[Federal Register Volume 60, Number 140 (Friday, July 21, 1995)]
[Notices]
[Pages 37768-37770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17988]




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Part V





Department of Education





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Office of Postsecondary Education; Notice

  Federal Register / Vol. 60, No. 140 / Friday, July 21, 1995 / 
Notices  

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DEPARTMENT OF EDUCATION


Office of Postsecondary Education

AGENCY: Department of Education.

ACTION: Notice of the results of the first meeting of the Borrower 
Defenses Regulations Negotiated Rulemaking Advisory Committee for the 
William D. Ford Federal Direct Loan (Direct Loan) Program, the Federal 
Family Education Loan (FFEL) Program, and the Federal Perkins Loan 
(Perkins) Program regulations and notice of cancellation of all future 
scheduled meetings; Notice of Interpretation.

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SUMMARY: This notice reports the results of the April meeting of the 
Borrower Defenses Regulations Negotiated Rulemaking Advisory Committee 
and cancels all future scheduled meetings. Further, this notice 
explains the Department of Education's (Department's) interpretation of 
certain Direct Loan Program regulations relating to borrower defenses, 
which became effective July 1, 1995. Finally, this notice contains 
information about administrative procedures the Department will 
implement regarding borrower defenses.

FOR FURTHER INFORMATION CONTACT: Nicki Meoli, Program Specialist, 
Policy Development Division, Office of Postsecondary Education, U.S. 
Department of Education, Room 3053, ROB-3, 600 Independence Avenue, 
SW., Washington, DC 20202-5400. Telephone: (202) 708-9406. Individuals 
who use a telecommunications device for the deaf (TDD) may call the 
Federal Information Relay Service (FIRS) at 1-800-877-8339 between 8 
a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: On August 18, 1994, the Department published 
a Notice of Proposed Rulemaking (NPRM) for the Direct Loan Program. (59 
FR 42646) That NPRM included a proposed rule that described certain 
defenses a Direct Loan borrower could raise against repayment of the 
loan. (Sec. 685.206(c), 59 FR 42663-42664, August 18, 1994) The 
preamble to the proposed rule stated that the Secretary intended that 
the rule would be effective for the 1995-1996 academic year only and 
that the Secretary would work with interested parties to develop 
regulations for borrower defenses that would apply to both the Direct 
Loan and the FFEL Programs. The new rule would be effective beginning 
with the 1996-1997 academic year. (59 FR 42649, August 18, 1994)
    After considering public comments received on the proposed rule, 
the Secretary decided to issue a final rule for the Direct Loan Program 
including the rule on borrower defenses that was included in the NPRM. 
In publishing the final rule for the Direct Loan Program, the Secretary 
noted that some of the commenters on the NPRM supported the Secretary's 
announcement that he intended to work with interested parties to 
develop regulations for borrower defenses that would apply to both the 
Direct Loan and the FFEL Programs. (59 FR 61664 and 61671, December 1, 
1994) These commenters urged the Secretary to structure the discussions 
under the negotiated rulemaking process and identified particular 
representatives for the process.
    In keeping with his commitment, on April 25, 1995, the Secretary 
convened the Borrower Defenses Regulations Negotiated Rulemaking 
Advisory Committee (Committee). The Department retained the services of 
a professional mediator to serve as a neutral convener and facilitator 
for the negotiated rulemaking. The Committee represented all affected 
parties, including representatives of institutions of higher education, 
higher education organizations, student loan lenders, guaranty 
agencies, loan servicers, legal aid organizations, students, and the 
Department. Establishment of the Committee was consistent with the 
Notice of Intent published by the Department on February 28, 1995. (60 
FR 11004)
    The ultimate goal of the negotiated rulemaking was to reach 
consensus among all committee members through discussion and 
negotiation among all interested and affected parties, including the 
Department.
    The issues the Department presented for negotiation included a 
determination of which acts or omissions of an institution of higher 
education a borrower could assert as defenses to a demand for repayment 
of a loan made under the Direct Loan, FFEL, and Perkins Programs, and 
the consequences of such defenses for the institution, the Secretary, 
and, under the FFEL Program, for the lender and the guaranty agency.
    The Committee consisted of the following organizations (some 
organizations with similar interests participated as a coalition):

