# Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-14052 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** June 16, 2016 - **Citation:** 81 FR 39330 ## Text DEPARTMENT OF EDUCATION 34 CFR Parts 30, 668, 674, 682, 685, and 686 RIN 1840-AD19 [Docket ID ED-2015-OPE-0103] Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program AGENCY: Office of Postsecondary Education, Department of Education. ACTION: Notice of proposed rulemaking. SUMMARY: The Secretary proposes to amend the regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to establish a new Federal standard and a process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school. We propose to also amend the Direct Loan Program regulations by prohibiting participating schools from using certain contractual provisions regarding dispute resolution processes, such as mandatory pre-dispute arbitration agreements or class action waivers, and to require certain notifications and disclosures by schools regarding their use of arbitration. We propose to also amend the Direct Loan Program regulations to codify our current policy regarding the impact that discharges have on the 150 percent Direct Subsidized Loan Limit. We also propose to amend the Student Assistance General Provisions regulations to revise the financial responsibility standards and add disclosure requirements for schools. Finally, we propose to amend the discharge provisions in the Federal Perkins Loan (Perkins Loan), Direct Loan, Federal Family Education Loan (FFEL), and Teacher Education Assistance for College and Higher Education (TEACH) Grant programs. The proposed changes would provide transparency, clarity, and ease of administration to current and new regulations and protect students, the Federal government, and taxpayers against potential school liabilities resulting from borrower defenses. DATES: We must receive your comments on or before August 1, 2016. ADDRESSES: Submit your comments through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery. We will not accept comments submitted by fax or by email or those submitted after the comment period. To ensure that we do not receive duplicate copies, please submit your comments only once. In addition, please include the Docket ID at the top of your comments. If you are submitting comments electronically, we strongly encourage you to submit any comments or attachments in Microsoft Word format. If you must submit a comment in Portable Document Format (PDF), we strongly encourage you to convert the PDF to print-to-PDF format or to use some other commonly used searchable text format. Please do not submit the PDF in a scanned format. Using a print-to-PDF format allows the U.S. Department of Education (the Department) to electronically search and copy certain portions of your submissions. • Federal eRulemaking Portal: Go to www.regulations.gov to submit your comments electronically. Information on using Regulations.gov , including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “Help.” • Postal Mail, Commercial Delivery, or Hand Delivery: The Department strongly encourages commenters to submit their comments electronically. However, if you mail or deliver your comments about the proposed regulations, address them to Jean-Didier Gaina, U.S. Department of Education, 400 Maryland Ave. SW., Room 6W232B, Washington, DC 20202. Privacy Note: The Department's policy is to make all comments received from members of the public available for public viewing in their entirety on the Federal eRulemaking Portal at www.regulations.gov . Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available. FOR FURTHER INFORMATION CONTACT: For further information related to borrower defenses, Barbara Hoblitzell at (202) 453-7583 or by email at: Barbara.Hoblitzell@ed.gov . For further information related to false certification and closed school loan discharges, Brian Smith at (202) 453-7440 or by email at: Brian.Smith@ed.gov . For further information regarding institutional accountability, John Kolotos or Greg Martin at (202) 453-7646 or (202) 453-7535 or by email at: John.Kolotos@ed.gov or Gregory.Martin@ed.gov . If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339. SUPPLEMENTARY INFORMATION: Executive Summary Purpose of This Regulatory Action The purpose of the borrower defense regulation is to protect student loan borrowers from misleading, deceitful, and predatory practices of, and failures to fulfill contractual promises by, institutions participating in the Department's student aid programs. Most postsecondary institutions provide a high-quality education that equips students with new knowledge and skills and prepares them for their careers. However, when postsecondary institutions make false and misleading statements to students or prospective students about school or career outcomes or financing needed to pay for those programs, or fail to fulfill specific contractual promises regarding program offerings or educational services, student loan borrowers may be eligible for discharge of their Federal loans. The proposed regulations would give students access to consistent, clear, fair, and transparent processes to seek debt relief; protect taxpayers by requiring that financially risky institutions are prepared to take responsibility for losses to the government for discharges of and repayments for Federal student loans; provide due process for students and institutions; and warn students, using plain language issued by the Department, about proprietary schools at which the typical student experiences poor loan repayment outcomes—defined in these proposed regulations as a proprietary school with a loan repayment rate that is less than or equal to zero percent, which means that the typical borrower has not paid down at least a dollar on his or her loans—so that students can make more informed enrollment and financing decisions. Section 455(h) of the Higher Education Act of 1965, as amended (HEA), authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan. Current regulations at § 685.206(c) governing defenses to repayment have been in place since 1995 but, until recently, rarely used. Those regulations specify that a borrower may assert as a defense to repayment any “act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law.” In response to the collapse of Corinthian Colleges (Corinthian) and the flood of borrower defense claims submitted by Corinthian students stemming from the school's misconduct, the Secretary announced in June 2015 that the Department would develop new regulations to establish a more accessible and consistent borrower defense standard and clarify and streamline the borrower defense process to protect borrowers and improve the Department's ability to hold schools accountable for actions and omissions that result in loan discharges. Consistent with the Secretary's commitment, we propose regulations that would specify the conditions and processes under which a borrower may assert a defense to repayment of a Direct Loan, also referred to as a “borrower defense,” based on a new Federal standard. The current standard allows borrowers to assert a borrower defense if a cause of action would have arisen under applicable state law. In contrast, the new Federal standard would allow a borrower to assert a borrower defense on the basis of a substantial misrepresentation, a breach of contract, or a favorable, nondefault contested judgment against the school for its act or omission relating to the making of the borrower's Direct Loan or the provision of educational services for which the loan was provided. The new standard would apply to loans made after the effective date of the proposed regulations. The proposed regulations would establish a process for borrowers to assert a borrower defense that would be implemented both for claims that fall under the existing standard and for later claims that fall under the new, proposed standard. In addition, the proposed regulations would establish the conditions or events upon which an institution is or may be required to provide to the Department financial protection, such as a letter of credit, to help protect students, the Federal government, and taxpayers against potential institutional liabilities. The Department also proposes a regulation that would prohibit a school participating in the Direct Loan Program from requiring, through the use of contractual provisions or other agreements, arbitration to resolve claims brought by a borrower against the school that could also form the basis of a borrower defense under the Department's regulations. The proposed regulations also would prohibit a school participating in the Direct Loan Program from obtaining agreement, either in an arbitration agreement or in another form, that a borrower waive his or her right to initiate or participate in a class action lawsuit regarding such claims and from requiring students to engage in internal institutional complaint or grievance procedures before contacting accrediting or government agencies with authority over the school regarding such claims. The proposed regulations also would prohibit a school participating in the Direct Loan Program from requiring, through the use of contractual provisions or other agreements, arbitration to resolve claims brought by a borrower against the school that could also form the basis of a borrower defense under the Department's regulations. The proposed regulations would also impose certain notification and disclosure requirements on a school regarding claims that are voluntarily submitted to arbitration after a dispute has arisen. Summary of the Major Provisions of This Regulatory Action: For the Direct Loan Program, we propose new regulations governing borrower defenses that would— • Clarify that borrowers with loans first disbursed prior to July 1, 2017, may assert a defense to repayment under the current borrower defense State law standard; • Establish a new Federal standard for borrower defenses, and limitation periods applicable to the claims asserted under that standard, for borrowers with loans first disbursed on or after July 1, 2017; • Establish a process for the assertion and resolution of borrower defense claims made by individuals; • Establish a process for group borrower defense claims with respect to both open and closed schools, including the conditions under which the Secretary may allow a claim to proceed without receiving an application; • Provide for remedial actions the Secretary may take to collect losses arising out of successful borrower defense claims for which an institution is liable; and • Add provisions to schools' Direct Loan program participation agreements that, for claims that may form the basis for borrower defenses— Prevent schools from requiring that students first engage in a school's internal complaint process before contacting accrediting and government agencies about the complaint; Prohibit the use of mandatory pre-dispute arbitration agreements by schools; Prohibit the use of class action lawsuit waivers; and To the extent schools and borrowers engage in arbitration in a manner consistent with applicable law and regulation, require schools to disclose to and notify the Secretary of arbitration filings and awards. The proposed regulations would also revise the Student Assistance General Provisions regulations to— • Amend the definition of a misrepresentation to include omissions of information and statements with a likelihood or tendency to mislead under the circumstances. The definition would be amended for misrepresentations for which the Secretary may impose a fine, or limit, suspend, or terminate an institution's participation in title IV, HEA programs. This definition is also adopted as a basis for alleging borrower defense claims for Direct Loans first disbursed after July 1, 2017; • Clarify that a limitation may include a change in an institution's participation status in title IV, HEA programs from fully certified to provisionally certified; • Amend the financial responsibility standards to include actions and events that would trigger a requirement that a school provide financial protection, such as a letter of credit, to insure against future borrower defense claims and other liabilities to the Department; • Require proprietary schools with a student loan repayment rate that is less than or equal to zero percent to provide a Department-issued plain language warning to prospective and enrolled students and place the warning on its Web site and in all promotional materials and advertisements; and • Require a school to disclose on its Web site and to prospective and enrolled students if it is required to provide financial protection, such as a letter of credit, to the Department. The proposed regulations would also— • Expand the types of documentation that may be used for the granting of a discharge based on the death of the borrower (“death discharge”) in the Perkins, FFEL, Direct Loan, and TEACH Grant programs; • Revise the Perkins, FFEL, and Direct Loan closed school discharge regulations to ensure borrowers are aware of and able to benefit from their ability to receive the discharge; • Expand the conditions under which a FFEL or Direct Loan borrower may qualify for a false certification discharge; • Codify the Department's current policy regarding the impact that a discharge of a Direct Subsidized Loan has on the 150 Percent Direct Subsidized Loan Limit; and • Make technical corrections to other provisions in the FFEL and Direct Loan Program regulations and to the regulations governing the Secretary's debt compromise authority. Please refer to the Summary of Proposed Changes section of this notice of proposed rulemaking (NPRM) for more details on the major provisions contained in this NPRM. Costs and Benefits: As further detailed in the Regulatory Impact Analysis, the benefits of the proposed regulations include: (1) An updated and clarified process and the creation of a Federal standard to streamline the administration of the borrower defense rule and to increase protections for students as well as taxpayers and the Federal government; (2) increased financial protections for the Federal government and thus for taxpayers; (3) additional information to help students, prospective students, and their families make educated decisions based on information about an institution's financial soundness and its borrowers' loan repayment outcomes; (4) improved conduct of schools by holding individual institutions accountable and thereby deterring misconduct by other schools; (5) improved awareness and usage, where appropriate, of closed school and false certification discharges; and (6) technical changes to improve the administration of the title IV, HEA programs. Costs include paperwork burden associated with the required reporting and disclosures to ensure compliance with the proposed regulations, the cost to affected institutions of providing financial protection, and the cost to taxpayers of borrower defense claims that are not reimbursed by institutions. Invitation to Comment: We invite you to submit comments regarding these proposed regulations. