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Dept. of Education Provides Guidance on Litigation Trigger in “Borrower Defense” Final Rule’s Financial Responsibility Standards

In December 2018, the Department of Education announced that it would begin implementing its “borrower defense” final rule which was issued in November 2016.  In addition to its provisions that address a student’s ability to assert a school’s misconduct as a defense to repayment of a federal student loan and its ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act, the final rule also includes financial responsibility standards for schools participating in Title IV programs.

The standards prescribe the events or conditions that the Secretary of Education must consider in determining whether a school is “financially responsible.”  Such events or conditions are referred to as “triggers” because they can result in a determination that a school is not financially responsible and thereby trigger an action by the Secretary to limit, suspend, or terminate a school’s participation in Title IV programs.  A school that is determined not to be financially responsible can restore its status as a financially responsible institution by providing a letter of credit or other financial protection to the Department to insure against future borrower defense claims and other liabilities to the Department.

Among the final rule’s “trigger” events or conditions is “actual or potential debts, liabilities, or losses that have stemmed or may stem” from litigation and reduce a school’s financial responsibility “score” below a certain level.  This trigger considers debts and liabilities “arising from a final judgment in a judicial proceeding or in an administrative proceeding, or from a settlement” or borrower defense-related lawsuits.  It also considers lawsuits that fall within a category labeled “other litigation.”  The final rule requires schools to report the filing of a lawsuit or the occurrence of another event or condition considered by this trigger.

The ED recently issued several Q&As that provide guidance on the financial responsibility triggers.  The following Q&A addresses what is covered by the “other litigation” category:

Does the category of “Other Litigation” described in 34 C.F.R. § 668.171(c)(1)(ii) and referenced in 34 C.F.R. § 668.171(h)(1)(ii) include all lawsuits meeting the requirements regardless of their subject matter or amount? Is there any claim type or materiality limitation to the requirement?

A3: 34 C.F.R. § 668.171(c)(1)(ii) and the corresponding reporting requirement in 34 C.F.R. §668.171(h)(1)(ii) do not limit the types of litigation that must be reported by the amount at issue or the type of claim that is brought. These requirements apply in every instance where an institution “is being sued in an action brought on or after July 1, 2017.” For example, lawsuits related to personal injury claims or fraud must be reported under 34 C.F.R. § 668.171(h)(1)(ii). The language of the regulation does not include any materiality threshold for litigation that must be reported under this requirement. Therefore, all litigation, regardless of the type of legal action or the size of the claim, must be reported.

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Culhane, Ballard, Partner
Partner

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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