Case 1:15-cv-01137 Document 1 Filed 07/16/15 Page 1 of 30

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STUDENT AID FUNDS, INC.,
Plaintiff,

Civil Action No.

v.
ARNE DUNCAN, in his official capacity as
Secretary of the Department of Education,
and
UNITED STATES DEPARTMENT OF
EDUCATION,
Defendants.

COMPLAINT
Plaintiff UNITED STUDENT AID FUNDS, INC., (“USA Funds” or “Plaintiff”), for its
Complaint against Defendants ARNE DUNCAN, in his official capacity as the Secretary of
Education (“Secretary”), and the DEPARTMENT OF EDUCATION (“the Department,” or
“Defendant”) (collectively with the Secretary for these purposes, the “Department”) alleges, by
and through its attorneys, on knowledge as to Plaintiff and on information and belief as to all
other matters, as follows:
PRELIMINARY STATEMENT
1.

This is an action under the Administrative Procedure Act, 5 U.S.C. §§ 551-706

(“APA”) and the Higher Education Act of 1965, 20 U.S.C. §§ 1070 et seq., as amended

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(“HEA”), challenging a new rule by the Department, purportedly issued under the HEA and its
promulgated regulations.
2.

USA Funds is a nonprofit “guaranty agency,” which, pursuant to certain loan

programs under the HEA, “guarantees” student loans by private lenders. When borrowers
default, USA Funds pays the private lender and assumes the loan, receives reinsurance from the
Department for most of the value of the loan, and then proceeds with collection efforts against
the defaulted borrower on behalf of the Department.
3.

The HEA provides that guaranty agencies shall assess reasonable collection costs

to borrowers who default on their student loans, and that guaranty agencies “may” charge such
collection costs to all defaulted borrowers up to certain statutory limits, without exception.
4.

In an amicus brief invited by a panel of the United States Court of Appeals for the

Seventh Circuit in a currently pending private damages lawsuit, the Department, in a filing on
May 21, 2015, announced a brand new rule, which the Department alleged to apply retroactively,
purporting to “interpret” its HEA regulations. Specifically, the Department stated for the very
first time that guaranty agencies “may not” assess collection costs to defaulted borrowers in
certain circumstances, namely, when a defaulted borrower enters into a rehabilitation agreement
within sixty days of notice of default, and complies with that agreement. See Brief for the
United States as Amicus Curiae in Support of Appellant and Reversal, Bible v. United Student
Aid Funds, Inc., 14-1806 (7th Cir. May 21, 2015) (the “Bible brief”).
5.

USA Funds responded in that Bible proceeding on June 11, 2015, noting, inter

alia, that the Department’s new rule violated the HEA and its regulations, was impermissibly
retroactive, and had never before been announced or communicated to the guaranty agency

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community of state and nonprofit agencies, in the form of interpretive “Dear Colleague Letters”
issued by the Department or otherwise.
6.

On July 10, 2015, in an obvious response to USA Funds’ brief, the Department

issued “Dear Colleague Letter Gen-15-14,” adopting many of the arguments previously recited
in the Bible brief and responding to some of the arguments of USA Funds, but going even further
in appearing to preclude collection costs for defaulted borrowers who enter into any kind of
repayment agreement at all, not just rehabilitation agreements, within sixty days of notice of
default. (Hereinafter, the Department’s position as reflected in the Bible brief and elaborated on
in Dear Colleague Letter Gen-15-14 will be referred to as the “New Rule.”) The government
filed Dear Colleague Letter Gen-15-14 in the pending Bible proceeding on the very same day it
was issued, July 10, 2015.
7.

The New Rule is contrary to the text of the HEA, contrary to the text of 34 C.F.R.

§ 682.410 and other applicable regulations, constitutes improper legislative rulemaking without
required notice and comment procedures, constitutes impermissible retroactive rulemaking, and
is unlawful, arbitrary, capricious, and irrational. The New Rule will significantly harm student
loan borrowers by discouraging timely loan rehabilitation, in contravention of congressional
intent and sound policy. USA Funds seeks an order from this Court declaring the Department’s
New Rule invalid, unenforceable, and contrary to law.
PARTIES
8.

Plaintiff United Student Aid Funds, Inc. is a nonprofit corporation engaged in the

business of guaranteeing and administering student loans, and providing aid and support to
college students from all walks of life and particularly among those who otherwise might be
unable to attend college. Throughout its more than 50-year history, USA Funds has served more

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than 22 million students and parents with more than $250 billion in guaranteed financial aid for
higher education. It has also provided support for thousands of education and financial
institutions nationwide. It is incorporated in the state of Delaware. Its principal place of
business is in Indianapolis, Indiana.
9.

Defendant Arne Duncan is the Secretary of the Department of Education. His

official address is 400 Maryland Avenue, S.W., Washington, D.C. 20202. He is being sued in
his official capacity. In that capacity, Secretary Duncan has overall responsibility for the
operation and management of the Department. Secretary Duncan, in his official capacity, is
therefore responsible for the Department’s promulgation of the challenged regulations and for
related acts and omissions alleged herein.
10.

Defendant Department of Education is, and was at all times relevant hereto, an

executive agency of the United States Government, 5 U.S.C. §§ 101, 105, subject to the APA, id.
§ 551(1). The Department, in its current form, was created by the Department of Education
Organization Act of 1979, 20 U.S.C. § 3401 et seq., Pub. L. No. 96-88, 93 Stat. 668. The
Department is headquartered at 400 Maryland Avenue, S.W., Washington, D.C. 20202.
JURISDICTION AND VENUE
11.

This action arises under the HEA, and the APA. This Court has subject-matter

jurisdiction over this action under 28 U.S.C. § 1331. The Department may be sued in connection
with its activities under the HEA pursuant to 20 U.S.C. § 1082. The Court is authorized to issue
the nonmonetary relief sought herein pursuant to 5 U.S.C. §§ 702, 705, and 706.
12.

