion of the

Commission staff and is not binding on the Commission.

However, it does represent staff's current enforcement position.

Sincerely,

John F. LeFevre

Program Advisor, General

Credit Division of Credit

Practices

82a

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, DC 20580

June 20, 1990

Joseph Esposito, Esquire

Akin, Gump, Strauss, Hauer & Feld

1333 New Hampshire Avenue, N.W.

Washington, D.C. 20036

Dear Mr. Esposito:

This is in reference to my letter to you of April 12,

1990, and Mr. Sauer's letter to you of January 9, 1989,

concerning the applicability of the Holder Rule to loans for

vocational education. In those letters, we indicated that the

Holder Rule would not apply to such loans because Regulation

Z of the Truth in Lending Act (TILA) exempts such loans from

its coverage, including loans authorized under the Guaranteed

Student Loan Program, Part B of Title IV of the 1965 Higher

Education Act.

In attempting to provide you with an expedited opinion

on this issue, I relied heavily on the underlying premise of Mr.

Sauer's letter, namely, that the Holder Rule should be limited

in its application to credit transactions that are currently

covered by the Truth in Lending Act and Regulation Z. Since

I now have reason to believe that this premise may be incorrect,

I must retract my letter to you of April 12 until Commission

staff has had a chance to thoroughly research the issue.

My doubt stems from the realization that Mr. Sauer's

premise was apparently based on several statements in the

Commission's Statement of Basis and Purpose (SBP) for the

83a

Rule (approved in 1975) indicating that Holder Rule coverage

should be linked to TILA coverage. At that time, however,

guaranteed student loans were covered by the TILA; in fact

they were not exempted until 1982. This, coupled with the

Commission's statement on page 53524 of the SBP (16 CFR

433) that the "[t}]he rule expressly applies to credit contracts

arising from sales or services, such as trade or vocational

school agreements....," appears to indicate that the Commission

at that time may have intended the loans at issue to be covered

by the Holder Rule.

In any event, it is clear to me that further study is

needed before a definitive opinion can be rendered. If we

conclude that such loans are covered, it is my intention to

recommend that the Commission issue an advisory opinion to

that effect. In the meantime | would suggest that your client

include the Holder notice in its loan agreements until the

Commission acts.

I appreciate your cooperation in this matter and hope

that this has not caused inconvenience to you or your client.

Sincerely,

| John F. LeFevre

| Program Advisor General Credit

Division of Credit Practices

84a

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, DC 20580

July 24, 1991

Jonathan Sheldon, Esquire

National Consumer Law Center

11 Beacon Street - #821

Boston, Massachusetts 02108

Re: Application of Holder Rule to Federally Guaranteed

Student Loans

Dear Mr. Sheldon:

This letter responds to your request, made in a filing in

connection with the review by the Federal Trade Commission

("Commission") of its Trade Regulation Rule concerning

Preservation of Consumers’ Claims and Defenses (16 C.F.R.

Part 433, the "Rule" or "Holder Rule") pursuant to the

Regulatory Flexibility Act. You request a staff opinion letter

clarifying the Rule's application to federally guaranteed student

loans. For the reasons stated herein, it is the opinion of the

FTC staff that federally guaranteed student loans are not

exempt from the Rule.

1. The Commission included educational loans when

it promulgated the Rule in 1975.

The literal scope of the Rule shows no hint of any

exception for contracts entered for educational purposes.

Under its provisions, a specific clause preserving consumer

defenses is to be included in any "consumer credit contract" or

"purchase money loan contract" by the seller "(i)n connection

85a

with any sale or lease of goods or services to consumers"

within the coverage of the FTC Act. 16 C.F.R. § 433.2

(emphasis added). '

The Statement of Basis and Purpose ("SBP") that the

Commission issued when it promulgated the Rule, combined

with the broad scope of the Rule, leaves no doubt that the

Commission intended the Rule to cover for-profit’ educational

loans. 40 Fed. Reg. 53506 (November 18, 1975). In the SBP,

immediately after quoting the required contractual language,

the Commission stated:

"The rule expressly applies to credit contracts arising

from sales of services, such as trade or vocational

school agreements..."( emphasis added) /d. at 53524.

Similarly, the Commission stated unequivocally that the record

in the rulemaking proceeding pursuant to which the Rule was

issued was replete with cases of instructional courses where

fraud and deception had occurred:

"Courses of training or instructions

(C)ases brought to our attention include courses of

' As you know, if the particular consumer was not

referred to the lender, and the lender was not affiliated with or

otherwise had no business arrangement with the school, the

transaction was not covered by the Rule. 15 C.F.R.. § 433.1(d).