American Association of Community Colleges
American Association of Cosmetology Schools
American Association of State Colleges and Universities
American Council on Education
Career College Association
Coalition of Higher Education Assistance Organizations
Coalition of private non-profit multi-State guaranty agencies
Consumer Bankers Association
Education Finance Council
Federation of Associations of Schools of Health Professions
Hispanic Association of Colleges and Universities
Legal Services Team
National Association of College and University Business Officers
National Association of Graduate-Professional Students
National Association of Independent Colleges and Universities
National Association of State Universities and Land Grant Colleges
National Association of Student Financial Aid Administrators
National Association for Equal Opportunity in Higher Education
National Council of Higher Education Loan Programs
Student Loan Marketing Association
United Negro College Fund
U.S. Department of Education
United States Student Association

Committee Recommendation

    The Committee was originally scheduled to meet for three sessions 
during the months of April, May, and June, 1995. However, during the 
first session, the Department was informed that the non-Federal 
negotiators had all agreed to recommend to the Department that no 
changes be made to existing regulations. The non-Federal negotiators 
thanked the Department for initiating the negotiated rulemaking process 
that many of them had requested to address the borrower defenses 
issues. However, they indicated that, after further consideration, they 
had concluded that they would not recommend further regulatory action 
on this issue at this time. In particular, the non-Federal negotiators 
recommended that the Department not pursue an attempt to draft 
consistent regulatory provisions governing borrower defenses in the 
Direct Loan, FFEL, and Perkins Programs, and the consequences of such 
defenses for the institution, the Secretary, and, under the FFEL 
Program, for the lender and the guaranty agency. Rather, the non-
Federal negotiators on the Committee told the Department that they were 
satisfied that the current regulations adequately address the issue of 
borrower defenses and that no further regulatory action is needed.
    The Secretary has considered carefully the recommendation of the 
non-Federal negotiators on the Committee and has decided not to make 
any regulatory changes on the issue of

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borrower defenses at this time. The Department is committed to 
regulating only when absolutely necessary, and then in the most 
flexible, most equitable, least burdensome way possible. Further, the 
Department will not regulate if a problem can be solved adequately 
without regulating. In this instance, the Secretary believes that 
borrower defenses issues, in particular issues related to the 
consequences of such defenses, can be adequately addressed by 
clarifying current regulations and by administrative processes. 
Therefore, the full Committee has reached consensus that no additional 
regulations are needed at this time, and this negotiated rulemaking 
process is concluded. In this notice, the Secretary provides some 
interpretive and administrative information regarding borrower 
defenses.

Notice of Meeting Cancellation

    Further meetings of the Committee are cancelled.

Clarification of Direct Loan Program Provisions

    During consideration of the issues to be discussed at the 
negotiated rulemaking sessions on borrower defenses, it became apparent 
to the Department that there was some confusion among negotiators and 
members of the public regarding the meaning of 34 CFR 685.206(c), which 
addresses borrower defenses in the Direct Loan Program. In light of 
that confusion, the Secretary is issuing this interpretation to ensure 
that program participants and the public generally understand the 
Secretary's intent in issuing the regulations.
    Section 685.206(c) provides that a borrower may assert, in certain 
specified proceedings, as a defense against repayment of a Direct Loan, 
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. In proposing this rule initially, the Secretary stated that 
the rule was intended to allow a Direct Loan borrower to request that 
the Secretary ``exercise his long-standing authority to relieve the 
borrower of his or her obligation to repay a loan on the basis of an 
act or omission of the borrower's school.'' (59 FR 42649, August 18, 
1994) In publishing the final regulations, the Secretary noted that the 
proposed regulations reflect that an ``act or omission of the school 
may, under certain circumstances, be a defense against collection of a 
loan.'' (59 FR 61671, December 1, 1994) The Secretary also noted that 
the reference to ``applicable State law'' was an acceptable interim 
standard until common regulations could be developed for the FFEL and 
Direct Loan Programs. (59 FR 61671, December 1, 1994)
    The regulatory reference to acts or omissions of a school that 
``would give rise to a cause of action against the school under 
applicable State law'' has been misunderstood by some members of the 
public. Some individuals have suggested that any act or omission of a 
school or its employees that could be the basis for a cause of action 
by the student against the school could be considered a borrower 
defense. For example, some participants suggested that a school's 
negligent failure to wipe up water in the school's hallway that results 
in an injury to a borrower who slips and falls on that surface could be 
considered a cause of action that could be a defense against repayment 
of the loan. The Secretary did not intend for the regulations to 
include such claims.
    The Secretary's statements in the preamble to the proposed rule and 
the final rule were intended to reflect the limited scope of the 
regulatory reference to a cause of action under applicable State law 
that could also be asserted as a defense to collection of a loan. The 
regulation does not provide a private right of action for a borrower 
and is not intended to create new Federal rights in this area. The 
Secretary's view is that claims of defenses by Direct Loan borrowers 
based on State laws should be recognized by the Department only if the 
school's act or omission has a clear, direct relationship to the loan.
    The Secretary is issuing this interpretation to clarify that his 
intent in adopting 34 CFR 685.206(c) remains consistent with the 
statements in the preambles to the proposed and final rules. The 
Secretary will acknowledge a Direct Loan borrower's cause of action 
under State law as a defense to repayment of a loan 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. The Secretary 
will not recognize, as a defense against repayment of the loan, a cause 
of action that is not directly related to the loan or the educational 
services. In this latter category, the Secretary includes such actions 
as personal injury tort claims or actions based on allegations of 
sexual or racial harassment.
    The borrower may certainly have a cause of action against the 
school for actions in these categories, but these actions are generally 
not related to the receipt or distribution of Direct Loan proceeds and 
are not a defense to collection of a loan. The Secretary believes that 
borrowers who believe they have a cause of action based on acts or 
omissions of the school in these areas should be able to choose to 
pursue appropriate legal recourse; but that it is not appropriate for 
the taxpayer to face a potential loss based on actions by schools in 
matters unrelated to the loan programs themselves.
    The Secretary will apply this interpretation of the regulations in 
determining whether a borrower has a recognizable defense against 
repayment of a Direct Loan under 34 CFR 682.206(c). The Secretary 
expects that the adjudication of individual claims will provide further 
explanation of the Secretary's interpretation of the regulatory 
requirements.

