United States: The 2019 Borrower Defense Rule Survives Summary Judgment (Mostly) Intact

On March 17, 2021, Southern District of New York Judge Lorna G. Schofield ruled that most of the 2019 Borrower Defense to Repayment Rule would survive cross-motions for summary judgement. On one issue, however, Judge Schofield ruled for the Plaintiff, the New York Legal Assistance Group (NYLAG), finding that the 2019 Rule's three-year statute of limitations on defensive claims was not a logical outgrowth of and deviated too sharply from the 2018 Notice of Proposed Rulemaking.

The decision means that most of the 2019 Rule remains intact – for the time being. Therefore, for loans first disbursed after July 1, 2020, the following policies survive: the standard of relief; the rejection of the group claims; the definition of financial harm and the types of acceptable evidence of financial harm; the allowance for pre-dispute arbitration agreements and class action waivers; the elimination of certain financial responsibility disclosure requirements; and the abolition of automatic closed school loan discharges.

Additionally, the court held that NYLAG did not show that the Administrative Procedures Act was violated when the Department failed to reopen the 2018 Negotiated Rulemaking process when the 2016 Rule when into effect. Similarly, NYLAG did not prove their claim that the Department negotiated in bad faith or treated the process as "as an empty formality."

As for the three-year statute of limitations for defense claims, the Southern District remanded the determination back to the Department for further proceedings consistent with the court's order. With the change in administration, it is unclear what will happen next. The Department will likely have to conduct negotiated rulemaking on this issue if the Biden Administration wanted to impose a new statute of limitations. Such a rulemaking could include a provision, consistent with the 2016 Rule, that would eliminate any statute of limitations from the 2019 Rule.

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.