State AGs seek injunction against Dept. of Education postponement of the Borrower Defense Rule; DeVos continues “regulatory reset” with delay of Gainful Employment Rule and campus financial products disclosure regulations

by Ballard Spahr LLP
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Eighteen states and the District of Columbia have filed suit against Secretary of Education Betsy DeVos seeking an injunction of the Department of Education’s indefinite postponement of the Obama Administration’s Borrower Defense Rule. While generally providing for loan forgiveness for borrowers deceived by postsecondary institutions, the Borrower Defense Rule also created a joint state-federal enforcement scheme by providing that any judgment obtained by a government agency against a postsecondary institution under state law would give rise to a borrower defense to loan repayment. The Rule also established that a state civil investigative demand against a school whose conduct resulted in a borrower defense qualifies as notice permitting the Secretary to commence a collection action against the school.

As part of her promise to conduct a “regulatory reset” Secretary DeVos announced last month that the Department of Education was postponing the July 1, 2017 effective date of the Rule “until further notice” and establishing a negotiated rulemaking committee to revise the Rule. The announcement came on the heels of a California Association of Private Postsecondary Schools (CAPPS) lawsuit to bar implementation of the Rule. CAPPS additionally filed, but later withdrew, a motion for preliminary injunction against the Rule’s prohibition on mandatory arbitration and class action waiver agreements. Eight states and the District of Columbia, each also a party to the latest lawsuit, previously filed a motion to intervene in the CAPPS lawsuit in support of the Rule. Secretary DeVos and CAPPS have entered memorandums in opposition to the states’ motion. The states must file their replies by July 26, 2017.

In a press release, the Department stated the indefinite postponement was “[d]ue to pending litigation challenging the [Borrower Defense Rule] regulations,” and lawful under Section 705 of the Administration Procedures Act (APA), which provides that an agency “may postpone the effective date of action taken by it, pending judicial review.” In the suit they have filed, the AGs claim that the postponement of the Rule injures their residents by depriving state authorities of increased enforcement powers, eliminating improved remedies for violations of law, and removing deterrence of misconduct by educational institutions.

The four causes of action generally allege that the postponement operates as a summary rescission of the rule in violation of Section 706 the APA. More specifically, the AGs assert that:

  • The Department failed to follow the APA’s formal notice and comment process, which is required when the Department delays the effective date of a final regulation for the purpose of substantive rulemaking, amendment, or rescission of the final regulation.
  • The Department’s Delay Notice does not comply with or even acknowledge the legal test applicable when the Department seeks a stay of its own regulations pending litigation, which requires: 1) a likelihood of prevailing on the merits; 2) an absence of delay will irreparably harm the Department; 3) that others will not be harmed by the delay; and 4) that the public interest requires a delay.
  • The Department has failed to provide justification for the postponement adequately related to the existence or consequences of the pending litigation. Specifically, the Department’s notice published in the Federal Register indicates a complete reconsideration of the rule (while the CAPPS litigation only challenges a few provisions) and the Department claims federal cost-savings which are unrelated to the CAPPS litigation.
  • The Department has failed to offer a reasoned analysis for reversing or departing from a previous policy position, which is required when a Delay Notice operates as an amendment or rescission to an existing rule.

Section 706 of the APA requires a reviewing court to set aside agency action, findings, and conclusions found to be “without observance of procedure required by law” or “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

As part of a previous post, we discussed the ability of a successor administrator to unilaterally stay the compliance date of a final rule under the APA. In Clean Air Council v. Pruitt, the D.C. Circuit vacated an EPA stay of its rule concerning methane and other greenhouse gas emissions. Before a final compliance date of June 3, 2017, several industry associations filed a petition with the EPA seeking reconsideration. The new EPA administrator issued a 90-day stay of the compliance date and announced that the Agency was reconsidering the rule. The D.C. Circuit found that the stay was “tantamount to amending or revoking a rule” and rejected the Agency’s reliance on its broad discretion to reconsider its own rules without complying with the APA’s formal notice and comment requirements.

The Department of Education also recently announced its plan to establish a negotiated rulemaking committee to revise the Gainful Employment Rule. This Obama Administration rule became effective in July 2015 and required that schools make disclosures such as graduation rates, earnings of graduates, and student debt amounts. The press release criticized the rule for “unfairly and arbitrarily limit[ing] students’ ability to pursue certain types of higher education and career training programs.” The effective date has been delayed one year to July 1, 2018. The Department has also provided a six-month extension—to January 1, 2018—for compliance with disclosure requirements for fees associated with school-sponsored debit cards and other financial products marketed on their campuses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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