lawsuits involving schools & state law cause of action as a defense to federal loan repayment...

Lawsuits Involving Schools & State Law Cause of Action as a

Defense to Federal Loan Repayment

Dennis CarielloFor the National Council of Higher Education Resources

September 25, 2015

Lawsuits Involving Schools A short history of consumer litigation against

schools Where we are today Some recent resolutions Misrepresentation of placement rates

Loan Discharge Due to State Law Cause of Action Current law Report of the Special Monitor Upcoming negotiated rulemaking

Overview

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Until a few years ago, DOED was regulator False claims act lawsuits were the primary source of legal risk DOJ and courts not terribly receptive Hansen Memo

But see CLC and University of Phoenix program review and settlement

Then, things started to change Main and Hendow decisions Economy drove higher enrollments New administration Elimination of Safe Harbors and Gainful Employment Regulation GAO Investigations & Harkin Report

A short history of consumer litigation against schools

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Hansen memo repealed Increasing number of investigations and investigators

Federal: DOED, CFPB, FTC, SEC, DOJ, Congress State: Attorneys General, state licensing authorities Local: city and county attorneys Accreditors – subject to scrutiny of their own Plaintiffs’ attorneys (FCA cases, consumer class actions, RICO

cases, securities actions, individual arbitrations/lawsuits)

Regarding more issues than ever before: All aspects of operations Institutional loans a source of much interest

Where we are today

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Department of Education: Remains the primary regulator Aggressive regulatory approach – program

integrity and gainful employment Until recently, not as aggressive on the

enforcement Recent actions relating to Corinthian, ITT &

DeVry Coordination with other agencies & groups

Where we are today

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CFPB: Has broad understanding of its own jurisdiction (not just

involved in financing matters) and no target is too big or too small

Sued for-profit education institutions (Corinthian, ITT) Loans required for benefit of school not students (90/10) Allegedly heavily marketed loans “ostensibly run by third parties” Heavy-handed origination and debt collection tactics Also – allegedly mislead students to enroll (utilized results of ITT’s

internal secret shopper reviews) Motion to dismiss:

TILA claims dismisses on statute of limitations (one-year) but unfair practice claims remain

ITT could be considered a covered person under Title X

Where we are today

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Department of Justice: Historically declined to intervene in FCA Recently, increased willingness to do - and has

started more of their own FCA suits Also – more willing to offer their opinions about

other matters (preemption & preclusion) Pre-suit investigations are more time consuming Policy to review all FCA matters for potential

criminal ramifications - Corinthian

Where we are today

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Recent Department of Justice Interventions: EDMC – Allegations relating to compensation of

recruiters Stevens-Henager College – Allegations relating to

compensation of recruiters ATI – Allegations relating to employment statistics,

enrollment of ineligible students – Case settled American Commercial Colleges – Allegations relating

to 90/10 rule – Case settled Maricopa County Community College – Allegations

relating to completion of service hours – Case settled

Where we are today

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Federal Trade Commission: Ashworth College – FTC’s Consent Order and

Complaint, alleging misrepresentations on accreditation: accreditation did not qualify graduates to obtain

mandatory state licensure credits earned are transferable

DeVry – misrepresentation on job placement?What is role of FTC in education? FTC’s traditional role related to advertising DOED and accreditors already cover

misrepresentation Risk of conflicting rules

Where we are today

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State Attorneys General: Working group of 19 AGs investigating sector Numerous lawsuits:

California, Massachusetts, and Wisconsin AGs sued CCi for alleged deceptive practices

CO AG sued Stevens-Henager College/CollegeAmerica for misrepresentation

Illinois AG sued Alta/Westwood Colleges, including for alleged federal CFPA violations

NM AG sued ITT for alleged unfair loan practices MN AG sued for misrepresentations and unfair loan practices

Several recent settlements between AGs and schools (Lincoln)

Employing the Harkin playbook – little need for additional Even cities! EDMC settles with San Francisco over

placement rates

Where we are today

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Some recent resolutions

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Company Allegations Resolution/Agreement

Keiser University (Everglades College)

Private qui tam action -incentive compensation

Plaintiffs won on liability under the FCA, but the court awarded no damages and only penalties Keiser will pay the gov. to resolve the FCA liability claims on appeal.

