Legal experts have identified the expansion of letter of credit triggers as a new proposed rule that has potentially “catastrophic” consequences for many higher education institutions.
The expansion is contained in the proposed new Department of Education rules on student lending and college governance, due to be published Nov. 1 following a submission period that ended at the beginning of this month.
Under the proposed rules, colleges could be required to post letters of credit -- equal to 10 percent or more of their total Title IV funding -- if they are sued by a state or federal agency for violating a debt obligation, for high default rates, or for low graduate employment rates.
Katherine Lee Carey, an attorney at the California firm of Cooley, which specializes in higher education law, believes it has not quite “fully sunk in” that the rules apply to all of higher education.
Carey said supporters of the rules are trying to convince schools that they won’t affect colleges “unless they do something wrong which, according to the same people, will apparently never happen.”
“If you read the section on financial responsibility triggers carefully, though, you can see how easily a school could end up on the wrong end of a 10 percent or more letter of credit, for being sued, not actually adjudicated to have done anything wrong, and for inadvertent errors and nonmaterial concerns,” Carey told the Higher Education Tribune.
“We did see comments from the American Council on Education, and other private institutions, which is a good sign that there is some recognition,” she said. “But the potential catastrophic impact this could have an every private college/university via the imposition of letters of credit is really frightening.”
Under the current rules, an higher education institution can be forced to deliver letters of credit for continued access to federal student aid if they fail financial stress tests. It is designed to protect federal funds.
“The problematic nature of this one seems to be the one point of agreement across many who commented, including institutions, some attorney generals, state associations, accreditors, financial aid associations, and congress members,” said Carey.
“I have no idea if ED will be swayed, but if there is anywhere that opposition is strong, it is this section," she said. "Hopefully that will result in this being removed or significantly amended to better protect institutions from financial ruin. So few institutions commented that you have to wonder if they believe that this isn’t something they need to worry about.”
While Carey believes there are a number of troubling aspects to the new regulations, including their broad scope that goes far beyond the original borrower defense to repayment (BDTR) statutes, she also identifies the definition of substantial misrepresentation as a serious concern.
“This too had a lot of opposition in the comments," Carey said. "I think the proposed change to remove any intent element, and the broad application, as well as the “presumption” that everyone in a group claim was harmed by it, all create concerns."
The process for making and granting BDTR claims is also a concern to Carey, as it appears to throw up due process issues.
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