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Dept. of Education Issues Guidance on Arbitration Ban

Last month, the Department of Education issued guidance on implementation of its “borrower defense” final rule that was issued in November 2016 and the subject of litigation that resulted in an October 2018 federal district court ruling requiring the Department to implement the rule.

Among the final rule’s provisions is a ban on all predispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act.  A “borrower defense claim” is a claim based on an act of the school that relates to the making of a Direct Loan or the provision of education services for which the loan was provided, that is or could be asserted by the borrower as a defense to repayment under ED’s administrative process for seeking a discharge of the underlying payment obligation.  (A Direct Loan is a federal student loan made by the ED.)

Both mandatory and voluntary predispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses.  In addition, schools are prohibited from relying on any predispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to predispute arbitration or other agreements addressing class actions that were entered into before the final rule’s effective date.

The guidance addresses the following:

  • Scope of arbitration ban. The guidance states that the final rule does not prohibit a school from having and enforcing a mandatory predispute arbitration requirement or class action ban in connection with any claim that does not involve a “borrower defense claim” or is in connection with any claim asserted by a student who is not a Direct Loan borrower (i.e., a borrower with a federal student loan made by the ED).  The guidance explains when a claim is not a “borrower defense claim” and advises that a student can enter into a voluntary post-dispute agreement with a school to arbitrate a borrower defense claim.

  • Implementation of the final rule for existing predispute arbitration agreements and class action bans.  The guidance discusses mandatory predispute arbitration agreements or other predispute agreements addressing arbitration and class action bans entered into between the final rule’s original effective date (July 1, 2017) and the date of the guidance (March 15, 2019).  The ED indicates that such agreements cannot be enforced as to any borrower defense claim made by a Direct Loan recipient but recognizes that schools may need time to prepare new enrollment agreements that comply with the final rule. The guidance provides that schools are not required to issue new enrollment agreements to students who may have accepted a mandatory predispute arbitration provision that is no longer enforceable.  Instead, schools can give such students written notice regarding the unenforceability of such provisions.  The guidance gives schools the option of taking one of the following actions within 60 days of the guidance: (1) amending the mandatory predispute arbitration agreement and any provision in the agreement addressing class actions to contain the language specified in the final rule for such agreements and provisions, or (2) begin providing notice as specified in the final rule to students regarding the unenforceability of mandatory predispute arbitration agreement no later than at the point of exit counseling or the date on which the school files its initial response to a demand for arbitration or service of a complaint from a student who has not already received a notice or amended agreement.  The guidance provides that the final rule “is clear on the requirements for predispute arbitration agreements and other predispute agreements entered into after the 60-day window provided in this announcement.”  It also indicates that a student involved in an arbitration proceeding that was ongoing as of October 16, 2018, is not obligated to take the arbitration to a final conclusion and requires a school involved in such an ongoing arbitration to provide the student with notice regarding the unenforceability of the mandatory predispute arbitration agreement.

  • Arbitral records.  The final rule requires the submission of arbitral or judicial records for any arbitration or lawsuit based on a borrower defense claim that was pending as of July 1, 2017 or initiated after July 1, 2017.  The guidance provides that schools must submit existing records no later than 90 days of the guidance and comply with the timeframes set forth in the final rule when submitting future records.

On July 31, 2018,  following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the final rule and replace it with “Institutional Accountability regulations.  Among the major changes to the final rule that the proposal would make is the removal of the arbitration ban.  The status of that rulemaking proceeding is unclear.  In its Fall 2018 semiannual agenda, the ED indicated that it anticipated issuing final rules in January 2019.

Copyright © by Ballard Spahr LLP

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Culhane, Ballard, Partner
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John L. Culhane, Jr., is known for his work advising on interstate direct and indirect consumer and residential mortgage loan and leasing programs, through both traditional brick-and-mortar facilities and e-commerce. Before joining Ballard Spahr, Mr. Culhane was associate counsel with Mellon Bank, N.A.; associate counsel with Bank of America NT&SA; and senior attorney (section chief) with the National Credit Union Administration, the federal agency regulating federal credit unions.

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