(Corinthian) ECMC Group and Zenith Education Group

CFPB action v. CCi. ECMC sought a release from all liability to CFPB on purchase

ECMC will engage an independent monitor for one year. Agrees to no institutional loans and debt relief. Certain “best practices” including: consumer disclosures, waiting period, documentation

Kaplan FL AG inquiry Resolved with no findings of wrongdoing. Agreed to provide scholarships and disclosures


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Company Allegations Resolution

Premier Education Group and Salter College

MA AG allegations re: placement rates

Consent judgment plus agrees to best practices and disclosures – specifically how to calculate placements

Sullivan & Cogliano MA AG allegations re: consumer practices

Placement verification and limitation on enrollments

Bridgepoint Education/Ashford University

IA AG allegations re: consumer practices

3 year appointment of monitor with power to observe training, review complaints, report to the IA AG. Dictates certain consumer disclosures

CEC NY AG re: placement rates Provide placement assistance and higher independent verification for placement


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State of Colorado v. Center for Excellence in Higher Education (CollegeAmerica & Stevens-Henager College)

Court – no TRO for alleged misrepresentations Weeks long enrollment process and three weeks of

classes before any charged provided safeguards to help students make informed decisions before incurring any charges

Loans – “make college affordable” They do make it affordable (even if not cheaper) – no

likelihood of success on the merits

Sources of requirements GE regs – required disclosure on websites and prom.

materials Sec. 668.41(d)(5)-must disclose any placement rates it

is required to calculate Methodology based on accreditors or state standardsLots of issues with this No national standard Rates are not apples to apples Each body allows exclusion and inclusion of certain

items Many AGs, for example, or the FTC think the rates are

misleading

Misrepresentation of placement rates

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Misrepresentation: “Any false, erroneous or misleading statement an eligible institution, …. makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, to a State agency, or to the Secretary.”

Regulation precludes substantial misrepresentations: “the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment.”

Intent to deceive, detrimental reliance or harm not required

Significant penalties for substantial misrepresentation


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Heald College Notice of intent to fine of $29.67MM for 946 alleged

instances of incomplete, inaccurate or false placement disclosures

DOED alleges three areas of noncompliance: Omission of “essential and material information concerning

methodology” Misrepresentation of placement rates for one program to

programmatic accreditor Lack of sufficient backup documentary support

Also – included persons already employed as “placed” DOED imposed maximum allowable fine for each

violation, $27,500 or $35,000 depending on the timing of the violation


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34 C.F.R. § 685.206(c)(1):“In any proceeding to collect on a Direct Loan, the borrower may assert as a defense against 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” DOED looking at discharge in connection with borrowers

at Corinthian Lots of unanswered questions What proceeding? What state law violations? Who decides if there was a violation of state law? What about recoupment?

Loan Discharge Due to State Law Cause of Action – Current Law

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What proceeding? Law includes: Tax refund offset proceedings; Wage garnishment proceedings; and Salary offset.

But--Secretary Duncan explained in August 4, 2014 letter to Sen. Elizabeth Warren: “[A] borrower who is not in default can also assert a claim that the loan is not legally enforceable on the basis of a claim against the school. To do so, the borrower should present the claim to the servicer handling the Direct Loan for the Department.”


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What state law violations are relevant?

A defense to repayment will be recognized “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.” 59 Fed. Reg. 61171 (Dec. 1, 1994).

Doesn’t include labor law, zoning or property safety, or other non-education standards

What about provision of non-teaching services?


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How do we determine if there is a violation of state law?

What’s the burden of proof? Does a third-party need to decide the issue, or can the

Secretary accept the defense to repayment? Does the Department decide the facts? What effect does the Secretary’s acceptance of a “state

law violation” have on an action for recoupment?


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How will recoupment of loans by the Secretary work? 34 C.F.R. § 685.206(c)(3): “The Secretary may initiate an

appropriate proceeding to require the school whose act or omission resulted in the borrower’s successful defense against repayment of a Direct Loan to pay to the Secretary the amount of the loan to which the defense applies.”

“However, the Secretary does not initiate such a proceeding after the period for the retention of records described in § 685.309(c) unless the school received actual notice of the claim during that period.”

What if the school succeeded (Student graduates, has a job, etc.)?


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June 25, 2015 - DOED appoints Joseph A. Smith, monitor under the National Mortgage Settlement, as “special master for borrower defense” to handle debt relief complaints under 34 C.F.R. § 685.206

September 3 – issues “First Report of the Special Master for Borrower Defense to the Under Secretary” “My paramount goal as Special Master is to develop a system for

providing debt relief to borrowers that is fair, transparent, and efficient, with minimal burden on borrowers.”

Met with “large coalition of advocates for debtors on student loans” and state attorneys general – but no schools

Next report November 30, 2015

Report of the Special Monitor

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August 20, 2015 Federal Register – Intent to Regulate to develop proposed regulations for determining which

acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a federal loan

(1) The procedures to be used for a borrower to establish a defense;

(2) the criteria that the Department will use to identify acts or omissions of an institution that constitute defenses to repayment;

(3) the standards and procedures that the Department will use to determine the liability of the institution; and

(4) the effect of defenses on institutional capability assessments

Upcoming negotiated rulemaking

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Dennis CarielloHogan Marren Babbo & Rose

[email protected]

New York --- Chicago

Questions?

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mailto:[email protected]

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