2 Of course, not-for-profit schools would not be

covered, because they are beyond the regulatory authority of

the Commission under the Federal Trade Commission Act. 15

U.S.C. § 44.

86a

English language instruction, television and modeling

school courses, computer schools, flying lessons, a

karate school, and other miscellaneous courses of

training or instructions." /d. at 53510.

Finally, the federal government's Office of Education

had no doubt that the Holder Rule applied, stating in a release

issued shortly after the Rule became effective that "all

for-profit educational institutions fall within the Rule's

definition of ‘seller’ and are covered" by its provisions and

therefore "the school is forbidden to accept the proceeds of the

loan unless the lender has included the required notice in the

contract."”

2. Congress did not exclude educational loans from

coverage under the Rule when it amended the Truth in Lending

Act in 1982.

The only argument that educational loans are not

covered focuses on a sequence of events that in no way relates

to the substance of the Holder Rule. First, in 1975 when it

formulated the key definitions of "purchase money loan" and

"financing a sale" and promulgated the Rule, the Commission

made reference to the Truth in Lending Act ("TILA") and its

implementing Regulation Z.* Second, in 1982 Congress

3 Bulletin #L16/S9 dated June 28, 1976, directed "TO

ALL LENDERS AND EDUCATIONAL INSTITUTIONS" by

the Office of Education (Department of Health, Education and

Welfare), predecessor to the Department of Education.

‘116 CFR §433.1(d-e)]. The former involves a "Finance

Charge within the meaning of the TILA. . ." and the latter

amounts to a “credit sale within the meaning of the TILA." The

definition of "consumer credit contract" [16 CFR §433.1(i)],

87a

amended the TILA to exclude federally guaranteed student

loans from that law's coverage in order to avoid imposing on

lenders duplicate disclosures that were required on federally

guaranteed loans under the Higher Education Act of 1965.°

Although a literal interpretation might lead to the

conclusion that federally guaranteed student loans became

exempt from the Rule as a result of these actions,” the

the document which of course must include the required clause

to preserve consumer defenses, incorporates by reference the

"purchase money loan" and "financing a sale" definitions.

* TILA §104(5), 16 U.S.C. §1603(6), added by Section

701(a) of the Garn-St. Germain Depository Institutions Act of

1982.

© The Commission's staff guidelines issued in 1976

assumed that the Rule's adoption of TILA definitions meant

that the Commission intended the scope of the Rule to equal

that of the TILA. 41 Fed. Reg. 20022 (May 4, 1976). Your

submission makes an argument that defining "purchase money

loan" to be a cash advance that includes a "finance charge

within the meaning of the TILA" means only that a loan is

covered if it provides a finance charge that meets the criteria set

forth in the statute and regulation [TILA §106, Reg. Z §226.4),

and that the Guidelines were therefore wrong to equate the

scope of the Rule with the TILA, even as it existed in 1976.

Because we base our analysis on the Rule and principles of

statutory construction, the Guidelines are not germane to our

conclusion. In any event, it is clear that the Guidelines (like

the Rule) contemplated the scope of the TILA as it existed in

1975 (or perhaps 1976, in the case of the Guidelines).

88a

universally accepted rule of statutory interpretation that is

applicable to this situation demonstrates that the 1982

amendment to the TILA had no impact on the Rule's scope.

The general rule for interpreting a statute that

incorporates another statute is that the statute incorporated is

taken as it existed at the time of incorporation, without

subsequent amendments, unless the legislature has expressly or

by strong implication shown its intention to incorporate

subsequent amendments. Sutherland, Statutory Construction

$51.08 (4th Ed. 1984); Curtis Ambulance of Florida, Inc. v.

Board of County Comm'rs, Shawnee County, 811 F.2d 1371,

1378-79 (10th Cir. 1987). Stated more generally, if Statute A

incorporates Statute B, a subsequent amendment to Statute B is

disregarded in construing Statute A unless the legislature

clearly intended to affect Statute A as well.’ A similar

interpretation should apply to regulations that incorporate

Statutes.

Furthermore, the Commission made it clear when the

Guidelines were released that they did not change the Rule,

stating, "The Commission wishes to call attention to the fact

that (the Guidelines) have not been formally reviewed or

adopted by the Commission, nor does anything therein alter or

amend either the Rule or the official Statement of Basis and

Purpose published with the Rule.” (emphasis added) 41 Fed.

Reg. 20022 (May 4, 1976).

’ This same approach, of course, means that the 1976

Staff Guidelines, insofar as they indicate that the scope of the

TILA is the same as the Rule, should be interpreted by using

the TILA as it existed when the Rule was promulgated (or, with

the same result, shortly afterward when the Guidelines were

issued) as the frame of reference.