Venue is proper in this Court under 28 U.S.C. § 1391(e)(l), because this is an

action against the United States, an officer of the United States, and an agency of the United
States. Defendant Department of Education resides in this judicial district; Defendant Secretary

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Duncan performs his official duties in this judicial district; and a substantial part of the events or
omissions giving rise to this action occurred in this judicial district.
13.

This Court can grant declaratory relief under 28 U.S.C. § 2201 (the Declaratory

Judgment Act), and 5 U.S.C. §§ 701-706, for violations of, inter alia, the APA, 5 U.S.C. § 706,
and the HEA, 20 U.S.C. § 1070 et seq.
FACTUAL ALLEGATIONS
A.

Statutory Framework: The Higher Education Act.

14.

The Higher Education Act of 1965 was enacted “to assist in making available the

benefits of postsecondary education to eligible students,” regardless of economic background.
20 U.S.C. § 1070(a). Among other things, the HEA established the Federal Family Education
Loan (“FFEL”) Program, administered by the Department of Education. See 20 U.S.C. § 1071.
15.

The purpose of the FFEL Program was to “enable the Secretary--(A) to encourage

States and nonprofit private institutions and organizations to establish adequate loan insurance
programs for students in eligible institutions … and (D) to guarantee a portion of each loan
insured under a program of a State or of a nonprofit private institution or organization which
meets the requirements of section 1078(a)(1)(B) of this title.” 20 U.S.C. § 1071.
16.

Under the FFELP, banks and other private financial institutions make loans to

students for education-related expenses. If a borrower defaults, a private guaranty agency, like
USA Funds, acting in a fiduciary capacity, pays the lender and collects on the defaulted loan.
The Department reinsures the guaranty agency for most of the defaulted loan. 34 C.F.R. §
682.100(a).

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17.

In 1986, Congress enacted the Higher Education Amendments of 1986, part of

which relate to the assessment of collection costs against defaulted borrowers. 20 U.S.C. §
1091a(b) provides:
“Notwithstanding any provision of State law to the contrary--(1) a borrower who
has defaulted on a loan made under this subchapter and part C of subchapter I of
chapter 34 of Title 42 shall be required to pay, in addition to other charges
specified in this subchapter and part C of subchapter I of chapter 34 of Title 42
reasonable collection costs. …”
20 U.S.C. § 1091a(b)(1) (emphasis added). The HEA does not define “reasonable collection
costs.”
18.

In 1992, the HEA was amended to provide for loan “rehabilitation.”

Rehabilitation is a pathway toward curing of a defaulted student loan, and provides that if a
defaulted borrower requests rehabilitation, and makes certain defined monthly payments, the
defaulted loan can then be “rehabilitated” and taken out of default status. A loan is deemed
“rehabilitated” when it is re-sold by the guaranty agency to a private lender, or to the
Department. There is a sound, congressionally-expressed policy in favor of loan rehabilitation to
help borrowers get out of default status.
19.

With regard to collection costs and loan Rehabilitation Agreements under the

Higher Education Act’s default reduction program, the HEA provides that when a guaranty
agency has secured all of the required payments and sells the loan to a lender, the guarantor
“may, in order to defray collection costs . . . charge to the borrower an amount not to exceed 18.5
percent of the outstanding principal and interest at the time of the loan sale.” 20 U.S.C. § 10786(a)(1)(D)(i)(II)(aa). (Effective July 1, 2014, the statute was amended to lower the percentage
from 18.5 percent to 16 percent. Pub. L. No. 113-67, § 501(1), 127 Stat. 1187 (Dec. 2, 2013).
Congress otherwise left that provision intact.)

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20.

The provision of the HEA regarding collection costs for defaulted borrowers who

enter into Rehabilitation Agreements at 20 U.S.C. § 1078-6(a)(1)(D)(i)(II)(aa) contains no
exceptions, exclusions, or carve-outs. A guaranty agency “may . . .charge” collection costs to
defaulted borrowers, including those who enter into Rehabilitation Agreements, no matter when
such agreements are entered.
B.

The Department’s Existing Regulations.

21.

The HEA grants the Secretary the power to “prescribe such regulations as may be

necessary to carry out the purposes of this part, including regulations applicable to third party
servicers.” 20 U.S.C. § 1082. The Department has promulgated various regulations under the
FFEL Program and HEA.
22.

Prior to its New Rule, the Department had not defined “reasonable collection

costs” in a way to mandate any across-the-board prohibition on the imposition of collection costs
on any class or sub-class of defaulted borrower. Instead, the Department promulgated 34 C.F.R.
§ 682.410, which establishes “Fiscal, administrative, and enforcement requirements.”
23.

Among other things, 34 C.F.R. § 682.410 establishes administrative requirements

for guaranty agencies, including the requirement that
Whether or not provided for in the borrower's promissory note and subject to any
limitation on the amount of those costs in that note, the guaranty agency shall
charge a borrower an amount equal to reasonable costs incurred by the agency in
collecting a loan on which the agency has paid a default or bankruptcy claim.
These costs may include, but are not limited to, all attorney's fees, collection
agency charges, and court costs.
34 C.F.R. § 682.410(b)(2) (emphasis added). Like the statute, Section 682.410(b)(2) does not
identify any exceptions, exclusions, or carve-outs to the general rule that collection costs may be
charged.

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24.

Another regulatory provision, 30 C.F.R. § 682.410(b)(5), concerns “reports to

consumer reporting agencies.” In relevant part, the regulation states
The guaranty agency, after it pays a default claim on a loan but before it reports
the default to a consumer reporting agency or assesses collection costs against a
borrower, shall, within the timeframe specified in paragraph (b)(6)(ii) of this
section, provide the borrower with—… (D) An opportunity to enter into a
repayment agreement on terms satisfactory to the [guaranty] agency.
34 C.F.R. § 682.410(b)(5)(ii)(D) (emphasis supplied).
25.

