The 2016 BDR Rule contains both “mandatory” and “discretionary” triggering events that, after reporting, may cause the Department to recalculate the institution’s composite score—a ratio used by the Department to measure an institution’s financial health.

This is the second in our series of Alerts focused on the U.S. Department of Education’s 2016 Borrower Defense to Repayment (BDR) Rule, promulgated by the Obama administration, and the March 15, 2019, guidance regarding the current effectiveness and implementation of that rule. As noted in our first Alert in this series, the guidance makes clear that the 2016 BDR Rule is now in effect.

Specifically, this Alert explains the obligations of postsecondary institutions participating in Title IV, Higher Education Act (HEA) programs to affirmatively report to the Department the occurrence of certain “triggering” events that occur after March 15, 2019, many of which must be reported to the Department within 10 days of occurrence.

This Alert also describes the “grace period” provided by the Department in the guidance for institutions to affirmatively report to the Department certain triggering events that have already occurred between July 1, 2017, and March 15, 2019 (the period from the effective date of the 2016 BDR Rule to the date of the guidance). The deadline for reporting events occurring during the grace period is May 14, 2019.

As explained below, the 2016 BDR Rule contains both “mandatory” and “discretionary” triggering events that, after reporting, may cause the Department to recalculate the institution’s composite score—a ratio used by the Department to measure an institution’s financial health. If the recalculated score fails or is in the zone, it could lead to a letter of credit or letter of credit alternative requirement, heightened cash monitoring restrictions, provisional Program Participation Agreement status and/or other Title IV participation restrictions.

Events Occurring Any Time After March 15, 2019

The 2016 BDR Rule identified a long list of events and actions that the Department will now consider when determining whether an institution is financially responsible and consequently eligible to participate in the Title IV, HEA programs.

Institutions are required to report all triggering events and actions to the Department. Although the reporting deadline varies depending on the type of triggering event, it is typically within 10 days of the occurrence of the event. Failure to timely report could result in an action by the Department to limit, suspend or terminate an institution’s participation in Title IV, HEA programs.

This short reporting turnaround means that all institutions should have a firm understanding of the types of events that will trigger a reporting requirement, the potential consequences of such reporting and a system to monitor for triggering events.

The 2016 BDR Rule identifies three triggering events that would automatically require a letter of credit or other financial protection. Namely, a Cohort Default Rate violation; a 90/10 violation; and certain SEC or exchange actions.

In addition, a number of other events and actions would require the Department to recalculate the institution’s composite score. A recalculated composite score would reflect the impact of the triggering event on the institution’s financial health unless the institution is able to demonstrate that the event will not have any such impact by, for example, providing evidence that the event is covered by insurance or has been resolved. These triggering events include:

• Settlements and final judgments in judicial proceedings;
• Lawsuits brought by federal or state agencies based on borrower defense claims;
• Lawsuits that have survived the summary judgment stage;
• Teach-out plans required by an institution’s accrediting agency as a result of the closure of the institution or any of the institution’s branches or additional locations; and
• Withdrawal of owner’s equity.

The 2016 BDR Rule also provides for a number of events that may result in the Department determining that the institution is not financially responsible if the event has a “material adverse effect” on the institution’s financial condition. These “discretionary” triggering events include:

• Significant fluctuations in Title IV funds;
• State licensing agency citations;
• Failure to pass a (yet to be determined) financial stress test;
• High annual dropout rates;
• Probation or a show cause action by the institution’s accreditor;
• Certain violations of an institution’s loan agreements; and
• Pending or likely borrower defense claims.

The occurrence of any of one of these triggering events has the potential to lead, at the Department’s discretion, to the posting of a letter of credit or other financial protections.

Events Occurring Between July 1, 2017, and March 15, 2019

The March 15, 2019, guidance issued by the Department recognized that due to the July 1, 2017, effective date of the 2016 BDR Rule and subsequent delays, triggering events may have already occurred and have gone unreported between July 1, 2017, and March 15, 2019.

As a result, the Department has provided guidance for the reporting events occurring during this period. Institutions must submit a notification to the Department of the following events concerning debts, liabilities and losses if they occurred after the fiscal year end for the most recent annual audit submission to the Department. Other triggering events relating to debts, liabilities and losses occurring after July 1, 2017, should be reflected in the institution’s most recent audited financials and do not need to be reported. This includes the following scenarios:

• The institution has a debt or liability arising from a final judgment/determination (judicial or administrative proceeding) or from settlement.
• The institution was required by its accrediting agency to submit a teach-out plan.
• For an institution with a composite score less than 1.5, any withdrawal of owner’s equity from the institution.

Institutions must notify the Department of lawsuits filed after July 1, 2017, that (1) have been brought by a federal or state authority regarding borrower defense claims and which have been pending for more than 120 days and were still pending as of March 15, 2019, or (2) are still pending as of March 15, 2019, and survived the motion for summary judgment stage.

Institutions must also notify the Department of the following events occurring between July 1, 2017, and March 15, 2019:

• 90/10 violations;
• SEC and stock exchange actions;
• State authorizing agency citations and accreditor show-cause orders or probation, unless they have been resolved as of March 15, 2019; and
• Violations of a loan agreement.

Institutions are required to notify the Department of each of the above-described events occurring between July 1, 2017, and March 15, 2019, via email by May 14, 2019.

For Further Information

If you have any questions related to this Alert, please contact Edward Cramp, Katherine D. Brodie, Brandi A. Taylor, any of the attorneys in the Higher Education Practice 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.