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses, and provide relevant information and data whenever possible, even when there is no specific solicitation of data and other supporting materials in the request for comment. We also urge you to arrange your comments in the same order as the proposed regulations. Please do not submit comments that are outside the scope of the specific proposals in this NPRM, as we are not required to respond to such comments. We invite you to assist us in complying with the specific requirements of Executive Orders 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from these proposed regulations. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Department's programs and activities. During and after the comment period, you may inspect all public comments about the proposed regulations by accessing Regulations.gov . You may also inspect the comments in person at 400 Maryland Ave. SW., Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington, DC time, Monday through Friday of each week except Federal holidays. To schedule a time to inspect comments, please contact one of the persons listed under FOR FURTHER INFORMATION CONTACT . Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record: On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed regulations. To schedule an appointment for this type of accommodation or auxiliary aid, please contact one of the persons listed under FOR FURTHER INFORMATION CONTACT . Background The Secretary proposes to amend §§ 30.70, 668.14, 668.41, 668.71, 668.90, 668.93, 668.171, 668.175, 674.33, 674.61, 682.202, 682.211, 682.402, 682.405, 682.410, 685.200, 685.205, 685.206, 685.209, 685.212, 685.214, 685.215, 685.200, 685.220, 685.300, 685.308, and 686.42 of title 34 of the Code of Federal Regulations (CFR), and also to add new §§ 668.176, 685.222, 685.223, and 685.310 to that title. The regulations in 34 CFR part 30 pertain to Debt Collection. The regulations in 34 CFR part 668 pertain to Student Assistance General Provisions. The regulations in 34 CFR part 674 pertain to the Perkins Loan Program. The regulations in 34 CFR part 682 pertain to the FFEL Program. The regulations in 34 CFR part 685 pertain to the Direct Loan Program. The regulations in 34 CFR part 686 pertain to the TEACH Grant Program. We are proposing these amendments to: (1) Specify that the standards used to identify an act or omission of a school that provides the basis for a borrower defense will depend on when the Direct Loan was first disbursed; (2) establish a new Federal standard and limitation periods that the Department will use to identify an act or omission of an institution that constitutes a borrower defense; (3) establish the procedures to be used for a borrower to initiate a borrower defense; (4) establish the standards and certain procedures that the Department would use to determine the liability of an institution for the amount of relief arising from a borrower defense; (5) prohibit schools' use of mandatory pre-dispute arbitration agreements or class action bans to resolve disputes for claims that could also form the basis of borrower defense claims or require borrowers to waive any rights to initiate or participate in class actions regarding such claims; and impose certain notification and disclosure requirements relating to a school's use of arbitration; (6) establish the conditions or events upon which an institution is or may be required to provide to the Department financial protection, such as a letter of credit, to help protect the Federal government, and thus taxpayers, against potential institutional liabilities; (7) require a proprietary institution with a student loan repayment rate that is less than or equal to zero percent to place a Department-issued plain language warning on its Web site and in advertising and promotional materials, as well as to provide the warning to prospective and enrolled students; (8) require that a school disclose to prospective and enrolled students if it is required to provide financial protection to the Department; (9) expand the allowable documentation that may be submitted to demonstrate eligibility for a death discharge of a title IV, HEA loan or a TEACH Grant service obligation; (10) revise the closed school discharge regulations to ensure borrowers are aware of and able to benefit from their ability to receive the discharge; (11) expand the eligibility criteria for the false certification loan discharge; (12) make technical corrections to the regulation that describes the authority of the Department to compromise, or suspend or terminate collection of, debts; (13) make technical corrections to the regulations governing the Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) repayment plans; (14) allow for the consolidation of Nurse Faculty Loans; (15) allow borrowers to obtain a Direct Consolidation Loan if the borrower consolidates at least one of the eligible loans listed in § 685.220(b); (16) clarify the conditions under which the capitalization of interest by FFEL Program loan holders is permitted; and (17) codify the conditions under which the discharge of a Direct Subsidized Loan will lead to the elimination or recalculation of a Subsidized Usage Period under the 150 Percent Direct Subsidized Loan Limit or the restoration of interest subsidy. Public Participation On August 20, 2015, we published a notice in the Federal Register (80 FR 50588) announcing our intent to establish a negotiated rulemaking committee under section 492 of the HEA to develop proposed regulations for determining which acts or omissions of an institution of higher education (“institution” or “school”) a borrower may assert as a borrower defense under the Direct Loan Program and the consequences of such borrower defenses for borrowers, institutions, and the Secretary. We also announced two public hearings at which interested parties could comment on the topic suggested by the Department and suggest additional topics for consideration for action by the negotiated rulemaking committee. The hearings were held on— September 10, 2015, in Washington, DC; and September 16, 2015, in San Francisco, CA. Transcripts from the public hearings are available at www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html . We also invited parties unable to attend a public hearing to submit written comments on the proposed topics and to submit other topics for consideration. Written comments submitted in response to the August 20, 2015, Federal Register notice may be viewed through the Federal eRulemaking Portal at www.regulations.gov , within docket ID ED-2015-OPE-0103. Instructions for finding comments are also available on the site under “How to Use Regulations.gov” in the Help section. On October 20, 2015, we published a notice in the Federal Register (80 FR 63478) requesting nominations for negotiators to serve on the negotiated rulemaking committee and setting a schedule for committee meetings. On December 21, 2015, we published a notice in the Federal Register (80 FR 79276) requesting additional nominations for negotiators to serve on the negotiated rulemaking committee. Negotiated Rulemaking Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to obtain public involvement in the development of proposed regulations affecting programs authorized by title IV of the HEA. After obtaining extensive input and recommendations from the public, including individuals and representatives of groups involved in the title IV, HEA programs, the Secretary in most cases must subject the proposed regulations to a negotiated rulemaking process. If negotiators reach consensus on the proposed regulations, the Department agrees to publish without alteration a defined group of regulations on which the negotiators reached consensus unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreement reached during negotiations. Further information on the negotiated rulemaking process can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html. On October 20, 2015, the Department published a notice in the Federal Register (80 FR 63478) announcing its intention to establish a negotiated rulemaking committee to prepare proposed regulations governing the Federal Student Aid programs authorized under title IV of the HEA. The notice set forth a schedule for the committee meetings and requested nominations for individual negotiators to serve on the negotiating committee. The Department sought negotiators to represent the following groups: Students/borrowers; legal assistance organizations that represent students/borrowers; consumer advocacy organizations; groups representing U.S. military servicemembers or veteran Federal loan borrowers; financial aid administrators at postsecondary institutions; State attorneys general (AGs) and other appropriate State officials; State higher education executive officers; institutions of higher education eligible to receive Federal assistance under title III, parts A, B, and F, and title V of the HEA, which include Historically Black Colleges and Universities, Hispanic-Serving Institutions, American Indian Tribally Controlled Colleges and Universities, Alaska Native and Native Hawaiian-Serving Institutions, Predominantly Black Institutions, and other institutions with a substantial enrollment of needy students as defined in title III of the HEA; two-year public institutions of higher education; four-year public institutions of higher education; private, nonprofit institutions of higher education; private, for-profit institutions of higher education; FFEL Program lenders and loan servicers; and FFEL Program guaranty agencies and guaranty agency servicers (including collection agencies). The Department considered the nominations submitted by the public and chose negotiators who would represent the various constituencies. On December 21, 2015, the Department published a notice in the Federal Register (80 FR 79276) requesting additional nominations for negotiators to serve on the negotiated rulemaking committee to represent constituencies that were not represented following the initial request for nominations. The Department sought negotiators to represent the following groups: State higher education executive officers; institutions of higher education eligible to receive Federal assistance under title III, parts A, B, and F, and title V of the HEA; two-year public institutions of higher education; private, for-profit institutions of higher education; and national, regional, or specialized accrediting agencies. The negotiating committee included the following members: Ann Bowers, for-profit college borrower, and Chris Lindstrom (alternate), U.S. Public Interest Research Group, representing students/borrowers. Noah Zinner, Housing and Economic Rights Advocates, and Eileen Connor (alternate), Project on Predatory Student Lending at Harvard Law School (at the time of nomination, New York Legal Assistance Group) representing legal assistance organizations that represent students. Maggie Thompson, Higher Ed, Not Debt, and Margaret Reiter (alternate), attorney, representing consumer advocacy organizations. Bernard Eskandari, Office of the Attorney General of California, and Mike Firestone (alternate), Commonwealth of Massachusetts Office of the Attorney General, representing State attorneys general and other appropriate State officials. Walter Ochinko, Veterans Education Success, Will Hubbard (first alternate), Student Veterans of America, and Derek Fronabarger (second alternate), Student Veterans of America, representing U.S. military servicemembers or veterans. Karen Solinski, Higher Learning Commission, and Dr. Michale McComis (alternate), Accrediting Commission of Career Schools and Colleges, representing accreditors. Becky Thompson, Washington Student Achievement Council, representing State higher education executive officers. Alyssa Dobson, Slippery Rock University, and Mark Justice (alternate), The George Washington University, representing financial aid administrators. Sharon Oliver, North Carolina Central University, and Emily London Jones (alternate), Xavier University of Louisiana, representing minority-serving institutions. Angela Johnson, Cuyahoga Community College, and Shannon Sheaff (alternate), Mohave Community College, representing two-year public institutions. Kay Lewis, University of Washington, and Jean McDonald Rash (alternate), Rutgers University, representing four-year public institutions. Christine McGuire, Boston University, and David Sheridan (alternate), Columbia University, representing private, nonprofit institutions. Dennis Cariello, Hogan Marren Babbo & Rose, Ltd., and Chris DeLuca (alternate), DeLuca Law, representing private, for-profit institutions. Wanda Hall, EdFinancial Services, and Darin Katzberg (alternate), Nelnet, representing FFEL Program lenders and loan servicers. Betsy Mayotte, American Student Assistance, and Jaye O'Connell (alternate), Vermont Student Assistance Corporation, representing FFEL Program guaranty agencies and guaranty agency servicers. Gail McLarnon, U.S. Department of Education, representing the Department. The negotiated rulemaking committee met to develop proposed regulations on January 12-14, 2016, February 17-19, 2016, and March 16-18, 2016. The Department held informational sessions by telephone for interested members of the committee on March 1 and March 3, 2016, to review the Department's loan repayment rate disclosure proposal, and on March 9 and March 10, 2016, at the request of a non-Federal negotiator, to hear from Professor Adam Zimmerman of Loyola Law School regarding agency class settlement processes. At its first meeting, the negotiating committee reached agreement on its protocols and proposed agenda. The protocols provided, among other things, that the committee would operate by consensus. Consensus means that there must be no dissent by any member in order for the committee to have reached agreement. Under the