Importantly, under this regulation, the terms of repayment agreements sufficient

to preclude the imposition of collection costs are within the discretion of the guarantor, as the
regulation provides the guaranty agency with discretion in establishing a “satisfactory”
repayment agreement with the borrower.
26.

The Department has long acknowledged this “discretion,” including in the Bible

brief itself (at pp. 8, 15), and in a 1997 letter attached to that brief (and described further below).
27.

Section 682.405, entitled “Loan rehabilitation agreement,” describes the

requirements and functions of those agreements in great detail. That regulation says not one
word about any exemption from collection costs, nor, in particular, the sixty day “exemption”
propounded by the Department in its New Rule.
28.

The requirement to participate in the Rehabilitation program is mandatory for

guaranty agencies. By statute, a guaranty agency “shall enter” into an agreement with the
Department to provide such a program, 20 U.S.C. § 1078-6(a)(1)(A), and by regulation “must
enter” into an agreement with the Department to establish such a program. 34 C.F.R. §
682.405(a)(1).
29.

A guaranty agency therefore has no “discretion” to simply opt out of the

Rehabilitation program.

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30.

Significantly for present purposes, however, there is no regulatory or other time

limit—sixty days, or otherwise—in which Rehabilitation Agreements must be offered to
defaulted borrowers. Indeed, according to Dear Colleague Letter Gen-15-14, the Department
itself apparently does not typically offer Rehabilitation Agreements during such periods for those
FFEL Program loans in its own portfolio: “[f]ew borrowers in the Department’s portfolio enter
into repayment within that initial period.”
31.

The only reference to “collection costs” in Section 682.405 is to expressly

acknowledge their applicability, without exception, to Rehabilitation Agreements: Section
682.405(b)(1)(vi)(B) requires the guarantor to provide notice to the defaulted borrower of “the
amount of any collection costs to be added to the unpaid principal of the loan when the loan is
sold to an eligible lender, which may not exceed 18.5 percent of the unpaid principal and accrued
interest on the loan at the time of the sale.”
32.

Other regulatory provisions acknowledge the imposition of collection costs upon

defaulted borrowers who enter into Rehabilitation Agreements, without any exceptions. 34
C.F.R. § 682.404(f), for example, provides that funds collected from defaulted borrowers must
be applied, “first,” to “collection costs.” That provision would make no sense if there were a
certain class of defaulted borrowers who were exempt from such collection costs, as the
Department contends in the New Rule.
33.

Finally, the Department’s regulations allow it to impose fines, and a host of other

remedial actions, upon guaranty agencies, for alleged violations of Federal requirements. 34
C.F.R. § 682.413(c)(1).

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C.

Long-standing Industry and Department Practices.

34.

In reliance on the HEA and its regulations, guaranty agencies have long assessed

collection costs against defaulted borrowers who enter into Rehabilitation Agreements. The
Department has been aware of this industry practice, has acquiesced to this practice, and has
never, until now, formally announced a contrary purported interpretation of the HEA and its
regulations.
35.

The costs incurred by guarantors such as USA Funds with regard to defaulted

borrowers who enter into Rehabilitation Agreements, no matter when those agreements are
entered, are very real and quite substantial.
36.

Many defaulted borrowers simply cannot be located—significant resources are

required to find, and maintain contact with, such borrowers. Communications and follow-up
efforts are extensive. Verifications, and sometime negotiations, over payment terms are
common. In its Dear Colleague Letter Gen-15-14, the Department recites conclusory, and
incorrect, assertions regarding the respective costs, but nothing in the record supports the
government’s naked allegations. In fact, costs associated with the administration of the
rehabilitation loan program are not significantly affected by whether a particular defaulted
borrower enters the program within two months, or two months and one day, or six months, or a
year after default. Nothing in the record could support a finding that a borrower who enters into
a rehabilitation agreement two months after default is not “similarly situated” for these purposes
to one who enters into a rehabilitation agreement several months, or several years, later.
37.

The Department has, for years and years, conducted comprehensive audits of

USA Funds and other guaranty agencies. See 34 C.F.R. § 682.410(b)(1).

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38.

During such audits, it is common practice for guaranty agencies to provide

detailed spreadsheets with rehabilitated loan information, by individual loan, broken out by
principal, interest, and collection charges, with associated dates, payment dates, and amounts.
Such detailed data make clear that collection costs are routinely assessed against defaulted
borrowers who are making Rehabilitation Agreement payments—even against those who entered
into Rehabilitation Agreements within 60 days after a default claim is paid.
39.

Moreover, guaranty agencies routinely supply to the Department documentation

of policies and internal audit procedures, which also make clear the practice of assessing
collection costs upon defaulted borrowers who are in Rehabilitation Agreement status. The
Department has never made any finding, nor taken any exception to, such practices.
40.

For example, the Department’s 2014 and 2012 audits of USA Funds’

rehabilitation loan program and collection cost assessment practices involved production of
account samples for borrowers who entered into Rehabilitation Agreements within the first sixty
days after default, and were charged collection costs. The Department made no findings of
discrepancies with regard to such accounts or charges.
41.

The only plausible explanation for the Department’s inaction is that the New Rule

was not known to the Department’s auditors, because it did not exist.
42.

The Department’s own regulatory and compliance guidance confirms the

discretion on the part of guaranty agencies that the New Rule would impermissibly and
precipitously abolish. For example, a government-mandated compliance supplement audit guide
from June 2015, referred to as the “A-133,” states, at page 4-84.032-G-16, that “A guaranty
agency may choose not to charge collection costs to a borrower who enters into a voluntary
repayment agreement with the guaranty agency during the 60-day period after notice from the

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guaranty agency . . . .” That guidance flatly contradicts the New Rule, which categorically states
that “the rules bar a guaranty agency” from charging such collection costs. Dear Colleague
Letter Gen-15-14, at 1.
43.

