By Sherry Gray and Laura Sitarski
Department of Education Clarifies Borrower Defense to Repayment Reporting Obligations in June 3 Q&A
Summary
On June 3, 2019, the U.S. Department of Education issued additional guidance, styled as a question and answer document, regarding financial responsibility reporting requirements under the Borrower Defense to Repayment regulation (collectively, the “Reporting Requirements”).
This most recent announcement is the third on this same topic in as many months (see the March 15, 2019 and March 20, 2019 announcements) and was issued in response to “a number of inquiries” the Department has continued to receive regarding the Reporting Requirements. Though the June 3rd question and answer document is short – less than a page and a half – it contains some important information. This post focuses on four immediate takeaways for higher education institutions from the June 3rd announcement.
First, the announcement purports to extend to public colleges and universities the same Reporting Requirements that apply to private nonprofit and for-profit institutions, even though the consequence that the Reporting Requirements can “trigger” – recalculation of the institution’s financial responsibility composite score – does not apply to public institutions. Second, this expanded reading of the Reporting Requirements has the effect of requiring all institutions to disclose litigation to the Department within 10 days of being served, and to report the same litigation multiple times. Third, the announcement confirms the Department’s expectation that institutions report all litigation, regardless of the monetary threshold or subject matter of the dispute. Fourth, the announcement states the Department’s expectation that all institutions notify it within 10 days whenever the institution enters into a settlement of a claim made against the institution, even if the claim being settled was not formally filed with a court or government agency.
Further detail on the potential impact of the Department’s interpretation of the Reporting Requirements is described below. Institutions should be mindful that the Department has stated that it plans to update the June 3rd question and answer document “on an ongoing basis”, and that institutions will be expected to make supplemental reports to the Department within 10 calendar days of new answers being posted.
This gives public institutions until June 13, 2019 to come into compliance with the Reporting Requirements in general. Other institutions should review the specific Reporting Requirements discussed in the June 3rd announcement regarding litigation and settlement, and consider whether a supplemental disclosure by June 13, 2019 is warranted. The remedies stated in the regulation for failure to report in a timely manner are a fine, or an action to limit, suspend, or terminate the institution’s ability to participate in the Title IV programs. The lack of precedent regarding the Reporting Requirements, coupled with the Department’s expansive interpretation of them, which in most cases is a result of the unfortunate breadth of the rules previously promulgated, make it more difficult for schools to ensure compliance or predict the severity of a fine or action the Department might impose for failure to make reports in a timely manner.
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The Reporting Requirements are independent obligations that apply to all institutions.
The June 3rd announcement unequivocally states that the Reporting Requirements “apply to all schools participating in the Title IV, [Higher Education Act] programs”, including public institutions. This position likely comes as a surprise to public institutions.
The Reporting Requirements are embedded in a regulatory section that has the stated purpose of establishing how an institution must establish its financial responsibility as a condition of participating in the Title IV programs. The same regulatory section specifically states that public institutions are presumed to be financially responsible by nature of the institution’s backing by the full faith and credit of the state which sponsors it, and this has been the consistent position of the Department for the last 20 years. Presumably then, the Reporting Requirements, which are designed to allow the Department to detect changes in an institution’s level of financial responsibility, would not apply to public institutions, as there is no on-going assessment done on public institutions’ financial responsibility. Several statements in the regulation’s preamble reinforce the notion that whatever changes the Department made to the financial responsibility provisions as part of the Borrower Defense to Repayment’s regulatory package, the Department – at least at the time that the regulation was drafted – did not intend those changes to apply to public institutions.
However, in the June 3rd announcement the Department, while acknowledging that the reported information would not be used to reconsider a public institution’s financial responsibility, stated that public institutions were nevertheless required to follow the Reporting Requirements found in 34 CFR 668.171(h). The Department provided no explanation as to what purpose the information reported by public institutions would be put, noting only that the Reporting Requirements “exist independently of any determination of whether the reported actions or events are failures of financial responsibility”.