protocols, if the committee reached a final consensus on all issues, the Department would use the consensus-based language in its proposed regulations. Furthermore, the Department would not alter the consensus-based language of its proposed regulations unless the Department reopened the negotiated rulemaking process or provided a written explanation to the committee members regarding why it decided to depart from that language. During the first meeting, the negotiating committee agreed to negotiate an agenda of seven issues related to student financial aid. These seven issues were: Borrower defenses, false certification discharges, institutional accountability, electronic death certificates, consolidation of Nurse Faculty Loans, interest capitalization, and technical corrections to the PAYE and REPAYE plans. During the second meeting, the negotiating committee agreed to add two additional issues: Closed school discharges and a technical correction to the regulations that describe the authority of the Department to compromise, or suspend, or terminate collection of, debts. Under the protocols, a final consensus would have to include consensus on all nine issues. During committee meetings, the negotiators reviewed and discussed the Department's drafts of regulatory language and the committee members' alternative language and suggestions. At the final meeting on March 18, 2016, the committee did not reach consensus on the Department's proposed regulations. For that reason, and according to the committee's protocols, all parties who participated or were represented in the negotiated rulemaking, in addition to all members of the public, may comment freely on the proposed regulations. For more information on the negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html. Summary of Proposed Changes The proposed regulations would— • Amend § 685.206 to clarify that existing regulations with regard to borrower defenses apply to loans first disbursed prior to July 1, 2017, and that a borrower defense asserted pursuant to this section will be subject to the procedures in proposed § 685.222(e) to (k); • Amend § 685.206 to remove the period of limitation on the Secretary's ability to recover from institutions the amount of the losses incurred by the Secretary on loans to which an approved borrower defense applies; • Amend § 685.206 to clarify that a borrower defense may be asserted as to an act or omission of the school that relates to the making of the loan or the provision of educational services that would give rise to a cause of action against the school under applicable State law; • Add a new borrower defense section at § 685.222 that applies to loans first disbursed on or after July 1, 2017; • Provide in § 685.222(a) that a borrower defense may be established if a preponderance of the evidence shows that the borrower has a borrower defense claim that relates to the making of the borrower's Direct Loan or the provision of educational services and meets the requirements in § 685.222(b), (c), or (d); • Provide in § 685.222(a) that a violation by a school of an eligibility or compliance requirement in the HEA or its implementing regulations is not a basis for a borrower defense; • Define in § 685.222(a) the terms “borrower” and “borrower defense”; • Amend the definition of “misrepresentation” in § 668.71 to define a misleading statement as one that “includes any statement that has the likelihood or tendency to mislead under the circumstances” and to include “any statement that omits information in such a way as to make the statement false, erroneous, or misleading”; • Establish in § 685.222(b), (c), and (d) a new Federal standard upon which a borrower defense may be based—a judgment against the school, a breach of contract by the school, or a substantial misrepresentation by the school; • Provide in § 685.222(d)(2) that in determining whether a school made a substantial misrepresentation, the Secretary may consider certain factors as to whether the reliance of a borrower on the misrepresentation was reasonable; • Establish in § 685.222(e) a procedure under which an individual borrower may assert a borrower defense; • Provide in § 685.222(f) a general description of a group borrower defense claim process, including the conditions under which the Secretary may allow a claim to proceed without receiving an application; • Establish in § 685.222(g) and (h) processes for borrower defense claims made by groups of borrowers with respect to closed schools and open schools, respectively; • Specify in § 685.222(i) that the relief granted to a borrower with an approved borrower defense is based on the facts underlying the borrower's claim; • Require in § 685.222(j) and (k) cooperation by the borrower in any borrower defense proceeding and, upon the granting of relief to a borrower, provide for the transfer to the Secretary of the borrower's right to recovery against third parties; • Add a new paragraph (k) to § 685.212 to include an approved borrower defense among the reasons for a discharge of a loan obligation, and to address borrower defense claims on Direct Consolidation Loans; • Amend § 685.205 to expand the circumstances under which the Secretary grants forbearance without requiring documentation from the borrower to include periods of time when a borrower defense has been asserted and is under review; • Amend § 685.300 to prevent schools from requiring that students first engage in a school's internal complaint process before contacting accrediting and government agencies about the complaint; prohibit the use of pre-dispute mandatory arbitration agreements by schools; prohibit the use of class action lawsuit waivers; and require schools to disclose to and notify the Secretary of arbitration filings; • Clarify in § 685.308 that the Secretary may recover from the school losses from loan discharges, including losses incurred from approved borrower defenses; • Amend § 668.171 to include conditions and events that trigger a requirement that the school provide financial protection, such as a letter of credit. Such conditions and events include incurring significant amounts of liability in recent years for borrower defense claim losses, a school's inability to pay claims, and events that would compromise a school's ability to continue its participation in the title IV, HEA programs; • Require in § 668.41 a proprietary school with a student loan repayment rate that is less than or equal to zero percent to place a Department-issued plain language warning on its Web site and in advertising and promotional materials, as well as to provide the warning to prospective and enrolled students; • Require in § 668.41 that a school disclose to prospective and enrolled students if it is required to provide financial protection, such as a letter of credit, to the Department; • Amend § 668.175 to state the amounts of financial protection, such as letters of credit, required in the event of particular occurrences; • Clarify in § 668.90 when a hearing official must uphold the limitation or termination requested by the Secretary for disputes related to the amount of financial protection, such as a letter of credit, for a school's failure under the financial responsibility standards; • Clarify in § 668.93 that a limitation sought by the Secretary on a school's participation in title IV, HEA programs may include a change in participation from fully certified to provisionally certified; • Amend §§ 674.61, 682.402, 685.212, and 686.42 to allow for a death discharge of a loan or TEACH Grant service obligation to be granted based on an original or certified copy of a death certificate that is submitted electronically or sent by facsimile transmission, or through verification of death in an electronic Federal or State database that is approved for use by the Secretary; • Amend §§ 668.14(b), 674.33(g), 682.402(d), and 685.214(f) to increase outreach by the Secretary and schools and make more information available to borrowers eligible for a closed school discharge so that they are aware of this option; • Amend § 685.215 to update and expand the existing categories of false certification discharge to include the improper certification of eligibility of a student who is not a high school graduate and false certification of a borrower's academic progress; • Amend § 682.211 to require lenders to grant a mandatory administrative forbearance for borrowers who have filed a borrower defense claim with the Secretary with the intent of seeking relief under § 685.212(k) after consolidating into the Direct Loan Program; • Update the provisions in § 30.70 to reflect the increased debt resolution authority provided in Public Law 101-552 that authorizes the Department to resolve debts up to $100,000 without approval from the Department of Justice (DOJ) as well as other changes to the Department's claim resolution authority; • Amend § 685.209 by making technical corrections and clarifying changes to the PAYE and REPAYE repayment plan regulations; • Amend § 685.220 to allow a borrower to obtain Direct Consolidation Loan, if the borrower consolidates any of the eligible loans listed in § 685.220(b); and • Clarify in §§ 682.202, 682.405, and 682.410 that guaranty agencies and FFEL Program lenders are not permitted to capitalize outstanding interest on FFEL loans when the borrower rehabilitates a defaulted FFEL loan; and • Amend § 685.200 to codify the Department's current practice regarding the elimination or recalculation of a subsidized usage period or the restoration of interest subsidy under the 150 Percent Direct Subsidized Loan Limit when a Direct Subsidized Loan is discharged. Significant Proposed Regulations We group major issues according to subject, with the applicable sections of the proposed regulations referenced in parentheses. We discuss other substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address proposed regulatory provisions that are technical or otherwise minor in effect. Borrower Defenses (§§ 668.71, 685.205, 685.206, and 685.222) Background: The proposed regulations address several topics related to the administration of title IV, HEA student aid programs and benefits and options for borrowers. The Department first implemented borrower defense regulations for the Direct Loan Program in the 1995-1996 academic year to protect borrowers. The Department's original intent was for this rule to be in place for the 1995-1996 academic year, and then to develop a more extensive rule for both the Direct Loan and FFEL Loan programs through negotiated rulemaking in the following year. However, based on the recommendation of non-Federal negotiators in the spring of 1995, the Secretary decided not to develop further regulations for the Direct Loan and FFEL programs. 60 FR 37768. As a result, the regulations have not been updated in two decades to establish appropriate processes or other necessary information to allow borrowers to effectively utilize their options under the borrower defense regulation. In May 2015, Corinthian, a publicly traded company operating numerous postsecondary schools that enrolled over 70,000 students at more than 100 campuses nationwide, filed for bankruptcy. Corinthian collapsed under deteriorating financial conditions and while subject to multiple State and Federal investigations, one of which resulted in a finding by the Department that the college had misrepresented its job placement rates. Upon the closure of Corinthian, which included Everest Institute, Wyotech, and Heald College, the Department received thousands of claims for student loan relief from Corinthian students. The Department is committed to ensuring that students harmed by Corinthian's fraudulent practices receive the relief to which they are entitled under the current closed school and borrower defense regulations. The Department appointed a Special Master in June 2015 to create and oversee a process to provide debt relief for these Corinthian borrowers who applied for Federal student loan discharges based on claims against Corinthian. The current borrower defense regulation, which has existed since 1995 but has rarely been used, requires a borrower to demonstrate that a school's acts or omissions would give rise to a cause of action under “applicable State law.” The regulation is silent on the process a borrower follows to assert a borrower defense claim. The landscape of higher education has changed significantly over the past 20 years. The role of distance education in the higher education sector has grown substantially. In the 1999-2000 academic year, about eight percent of students were enrolled in at least one distance education course; by the 2007-2008 academic year, that number had grown to 20 percent. 1 Recent IPEDS data indicate that in the fall of 2013, 26.4 percent of students at degree-granting, title IV-participating institutions were enrolled in at least one distance education class. 2 Much of this growth occurred within and coincided with the growth of the proprietary higher education sector. In the fall of 1995, degree-granting, for-profit institutions enrolled approximately 240,000 students. In the fall of 2014, degree-granting, for-profit schools enrolled over 1.5 million students. 3 These changes to the higher education industry have allowed students to enroll in colleges based in other States and jurisdictions with relative ease. 1 Learning at a Distance: Undergraduate Enrollment in Distance Education Courses and Degree Programs ( http://nces.ed.gov/pubs2012/2012154.pdf ). 2 2014 Digest of Education Statistics: Table 311.15: Number and percentage of students enrolled in degree-granting postsecondary institutions, by distance education participation, location of student, level of enrollment, and control and level of institution: Fall 2012 and fall 2013. 3 2015 Digest of Education Statistics: Table 303.10: Total fall enrollment in degree-granting postsecondary institutions, by attendance status, sex of student, and control of institution: Selected years, 1947 through 2025— http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=yes . These changes have had an impact on the Department's ability to apply its borrower defense regulations. The current borrower defense regulations do not identify which State's law is considered “applicable” State law on which the borrower's claim can be based. 