89a

Applying the principle, it is clear to us that the Holder

Rule's reference to the TILA and Regulation Z incorporated

those laws only as they existed in 1975. In this case, there is no

indication that the Commission intended to incorporate changes

in the TILA, or that one of Congress’ purposes in enacting the

1982 amendment to the TILA was to remove student loans

from coverage by the Holder Rule. On the contrary, the

purpose of the 1982 amendments was simply to provide

students with one set of uniform, clear disclosures for student

loans. In sum, the principles of statutory construction require

that we disregard amendments to the TILA and Regulation Z

made subsequent to the Rule's issuance in 1975, in construing

references to them in the Holder Rule.

We are aware that one federal appellate court has held

that "loans made, issued or guaranteed under the (Higher

Education Act of 1965) have been exempted from the FTC rule

on preservation of consumer defenses." Veal v. First American

Savings Bank, 914 F. 2d 909, 914 (7th Cir. 1990) The quoted

material, which was included in an opinion that dealt with a

broad range of alleged wrongdoing and legal issues, was set

forth without any discussion whatsoever. We respectfully

’ The case involved charges of breach of contract,

breach of fiduciary duty, fraud, negligence, and violation of the

Indiana Deceptive Practices Act and the Higher Education Act

of 1965. Jd. at 912. The opinion also discussed the Indiana

UCC and numerous rules issued by the Department of

Education. /d. at 913-14.

° The quoted statement was followed only by two

citations. First, it cited 15 U.S.C. §1603(6), the TILA

exemption that was added in 1982. Second, it cited 16 C.F.R.

§226.3(f), a nonexistent regulation.

90a

disagree, based on the foregoing detailed analysis that (1) the

Commission covered student loans when it issued the Rule in

1975 and (2) Congress did not reduce the Rule's scope when it

amended the TILA in 1982.

This letter constitutes informal staff opinion that is not

binding on the Commission.

Sincerely,

Jean Noonan, Associate Director

for Credit Practices

9la

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, DC 20580

February 11, 1993

Jonathan Sheldon, Esquire

National Consumer Law Center

11 Beacon Street - #821

Boston, Massachusetts 02108

Dear Mr. Sheldon:

This responds to your recent inquiries to my staff

concerning the documentation of federally guaranteed student

loans in accord with the Commission's Trade Regulation Rule

concerning Preservation of Consumers' Ciaims and Defenses

("Holder Rule" or "Rule"). It is our opinion that all documents

evidencing student loan transactions (which you advise are

usually promissory notes to the lender) that are covered by the

Holder Rule must be drafted to comply with its terms,

specifically to include the provision (sometimes called the

"Holder notice") that it mandates.

The essence of the Holder Rule is the requirement that

any seller of goods or services must include the required clause

in the documents evidencing the obligation (16 C.F.R. § 433.2)

to provide that if the consumer has a good defense against

paying the seller, he or she can defend a claim by the lender on

the same basis. There is simply no other way for a provider of

goods or services to comply with the Rule than to include this

provision in each such document.

It continues to be the Commission staff's opinion that

federally guaranteed student loans are not exempt from the

92a

Rule, for the reasons set forth in detail by my predecessor, Jean

Noonan, in a letter to you dated July 24, 1991. Those views

were subsequently ratified by the Commission in a notice

terminating its review of the Holder Rule under the Regulatory

Flexibility Act on July 29, 1992 (57 FR 28814, 28815 nil).

Furthermore, the reasoning in the July 1991 letter was followed

by Judge Richey in Jackson v. Culinary School of Washington,

788 F. Supp. 1233, 1250-51 (D.D.C. 1992), the only significant

judicial opinion we know of that contains legal analysis of this

issue.

Where the Rule applies to an educational loan,

therefore, the school must include the required clause (Holder

notice) in the loan documents. As you are aware, the Rule is

inapplicable to not-for-profit schools, which are beyond the

regulatory jurisdiction of the Commission under the Federal

Trade Commission Act. 15 U.S.C. § 44. Also, if the consumer

is not referred to the lender, and the lender is not affiliated with

or otherwise has no business arrangement with the school, the

Holder Rule will not apply by its own terms. 16 C.F.R. §

433.1(d). In all other cases, the Rule will be in force and

require the loan document form to include the necessary

provision.

Finally, you inquired about the permissibility of a

standard form promissory note that would include the clause

required by the Holder Rule, but would allow the lender or

seller to strike it out where it was not applicable. We see no

reason why this would in any way contravene the Holder Rule.

93a

This letter constitutes an informal staff opinion that is

not binding on the Commission.

Yours truly,

David Medine

Associate Director for Credit

Practices