At least until very recently, the Department’s own website guidance for defaulted

borrowers was also consistent with this long-standing industry practice, and inconsistent with the
New Rule. That web site stated that: “Another option for getting your loan out of default is loan
rehabilitation. To rehabilitate your Direct Loan or FFEL Program loan, you and ED must agree
on a reasonable and affordable payment plan. (Remember, contact your school for your Perkins
Loan.) Your loan is rehabilitated only after you have voluntarily made the agreed-upon payments
on time and the loan has been purchased by a lender. Outstanding collection costs may be added
to the principal balance.” Federal Student Aid, Office of the U.S. Department of Education,
“Don’t get discouraged if you are in default on your federal student loan” available at
https://studentaid.ed.gov/sa/repay-loans/default/get-out (last accessed July 8, 2015) (emphasis
added).
44.

The Department’s website was therefore inconsistent with the New Rule. The

Department did not tell defaulted borrowers that collection costs cannot be imposed if defaulted
borrowers entered into a rehabilitation agreement within the first 60 days after notice of default.
Rather, the Department warned defaulted borrowers that collection costs “may be added,”
without exception.
45.

USA Funds and other guaranty agencies have reasonably relied on the

Department’s lack of enforcement, lack of guidance letters, and its public statements such as
those on its website when interpreting their rights and obligations under the HEA and its
regulations.

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D.

The Department’s New Rule.

46.

On July 29, 2013, a defaulted borrower, Bryanna Bible, filed a Complaint in the

United States District Court for the Southern District of Indiana. Bible v. USA Funds, Inc., No.
1:13-CV-00575-TWP (S.D. Ind. Apr. 8, 2013). In her Complaint, Bible alleged breach of
contract and RICO claims against USA Funds on her own behalf and on behalf of “all persons
who entered into a loan agreement that is silent on or allows collection costs only to the extent
allowed under the Higher Education Act, . . . and who subsequently entered into an
agreement . . . , and, on whom Defendant subsequently imposed collection costs at any time from
six years prior to the filing of this Complaint.” Id. at 8-9.
47.

The Department is not a party to the Bible proceedings.

48.

On March 14, 2014, District Court Judge Tanya Walton Pratt granted USA

Funds’ Motion to Dismiss, finding in part, that HEA regulations explicitly allow guarantors to
assess collection charges to defaulting borrowers who enter into Rehabilitation Agreements.
Bible v. United Student Aid Funds, Inc., No. 1:13-CV-00575-TWP, 2014 WL 1048807, at *9
(S.D. Ind. Mar. 14, 2014). The court found that “The imposition of collection costs is clearly
and explicitly authorized - and mandated - by the HEA regulations… [and] the HEA regulations
acknowledge that collection costs will be imposed on borrowers during [the] rehabilitation
program, and USA Funds did not act contrary to the HEA in doing so.” Id.
49.

On appeal, the United States Court of Appeals for the Seventh Circuit invited the

Department to file an amicus curiae brief addressing “whether and under what circumstances the
Higher Education Act, as amended, and its regulations allow a guaranty agency participating in
the Federal Family Education Loan Program to assess collection costs against a first-time
defaulted borrower who (1) timely enters into a rehabilitation agreement with the guarantor upon

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receiving notice that the guarantor has paid a default claim and (2) complies with that
agreement.” Bible v. USA Funds, Inc., 14-1806 (7th Cir. Jan. 28, 2015).
50.

The Department filed the Bible brief on May 21, 2015. In the Bible brief, after

noting that “[t]he United States . . . has a significant interest in the proper construction of the
Higher Education Act and the Secretary’s implementing regulations,” id. at 1, the Department
stated for the very first time ever that “[t]he Department interprets its regulations to provide an
exception with regard to collection costs charged when a borrower promptly enters into a loan
repayment agreement after the borrower has been notified by the guarantor that it has paid a
default claim.” Id. at 8, 12.
51.

As the basis for its New Rule, the Department relied on “the requirement in 34

C.F.R. § 682.410(b)(2) that a guaranty agency assess collection costs to be subject to the
conditions in paragraph (b)(5), which require a guaranty agency to perform certain tasks ‘after it
pays a default claim on a loan but before it reports the default to a consumer reporting agency or
assesses collection costs against a borrower.’” Id. at 13-14.
52.

In the Bible brief (and in Dear Colleague Letter Gen-15-14), the Department

relied on two letters from the 1990's as purported evidence that the New Rule was a part of the
Department’s existing policy. Neither letter, however, supports or advances the radical departure
reflected by the New Rule.
53.

The first letter, a March 14, 1994 letter to “Guaranty Agency Directors,” merely

discussed the collection costs being assessed against defaulted borrowers in response to the 1992
Amendments to the Higher Education Act, and was all about the amounts of such costs that
would be deemed “reasonable.” The Department concluded that “the amount of collection costs
that will be considered ‘reasonable’ under these circumstances to be an amount that does not

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exceed 18.5 percent of the outstanding amount of principal and accrued interest on the loan.”
Bible brief, SA 3. That letter says not one word about prohibiting the imposition of collection
costs to any subset of defaulted borrowers who enter Rehabilitation Agreements. Indeed, the
only logical inference from the correspondence is that such charges, up to 18.5 percent, would be
allowed. The letter therefore undercuts, rather than supports, the New Rule.
54.

Similarly, the second letter, correspondence dated June 28, 1997 to the Texas

Guaranteed Student Loan Corporation (“TGSLC”), fails to support the New Rule. That private
letter (which had never previously been disclosed to USA Funds or otherwise made public, as far
as USA Funds is aware) was a response to TGSLC’s query about whether it was allowed to
forego assessing collection costs against “defaulted FFELP borrowers who enter into satisfactory
repayment … during the 60-day period following claim payment of a defaulted FFEL loan.” Id.
at SA 1. The Department responded that “the agency is not required to assess borrower
collection costs.” “Not required,” however, is not the same thing as “not allowed.” Indeed, the
discretion of a guaranty agency to forego collection costs upon entry of repayment agreements
“satisfactory to the [guaranty] agency” has never been disputed.
55.