4 Generally, the regulation was assumed to refer to the laws of the State in which the institution was located; we had little occasion to address differences in protection for borrowers in States that offer little protection from school misconduct or borrowers who reside in one State but are enrolled via distance education in a program based in another State. Some States have extended their rules to protect these students, while others have not. As a result of the difficulties in application and interpretation of the current State law standard, as well as the lack of clarity surrounding the procedures that apply for borrower defense, the Department took additional steps to improve the borrower defense claim process. 4 In the few instances in which claims have been recognized under current regulations, borrowers and the school were typically located in the same State. In a Federal Register notice published on October 20, 2015 (80 FR 63478), the Department announced its intent to establish a negotiated rulemaking committee to develop proposed regulations that establish, among other items, the criteria that the Department will use to identify acts or omissions of an institution that constitute, for borrowers of Federal Direct Loans, a borrower defense, including a Federal standard, the procedures to be used for a borrower to establish a borrower defense, and the standards and procedures that the Department will use to determine the liability of the institution for losses arising from approved borrower defenses. We propose to create a new § 685.222, and amend §§ 668.71, 685.205, and 685.206, to establish, effective July 1, 2017, a new Federal standard for borrower defenses, new limitation periods for asserting borrower defenses, and processes for the assertion and resolution of borrower defense claims. In the following sections, we describe in more detail these proposed changes and other clarifying changes proposed to improve the borrower defense process. Borrower Defenses—General (§ 685.222(a)) Statute: Section 455(h) of the HEA authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan. Section 487 of the HEA provides that the Secretary can take enforcement action against an institution participating in the title IV, HEA programs that substantially misrepresents the nature of the institution's education program, its financial charges, or the employability of its graduates. Current Regulations: Section 685.206(c) establishes the conditions under which a Direct Loan borrower may assert a borrower defense, the relief afforded by the Secretary in the event the borrower's claim is successful, and the Secretary's authority to recover from the school any loss that results from a successful borrower defense. Specifically, § 685.206(c) provides that a borrower defense may be asserted based upon any act or omission of the school that would give rise to a cause of action against the school under applicable State law. The current regulations in § 685.206(c) are described in more detail under “Borrower Responsibilities and Defenses (34 CFR 685.206).” Proposed Regulations: Proposed § 685.222(a) would provide that borrower defense claims asserted by a borrower for Direct Loans first disbursed before July 1, 2017, are considered by the Secretary in accordance with the provisions of § 685.206(c), while borrower defense claims asserted by a borrower for Direct Loans first disbursed on or after July 1, 2017, will be considered by the Secretary in accordance with the provisions of § 685.222. For borrower defense claims asserted by a borrower for Direct Loans first disbursed on or after July 1, 2017, proposed § 685.222 would establish a new Federal standard and new limitation periods. Proposed § 685.222 would also establish a process for the assertion and resolution of all borrower defense claims—both those made under § 685.206(c) for Direct Loans first disbursed prior to July 1, 2017, and for those made under proposed § 685.222. We describe the proposed regulations relating to the new Federal standard and new limitation periods under “Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 CFR 668.71),” and the borrower defense claim process under “Process for Individual Borrowers (34 CFR 685.222(e)),” “Group Process for Borrower Defenses—General (34 CFR 685.222(f)),” “Group Process for Borrower Defenses--Closed School (34 CFR 685.222(g)),” and “Group Process for Borrower Defense Claims--Open School (34 CFR 685.222(h)).” For borrower defense claims asserted by a borrower for Direct Loans first disbursed on or after July 1, 2017, proposed § 685.222(a)(2) would provide that a preponderance of the evidence must show that the borrower has a borrower defense that relates to the making of the borrower's Direct Loan or the provision of educational services by the school to the student and that meets the requirements under § 685.222(b), (c), or (d), which are described in detail under ”Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 CFR 668.71).” Section 685.222(a)(3) would clarify that a violation by the school of an eligibility or compliance requirement in the HEA or its implementing regulations is not a basis for a borrower defense unless that conduct would by itself, and without regard to the fact that the conduct violated an HEA requirement, give rise to a cause of action against the school under either applicable State law or under the new Federal standard, whichever is applicable depending on the first disbursement date of the Direct Loan in question. Proposed § 685.222(a)(4) would define “borrower” and “borrower defense.” Under the proposed definitions, “borrower” would mean the borrower and, in the case of a Direct PLUS Loan, the student and any endorsers. Under proposed § 685.222(a)(5), “borrower defense” would include one or both of the following: a defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and a right to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part. If the borrower asserts both a borrower defense under § 685.222 and any other objection to an action of the Secretary with regard to the Direct Loan at issue (such as a claim for a closed school discharge or false certification discharge), the Secretary would notify the borrower of the order in which the Secretary considers the borrower defense and any other objections. The order in which the Secretary will consider objections, including borrower defense, would be determined by the Secretary as appropriate under the circumstances. Reasons: We propose to establish in § 685.222 a new Federal standard and new limitation periods for borrower defense claims asserted with respect to loans first disbursed after the expected effective date of these proposed regulations—July 1, 2017—as well as a process for the assertion and resolution of all borrower defense claims, both those made under proposed § 685.206(c) and those made under proposed § 685.222. The Department believes that the proposed changes could reduce the number of borrowers who are struggling to meet their student loan obligations. During the public comment periods of the negotiated rulemaking sessions, many public commenters who were borrowers mentioned that they believed that they had been defrauded by their institutions of higher education and were unable to pay their student loans or obtain debt relief under the current regulations. For instance, many of these borrowers stated that they had relied upon the misrepresentation by their school as to employment outcomes, but later found out that they were unable to secure employment as had been represented to them before their enrollment. We discuss more specifically our reasons for adopting a new Federal standard and limitation periods under the discussion of “Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 CFR 668.71).” We discuss our reasons for establishing a borrower defense claim process under “Process for Individual Borrowers (34 CFR 685.222(e),” “Group Process for Borrower Defenses—General (34 CFR 685.222(f),” “Group Process for Borrower Defenses—Closed School (34 CFR 685.222(g),” and “Group Process for Borrower Defense Claims—Open School (23 CFR 685.222(h).” We explain why the borrower defense regulations apply only to the Direct Loan Program under “Discharge of a Loan Obligation (§ 685.212).” Proposed § 685.222(a) would establish provisions of general applicability for borrower defense claims. As noted above, we would clarify in paragraphs (a) and (b) of that section that borrower defense claims for loans disbursed before July 1, 2017, are made under § 685.206(c) and that borrower defense claims for loans disbursed on or after July 1, 2017, are made under proposed § 685.222. Although proposed § 685.206(c) also would specify that it applies to borrower defense claims for loans disbursed before July 1, 2017, we believe that also stating the general framework in § 685.222 would help eliminate any confusion as to which standard applies. In proposed § 685.222(a)(2) and (5), we would establish the basic elements of borrower defense claims for loans disbursed on or after July 1, 2017. Specifically, proposed § 685.222(a)(2) and (5) would require that a borrower defense claim: • Is supported by a preponderance of the evidence; • Relates to the making of the borrower's Direct Loan or the provision of educational services; and • Meets the requirements under paragraph (b), (c), or (d) of the section. In addition, proposed § 685.222(a)(2) would clarify that a claim may be brought by a borrower to discharge amounts owed to the Secretary on a Direct Loan, in whole or in part, or to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part, or both. A claim is supported by a “preponderance of the evidence” if there is sufficient evidence produced to persuade the decision maker that it is more likely than not that something happened or did not happen as claimed. In practice, the decision maker in a borrower defense proceeding would measure the value, or weight, of the evidence (including attestations, testimony, documents, and physical evidence) produced to prove that the borrower defense claim as alleged is true. We believe this evidentiary standard is appropriate as it is the typical standard in most civil proceedings. Additionally, the Department uses a preponderance of the evidence standard in other processes regarding borrower debt issues. See 34 CFR 34.14(b), (c) (administrative wage garnishment); 34 CFR 31.7(e) (Federal salary offset). We believe that this evidentiary standard strikes a balance between ensuring that borrowers who have been harmed are not subject to an overly burdensome evidentiary standard and protecting the Federal government, taxpayers, and institutions from unsubstantiated claims. We discuss the types of evidence that may be presented in support of a claim under “Process for Individual Borrowers (34 CFR 685.222(e)).” Proposed § 685.222 would clarify that, whether a borrower defense is brought under the standard described in § 685.206(c) or the standards in proposed § 685.222(b), (c), and (d), the Department's position is that it will acknowledge a borrower defense asserted under the regulations “only if the cause of action directly relates to the loan or to the school's provision of educational services for which the loan was provided.” 60 FR 37768, 37769. Such claims may include, for example, fraud in the making of the Direct Loan in the course of student recruitment or a failure to provide educational services. In some circumstances, this may include post-enrollment services like career advising or placement services. The Department does not recognize as a defense against repayment of the loan a cause of action that is not directly related to the loan or to the provision of educational services, such as personal injury tort claims or actions based on allegations of sexual or racial harassment. Id. The proposed language is consistent with this longstanding position and is also reflected in similar proposed language for § 685.206(c). Non-Federal negotiators also requested clarification on whether borrower defenses may be asserted as to tort claims asserting that educational institutions and their employees breached their duty to educate students adequately (otherwise known as “educational malpractice”), or to issues relating to academic and disciplinary disputes. Courts that have considered claims characterized as educational malpractice have generally concluded that State law does not recognize such claims. 5 The Department does not intend in these regulations to create a different legal standard, and for existing loans would apply that same principle under § 685.206(c), and would maintain that same position in applying the standards proposed in § 685.222. Claims relating to the quality of a student's education or matters regarding academic and disciplinary disputes within the judgment and discretion of a school are outside the scope of the borrower defense regulations. The Department recognizes, however, that in certain circumstances, such as where a school may make specific misrepresentations about its facilities, financial charges, programs, or employability of its graduates, such misrepresentations may function as the basis of a borrower defense as opposed to being a claim regarding educational quality. 6 Additionally, a breach of contract borrower defense may be raised where a school has failed to deliver specific obligations, such as programs and services, it has committed to by contract. The Department also notes that the limitations of the scope of the borrower defense regulations should not be taken to represent any view that other issues are not properly the concern of the Department as well as other Federal agencies, State authorizers and other State agencies, accreditors, and the courts. 5 See Bell v. Board of Educ. of City of West Haven, 55 Conn. App. 400, 739 A.2d 321, 139 Ed. Law Rep. 538 (1999), noting that the vast majority of courts have refused to recognize a cause of action for educational malpractice; Sain v. Cedar Rapids Cmty. Sch. Dist., 626 NW.2d 115, 121 (Iowa 2001) (Educational malpractice almost universally rejected as a cause of action). 6 See, e.g., Sain v. Cedar Rapids Cmty. Sch. Dist., 626 NW.2d 115, 121 (Iowa 2001), recognizing that tort of negligent misrepresentation applicable in education context. With regard to the other required elements of a borrower defense claim, we discuss our reason for requiring a borrower defense to meet the requirements under paragraphs (b), (c), and (d) of proposed § 685.222 under “Federal Standard and Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 CFR 668.71).” Proposed § 685.222(a)(3) would set forth the Department's longstanding position that an act or omission by the school that violates an eligibility or compliance requirement in the HEA or its implementing regulations does not necessarily affect the enforceability of a Federal student loan obtained to attend the school, and is not, therefore, automatically a basis for a borrower defense. 