As result, public colleges and universities are now on notice that the Department expects that they report the events described in 34 CFR 668.171(h). And in fairness, the required reporting may alert the Department to trends in lawsuits against specific public institutions that may implicate consumer rights in the same manner that the Department may be alerted to such trends for institutions in other sectors. This newly confirmed reporting obligation for public institutions raises the same set of concerns that private nonprofit and for-profit institutions have considered, including that the information required to be reported under the Reporting Requirements could very well violate confidentiality obligations (for example, as are routinely contained in settlement agreements), and could put sensitive information within reach of a Freedom of Information Act (“FOIA”) request. On this subject, all schools are encouraged to consider whether the information they disclose in response to the Reporting Requirements is potentially covered by a FOIA exemption and if so, request at the time of the report that the Department withhold specifically designated information if it receives a FOIA request covering the information.
Institutions need to disclose all litigation within 10 days of service, and may need to disclose the same litigation multiple times.
In the June 3rd announcement, the Department conceptually divorced the Reporting Requirements from the provisions describing the triggering events that lead the Department to reconsider an institution’s financial responsibility status. With the Reporting Requirements as stand-alone requirements, institutions must abide by the timeframes for reporting events outlined in 34 CFR 668.171(h). In some cases, the timeframes set out in the Reporting Requirements occur before the event in question becomes a triggering event, as described in 34 CFR 668.171(c).
Specifically, 34 CFR 668.171(c)(1)(i)(B) and (ii) describe the types of litigation that will trigger a recalculation of an institution’s financial responsibility composite score. For litigation initiated by a federal or state regulator that relates to a student’s federal loans or education (“Regulator–Initiated BDR Litigation”), the case must be pending for at least 120 days – designed to be past the point of a motion to dismiss – before it becomes a triggering event. For all other litigation (“Other Litigation”), the case does not become a triggering event unless it progresses beyond one or more deadlines associated with the institution’s filing of (or failing to file) a motion for summary judgment.
However, the Reporting Requirements set out at 34 CFR 668.171(h) require an institution to report Regulator-Initiated BDR Litigation within 10 days after the institution is served with the litigation. The same section requires Other Litigation to be disclosed both within 10 days of service, and when the court sets a deadline for the filing of the institution’s motion for summary judgment. The Department has confirmed a literal reading of the regulation – which means that all institutions must report all litigation to the Department within 10 days of being served. In addition, for Other Litigation – which is the vast majority of litigation in which an institution could be involved – an institution must also report the same piece of litigation to the Department when a deadline for filing a summary judgment motion is set, and yet again if the case is still pending when the applicable summary judgment-related deadline set in 34 CFR 668.171(c)(1)(ii) passes. For Regulator-Initiated BDR Litigation, the case would need to be disclosed again if it is still pending after 120 days. This is unfortunately the regulatory construct of the rule initially promulgated in 2016.
All litigation must be reported, regardless of monetary threshold or subject matter.
The Department confirmed in the June 3rd announcement that there are no materiality or subject matter thresholds for the litigation that institutions must report to the Department. Using the examples of personal injury claims and fraud claims being reportable, the Department states that the regulations “do not limit the types of litigation that must be reported by the amount at issue or the type of claim that is brought”. The only limitation on this reporting category is temporal; the litigation is only reportable if it was “brought on or after July 1, 2017”. In addition to any litigation brought against institutions by their students, institutions with large populations of non-unionized employees will likely have employment-related litigation to consider for disclosure under this Reporting Requirement. Once again, the Department’s interpretation is not inconsistent with the broad language of the rule.
All institutions must report all settlements in which the institution incurs a debt or liability.
In the June 3rd announcement, the Department reiterated that in addition to reporting debts and liabilities arising from final judgments in judicial or administrative proceedings, all institutions are required to report “[a]ll settlements” to the Department. This expressly includes settlements the institution reaches on claims that have not yet been filed in a judicial or administrative forum, i.e. early settlements of claims that did not mature into litigation or a regulatory complaint or charge.