Significantly, the 1997 letter makes no mention whatsoever of Rehabilitation

Agreements, nor is there any reason to conclude that the circumstances addressed by the letter
involved such agreements. Correctly read, all that the letter does is confirm the “discretion”
inherent to the “satisfactory to the agency” language of 34 C.F.R. § 682.410(b)(5)(ii)(D). That
“discretion” is conspicuously lacking with respect to the terms of Rehabilitation Agreements,
and the letter therefore actually undercuts, rather than supports, the Department’s New Rule.
56.

On June 11, 2015, USA Funds filed a response to the Bible brief in the United

States Court of Appeals for the Seventh Circuit (“USA Funds’ Bible response”). In USA Funds’

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Bible response, USA Funds explained, inter alia, that the Department had “stitched together a
purported ‘interpretation,’ never before announced, for which there is no prior enforcement, no
industry fact-finding, no statement of reasons, no prior notice or opportunity to comment, no
contemporaneous articulation of impact, effect, or policy, no existing policy or purpose
statement—indeed, nothing to suggest that the government’s position is anything other than
after-the-fact wishful thinking by the Department of Education about what it (now, apparently)
would prefer that the regulations say, when they do not. Not only is the government’s currentlyasserted position not supported by what the regulations actually say, that ‘interpretation’
introduces irreconcilable inconsistencies in the actual language of the regulations, and violates
the letter and spirit of the statute.” Id. at 1-2.
57.

USA Funds further explained in its Bible response that: (i) Rehabilitation

Agreements are not the sort of discretionary “repayment agreement on terms satisfactory to the
[guaranty] agency” sufficient to preclude the imposition of collection costs, id. at 6-11; (ii) that
the “sixty day” period imposed by the New Rule appears nowhere in any existing regulation, and
that the Department had mischaracterized the actual timing provision in the regulations in its zeal
to support the New Rule, id. at 11-13; (iii) that the New Rule was based upon impermissibly
reading an exception into the statute (20 U.S.C. § 1078-6(a)(1)(D)(i)(II)(aa)) that Congress did
not provide, id. at 14-15; and (iv) that the Department’s position in the correspondence described
above, and in a prior proceeding (Educational Credit Management Corporation v. Barnes, 318
B.R. 482 (S.D. Ind. 2004), aff’d, Black v. Education Credit Mgmt. Corp,, 459 F.3d 796 (7th Cir.
2006)) did not support the Department or the New Rule.
58.

USA Funds emphasized that “the Department of Education has never, ever taken

the position that collection costs are prohibited when a defaulted borrower enters into a

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Rehabilitation Agreement within sixty days of receiving notice of default, upon the basis that
such costs would be ‘unreasonable’ or for any other reason.” USA Funds’ Bible response at 1516.
59.

USA Funds further stated in its Bible response that “The Department of Education

has never publicly issued a ‘Dear Colleague Letter,’ which is its customary method of clarifying
regulatory obligations, to guarantors stating [its] position.” Id. at 16.
60.

On July 10, 2015, the Department, belatedly and in an obvious response to USA

Funds, issued Dear Colleague Letter Gen-15-14, purporting to “restate and clarify” the position it
had staked out for the first time in the Bible brief.
61.

Upon information and belief, which USA Funds expects to confirm and prove

during discovery, the Department issued Dear Colleague Letter Gen-15-14 in response to USA
Funds’ position in the Bible litigation.
62.

Dear Colleague Letter Gen-15-14 does not “restate and clarify” anything. It

includes, and elaborates on, many of the very same arguments made by the Department for the
very first time in the Bible brief. Indeed, it appears to go even further, by not limiting the new
prohibition to Rehabilitation Agreements, but suggesting that any repayment agreement at all
entered into within sixty days of notice of default—whether “on terms satisfactory to the
[guaranty] agency” or not—would preclude the imposition of collection costs.
E.

The Department’s New Rule is inconsistent with the HEA.

63.

With its New Rule, the Department impermissibly re-writes the HEA, and reads

into that statute a mandatory exception that is not there. The HEA provides that when a guaranty
agency has secured all of the required payments and sells a rehabilitated loan to a lender, the
guarantor “may, in order to defray collection costs . . . charge to the borrower an amount not to

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exceed 18.5 percent [now 16 percent] of the outstanding principal and interest at the time of the
loan sale.” 20 U.S.C. § 1078-6(a)(1)(D)(i)(II)(aa).
64.

The provision of the HEA regarding collection costs for defaulted borrowers who

enter into Rehabilitation Agreements at 20 U.S.C. § 1078-6(a)(1)(D)(i)(II)(aa) contains no
exceptions, exclusions, or carve-outs. A guaranty agency “may . . .charge” collection costs to
defaulted borrowers, including those who enter into Rehabilitation Agreements, no matter when
such agreements are entered.
65.

In its New Rule, the Department purports to instruct guaranty agencies that they

“may not charge” collection costs to a certain class of defaulted borrowers—i.e., those borrowers
who “promptly after default enters into a repayment agreement, in particular a rehabilitation
agreement, with that [guaranty] agency, and who honors that agreement.” The statute provides
for no such exception, nor has that the purported exception ever been defined or described in any
regulation, guidance, or other formal or informal statement by the Department, prior to the filing
of the Bible brief.
66.

In addition, the Department’s New Rule rewrites the HEA by creating, for the

first time, an exception to 20 U.S.C. § 1091a(b)’s requirement that defaulted borrowers “shall be
required” to pay “reasonable collection costs.” Under its New Rule, borrowers in default are
now not required to pay reasonable collection costs, if they “promptly after default enter into a
repayment agreement.” Dear Colleague Letter Gen-15-14, at p. 1. The Department’s New Rule
rewrites the statute so that the word “reasonable” now purports to modify “shall be required,”
rather than “collection costs.”

