Generally, warnings of this type from the Department are a precursor to ramped-up enforcement action for institutions and third-party servicers.
Institutions of higher education participating in the federal student aid programs implemented by the U.S. Department of Education, such as Direct Loan, the Pell Grant Program, Federal Work Study and others, should pay careful attention to a recent enforcement bulletin issued by the Department’s Office of Federal Student Aid. The bulletin reminds institutions of higher education and third parties who serve such institutions that certain statements may create risk of a “substantial misrepresentation” violation under the Higher Education Act of 1965 (HEA) requirement contained in 34 C.F.R. §§ 668.71-75.
The Department’s stated reason for issuing the reminder is that, in its day-to-day oversight function, it has observed conduct that could rise to the level of an actionable substantial misrepresentation and is actively monitoring complaints, tips, lawsuits and borrower defense to repayment (BDR) applications from students, faculty and staff who allege that institutions and their representatives may have made substantial misrepresentations. The Department states that “where warranted, the Department will hold institutions accountable” and can take administrative action against an institution if it determines that the institution has made a substantial misrepresentation about the nature of its educational program, its financial charges or the employability of its graduates. These are all categories of information that prospective students are likely to reasonably rely upon in making an enrollment decision.
The announcement appears to break no “new ground” on what is considered a substantial misrepresentation under the HEA, yet institutions and third-party servicers (as defined in 34 C.F.R. § 668.2 and relevant subregulatory guidance) would do well to take the opportunity to review whether they have sufficient review processes in place for student-facing materials used in advertising, marketing, admissions or any other aspect of its operations and programs that contain statements about the educational program itself, the institution, program costs and potential outcomes. Generally, warnings of this type from the Department are a precursor to ramped-up enforcement action for institutions and third-party servicers. Also, even though the Department by court order is currently enjoined from applying a recently amended, more borrower-friendly BDR claim standard to allow loan discharges based on a substantial misrepresentation, the Department can still enforce prior versions of the BDR rule that rely on the same rule, and can continue to interpret and apply the longstanding program integrity substantial misrepresentation prohibition through the Department’s program review process.
Consequences for Violation
Where the Department identifies a substantial misrepresentation, administrative action may be taken against an institution, including a fine or limiting the institution’s participation in the Title IV program. With fines of up to $69,733 per violation (i.e., per statement), misrepresentation fines can quickly escalate into eye-popping numbers. The Department fined Grand Canyon University $37.7 million after it determined that the university had misrepresented the cost of its doctoral programs. Fines vary and can be influenced by case-by-case factors, including gravity of the misrepresentation, size of the institution, number of institutions served by a third-party servicer, extent to which a third-party servicer contributed to the violation, number of students impacted, automated repetition of the statement and failure to correct known violations.
For institutions already on provisional program participation agreement status, the Department can theoretically revoke Title IV approval or could deny recertification of an institution for serious violations. Even for fully certified institutions, the Department is authorized to take emergency action against an institution, servicer or “agents of the institution” who have made a substantial misrepresentation. In addition, for any institution found to have engaged in a substantial misrepresentation, the Department is authorized to require the institution to hire a monitor and to submit marketing and other recruiting materials (e.g., call scripts) for the review and approval of the Secretary. In addition, it is a violation of Title IV administrative capability standards for an institution to have engaged in a substantial misrepresentation, the result of which can lead to failure of administrative capability consequences including provisional program participation agreement status or termination.
Recommendations
We recommend that institutions and third-party servicers conduct a thorough review of all publicly facing marketing and admissions material, and have in place a regular process for review of all such materials designed to mitigate risk of a substantial misrepresentation. Fortunately, this type of review also potentially reduces risk of misrepresentations that could also be actionable under accrediting agency standards, state unfair and deceptive practices laws and Federal Trade Commission standards.
Institutions and third-party servicers should also ensure that marketing, admissions and other operational units are well trained in the requirements of the rule, and that written contracts between institutions and third-party servicers appropriately allocate obligations and risks. Many institutions have in place a marketing and admissions material regular review process (including for copy used by third-party vendors). In any event, institutions should be prepared to demonstrate that statements related to educational programs, cost and outcomes are verifiable by current documents and data.
For More Information
If you have any questions about this Alert, please contact Katherine D. Brodie, Anthony J. Guida Jr., Kristina Gill, Jessica S. High, any of the attorneys in our Education Industry Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.