Presentation on theme: "For the National Council of Higher Education Resources"— Presentation transcript:
1 For the National Council of Higher Education Resources Lawsuits Involving Schools & State Law Cause of Action as a Defense to Federal Loan RepaymentDennis CarielloFor the National Council of Higher Education ResourcesSeptember 25, 2015
2 Overview Lawsuits Involving Schools A short history of consumer litigation against schoolsWhere we are todaySome recent resolutionsMisrepresentation of placement ratesLoan Discharge Due to State Law Cause of ActionCurrent lawReport of the Special MonitorUpcoming negotiated rulemaking
3 A short history of consumer litigation against schools Until a few years ago, DOED was regulatorFalse claims act lawsuits were the primary source of legal riskDOJ and courts not terribly receptiveHansen MemoBut see CLC and University of Phoenix program review and settlementThen, things started to changeMain and Hendow decisionsEconomy drove higher enrollmentsNew administrationElimination of Safe Harbors and Gainful Employment RegulationGAO Investigations & Harkin Report
4 Where we are today Hansen memo repealed Increasing number of investigations and investigatorsFederal: DOED, CFPB, FTC, SEC, DOJ, CongressState: Attorneys General, state licensing authoritiesLocal: city and county attorneysAccreditors – subject to scrutiny of their ownPlaintiffs’ attorneys (FCA cases, consumer class actions, RICO cases, securities actions, individual arbitrations/lawsuits)Regarding more issues than ever before:All aspects of operationsInstitutional loans a source of much interest
5 Where we are today Department of Education: Remains the primary regulatorAggressive regulatory approach – program integrity and gainful employmentUntil recently, not as aggressive on the enforcementRecent actions relating to Corinthian, ITT & DeVryCoordination with other agencies & groups
6 Where we are today CFPB: Has broad understanding of its own jurisdiction (not just involved in financing matters) and no target is too big or too smallSued 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 tacticsAlso – 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 remainITT could be considered a covered person under Title X
7 Where we are today Department of Justice: Historically declined to intervene in FCARecently, increased willingness to do - and has started more of their own FCA suitsAlso – more willing to offer their opinions about other matters (preemption & preclusion)Pre-suit investigations are more time consumingPolicy to review all FCA matters for potential criminal ramifications - Corinthian
8 Where we are today Recent Department of Justice Interventions: EDMC – Allegations relating to compensation of recruitersStevens-Henager College – Allegations relating to compensation of recruitersATI – Allegations relating to employment statistics, enrollment of ineligible students – Case settledAmerican Commercial Colleges – Allegations relating to 90/10 rule – Case settledMaricopa County Community College – Allegations relating to completion of service hours – Case settled
9 Where we are today Federal Trade Commission: Ashworth College – FTC’s Consent Order and Complaint, alleging misrepresentations on accreditation:accreditation did not qualify graduates to obtain mandatory state licensurecredits earned are transferableDeVry – misrepresentation on job placement?What is role of FTC in education?FTC’s traditional role related to advertisingDOED and accreditors already cover misrepresentationRisk of conflicting rules
10 Where we are today State Attorneys General: Working group of 19 AGs investigating sectorNumerous lawsuits:California, Massachusetts, and Wisconsin AGs sued CCi for alleged deceptive practicesCO AG sued Stevens-Henager College/CollegeAmerica for misrepresentationIllinois AG sued Alta/Westwood Colleges, including for alleged federal CFPA violationsNM AG sued ITT for alleged unfair loan practicesMN AG sued for misrepresentations and unfair loan practicesSeveral recent settlements between AGs and schools (Lincoln)Employing the Harkin playbook – little need for additionalEven cities! EDMC settles with San Francisco over placement rates
11 Some recent resolutions CompanyAllegationsResolution/AgreementKeiser University (Everglades College)Private qui tam action -incentive compensationPlaintiffs won on liability under the FCA, but the court awarded no damages and only penaltiesKeiser will pay the gov. to resolve the FCA liability claims on appeal.(Corinthian) ECMC Group and Zenith Education GroupCFPB action v. CCi. ECMC sought a release from all liability to CFPB on purchaseECMC will engage an independent monitor for one year. Agrees to no institutional loans and debt relief. Certain “best practices” including: consumer disclosures, waiting period, documentationKaplanFL AG inquiryResolved with no findings of wrongdoing. Agreed to provide scholarships and disclosures
12 Some recent resolutions CompanyAllegationsResolutionPremier Education Group and Salter CollegeMA AG allegations re: placement ratesConsent judgment plus agrees to best practices and disclosures – specifically how to calculate placementsSullivan & CoglianoMA AG allegations re: consumer practicesPlacement verification and limitation on enrollmentsBridgepoint Education/Ashford UniversityIA AG allegations re: consumer practices3 year appointment of monitor with power to observe training, review complaints, report to the IA AG. Dictates certain consumer disclosuresCECNY AG re: placement ratesProvide placement assistance and higher independent verification for placement
13 Some recent resolutions State of Colorado v. Center for Excellence in Higher Education (CollegeAmerica & Stevens-Henager College)Court – no TRO for alleged misrepresentationsWeeks long enrollment process and three weeks of classes before any charged provided safeguards to help students make informed decisions before incurring any chargesLoans – “make college affordable”They do make it affordable (even if not cheaper) – no likelihood of success on the merits
14 Misrepresentation of placement rates Sources of requirementsGE regs – required disclosure on websites and prom. materialsSec (d)(5)-must disclose any placement rates it is required to calculateMethodology based on accreditors or state standardsLots of issues with thisNo national standardRates are not apples to applesEach body allows exclusion and inclusion of certain itemsMany AGs, for example, or the FTC think the rates are misleading
15 Misrepresentation of placement rates 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 requiredSignificant penalties for substantial misrepresentation
16 Misrepresentation of placement rates Heald CollegeNotice of intent to fine of $29.67MM for 946 alleged instances of incomplete, inaccurate or false placement disclosuresDOED alleges three areas of noncompliance:Omission of “essential and material information concerning methodology”Misrepresentation of placement rates for one program to programmatic accreditorLack of sufficient backup documentary supportAlso – 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
17 Loan Discharge Due to State Law Cause of Action – Current Law 34 C.F.R. § (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 questionsWhat proceeding?What state law violations?Who decides if there was a violation of state law?What about recoupment?
18 Loan Discharge Due to State Law Cause of Action – Current Law What proceeding? Law includes:Tax refund offset proceedings;Wage garnishment proceedings; andSalary 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.”
19 Loan Discharge Due to State Law Cause of Action – Current Law 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 (Dec. 1, 1994).Doesn’t include labor law, zoning or property safety, or other non-education standardsWhat about provision of non-teaching services?
20 Loan Discharge Due to State Law Cause of Action – Current Law 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?
21 Loan Discharge Due to State Law Cause of Action – Current Law How will recoupment of loans by the Secretary work?34 C.F.R. § (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 § (c) unless the school received actual notice of the claim during that period.”What if the school succeeded (Student graduates, has a job, etc.)?
22 Report of the Special Monitor June 25, 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. §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 schoolsNext report November 30, 2015
23 Upcoming negotiated rulemaking August 20, 2015 Federal Register – Intent to Regulateto 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
24 Questions?Dennis Cariello Hogan Marren Babbo & Rose New York --- Chicago