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F.
67.

The Department’s New Rule is inconsistent with existing HEA Regulations.
The Department’s New Rule is also inconsistent with the existing HEA

regulations. The text of 34 C.F.R. § 682.410(b)(2), expressly allows the imposition of formulabased collection costs on defaulted borrowers, without exception. The text of the regulation
states that “the guaranty agency shall charge a borrower an amount equal to reasonable costs
incurred by the agency in collecting a loan on which the agency has paid a default or bankruptcy
claim…” Id. Nowhere is an exception contemplated. The new and drastic change of position
reflected by the New Rule is not fairly encompassed by the existing regulation. Instead, the New
Rule is a repudiation of the mandatory assessment element of 34 C.F.R. § 682.410(b)(2).
68.

An agency is not free to disregard its regulations at will. An agency issuing a

legislative rule is bound by the rule until that rule is amended or revoked. The creation of
exceptions by the New Rule constitutes an effective amendment to 34 C.F.R. § 682.410(b)(2).
The New Rule changes existing law, and the known and disclosed existing practices of guaranty
agencies, without providing adequate notice or the opportunity to comment.
69.

The error of the Department’s post hoc “interpretation” is further confirmed by

its mischaracterization of the time limit provisions in the regulations. Because collection costs
are so clearly allowed for Rehabilitation Agreements, e.g., 20 U.S.C. § 10786(a)(1)(D)(i)(II)(aa), the Department must, necessarily, constrain its position to argue that
collection costs are only prohibited for some argued (albeit unstated) excepted subset of such
agreements. It does so in the New Rule by urging that collection costs are only prohibited where
a defaulted borrower “promptly after default enters into a repayment agreement, in particular a
rehabilitation agreement, with that [guaranty] agency, and who honors the agreement.” Dear

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Colleague Letter Gen-15-14. (emphasis supplied). The government then arbitrarily assigns
“sixty days” as the period for such “promptness.”
70.

That is not what the regulations say. There are two actual time limits in the

regulations invoked by the Department. First, there is 45 days, which is the period during
which a notice letter describing the procedural rights identified in Section 682.410(b)(5) must be
sent, from the payment of the default claim by the guarantee agency to the original lender. That
period is stated in 34 C.F.R. § 682.410(b)(6)(ii), which is incorporated by reference by Section
682.410(b)(5)(ii).
71.

Second, there is a sixty day period relating to administrative review: Section

682.410(b)(5)(iv)(B) requires a guaranty agency to provide sixty days to a borrower to request
administrative review, from receipt of the required notice that such review is available.
72.

Significantly, however, that is all that that regulation says—it makes no reference

whatsoever to collection costs, Rehabilitation Agreements, or anything else of relevance to the
present issues. The mythical “60-day” period is simply inapposite to the matters before the
Court in the Bible case, and to the new position staked out in the Department’s Bible brief and
Dear Colleague Letter Gen-15-14.
73.

The government blatantly misstates what the regulation says when it contends that

“the guaranty agency must give the borrower at least 60 days to take any of several actions,
including entering into a repayment agreement with the guaranty agency.” Dear Colleague
Letter Gen-15-14, at 1. The regulations do not say that.
74.

As noted, the “sixty days” only applies to a borrower’s required time period “for

requesting administrative review under paragraph (b)(5)(ii)(C) of this section.” 34 C.F.R.
§ 682.410(b)(5)(iv)(B) (emphasis supplied). Not, as the government incorrectly contends, to the

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other “actions” described at Section 682.410(b)(5)(ii), nor, more to the point, to the opportunity
to “enter into a repayment agreement on terms satisfactory to the agency” under Section
682.410(b)(5)(ii)(D). The government has misstated the regulations in its zeal to conform them
to its after-the-fact construct.
75.

The government’s regulatory mischaracterizations regarding “promptness” are

significant. The utter silence of the regulations with regard to such a key aspect of the
government’s construct underscores the contrived nature of that purported “interpretation.”
Without a clear definition of “timely” or “promptly,” the government has retroactively imposed
an unknowable scheme. The government, in its New Rule, has picked a number out of the
air—sixty days, because that is a time period from another subsection of the regulations that
applies to other actions for other purposes. That, however, is creating de facto a new
regulation, not “restating and clarifying.” It provides nothing like the “fair warning” that is
required.
76.

The Department also impermissibly reads the “on terms satisfactory to the

[guaranty] agency” language completely out of 34 C.F.R. § 682.410(b)(5)(ii)(D).
77.

Pursuant to the Department’s New Rule, decades of discretion by guaranty

agencies, expressly contemplated by the “satisfactory to the [guaranty] agency” text of the
regulation, would be precipitously wiped away, in one fell swoop.
78.

Under the Department’s New Rule, a guaranty agency, now, “must accept as

satisfactory to the agency” non-discretionary Rehabilitation Agreements, and, indeed, maybe
even any offered “repayment” agreement at all, no matter how attenuated to the ultimate curing
of the default such an agreement might be. Dear Colleague Letter Gen-15-14, at 5.

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G.

The Department’s New Rule is a new legislative rule.

79.

The Department’s New Rule, although styled as a purported interpretation or

“clarification,” is a de facto new substantive and legislative rule, for which required notice-andcomment procedures under the APA were not followed.
80.

The New Rule has drastically changed the rules of the game for USA Funds and

other guaranty agencies. Since the enactment of 20 U.S.C. § 1091a(b)(1), USA Funds has
assessed collection costs against defaulted borrowers, unless the borrowers were able to satisfy
their obligations on terms satisfactory to the guaranty agency. The New Rule changes the entire
student loan regime by creating, for the first time, a broad and mandatory exception to the
assessment of collection costs.
81.