7 The HEA vests the Department with the sole authority to determine and apply the appropriate sanction for HEA violations. A school's act or omission that violates the HEA may, of course, give rise to a cause of action under other law, and that cause of action may also independently constitute a borrower defense claim under § 685.206(c) or proposed § 685.222. For example, advertising that makes untruthful statements about placement rates violates section 487(a)(8) of the HEA, but may also give rise to a cause of action under common law based on misrepresentation 8 or constitute a substantial misrepresentation under the new Federal standard and, therefore, constitute a basis for a borrower defense claim. 7 As stated by the Department in 1993: [The Department] considers the loss of institutional eligibility to affect directly only the liability of the institution for 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 FR 13337. Armstrong v. Accrediting Council for Continuing Educ. & Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999), opinion amended on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999) (rejecting claim of mistake of fact regarding institutional accreditation as grounds for rescinding loan agreements). 8 See, e.g., Moy v. Adelphi Inst., Inc., 866 F. Supp. 696, 706 (E.D.N.Y. 1994) (upholding claim of common law misrepresentation based on false statements regarding placement rates.) In proposed § 685.222(a)(4), we propose to define “borrower” to provide clarity and to include all parties who may be responsible for repaying the Secretary for a Direct Loan to which a borrower defense claim relates or who are otherwise harmed. In proposed § 685.222(a)(5), “borrower defense” is defined to include one or both of the following: A defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and a right to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part. Currently, the existing regulation for borrower defense at § 685.206(c) allows for reimbursement of amounts paid towards a loan as possible further relief, in addition to a discharge of any remaining loan obligation, for approved borrower defenses. The Department believes that the proposed definition will more accurately capture borrowers' requests for and the Secretary's ability to offer relief through the borrower defense process—for both a discharge of any remaining loan obligation and for reimbursement of amounts paid to the Secretary for the loan that is the subject of an approved borrower defense. Federal Standard and Limitation Periods (§ 685.222(b), (c), and (d) and § 668.71) Statute: Section 455(h) of the HEA authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan. Section 487 of the HEA provides that institutions participating in the title IV, HEA programs shall not engage in substantial misrepresentation of the nature of the institution's education program, its financial charges, or the employability of its graduates. Current Regulations: Section 685.206(c) provides that a borrower defense may be asserted based upon any act or omission of the school that would give rise to a cause of action against the school under applicable State law. The current regulations in § 685.206(c) are described in more detail under “Borrower Responsibilities and Defenses (34 CFR 685.206).” Subpart F of the Student Assistance General Provisions establishes the types of activities that may constitute substantial misrepresentation by an institution and defines “misrepresentation” and “substantial misrepresentation.” “Misrepresentation” is defined in proposed § 668.71(c) as a false, erroneous, or misleading statement that an eligible institution, one of its representatives, or any eligible institution, organization, or person with whom the eligible institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, makes directly or indirectly to a student, prospective student, a member of the public, an accrediting agency, a State agency, or the Secretary. Under the proposed regulations, we would clarify that a misleading statement also includes any statement that has the likelihood or tendency to deceive. A statement is any communication made in writing, visually, orally, or through other means. “Misrepresentation” also includes the dissemination of a student endorsement or testimonial that a student gives either under duress or because the institution required the student to make such an endorsement or testimonial to participate in a program. “Substantial misrepresentation,” also defined in § 668.71(c), means “any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person's detriment.” Proposed Regulations: Proposed § 685.222(b), (c), and (d) would establish a new Federal standard for a borrower defense. Proposed § 685.222(b) would provide that if a borrower has submitted for consideration a nondefault, favorable contested judgment against the school based on State or Federal law from a court or administrative tribunal of competent jurisdiction for relief, the judgment might serve as a basis for a borrower defense. This would apply regardless of whether the judgment was obtained by the borrower as an individual or member of a class, or was obtained by a State attorney general (State AG) or other governmental agency. Judgments that could form the basis of a borrower defense under this section would not be limited to causes of action based on breach of contract or a substantial misrepresentation under § 685.222(c) or (d), respectively. Rather, they could also be based on other causes of action under State or Federal law, provided that the claim relates to the making of the borrower's Direct Loan for enrollment at the school, or the provision of educational services for which the loan was provided. There would be no time limitation on a borrower's ability to assert a borrower defense based on such a judgment. Proposed § 685.222(c) would define the conditions under which a breach of contract might be the basis for a borrower defense and specify the limitation period for recovering payments previously made on the loan in connection with such a claim. Under proposed § 685.222(c), a borrower would have a borrower defense if the school that the borrower received a Direct Loan to attend failed to perform its obligations under the terms of a contract with the student. A borrower would be permitted to assert, at any time, a claim based on breach of contract as a defense to repayment of the amount still outstanding on the loan. A borrower would be permitted to assert that same claim as grounds for recovery of amounts previously collected by the Secretary not later than six years after the breach by the school of its contract with the student. Proposed § 685.222(d) would establish the conditions under which a substantial misrepresentation might serve as the basis for a borrower defense, and the limitation period for recovering payments previously made on the loan. Under proposed § 685.222(d), a borrower would have a borrower defense if the school or any of its representatives, or any institution, organization, or person with whom the school has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation that the borrower reasonably relied on when the borrower decided to attend, or to continue attending, the school. “Substantial misrepresentation” would have the definition set forth in subpart F, as amended by these proposed regulations. The proposed regulations would modify the definition of misrepresentation in § 668.71(c) to replace the word “deceive” with “mislead under the circumstances.” The definition would also be expanded to specify that a misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading. Section 685.222(d) would also establish that a borrower may assert, at any time, a defense to repayment for amounts still owed on the loan to the Secretary, but may assert a right to recover funds previously collected by the Secretary no later than six years after the borrower discovers, or reasonably could have discovered, the information constituting the substantial misrepresentation. The definition of “substantial misrepresentation” would require a borrower to have reasonably relied on a misrepresentation to his or her detriment. Under proposed § 685.222(d), in determining whether a borrower's reliance on a misrepresentation was reasonable, the decision maker, whether a designated Department official or hearing official, as described in detail under “Process for Individual Borrowers (34 CFR 685.222(e)),” “Group Process for Borrower Defenses—General (34 CFR 685.222(f)),” “Group Process for Borrower Defenses—Closed School (34 CFR 685.222(g)),” and “Group Process for Borrower Defense Claims—Open School (34 CFR 685.222(h)),” could consider, among other things, if the school or its representatives or other specified parties engaged in conduct such as: • Demanding that the borrower make enrollment or loan-related decisions immediately; • Placing an unreasonable emphasis on unfavorable consequences of delay; • Discouraging the borrower from consulting an adviser, a family member, or other resources; • Failing to respond to the borrower's requests for more information, including about the cost of the program and the nature of any financial aid; or • Otherwise taking advantage of the borrower's distress or lack of knowledge or sophistication. Reasons: The current borrower defense standard in § 685.206(c) is wholly dependent upon State law and, as a result, may provide uneven relief to students affected by the same bad practices but who attended schools in different States; a Federal standard would help to ensure fair and equitable treatment of all borrowers. Moreover, the reliance upon State law presents a significant burden for borrowers who are making a threshold determination as to whether they may have a claim and for Department officials who must determine the applicability and interpretation of laws that may vary from one State to another. In crafting the Federal standard, the Department sought to incorporate not only the substantial misrepresentation regulation (34 CFR 668 subpart F), but also other causes of action upon which students had based complaints against schools in court cases. For example, the Federal standard maintains the borrower's ability to bring forward a claim based on a judgment determined by a court or administrative tribunal applying either State or Federal law. We also noted that a common claim that students had raised in lawsuits against postsecondary schools was breach of contract. 9 These bases for a borrower defense would ensure that the Federal standard provides effective relief opportunities for borrowers, and efficient administration of the process by which the Department and borrowers interpret and apply the standard, resulting in more timely resolution for all parties involved. However, we do not believe it would be appropriate to adopt a standard that would make the fact that the conduct violates an HEA requirement an automatic ground for a borrower defense, whether that claim is asserted directly or indirectly based on State law. Such conduct, to the extent it injures borrowers through substantial misrepresentation or a breach of contract, would already be covered by the proposed Federal standard. Moreover, it is not clear that any other such conduct forms an appropriate basis for loan discharge. Similarly, non-Federal negotiators suggested that the Department provide that all causes of action under State law constitute a basis for borrower defense. As explained previously, we believe that an approach based on State law would present a significant burden for borrowers and Department officials to determine the applicability and interpretation of States' laws and would increase the risk of uneven relief for similarly situated borrowers; therefore, we decline to adopt such a standard. 9 See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 129, 133 (3d Cir. 2011); Chenari v. George Washington Univ., No. CV 14-0929 (ABJ), 2016 WL 1170922 (D.D.C. Mar. 23, 2016). Non-Federal negotiators also proposed other bases for borrower defense, such as deceptive, unfair, or abusive conduct. We carefully considered such suggestions and decided that they were not appropriate for the borrower defense regulations. The Department believes it would face significant challenges in determining which cases of such conduct warrant relief. A wide variety of conduct can be considered deceptive, unfair, or abusive, under both State and Federal law, and characterizing particular conduct as falling under such standards would require the Department to engage in a nuanced application of complex legal doctrines that vary across jurisdictions and that often have not been subject to a degree of judicial development sufficient to make their application to the borrower defense context clear. Furthermore, some of the significant sources of law regarding such conduct would not easily transfer to the borrower defense context. Federal and State law empowers government agencies to pursue relief for deceptive and unfair conduct. 10 In exercising this authority, Federal and State agencies are charged with gathering facts about particular practices, and weighing appropriate policy considerations to determine whether the practice warrants the exercise of their authority under these laws. The borrower defense regulations, on the other hand, are directed necessarily toward claims by individuals, which should not be subject to public policy considerations. Nonetheless, we agree with the negotiators that deceptive, unfair, or abusive practices that may not otherwise constitute a misrepresentation under the proposed definition should be taken into consideration when we are evaluating a borrower defense claim. See “Substantial misrepresentation: Reasonable reliance” in this section for a discussion of how we propose to consider such conduct for the purpose of a borrower defense claim based on a substantial misrepresentation. 