This leaves institutions to define what a “settlement” is, short of the resolution of a formal claim asserted in an administrative or judicial filing. Such a definition conceivably could include settlements of complaints lodged internally with the institution by its students or employees. At minimum, institutions should identify and consider reporting settlements of claims that were asserted in a written demand, particularly by an attorney representing the claimant, and regarding which the institution entered into a settlement agreement with the claimant. However, even the simple return of a student’s tuition and fees could be reportable, if it was triggered by a complaint the student filed with the school.
Assuming the Department has received and will continue to receive a deluge of reports, most (but not all) of which seem to be required by the language of the regulations, it presumably will take the Department some time to digest the information. It is possible the volume and/or nature of the reports filed will cause the Department to establish some threshold below which reporting is not required. However, the Department has given no public indication of such a shift in position.
Please contact Sherry Gray, Laura Sitarski, or another Powers attorney with whom you regularly work if you have any questions regarding the new reporting requirements.
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Powers will continue to monitor the Department’s guidance for additional developments.
1 The stated purpose of 34 CFR 668.171 is as follows: “(a) Purpose. To begin and to continue to participate in any title IV, HEA program, an institution must demonstrate to the Secretary that it is financially responsible under the standards established in this subpart.” 81 Fed. Reg. 76073.
2 34 CFR 668.171(i) (“The Secretary considers a domestic public institution to be financially responsible if the institution— (i)(A) Notifies the Secretary that it is designated as a public institution by the State, local, or municipal government entity, tribal authority, or other government entity that has the legal authority to make that designation; and (B) Provides a letter from an official of that State or other government entity confirming that the institution is a public institution; and (ii) Is not subject to a condition of past performance under § 668.174.”).
3 81 Fed. Reg. 76006 (“We rely, and have for nearly 20 years relied, on the full-faith and credit of the State to cover any debts and liabilities that a public institution may incur in participating in the title IV, HEA programs.”).
4 See Fed. Reg. 76006 (“Under the current regulations in §§ 668.171(b) and (c), a public institution is not subject to the general standards of financial responsibility and is considered financially responsible as long as it does not violate any past performance provision in § 668.174. The Department has on occasion placed public institutions on heightened cash monitoring for failing to file required audits in a timely manner, but even then has never required a public institution to provide financial protection of any type because we already have it in the form of full-faith and credit. We would like to clarify that we are not changing long-standing policy for public institutions with these final regulations. In other words, the triggering events in § 668.171(c) through (g) of these regulations do not apply to public institutions.”). See also id. at 75996 (noting that if a public institution were to lose Title IV eligibility, the Department “already ha[s] financial protection in the form of full faith and credit of the State to cover any liabilities that may arise”); id. at 76052 (“…public institutions are not subject to the financial protection requirements”); and id. at 76057 (“…public institutions are not subject to the changes in the financial responsibility provisions because of their presumed backing by their respective States.”).
5 See 81 Fed. Reg. at 76074 for the Reporting Requirements listed in 34 CFR 668.171(h).
6 See 81 Fed. Reg. 76073 (describing at 34 CFR 668.171(c)(1)(i)(B) the event that triggers the recalculation of the institution’s composite score as “[t]he institution is being sued in an action brought on or after July 1, 2017 by a Federal or State authority for financial relief on claims related to the making of the Direct Loan for enrollment at the school or the provision of educational services and the suit has been pending for 120 days.”).
7 See Id. (describing at 34 CFR 668.171(c)(1)(ii) the event that triggers the recalculation of the institution’s composite score as the court denying the institution’s motion for summary judgment, the deadline for filing summary judgment motions passing without the institution filing such a motion, or if no deadline is set and no motion is filed, the court’s setting of a pretrial conference or trial date).