Ministry of Education takes action to hold owners, investors and controlling parties accountable for college and university liabilities – Consumer Protection

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On March 23, 2022, the U.S. Department of Education (“Department”) announcement an important new policy that, in some cases, will require owners, investors, and controlling parties of private colleges and universities to guarantee the school’s regulatory liabilities. This policy extends to all private institutions, including proprietary and not-for-profit higher education institutions, and will be of significant concern to any entity that currently owns or controls a private post-secondary institution. Organizations considering an investment or acquisition in private higher education will also want to carefully consider this development.

The new policy

As readers of REGucation may know, institutions are required to enter into a written Program Participation Agreement (“PPA”) with the Secretary of Education which sets out the terms and conditions for participation in federal financial assistance programs (“Title IV”). The Department may terminate an institution’s Title IV eligibility if the institution fails to meet its specified obligations.

Historically, the PPA has been signed by an authorized representative of the institution. Under the new policy, corporations or other legal entities that “have or could have a direct or indirect effect on the administrative capacity or financial responsibility of the institution” may also be required to sign the PPA. There is a rebuttable presumption that the following entities would be considered to have a direct or indirect effect on an establishment:

  • Are the sole member or hold 100% direct or indirect equity or voting rights in the institution;

  • Hold less than 100% ownership but otherwise exercise (directly or indirectly) substantial control over the institution; or

  • Provide audited financial statements or other financial submissions on behalf of the institution.

In addition to impacting the owners and investors of the owning institutions, this rebuttable presumption would also appear to encompass hospitals, religious denominations and other organizations that control private nonprofit institutions through direct ownership of the assets of institution, or unique membership or other governance relationships. , or who provide financial statements to the Department in support of settlement.

The Department has indicated that it will require controlling parties to co-sign the PPA in the following circumstances, among others:

  • If the institution has achieved a composite financial responsibility score of less than 1.5 since its last certification (initial or recertification);

  • If the establishment is in provisional status of certification by the Department;

  • If the establishment undergoes a change of ownership;

  • If the institution is on HCM2;

  • If the Department has approved a significant number of borrower defense requests or false certifications for the institution, or if there are a significant number of these types of requests under review which, if approved, result in significant liability risk;

  • If the Ministry has recently identified systemic or significant audit or program review findings, or has outstanding debts resulting from an audit or program review; or

  • If the institution or any of its officers or interest holders has consented to or been the subject of a judgment of fraud or misrepresentation entered against it by a federal or state court, a foreign court or an arbitration body.

In its announcement, the Department specifically states that by co-signing the PPA, these “entities (but not individuals who sign as authorized representatives of the entities) agree to assume responsibility for financial losses to the federal government related to the administration of the institution. Title IV programs.”

The new policy will be implemented for private institution PPAs issued on or after March 23, 2022, for ownership changes, initial certifications, and reinstatements, and July 1, 2022, for a recertification. The Department also reserves the right to apply the new policy to PPAs issued before March 23, 2022, provided the agency has already communicated an additional signature requirement to the institution.

Comments

Among the examples provided by the Ministry that will require a co-signature, three immediately caught our attention.

  • First, according to Department data, just over 8% of institutions had composite scores below 1.5 for fiscal years ending between July 1, 2019 and June 30, 2020. However, it is reasonable to expect that many institutions with historically strong composite scores fell below 1.5 during the pandemic. , or could soon fall below 1.5 in the absence of continued pandemic-related aid. Indeed, this concern has prompted repeated requests from the higher education lobby for a reduction in the composite score. Unfortunately, it seems that the Department will instead seek financial guarantees from the parent entities.

  • Second, the inclusion of ownership changes is remarkable in that it is the only example that does not necessarily involve an institution that is experiencing financial or compliance issues. While ownership changes sometimes involve the acquisition of a struggling institution, they can also involve two strong organizations with no financial or compliance issues. Indeed, a new parent, owner or investor could even significantly strengthen an institution being acquired.

  • Third, we note that Commerce has suggested that owners or controlling parties of a facility with provisional certification status might be required to co-sign the PPA. This is of particular interest, given the Department’s concurrent efforts during the last round of negotiated rules to significantly expand the circumstances under which establishments can be placed in provisional certification status.

In reviewing the new policy, we also observed that there may not be a perfect match between the policy and the statutory authority upon which it is based. The Department’s legislative authority to impose these new requirements stems, in part, from 20 USCA § 1099c(e)which empowers the Secretary to require “the assumption of personal liability, by one or more persons who exercise substantial control over this establishment, as determined by the Secretary, for financial losses suffered by the Federal Government, beneficiaries of assisting students and other program participants with funds under this subchapter, and civil and criminal monetary penalties[.]The same statute, however, also limits this power, expressly stating that the secretary “shall not” impose such liability on an institution that:

  • Has not been the subject of an action of limitation, suspension or termination by the Secretary or a guarantee agency within the preceding 5 years;

  • Did not have, during its 2 most recent audits of the execution by the establishments of programs falling under this sub-chapter, an audit finding resulting in the obligation for the establishment to reimburse an amount greater than 5% of funds the institution has received from programs under this sub-chapter in any year;

  • Meets and has met, within the previous 5 years, the financial accountability standards under subsection (c); and

  • Has not been cited in the previous 5 years for failing to submit audits required under this sub-chapter in a timely manner.

It would seem possible that an establishment in change of ownership, or even in provisional certification, nevertheless fulfills each of the above criteria. In such a case, it would appear that requiring an owner or controlling party to accept responsibility for the institution’s debts could directly violate the law.

We expect these and other issues to be discussed in detail as the Department begins to implement this new policy. For its part, Thompson Coburn will be monitoring its implementation closely and plans to provide updates as additional information becomes available. We also anticipate continued coverage of the many proposed sets of rules expected from the Department this year.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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