10 See, e.g., 12 U.S.C. 5531, 15 U.S.C. 43 (authorities used or referenced, respectively, by the Consumer Financial Protection Bureau (CFPB) and State agencies, and the Federal Trade Commission (FTC)). For deceptive and unfair practices, the CFPB has stated that its standards are informed by the standards for the same terms as used by the FTC. See CFPB Bulletin 2013-7, “Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts,” (Jul. 10, 2013). The Department's substantial misrepresentation regulations (34 CFR part 668 subpart F) were informed by the FTC's policy guidelines on deception, and we believe they are more tailored to, and suitable for, use in the borrower defense context. The Department proposes that in the borrower defense context, certain factors addressing specific problematic conduct may be considered to determine whether a misrepresentation has been relied upon to a borrower's detriment, thus making the misrepresentation “substantial” under the proposed regulation. With regard to unfair and abusive conduct, we considered the available precedent and determined that it is unclear how such principles would apply in the borrower defense context as stand-alone standards. Such practices are often alleged in combination with misrepresentations and are not often addressed on their own by the courts. With this lack of guidance, it is unclear how such principles would apply in the borrower defense context. Moreover, many of the borrower defenses the Department has addressed or is considering have involved misrepresentations by schools, such as in the case of Corinthian. The Department believes that its proposed standard as described below will address much of the behavior arising in the borrower defense context. We believe that the standard that we are proposing appropriately addresses the Department's interests in accurately identifying and providing relief to borrowers for misconduct by schools; providing clear standards for borrowers, schools, and the Department to use in resolving claims; and avoiding for all parties the burden of interpreting other Federal agencies' and States' authorities in the borrower defense context. As a result, the Department declines to adopt standards for relief based on unfair and abusive conduct. However, we note that actions against institutions may be taken, and borrowers may have avenues of relief outside of the Department, under other Federal or State statutes based on unfair and abusive conduct, which may result in State or Federal court judgments. Because the Department does not adopt the unfair and abusive conduct as a Federal borrower defense standards unless reduced to a contested judgment against the school under proposed § 685.222(b), the Department does not consider its own findings and determinations in the borrower defense context for the proposed standards in § 685.222 to be dispositive or controlling for actions brought by any other Federal or any State agency in the exercise of their power under the statutes on which they rely. We intend that, to the extent that borrowers fail to establish a claim under the regulations proposed here, such a determination does not affect the ability of another agency to obtain relief under a different standard that the agency is authorized to apply. We note that the Department commonly uses the term “hearing official” in its regulations, such as 34 CFR subparts G and H (proceedings for limitation, suspension, termination and fines, and appeal procedures for audit determinations and program review determinations). The hearing officials referred to in the proposed regulations would make decisions and determinations independent of the Department official described in proposed § 685.222(e) to (h). Although here we use the term “Department official” to describe the individual who reviews and decides an individual borrower defense claim pursuant to § 685.222(e), for the group processes described in proposed § 685.222(g) and (h), we use the term “Department official” to describe the individual who performs a very different role. In the group process, the “Department official” is the individual who would initiate the group borrower defense process and who would present evidence and respond to any argument for the group borrower defense claimants. The decision would then be made by the hearing official, who is independent of the Department official who asserts the claims, and that decision would be based on the merits of the borrower defense claim as described in the proposed regulations, and not upon other considerations. Judgment Against a School As discussed, the Department is declining to adopt a standard based on applicable State law for loans first disbursed after July 1, 2017, due, in part, to the burden to borrowers and Department officials in interpreting and applying States' laws. While we believe that the proposed standards will capture much of the behavior that can and should be recognized as the basis for borrower defenses, it is possible that some State laws may offer borrowers important protections that do not fall within the scope of the Department's Federal standard. To account for the situations in which this is the case, the proposed regulations would provide, as a basis for a borrower defense, nondefault, contested judgments obtained against a school based on any State or Federal law, whether obtained in a court or administrative tribunal of competent jurisdiction. Under the proposed regulations, a borrower may use such a judgment as the basis for a borrower defense if the borrower was personally affected by the judgment, that is, the borrower was a party to the case in which the judgment was entered, either individually or as a member of a class that obtained the judgment in a class action lawsuit. As with all the borrower defense standards, to support a borrower defense claim, the judgment would be required to pertain to the making of a Direct Loan or the provision of educational services to the borrower. We believe that the proposed standard would allow for recognition of State law and other Federal law causes of action, but would also reduce the burden on the Department and borrowers of having to make determinations on the applicability and interpretation of those laws. We also propose that a judgment obtained by a governmental agency, such as a State AG or a Federal agency, that a borrower can show relates to the making of the borrower's Direct Loan or the provision of educational services to the borrower, may also serve as a basis for a borrower defense under the standard, whether the judgment is obtained in court or in an administrative tribunal. Governmental agencies may not specifically join individual constituents as parties to a lawsuit; however, any resulting judgment may result in determinations that an act or omission of a school was in violation of State or Federal law and thus be the basis of a borrower defense for an individual within the group identified as injured by the conduct for which the government agency brought suit. In considering a borrower defense claim, for either an individual borrower under proposed § 685.222(e) for individually-filed applications or for a group of borrowers under proposed § 685.222(f),(g), and (h), based upon a favorable judgment obtained in court or an administrative tribunal, the Department will consider the relief to which that judgment entitles the borrower based upon the judgment's findings regarding the school's liability under the state or Federal law at issue, whether or not the form and amount of relief was prescribed as part of the favorable judgment. Depending on the facts and circumstances of the judgment, the Department may determine relief as described in proposed § 685.222(i). 11 The Department will also consider to what degree the claimant has already received relief as an outcome of the judgment at issue, if any. 11 For example, the judgment may be one obtained by an enforcement agency and may not identify or require any individual as a party for whom particular relief is required; the judgment may simply provide injunctive relief, barring a particular practice as violating applicable law, but not addressing or requiring any relief for individuals; or the judgment may find liability, but also determine that the affirmative claim is time-barred. The Department is aware that many court cases may not result in contested, nondefault judgments, for reasons such as settlement. However, we are proposing to limit the basis for a borrower defense under § 685.222(b) to nondefault, contested judgments in courts or administrative tribunals. The Department is seeking to establish a process that results in accurate determinations of borrower defenses after a careful consideration of evidence. We are proposing to consider decisions made by courts and administrative tribunals, as the decision-making process in those forums similarly involves a consideration of evidence from all parties and the decision is one that has been made on the merits of the claim. By limiting this standard to nondefault, contested judgments, we would reduce or eliminate the need for the Department to evaluate the merit of borrower claims based on State law by including only those judgments that are in fact the product of litigation in which both claimant and school challenged the contentions of the opponent and a tribunal decided the case on the merits. The standard would echo the principle of res judicata, whereby parties are bound by a judgment entered by a court of competent jurisdiction and may not challenge that judgment either before that tribunal or before a different tribunal. Default judgments generally do not involve the same level of factual and evidentiary evaluation, or provide a decision on the merits resulting from a contested hearing where all parties have had an opportunity to present evidence and arguments. Similarly, settlements do not require a decision maker to reach a decision after an evaluation of the evidence. As a result, we propose that judgments may form the basis of a borrower defense only if they are nondefault, contested judgments rendered by a court or administrative tribunal of competent jurisdiction. Although other court orders that do not rise to the level of a contested, nondefault judgment ( e.g., settlement or motion to dismiss orders) may not be used to satisfy the proposed judgment standard for borrower defense claims, the Department welcomes the submission of and will consider any such orders, other court filings, admissions of fact or liability, or other evidence used in such a court proceeding as evidence in the borrower defense process under the other proposed standards. The Department would also welcome the submission of and will consider any arbitration filings, orders, and decisions for consideration in the borrower defense process. Similarly, we recognize that a party to a suit or administrative proceeding may be barred from disputing a factual finding or issue decided in that proceeding if that fact or issue were to arise in a different case, even if the ruling on the fact or issue was not a final judgment on the merits resulting from a contested proceeding that meets the standard we propose here. We propose to take such findings and rulings on such specific facts and issues into account, and give them appropriate weight if principles of collateral estoppel would bar the school from disputing the matter. Breach of Contract In developing a new Federal borrower defense standard, we recognize that students enter into enrollment agreements and other contracts with the school to provide educational services and that borrowers have, over the years, asserted claims for relief against schools for losses arising from a breach of those contracts. 12 We therefore propose to include a separate ground for relief, based on a breach by the school of the contract with the borrower, because such claims may not necessarily fall within the scope of the substantial misrepresentation component of the Federal standard. 12 See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 129 (3d Cir. 2011). The terms of a contract between the school and a borrower will largely depend on the circumstances of each claim. For example, a contract between the school and a borrower may include an enrollment agreement and any school catalogs, bulletins, circulars, student handbooks, or school regulations. 13 13 In Ross v. Creighton University, 957 F.2d 410 (7th Cir. 1992), in describing the limits of a contract action brought by a student against a school, the court stated that there is “ `no dissent' ” from the proposition that “ `catalogues, bulletins, circulars, and regulations of the institution made available to the matriculant' ” become part of the contract. See 957 F.2d at 416 (citations omitted). See also Vurimindi, 435 F. App'x at 133 (quoting Ross ). A non-Federal negotiator requested that we limit the standard to material breaches of contract. 14 The Department anticipates that it may receive borrower defense claims regarding breaches of contract that may not be considered to be material breaches that would have warranted a cancellation of the contract between the borrower and the school. For example, a breach of contract may pertain to a school's failure to fulfill a specific contractual promise to provide certain training or courses, but the school may have otherwise performed its other obligations under its contract with the borrower. The Department is comfortable with its ability to grant relief commensurate to the injury to a borrower alleged under the breach of contract standard, which may constitute full relief or partial relief with respect to a borrower's Direct Loan. The Department's proposed methods for determining relief, which would require a consideration of available evidence and arguments by a Department official or a hearing official, as applicable, are discussed in more detail under “Borrower Relief (34 CFR 685.222(i) and Appendix A).” 