Administrative Processes To Ensure Similar School Liability for 
Borrower Defenses in Both the Direct Loan Program and the FFEL Program

    Some members of the FFEL industry have asserted that there will be 
greater liabilities for institutions participating in the Direct Loan 
Program than for institutions participating in the FFEL Program as a 
consequence of differences in borrower defenses between the Direct Loan 
and FFEL Programs. These assertions are inaccurate.
    The Department has consistently stated that the potential legal 
liability resulting from borrower defenses for institutions 
participating in the Direct Loan Program will not be significantly 
different from the potential liability for institutions participating 
in the FFEL Program. (59 FR 61671, December 1, 1994, and Dear Colleague 
Letter GEN 95-8 January 1995) That potential liability usually results 
from causes of action allowed to borrowers under various State laws, 
not from the Higher Education Act or any of its implementing 
regulations.
    Institutions have expressed some concern that there is a potential 
for greater liability for institutions in the Direct Loan Program than 
in the FFEL Program under 34 CFR 685.206. The Secretary believes that 
this concern is based on a misunderstanding of current law and the 
intention of the Direct Loan regulations.
    The Direct Loan regulations are intended to ensure that 
institutions participating in the FFEL and Direct Loan Programs have a 
similar potential liability. Since 1992, the FFEL Program regulations 
have provided that an institution may be liable if a FFEL Program loan 
is legally unenforceable. (34 CFR 682.609) The Secretary intended to 
establish a similar standard in the Direct Loan Program by issuing 34 
CFR 685.206(c). Consistent with that intent, the Secretary does not 
plan to

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initiate any proceedings against schools in the Direct Loan Program 
unless an institution participating in the FFEL Program would also face 
potential liability.
    An FFEL Program borrower who alleges that he or she has a defense 
against repayment of his or her loan because of some action or failure 
of the borrower's school may present his or her arguments to the 
guaranty agency or the Department during the collection process. (34 
CFR 30.24, 682.410(b)(5)(ii)(C), and 682.410(b)(5)(vi)(I)) If, as part 
of this process, part or all of the loan is deemed unenforceable, the 
Department will next consider whether the school should be held liable 
for the amount of the loan forgiven.
    The Direct Loan Program regulations at 34 CFR 685.206 establish a 
similar process and allow the borrower to assert as a defense against 
repayment of his or her loan ``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.'' If the Department 
forgives all or part of a loan under this process, it will, in the same 
manner as it will in the FFEL Program, consider whether the school 
should be held liable for the amount of the loan forgiven.
    Thus, the Secretary will initiate proceedings to establish school 
liability for borrower defenses in the same manner and based on the 
same reasons for a school that participates in the Direct Loan Program 
or the FFEL Program. The school will be entitled to due process in 
these proceedings, in accordance with the statutory and regulatory 
provisions addressing them. The Department intends to perform its 
oversight responsibilities for both loan programs in a manner that 
provides equitable determinations of institutional liability and 
promotes sound program administration.

    Dated: July 17, 1995.
Richard W. Riley,
Secretary of Education.
[FR Doc. 95-17988 Filed 7-20-95; 8:45 am]
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