In its New Rule, the Department is not “interpreting,” or “clarifying,” 34 C.F.R. §

682.410, but, rather, has created an entirely new substantive rule and regulation. The HEA
grants the Department power to promulgate reasonable regulations, but such regulations must be
issued in compliance with the HEA and APA.
82.

As such, the Department was required to go through the traditional notice and

comment rulemaking before issuing the New Rule, under 5 U.S.C § 553. It did not do so.
H.

The Department’s New Rule was ill-considered and arbitrary, and will
ultimately harm borrowers.

83.

The Department did not consider relevant factors when issuing its New Rule. As

such, the Department’s New Rule is invalid.
84.

Upon information and belief, which USA Funds expects to confirm and prove

through the discovery to which it is entitled, in connection with its announcement of the New
Rule the Department: (i) did not conduct any studies of impacts of the New Rule upon
rehabilitation programs or availability of rehabilitation agreements; (ii) did not assess amounts or

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relative impacts of the New Rule’s prohibition of collection costs upon guaranty agencies; (iii)
did not assess actual collection efforts or costs incurred with respect to borrowers who enter into
rehabilitation agreements with sixty days versus after sixty days after notice of default; (iv) did
not solicit the views of interested parties or constituencies; and (v) did not attempt to assess or
reconcile prior contrary industry and Department practices.
85.

Upon information and belief, which USA Funds expects to confirm and prove

through the discovery to which it is entitled, in connection with the New Rule the Department:
(i) relied on factors which Congress did not intend it to consider; (ii) entirely failed to consider
important aspects of the problems and issues; (iii) offered post hoc explanations for its position
that run counter to the evidence that was or should have been before the Department; (iv) failed
to consider or provide appropriate notice; and (v) engaged in a flawed process, which led to a
result that is so implausible that it cannot have been the product of a difference in view or the
product of agency expertise.
86.

To the extent that the Department’s New Rule would be justified by a purported

desire on the part of the Department to foster rehabilitation for the benefit of defaulted
borrowers, that position cannot be justified upon such grounds, because it will likely have the
opposite effect.
87.

USA Funds and other guaranty agencies will suffer severe economic harm if they

are not allowed to charge collection costs on certain classes of Rehabilitation Agreements.
Under the New Rule, there are powerful economic incentives for guaranty agencies such as USA
Funds to discontinue efforts to promote Rehabilitation Agreements within sixty days of notice of
default.

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88.

Accordingly, defaulted borrowers who might otherwise be made aware of the

rehabilitation option will likely not have as much access to such information under the
Department’s New Rule, to the detriment of such defaulted borrowers and in contravention of
congressional intent and sound policy.
I.

The Department’s New Rule is impermissibly retroactive.

89.

As described above, neither USA Funds nor any other guaranty agency had any

prior notice of the substance of the New Rule prior to the filing of the Bible brief, and then the
issuance of Dear Colleague Letter Gen-15-14.
90.

The New Rule was flatly inconsistent with long-standing practices in the industry,

which were well-known (or certainly knowable) to the Department.
91.

The New Rule, by incorrectly and inaccurately purporting to be a “restat[ment]

and clarif[ication]” of existing rules, purports to impose new substantive rules retroactively,
without notice, due process, nor fair or adequate warning to USA Funds.
92.

The purported retroactive impact of the New Rule could potentially result in

substantial financial exposure and harm to USA Funds and other guarantors.
J.

The Department’s New Rule is not entitled to deference.

93.

Interpretations that are plainly erroneous or inconsistent with the statute and/or

regulation are not afforded any deference. Deference is similarly unavailable when the purported
“interpretation” was really undertaken to create de facto a new regulation.
94.

Deference is not appropriate when there is reason to suspect that the interpretation

does not reflect the agency’s fair and considered judgment on the matter. There was no fair and
considered judgment by the Department with regard to the New Rule.

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95.

As described above, the Department’s New Rule is contrary to the text of both the

HEA and the regulations, including 34 C.F.R. § 682.410.
96.

As described above, the Department’s New Rule is a de facto new regulation,

which constitutes a radical break from both the text of the statute and regulations, and the
practice of both guaranty agencies and of the Department.
97.

The Department’s New Rule is the product of, and constitutes, final agency action

for purposes of judicial review by this Court.
COUNT 1
(VIOLATION OF THE HIGHER EDUCATION ACT)
98.

Plaintiff incorporates the preceding paragraphs as if fully set forth herein.

99.

The HEA provides that a guaranty agency “may, in order to defray collection

costs . . . charge to the borrower an amount not to exceed 18.5 percent [now 16 percent] of the
outstanding principal and interest at the time of the loan sale.” 20 U.S.C. § 10786(a)(1)(D)(i)(II)(aa). The provision of the HEA contains no exceptions, exclusions, or carveouts. A guaranty agency “may . . .charge” collection costs to defaulted borrowers, including
those who enter into Rehabilitation Agreements, no matter when such agreements are entered.
100.

In its New Rule, the Department purports to instruct guaranty agencies that they

“may not charge” collection costs to a certain class of defaulted borrowers, in violation of the
HEA.
101.

By its text, the HEA requires that borrowers who have defaulted on a loan “shall

be required to pay reasonable collection costs. …” 20 U.S.C. § 1091a(b)(1).
102.

In its New Rule, the Department has misconstrued the HEA by applying

“reasonable” to “shall be required to pay,” rather than the “collection costs” dictated by the
statute.

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103.

USA Funds is adversely affected and aggrieved by the New Rule, and will suffer

legal wrong because of the impermissible agency action.
104.

The New Rule is in violation of, and not authorized by, the Higher Education Act

of 1965, 20 U.S.C. § 1070(a) et seq.
105.

Because it is inconsistent with the HEA, the New Rule exceeds the Department’s

statutory jurisdiction and authority.
106.