14 See Modern Law of Contracts § 11:1 (quoting Andersen, A New Look at Material Breach in the Law of Contracts, 21 UC Davis L. Rev. 1073 (1988)) (“[M]ateriality is best understood in terms of the specific purpose of the cancellation remedy that material breach entails.”) The non-Federal negotiator also requested that we exclude claims for educational malpractice or claims regarding schools' academic standards. As explained earlier in this discussion, we decline to impose a materiality requirement, but would consider the circumstances underlying a breach of contract borrower defense and award relief that is commensurate with the injury to the borrower. We also explain under “Borrower Defenses—General (§ 685.222(a))”))” that the Department does not consider claims relating to educational malpractice or academic disputes to be within the scope of the proposed borrower defense regulations. Substantial Misrepresentation The proposed Federal standard for borrower defense based upon a substantial misrepresentation is predicated on existing regulations in the Student Assistance General Provisions (34 CFR 668 subpart F) that address misrepresentation. These existing regulations provide a clear framework regarding the acts or omissions that would constitute misrepresentations as they relate to the nature of educational programs, the nature of financial charges, and the employability of graduates. Under proposed § 685.222(d), to establish a borrower defense based on a substantial misrepresentation, a borrower must demonstrate that (1) there was a misrepresentation by the college made to the borrower, (2) the borrower reasonably relied on that substantial misrepresentation when he or she decided to attend, or to continue attending, the school, and (3) that reliance resulted in a detriment to the borrower. Substantial Misrepresentation: Misrepresentation We have proposed to revise the definition of “misrepresentation” in § 668.71 to provide clarity and specificity, as it is important that the definition of “misrepresentation,” whether for the Department's enforcement purposes or in the borrower defense context, capture the full scope of acts and omissions that may result in a borrower being misled about the provision of educational services or making of a Direct Loan. Specifically, we propose to replace the word “deceive” with “mislead under the circumstances.” In some contexts the word “deceive” implies knowledge or intent on the part of the school, which is not a required element in a case of misrepresentation. Although we stated that the Department “considers a variety of factors, including whether the misrepresentation was intentional or inadvertent” in the preamble to the final rule for subpart F, 75 FR 66915, we believe that this proposed change would more clearly reflect the Department's intent that a misrepresentation does not require knowledge or intent on the part of the school. A non-Federal negotiator at the negotiated rulemaking requested that specific intent be considered as an element of misrepresentation. As the Department explained in the preamble to the final rule for subpart F, 75 FR 66914, while the Department declines to include a specific intent element, the Department has always operated within a rule of reasonableness and has not pursued sanctions without evaluating the available evidence in extenuation and mitigation as well as in aggravation. Whether using the definitions in subpart F for the Department's enforcement purposes or for evaluating a borrower defense claim, we intend to continue to consider the circumstances surrounding any misrepresentation before determining an appropriate response. That said, the general rule is that an institution is responsible for the harm to borrowers caused by its misrepresentations, even if such misrepresentations cannot be attributed to institutional intent. We believe this is more reasonable and fair than having the borrower (or the Department) bear the cost of such injuries. It is also reflective of the consumer protection laws of many States. We also propose to add to the definition of “misrepresentation” a sentence addressing omissions, which would read, “Misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.” Some non-Federal negotiators were concerned about the use of the word “information” as opposed to “facts.” These non-Federal negotiators were concerned that the use of the word “facts” might imply a higher standard than would be required for a borrower to prove a substantial misrepresentation had occurred. Another non-Federal negotiator believed that a misrepresentation of “facts” more accurately described what should be required. Although we believe that the two words are effectively synonymous, we propose to use the word “information,” as this change was endorsed by most of the non-Federal negotiators. Non-Federal negotiators requested that the Department clarify what is meant by “misleading under the circumstances,” as used in the proposed definition of “misrepresentation.” One non-Federal negotiator asked whether the term “under the circumstances” was a reference to the use of the term by the Federal Trade Commission (FTC). In the 1983 FTC Policy Statement on Deception, the FTC clarified that, for a representation, omission, or practice to be deceptive, it must be likely to mislead reasonable consumers under the circumstances. 15 The FTC looks at the totality of the practice when determining how a reasonable recipient of the information would respond. If a representation is targeted to a specific audience, then the FTC determines the effect of the practice on a reasonable member of that group. We believe it is appropriate that, in reviewing a borrower defense claim based on a substantial misrepresentation, we similarly consider the totality of circumstances in which the statement or omission occurs, including the specific group at which a statement or omission was targeted, to determine whether the statement or omission was misleading under the circumstances. A statement made to a certain target group of students may not lead to reliance and injury; however, when the statement is made to a different target group that may not be the case. 15 FTC Policy Statement on Deception, 103 F.T.C. 110, 174 (1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)), available at www.ftc.gov/bcp/policystmt/ad-decept.htm . Moreover, we propose to include the language “under the circumstances” to clarify that, to constitute a substantial misrepresentation, the misleading statement or omission must have been made in a situation where the borrower or student should have been able to rely upon the school to provide accurate information. For example, if a student is speaking with a course instructor about her difficulties paying tuition and the course instructor advises her to meet with the financial aid office because “there are scholarships available,” that circumstance would most likely not create an expectation that the course instructor is assuring the student that she will receive a scholarship. However, if a student is speaking with a financial aid advisor and asks if she will receive scholarships to help cover the cost of her education and the financial aid advisor says, “Yes. Most of our students receive scholarships,” that statement may be considered misleading under the circumstances, given that the speaker is someone whose professional role is to provide students with guidance pertaining to student aid. Substantial Misrepresentation: Reasonable Reliance Although the definition of “substantial misrepresentation” in § 668.71 requires that the borrower reasonably relied on the misrepresentation, or could reasonably be expected to rely, proposed § 685.222(d) would require there to have been actual reasonable reliance. Section 668.71 refers to the Department's enforcement authority to impose fines, or limit, suspend, or terminate a school's participation in title IV, HEA programs. As an enforcement body acting in the public interest, the Department believes that it is appropriate for the Department to be able to stop misrepresentations even before any persons are misled, and thus to act upon misrepresentations that “could have been reasonably relied upon” by a person. However, borrower defenses relate to injuries to individual borrowers. Unlike the Department's interest in public enforcement of its regulations and laws, an individual borrower's interest in bringing a borrower defense is predicated upon the harm to the borrower. We also believe that an actual reliance requirement will protect the Federal Government, taxpayers, and institutions from unsubstantiated claims. As a result, we believe that it is appropriate to require that the evidence show that the misrepresentation at issue influenced the borrower, or led to the borrower's reliance on the misrepresentation, to the borrower's detriment. We note, however, that a rebuttable presumption of reasonable reliance may arise in claims brought for a group of borrowers, as we discuss in detail under “Group Process for Borrower Defenses—General (34 CFR 685.222(f)).” Generally, reasonable reliance refers to what a prudent person would believe and act upon if told something by another person. Moreover, reasonable reliance considers the representation or statement from the viewpoint of the audience the message is intended to reach--in this case, prospective or continuing students. Thus, in assessing whether a substantial misrepresentation has occurred, the Department would consider the facts of the case in the context of the audience. As discussed, the standard requires not just that a borrower has relied upon a misrepresentation to the borrower's detriment, but also requires that the reliance be reasonable. As discussed in the introduction to this “Reasons” section, non-Federal negotiators representing students and borrowers, consumer advocacy organizations, and legal assistance organizations that represent students and borrowers, advocated that the Federal standard include a provision for abusive practices on the part of a school, particularly as they relate to high pressure or aggressive sales tactics. We agree that there has been evidence of such conduct on the part of some schools, but believe it would be difficult to develop clear, consistent standards as to when such conduct, in the absence of any misrepresentation by the school, should give rise to a right of relief from the loans taken out to attend the school. However, we also believe that such high pressure or aggressive sales tactics may make borrowers more likely to rely upon a misrepresentation. As a result, we have determined that reliance on a misrepresentation may be appropriately viewed as more reasonable when the misrepresentation is made in the context of certain circumstances, including those that may be considered to be high pressure or aggressive sales tactics. To address these concerns, in proposed § 685.222(d) we include a non-exhaustive list of examples of factors that, if present in conjunction with a misrepresentation on the part of the school, would likely elevate that misrepresentation to a substantial misrepresentation. However, as proposed by the Department, the factors by themselves would not necessarily mandate a finding of substantial misrepresentation, nor would the absence of any of the factors defeat a borrower defense based on substantial misrepresentation. It may be entirely reasonable for a borrower to rely on a misrepresentation without any of these factors present. Rather, as proposed, the factors would be non-exhaustive examples of conduct that could be considered in a determination of whether a borrower's reliance on a misrepresentation was reasonable, even if such reliance would not have been reasonable in the absence of such conduct, thus making the misrepresentation substantial. Specifically, we looked at the borrower defenses before the Department and comments from non-Federal negotiators regarding issues such as schools making insistent demands of students to make commitments to enroll and the borrowers' lack of information and resources. As a result, we propose that a misrepresentation, when coupled with conduct that affects a borrower's understanding of his or her decision-making timeframe, such as demanding that the borrower make enrollment or loan-related decisions immediately or placing an unreasonable emphasis on unfavorable consequences of delay, may lead a borrower to reasonably rely upon the misrepresentation and, thus, elevate the misrepresentation to a substantial misrepresentation for the purposes of asserting a borrower defense. Similarly, conduct that affects a borrower's information-gathering regarding the risks and potential benefits of his or her decision, such as discouraging a borrower from consulting an advisor, a family member, or other resources or failing to respond to a borrower's reasonable requests for information, may lead a borrower to reasonably rely upon the misrepresentation for the purposes of asserting a substantial misrepresentation as a borrower defense. We also recognize that school conduct that takes advantage of the borrower's distress or lack of knowledge or sophistication may also elevate the misrepresentation to a substantial misrepresentation, by way of affecting a borrower's reasonable reliance on a misrepresentation, for the purposes of borrower defense. For example, a school may be found to have made statements that would not have been misleading to a borrower of average English ability; however, when made to a borrower with limited English proficiency in a way that takes advantage of the borrower's lack of knowledge or sophistication, the circumstances may warrant a borrower defense under the standard. As noted above, a non-Federal negotiator requested that the Department use a “justifiable” reliance standard. While a reasonable reliance standard looks to whether a reasonably prudent person would be justified in his or her reliance and may be measured against the behavior of other persons, the justifiable reliance standard is measured by reference to the plaintiff's capabilities and knowledge. 16 As discussed, the proposed standard would allow consideration of practices that would impact a specific borrower's understanding and reliance upon a misrepresentation in a way that would reference the borrower's understanding and knowledge. However, the Department believes that it is appropriate for the proposed standard to consider the perspective of not only the borrower, but of similarly situated borrowers, especially to the extent it is composed of other Direct Loan borrowers or potential Direct Loan borrowers who may be subject to the same misrepresentations by the school. As discussed under “Group Process for Borrower Defenses—General (34 CFR 685.222(f)),” “Group Process for Borrower Defenses--Closed School (34 CFR 685.222(g)),” and “Group Process for Borrower Defense Claims--Open School (34 CFR 685.222(h)),” in addition to proposing this regulation to provide relief for individual borrowers who have filed applications for relief, the borrower defense regulation also proposes that the Department may initiate a process for determinations as to both a school's liability and as to borrower defenses for a group of borrowers, which may include those who have not applied for relief. As discussed under “Group Process for Borrower Defenses—General (34 CFR 685.222(f)),” the Department anticipates that such proceedings, in which Secretary may recover from the school the amount of losses from granting borrower defense relief, will have a significant deterrent effect on the school and promote compliance among other schools in a way that will benefit other borrowers. By considering both the individual borrower's perspective and the perspective of similarly situated borrowers at the institution, we believe the Department official or hearing official, as applicable, would be able to determine an amount of relief that is fair to the borrower and protect the Department's general interest in other Direct Loan borrowers who have also attended the school and who may have been subject to the same misrepresentations. 