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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386005_1137%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2000
- **Citation:** 528 U.S. 1073

## Text

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

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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

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(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

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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

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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

:
;

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[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....

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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

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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.

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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

—————

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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

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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.

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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 equ

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386005_1137%3A2. Public record. Not legal advice.