Accordingly, the New Rule exceeds statutory authority, jurisdiction, and

limitations, in violation of 5 U.S.C. § 706(2)(C), and is not in accordance with law, in violation
of 5 U.S.C. § 706(2)(A). As such, the New Rule is arbitrary, capricious, an abuse of discretion,
otherwise not in accordance with law, and issued without observance of the procedures required
by law.
107.

Plaintiff has no adequate administrative remedy for the Department’s unlawful

action as described herein.
COUNT 2
(VIOLATION OF EXISTING REGULATIONS)
108.

Plaintiff incorporates the preceding paragraphs as if fully set forth herein.

109.

By its text, 34 C.F.R. § 682.410(b)(2) requires that a guaranty agency assess

reasonable collection costs “equal to reasonable costs incurred by the agency in collecting a loan
on which the agency has paid a default or bankruptcy claim.”
110.

The Department’s New Rule is in conflict with the text of 34 C.F.R. §§

682.410(b)(2).
111.

As described further above, the Department’s New Rule impermissibly reads

the “on terms satisfactory to the [guaranty] agency” language completely out of 34 C.F.R. §
682.410(b)(5)(ii)(D).

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112.

The Department’s New Rule impermissibly creates a new, previously

unannounced “60 day” deadline out of whole cloth and contrary to the actual text of the existing
regulations, during which collection costs may not be charged to defaulted borrowers who enter
into Rehabilitation Agreements, or, potentially, other repayment agreements, during that period.
113.

Accordingly, for all of the reasons described above, the New Rule is arbitrary,

capricious, an abuse of discretion, otherwise not in accordance with law, and issued without
observance of the procedures required by law.
114.

Plaintiff has no adequate administrative remedy for the Department’s unlawful

action as described herein.
COUNT 3
(FAILURE TO FOLLOW NOTICE AND COMMENT RULEMAKING)
115.

Plaintiff incorporates the preceding paragraphs as if fully set forth herein.

116.

The Department’s New Rule is in such conflict with the text of 34 C.F.R. §§

682.410, 682.405, and other statutory and regulatory provisions that it constitutes a brand new
substantive regulation.
117.

The Department’s New Rule is a substantive rule that will affect USA Funds’

legal rights or obligations and result in legal consequences.
118.

When the notice and comment rulemaking requirement applies, the agency must

publish notice in the Federal Register, including information as to the time, place, and nature of
the proceedings; reference to the appropriate legal authority and the substance of the proposed
rule or a description of the subjects and issues involved. The agency must also give interested
persons an opportunity to participate in the rulemaking through submission of written data,
views, or arguments. Only once these requirements are satisfied can an agency promulgate a
new rule or regulation.

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119.

The Department failed to follow any of these required procedures with respect to

the New Rule. Specifically and without limitation, the Department failed to: (a) publish its New
Rule; (b) refer to the appropriate legal authority and the substance of the proposed rule or a
description of the subjects and issues involved; and (c) give interested persons an opportunity to
participate in the rulemaking through submission of written data, views, or arguments.
120.

Accordingly, Defendants have violated 5 U.S.C. § 553.

121.

Plaintiff has no adequate administrative remedy for the Department’s unlawful

action as described herein.
COUNT 4
(ARBITRARY AND CAPRICIOUS AGENCY ACTION)
122.

Plaintiff incorporates the preceding paragraphs as if fully set forth herein.

123.

The Department’s New Rule conflicts with existing Department regulations, and

the HEA.
124.

Upon information and belief, which USA Funds expects to confirm and prove

during the discovery to which it is entitled in this proceeding, the Department did not consider:
(i) its longstanding history of not citing guaranty agencies for assessing collection costs to
borrowers who enter Rehabilitation Agreements within 60 days; (ii) the financial impact of the
New Rule on USA Funds and similarly situated guaranty agencies; (iii) the financial and
educational impact on borrowers of the New Rule; nor (iv) any of the other relevant
considerations or evidence that might have led to rational or permissible rulemaking.
125.

Therefore, the New Rule is unsupported by the facts and record before the

Department.
126.

Accordingly, the Department has violated 5 U.S.C. § 706 with the New Rule.

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127.

Plaintiff has no adequate administrative remedy for the Department’s unlawful

action as described herein.
COUNT 5
(IMPERMISSIBLE RETROACTIVE RULEMAKING)
128.

Plaintiff incorporates the preceding paragraphs as if fully set forth herein.

129.

The Department’s New Rule purports to have retroactive effect on USA Funds’

past assessment of collection costs.
130.

In light of the statutory and regulatory texts, and the Department’s previous

acquiescence in USA Funds’ assessment of collection costs, the New Rule was unforeseeable.
131.

USA Funds had no adequate or fair warning, and was not afforded any sufficient

due process or other rights, in connection with the purported retroactive determination that
practices that were previously and apparently allowed would be deemed by the Department, after
the fact, to be unallowed.
132.

The Department’s New Rule constitutes retroactive rulemaking. Such retroactive

rulemaking power was not expressly conveyed by Congress in the HEA.
133.

The New Rule is therefore arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law.
134.

Accordingly, the Department has violated 5 U.S.C. § 706.

135.

Plaintiff has no adequate administrative remedy for the Department’s unlawful

action as described herein.

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PRAYER FOR RELIEF
Plaintiffs pray that this Court:
1.

Declare the Department’s New Rule invalid, unenforceable and contrary to law.

2.

Award Plaintiff its costs and reasonable attorney’s fees as appropriate.

3.

Grant such further and other relief as this Court deems just and proper.

Dated: July 16, 2015

MORGAN, LEWIS & BOCKIUS LLP

By:

/s Brad Fagg
Brad Fagg (D.C. Bar No. 433645)
bfagg@morganlewis.com

1111 Pennsylvania Avenue, NW
Washington, DC 20004
Telephone:
+1.202.739.3000
Facsimile:
+1.202.739.3001

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