16 See Restatement (Third) of Torts: Liab. for Econ. Harm § 11 TD No 2 (2014)(“[R]easonableness is measured against community standards of behavior. Justifiable reliance has a personalized character. It is measured by reference to the plaintiff's capabilities and knowledge; a plaintiff's sophistication may affect a court's judgments about what dangers were fairly considered obvious.”). The non-Federal negotiator also requested that we limit the standard to material misrepresentations. It is the Department's understanding that under Federal deceptive conduct prohibitions, a misrepresentation must be material for deception to occur. In this context, material misrepresentation involves information important to consumers, likely to affect the consumer's choice or conduct regarding a product or service. 17 The Department believes that a materiality element is not required in either the proposed amendments to the definition for the Department's enforcement authority under § 668.71 or as this definition is adopted for the purposes of the proposed Federal standard under § 685.222(d). In the context of the Department's enforcement authority, the Department previously declined in 2010 to adopt a materiality component, stating that the regulatory definition of “substantial misrepresentation” is “clear and can be easily used to evaluate alleged violations of the regulations.” 75 FR 66916. 17 See, e.g., F.T.C. Policy Statement on Deception, 103 F.T.C. at 182; see also Restatement (Second) of Torts § 538 (1977) (“The matter is material if (a) a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question; or (b) the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it.”). In adopting the definition of “substantial misrepresentation” for the purposes of borrower defense, the Department similarly believes that the definition is clear and can be easily used to evaluate borrower defenses. Moreover, a substantial misrepresentation in the borrower defense context incorporates similar concepts to materiality. Under proposed § 685.222(d), the borrower must show that he or she “reasonably relied” upon the misrepresentation at issue. As discussed above, generally materiality refers to whether the information in question was information to which a reasonable person would attach importance to, in making the decision at issue. Similarly, in determining whether the borrower reasonably relied on the misrepresentation, the Department would consider whether the misrepresentation related to information to which the borrower would reasonably attach importance in making the decision to enroll or continue enrollment at the school. As a result, the Department considers it unnecessary to add an explicit materiality element to the definition of “substantial misrepresentation,” for the purposes of claims under the borrower defense regulations. Substantial Misrepresentation: The Borrower's Detriment The definition of “substantial misrepresentation,” for the purpose of proposed § 685.222(d), would require that the borrower reasonably relied on the misrepresentation to the borrower's detriment. As noted previously, the proposed borrower defense regulations are intended to provide relief for individual borrowers for schools' wrongful conduct that led in a meaningful way to harm or injury to the borrower based upon the borrower's specific circumstances. We believe that a demonstration of detriment or injury to the borrower will protect the Federal government, taxpayers, and institutions from unsubstantiated claims. As a result, we believe that it is appropriate to require that a preponderance of the evidence demonstrate the misrepresentation at issue influenced the borrower, or led to the borrower's reliance on the misrepresentation, to the borrower's detriment. Limitation Periods For each of the bases for a borrower defense under the proposed Federal standard, the Department considered whether there should be a limitation on the time period during which borrower defense claims may be brought and, if so, what the limitation period should be. Because the availability of evidence for a borrower defense that is based on a judgment in a court or administrative tribunal is not a concern, as the only evidence required is the judgment itself, we propose no limitation period under proposed § 685.222(b) for those claims. However, for the bases for a borrower defense in proposed § 685.222(c) and (d), we believe a limitation period is appropriate. A limitation period for borrower defense claims based on a breach of contract or substantial misrepresentation, by encouraging borrowers to assert borrower defense claims while memories and evidence are fresh, would make the claim resolution process more reliable. When considering a limitation period that would provide for a reasonable amount of time during which a borrower might submit a claim, we also recognized that common law generally allows a debtor to assert claims from the same transaction as the loan at any time as a defense to repayment of the loan, but requires a debtor to assert any claim for recovery of payments already made within the deadlines that would apply had the debtor brought suit on the claim. Consistent with that generally applicable principle, we propose here that no limitation period would apply to borrower defense claims asserted under proposed § 685.222(c) or (d) as defenses to repayment of any outstanding loan obligation. To select an appropriate limit on the period during which a claim for recovery may be made, we looked to the existing limitation periods under State and Federal law for similar claims. With regard to a borrower defense claim based on a substantial misrepresentation, we considered, among other things, limitation periods applicable to consumer protection and fraud claims, as those claims often address misleading or deceptive conduct and are, thus, analogous to claims based on a substantial misrepresentation. The Department's research indicates that six years is one of the breach of contract limitation periods most commonly used by States, as well as the limitation period applicable to non-tort claims against the United States, 28 U.S.C. 2401(a). Because many non-Federal negotiators' discussions of school misconduct included discussions of fraud, the Department also considered existing limitation periods for fraud. Although limitation periods under State consumer protection laws vary, our research indicates that three years is one of the most common limitation periods used by the States. For claims for recovery of payments already made that are based on breach of contract, we propose a six-year limitation period that would begin upon the breach of contract. For claims for recovery of payments already made that are based on a substantial misrepresentation, we also propose six years as the limitation period, but the period would begin when a borrower discovers or should have reasonably discovered the facts that constitute the misrepresentation. Although six years is longer than the period afforded under many State laws for fraud and consumer protection, other States do provide a six-year limitation period for similar claims, and the Department believes a six-year period would provide sufficient time for a borrower to gather evidence related to a substantial misrepresentation. The non-Federal negotiators representing consumer advocates, legal assistance organizations, and State AGs suggested that no limitation period should apply to defenses to repayment of remaining amounts owed on a debt, under the legal principle of recoupment (asserting a claim as a defense to repayment). As noted earlier, we propose to adopt this position. Later, some non-Federal negotiators suggested that, notwithstanding the distinction under State and Federal law between recoupment and asserting a claim for an affirmative recovery of amounts previously paid, the Department should apply no limitation period to affirmative claims for recovery. In support of this position, they cited the Department's ability to collect on a Direct Loan until it is paid in full or discharged. Other non-Federal negotiators, however, expressed concerns about having no limitation period for borrower defense claims, stating that such an approach would result in significant difficulties for a school in responding to allegations due to a lack of documentary evidence and witnesses and would subject schools to broader liability than under the current borrower defense standard based upon State law under § 685.206(c). After careful consideration of the legal principles cited by the negotiators, we do not believe there is justification to depart from the requirements that Federal and State courts generally apply to affirmative claims to recover amounts already collected on a debt. We believe the proposed limitation periods are appropriate for the reasons stated above, regarding existing periods of limitation in State and Federal law and the Department's interest in the reliability of the claim resolution process. However, we seek comment on whether the Department should adopt different limitation periods for borrower defense claims under § 685.222(c) and (d), and, if so, what the limitation periods should be, what the supporting rationale for those periods would be, and why those other limitation periods would meet the objectives outlined in this section. Non-Federal negotiators asked the Department to clarify, with respect to the substantial misrepresentation limitation period, when a borrower would be deemed to have discovered, or when a borrower should have reasonably discovered, the facts constituting a substantial misrepresentation. For example, a borrower may learn of a substantial misrepresentation upon discussion with other students or borrowers, or it may be deemed that a borrower should have reasonably known of the facts underlying a substantial misrepresentation if facts concerning the misrepresentation are published in nationwide news articles. However, the borrower must demonstrate when the borrower discovered the facts underlying the specific substantial misrepresentation forming the basis of the borrower defense. For example, knowledge of one particular problem at a school would not necessarily give notice of other, unrelated problems. Thus, student warnings issued for gainful employment programs under 34 CFR 668.410 or relating to repayment rate under proposed § 668.41(h), or the disclosure of proposed financial protections, such as a letter of credit, under proposed § 668.41(i), would warn students about whether a program could close soon, the repayment outcomes of borrowers at the school, or the school's financial risk, but would not put students on notice of misrepresentations by the school of matters other than earnings and debt of graduates or financial soundness. To demonstrate that the borrower is asserting a borrower defense within six years of discovery of the facts on which the claim is based, the borrower should explain in the borrower defense application how he or she learned of the substantial misrepresentation and include any applicable documents or other information demonstrating the source of the knowledge. Again, we note that, under the proposed regulations, the borrower may assert a claim based on substantial misrepresentation solely for discharge of the remaining amount owed on the Direct Loan at any time. Process for Individual Borrowers (§ 685.222(e)) Statute: Section 455 of the HEA sets forth the terms and conditions of Direct Loan Program loans. Current Regulations: Section 685.206(c) states that borrowers have the right to assert borrower defenses, but does not establish any process for doing so. Proposed Regulations: Proposed § 685.222(e) would establish the process for an individual borrower to bring a borrower defense. Proposed § 685.222(e)(1) would describe the steps an individual borrower must take to initiate a borrower defense claim. First, an individual borrower would submit an application to the Secretary, on a form approved by the Secretary. In the application, the borrower would certify that he or she received the proceeds of a loan to attend a school; would have the opportunity to provide evidence that supports the borrower defense; and would indicate whether he or she has made a claim with respect to the information underlying the borrower defense with any third party, and, if so, the amount of any payment received by the borrower or credited to the borrower's loan obligation. The borrower would also be required to provide any other information or supporting documentation reasonably requested by the Secretary. The Secretary would provide notice of the borrower's application for a borrower defense to the school at issue. Proposed § 685.222(e)(2) would describe the treatment of defaulted and nondefaulted borrowers upon the Secretary's receipt of the borrower defense claim. If the borrower is not in default on the loan for which a borrower defense has been asserted, the Secretary would grant an administrative forbearance, notify the borrower of the option to decline the forbearance and to continue making payments on the loan, and provide the borrower with information about the availability of the income-contingent repayment plans under § 685.209 and the income-based repayment plan under § 685.221. If the borrower is in default on the loan for which a borrower defense has been asserted, the Secretary would suspend collection activity on the loan until the Secretary issues a decision on the borrower's claim; notify the borrower of the suspension of collection activity and explain that collection activity will resume if the Secretary determines that the borrower does not [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-14052. Public record. Not legal advice.