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For the National Council of Higher Education Resources

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1 For the National Council of Higher Education Resources
Lawsuits Involving Schools & State Law Cause of Action as a Defense to Federal Loan Repayment Dennis Cariello For the National Council of Higher Education Resources September 25, 2015

2 Overview 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

3 A short history of consumer litigation against schools
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

4 Where we are today Hansen memo repealed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

5 Where we are today 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

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 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

7 Where we are today 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

8 Where we are today 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

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 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

10 Where we are today 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

11 Some recent resolutions
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

12 Some recent resolutions
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

13 Some recent resolutions
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

14 Misrepresentation of placement rates
Sources of requirements GE regs – required disclosure on websites and prom. materials Sec (d)(5)-must disclose any placement rates it is required to calculate Methodology based on accreditors or state standards Lots 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

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 required Significant penalties for substantial misrepresentation

16 Misrepresentation of placement rates
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

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 questions What 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; 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.”

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 standards What 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 schools Next report November 30, 2015

23 Upcoming negotiated rulemaking
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

24 Questions? Dennis Cariello Hogan Marren Babbo & Rose New York --- Chicago

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