Last week Amy Schmitz (Missouri) sent out a message on this topic on the list serv and I asked if she could morph it into a blog post, which she has kindly done.
On October 28, the Department of Education issued final regulations intended to protect student loan borrowers against school closures and fraud. To that end, the rules include significant provisions restricting school arbitration agreements; clarifying student rights to raise school fraud as a defense to loan repayment; providing automatic closed school loan discharges to certain eligible borrowers; and providing new rights for students to obtain false certification loan discharges. See https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf. Although some provisions are likely to face legal challenge, the rules generally will be effective July 1, 2017.
For those in the dispute resolution community, the provisions that may be of most interest are those limiting school arbitration and class-waiver requirements. This came in the wake of some institutions, such as Corinthian Colleges, using class action waivers and arbitration clauses to thwart actions by students for fraudulent and abusive conduct that largely pushed students into financial peril. The new rules prohibit schools participating in the federal student loan program from entering into pre-dispute arbitration agreements with students or agreements that purport to waive students’ rights to bring class actions. These limitations apply to agreements with students who have obtained Federal Direct Loans or benefited from Direct Parent PLUS Loans, and apply to claims regarding the making of the Federal Direct Loan or the provision of educational services for which the loan was obtained. This bars schools from using contract clauses or stand-alone pre-dispute agreements with students that waive students’ right to go to court or to pursue a class action over any claims that could also give rise to a “borrower defense” claim (described more fully in the new rules). The provisions also bar a school from relying on an existing pre-dispute arbitration agreement or other agreement to force an individual or class action out of court. This includes agreements entered into prior to the rule’s effective date. The school must either amend the agreement or notify the students that they will not enforce the agreement.
The rules also aim to increase transparency regarding such “borrower defense” related arbitration and litigation. If schools do engage in arbitration proceedings in a manner that is consistent with the regulations and applicable law, the rules require that these schools notify the Secretary of Education and provide disclosures. The rules similarly require that schools disclose such judicial filings and dispositions.
The complete provisions are lengthy, and can be reviewed in the PDF linked above from 75926 Federal Register/Vol. 81, No. 211/Tuesday, November 1, 2016/Rules and Regulations.
Meanwhile, we wait for the Consumer Financial Protection Bureau (CFPB) to issue final regulations regarding its proposal to prohibit companies from including pre-dispute arbitration clauses in agreements regarding financial products or services that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Although the proposal would allow companies to include arbitration clauses in their contracts, it would require that the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.
In our ADR class, we talked about certain limitations posed by the no class-action clauses. At various points throughout the semester we also discussed un-equal bargaining power. I think that regulations such as those issued by the Department of Education work towards providing some relief to the limitations of no class-action clauses and in some respects even the playing field.
There are both pro’s and con’s to no class-action clauses. One consequence of courts generally upholding arbitration clauses that ban class actions is that some potential plaintiffs (especially those low on resources) may be inadvertently barred from a resolution. Students with heavy school loans are a prime example.
These regulations aim to help students should they be victim of fraudulent universities or abusive conduct by universities. A student in one of these situations, already burdened with immense student loans, has less resources to go through the arbitration process as an individual. However, if class-action is made available to them, they have a better chance at getting at least some recovery. They are able to go through the arbitration process at less of a personal expense, both money and time-wise. The students will also likely have an attorney to help them through the process, something that a student with heavy loans may not have access to.
The regulations may face an uphill legal battle, as one of the main arguments in favor of the regulations is public policy concerns. As we learned in class, public policy arguments rarely sway the court when it comes to arbitration. But, because the scenarios outlined above have so many moving parts, courts may be persuaded that the regulations can stand.
In sum, I think that regulations such as those issued by the Department of Education work towards providing some relief to the limitations of no class-action clauses and in some respects even the playing field. No matter the outcome, it will be interesting to see how the courts respond and interact with the proposed regulations.
I think the retroactive provision is a crucial and fundamental step to help those students who took on an education loans, for whatever reason, in order to attend an institution which routinely engaged in deceptive and/or immoral tactics so as to gain federal funding. However, I’m curious to see if the schools which instigated this shift in the rules are going to comply with the necessary notification steps. I recall the notification (or lack thereof) is an ongoing issue for students who are eligible for the loan forgiveness plan which was recently passed. Regardless, I hope the CFPB continues to receive funding under the Trump administration, and continues to zealously advocate on our behalf!
That is an interesting problem for dispute resolution to consider. It would be really interesting to see past examples where students have attempted class actions, as well as the exact wording and treatment of the universities’ waivers to them.